Changes in contracts awarded in the armament sector – Decision No. 367/MON

PUBLISHED AT: Saturday, 07 May 2016, 13:29
Jarosław Kruk

On September 15, 2015, Decision No. 367/MON took effect, which has changed some of the principles of awarding key contracts in the armament industry in Poland. The issue of decisions regulating principles and procedures of awarding contracts in the national defense department is relatively rarely approached; that is why I will present some reflections on the implemented changes. The changes in question are intended to grant the Ministry of National Defense greater control over the organization of key contracts from the perspective of the interest of Poland’s security; there is much doubt, however, as to the understanding of some of the provisions of the new Decision – as Stanisław Michałowski and Jarosław Kruk write on blog.

To begin with, I will briefly present the types of principles of organizing contracts in the armament sector in Poland. Naturally, contracts organized by organizational units subjected to the Ministry of National Defense or under its supervision (hereinafter collectively referred to as the MoND) play a crucial role. In this regard – as it is in other sectors related to the public funds – there is a general principle to organize a contract in compliance with general provisions of the Public Procurement Law (PPL). As regards some of the contracts pertaining i.a. to the supply of military equipment,  specific provisions of PPL shall apply – specified in chapter Contracts in the field of defense and security  (the provisions which are a result of the implementation of the so-called defense directive). Therefore, it is a rule that in the Polish armament industry contracts are implemented in accordance with general provisions of the Public Procurement Law (PPL), based on general principles or in accordance with specific provisions. The PPL is extremely strongly based on the provisions of the UE law which are aimed at ensuring the proper functioning of the internal market.  Respecting UE freedoms is aimed to ensure equal access of the entrepreneurs from the EU states to contracts implemented in other EU states, including contracts in the armament sector in Poland.

The Public Procurement Law, however, contains some exclusions which make it possible to depart from the application thereof, and consequently depart from the requirements posed by the EU law. The PPL stipulates that, this act shall not apply to contracts pertaining to the production or trading in arms, munitions or war materials referred to in the Article 346 of the Treaty on the Functioning of the European Union if the basic interest of the State security so requires and the contract award without the application thereof shall not have a negative effect on the competition conditions  in the internal market in relation to the products which are not solely intended for military purposes. The above provision of the PPL is a copy of the Article 346 of the TFEU cited therein, which stipulates that in exceptional cases justified by basic interests of the state security it is admissible to take measures which are otherwise incompliant with the EU law. To picture the above, the PPL, relying on the provisions of the Treaty, indicates that the provisions thereof (based on the EU protection of the internal market) may not be applied unless the Article 364 of the TFEU so permits.

This is where a question arises, if not the PPL, what regulates the principles and procedures of awarding contracts in these exceptional cases? These are precisely decisions of the Ministry of National Defense, and the last one issued in this case is Decision No. 367/MON. By way of explanation, a certain noteworthy issue pertains to the legal characters of such a decision, which is often forgotten as we are used to the principles governing the PPL. In fact, Decision No. 367/MON is not the source of generally applicable law (as opposed to the PPL, which is a legislative act) as it falls outside the catalogue of the sources of law indicated in the Constitution of the Republic of Poland. Decision No. 367/MON, undeniably, is not an administrative decision either, i.e. an external administrative act which - on the basis of a legislative act - regulates rights and duties of individually designated entities. The decision, therefore, to a significant extent is the so called internal administrative act, i.e. an instruction on the organization of contracts issued by the Ministry of National Defense to its reporting or supervised units.

It deserves a strong emphasis that Decision No. 367/MON per se does not give rise to any rights and duties towards third parties, e.g. entities applying for a contract, subcontractors. What regulates all those rights and duties, then? In a nutshell,  these are Polish legislative acts, primarily the Civil Code (to which the Decision in question makes an ill-conceived reference). Within the limits admissible by law the Decision will naturally participate in the shaping of the content of the legal relations between ordering parties and contractors. However, this is only possible within the limits set by the Civil Code and other statutes. Apart from the participation in the shaping of the legal relations, one needs to remember that contracts are prepared by people who report to the Minister; therefore, the conditions of contracts will (at least they should) correspond to the content of the Decision No. 367/MON. Decision No. 367/MON is therefore a crib for the entrepreneurs based on which an interested party may predict the manner in which the MoND will organize a contract.

Also, one needs to remember that in the future contracts covered by Decision 367/MON (until the change thereof) will pertain to the most important contracts on the Polish armament market. Without going into details one needs to indicate all cases of use of offset in the future require that a supply contract per se should be covered by the exclusion under Article 364 of the TFEU (though this is not a sufficient requirement to apply offset). As indicated above, the instances of contracts covered by this exclusion are precisely covered by Decision No 367/MON.

Does the fact of the Minister being authorized to issue an administrative act in the form of the Decision mean that the MoND, issuing the Decision independently, has unrestricted liberty to specify the conditions of contracts in the above cases? Naturally, it does not. The conditions of the contracts performed on the basis of the exclusion under Article 346 of the TFEU (i.e. in compliance with the Decision) must comply with this provision; to put it otherwise, if we fail to fulfill the conditions which enable the application of means contrary to the EU law, we will act against the law and risk an accusation of an unlawful violation of the principles governing the internal market. The conditions of the contracts which restrict the principles of the internal market may not fall outside the necessary minimum required for the protection of basic interests of the state security as regards products for military purposes. It is concurrently excluded to go outside the above purpose, i.e. apply restrictions for purely economic reasons (more on Article  346 of the TFEU here).

Bearing in mind these principles, it is worthwhile to take a glance at some novelties implemented by Decision No. 367/MON. There is a great number of changes compared to a previous decision governing this matter (Decision No. 118/MON), I will focus on a few of them.

In the first place it needs to be indicated that the conditions for joint application for a contract have been significantly modified, so has been the possibility of use of subcontractors. Before in general it was possible for contractors to jointly apply for a contract; there was also liberty of using the services of subcontractors. The Decision has introduced a significant modification in this respect.  The decision stipulates that the ordering party may admit the possibility of jointly applying for a contract unless this contradicts the assessment of the MoND. This provision is phrased in such a way that it is based on the principle of the exclusion of joint application for a contract unless the ordering party decides otherwise.  The phrase “may admit (…) unless”  conspicuously indicates that  when the MoND remains silent, a general principle is that of lack of its consent.

Naturally, as long as this is not contrary to the MoND’s assessment, the ordering party may (showing mercifulness) give its consent for the contractors’ joint application for a contract. Additionally, many provisions have been added in terms of the contractors’ joint application which enable the ordering party to restrict the type of entities which may become co-contractors. A glaring example of this is a provision which directly mentions that the ordering party may indicate entities or features of the entities which are responsible for the performance of a part of the contract. To put it otherwise, the ordering party may indicate specifically whom he expects as an entity which performs a part of the contract.

What is more, freedom of use of subcontractors has been significantly limited. The Decision stipulates that that the ordering party may give its consent for entrusting a part of his contract to subcontractors with the proviso that each subcontractor must have independent knowledge, experience and a technical potential which is essential for the performance of the entrusted part of the contract. In effect of an analysis of this provision along with other provisions pertaining to subcontracting, one can see that the ordering party totally excludes the possibility of entrusting the entirety of the contract performance to the subcontracting party.  Additionally, it is presumed that the subcontractors have to be able to perform the entrusted part independently; they may not share the potential which is necessary to perform their part of the contract. The above is additionally possible only if the ordering party permits the use of subcontractors. In conclusion of this section, it needs to be added that even at the stage of contract performance the ordering party may refuse to conclude a contract with a subcontractor proposed by the contractor in cases provided for in the Decision.

The above provisions aimed at entrusting full control of the strategic contracts to the MoND per se perhaps don’t sound that bad, but when interpreted jointly they may lead to a conclusion that the MoND adopted a principle that a contractor should be an entity which independently meets all the requirements to perform a contract. There are exceptions to this principle but only to some extent. This is because these provisions may raise serious doubts if we analyze the structure of the national defense industry with large mother companies operating without an independent potential in terms of contract performance.  Firstly, according to the provisions thereof the Decision excludes a model where a mother company “with no potential”  independently applies for a contract with its subsidiaries as prospective subcontractors. Naturally, this depends on a specific arrangement of contract conditions, perhaps a sufficient “part of the contract: performed by the mother company will be specified in terms of having relevant organizational structures and financial potential for an undertaking, providing a warranty, etc. At each subsequent stage of the contract it is also necessary to clearly depart from this “typical” independent contract performance. Each time it is necessary to obtain a consent for joint application or partial use of subcontractors.

In conclusion, all depends on how the MoND will arrange a contract, and it has great liberty in this regard (though exposing itself to an allegation of exceeding the limits of exclusion under Article 346 of th TFEU).  These changes significantly make the results of a performed contract contingent upon proper arrangement of the conditions by MoND. This is because it suffices to know the structure of potential participants in the proceedings to adequately adjust the conditions of the contract.

Another novelty which deserves attention is a new catalogue of conditions for the exclusions of subcontractors form the proceedings to award a contract. There are multiple novelties in this regards, I will focus on only a few of them, the most dangerous ones.

First of all, a decision on withdrawal of the security clearance will entail the exclusion from the proceedings to award a contract. This does not exclusively pertain to an entity which applies for a contract, but also to a Member of the Board of such an entity. The problem lies in the fact that the text of the Decision does not answer a question to what period such a withdrawal pertains and for how long the bases for the exclusion will persist. One must be extremely careful and ensure that an  MoB currently holding this position has not received a withdrawal decision – or to phrase it otherwise – that upon receiving this decision the person receiving thereof is no longer an MoB.

A novel ground for the exclusion which deserves even greater attention is violation of Article 122a of the Law of Military Service of Professional Soldiers. Upon the opening of this legislative act one can notice immediately that the contractor or his subsidiaries are forbidden to employ soldiers bound to submit personal property declarations prior to the lapse of 3 years from the day of their being discharged from the professional military service, i.e. professional soldiers (apart from officers holding professional positions of military courts judges and positions of military prosecutors of the organizational units of the prosecutor’s office) and non-commissioned officers performing professional military service in financial and logistic bodies who, in the period of three years prior to their discharge from the professional military service, participated in the public procurement proceedings or in contract performance, where the former and the latter are very broadly understood. For instance, contract performance covers works acceptance where it was confirmed that all requirements specified in a contract and relevant provisions of law had been fulfilled.

Apparently, this is a very serious threat to Polish businesses operating in the armament industry. The above provision is formulated in such a way that both intended and unintended employment of such a soldier in a company or its subsidiary, regardless of a basis thereof (contract of employment, contract to perform a specific task) may potentially result in the exclusion of a business operator from contracts. This requirement appears even more dangerous in view of the fact that no temporal framework for the grounds for the exclusion has been specified.  Thus, if a company or its subsidiary employed a soldier, contrary to Article 122a, it may formally be recognized as a contractor who has infringed the provision which is a condition for the exclusion from contracts without any temporal restriction. This provision is so ill-conceived in terms of its formulation that we may only hope that the MoND will apply it reasonably.

Finally, to picture the problems related to the application of the Decision, I will make a fuss a bit by pointing to some “interesting” provision which the Decision has inherited from its predecessor. In terms of specification of the principles of concluding contracts the Decision indicates a short sentence “contracts shall be concluded for a specified period”. The value of this provision is only such that a contrario the employees should be told to avoid concluding contracts for an indefinite period. Reluctance to conclude such contracts is obvious, on the one hand, it is hard to estimate their value, on the other hand, under the Civil Code  this kind of contracts may be fairly easily terminated. Nevertheless, the order to conclude contracts exclusively for a specified period is exceptionally weird. The term “a contract for a specified period” is characteristic of the Labor law – in principle it is intended to refer to contracts which are temporal in their nature, characterized by a continuous or repetitive performance, where the term of the contract is predetermined.  If we take a look at this definition and try to apply it, we should understand that the contracting party may not conclude contracts which do not contain this kind of performance. Thus, for instance we should conclude that the ordering party may not purchase military equipment, because by its very nature, a sales contract may not be concluded for a definite period.  It appears that we are only left with a lease option or related options, or we may also trust in reasonable application of the Decision.

Stanisław Michałowski, Advocate

PhD candidate at the Faculty of Law and Administration of the University of Warsaw

Kruk & Partners Law Firm

Jarosław Kruk, Attorney-at- Law, Managing Partner

Kruk & Partners Law Firm

Jarosław Kruk
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