Change in the legal form of the contractor during ongoing public procurement proceedings

Many entrepreneurs, due to the nature of their business activities, obtain their contracts through public procurement procedures. We can imagine that during the course of the entire procedure, there may be a need to change the legal form of the business. In such a situation, the entrepreneur must consider what impact such a change will have on the ongoing public procurement procedure. In addition, the question arises as to whether such a change can be made after the conclusion of the contract for the performance of the contract or whether it should take place at the stage of evaluation of the tenders submitted in the procedure.Many entrepreneurs, due to the nature of their business, obtain their contracts through a public procurement procedure. We can imagine that during the entire procedure the need arises to change the legal form of the business. In such a situation, the entrepreneur must consider what impact such a change will have on the ongoing public procurement procedure. Moreover, the question also arises as to whether such a change may be made after the conclusion of the contract for the performance of the contract, or whether it should take place still at the stage of evaluation of the bids submitted in the procedure.

Change in the legal form of the contractor under the provisions of the Commercial Companies Code

A change in legal form may take place in various ways, i.e. through a merger, division or transformation. In all these cases, the Commercial Companies Code generally provides for universal succession, which means that all rights and obligations of the predecessor are automatically transferred to the newly created legal entity. This is confirmed by the case law of the National Appeal Chamber, which in one of its rulings clearly stated that “the general successor has the status of a contractor within the meaning of Article 2(11) of the Public Procurement Law, and is therefore entitled to apply for a contract, including by submitting a preliminary tender. Consequently, the possible selection of this contractor does not violate the provision of Article 7(3) of the Public Procurement Law[1]“ (currently Article 17(2) of the Public Procurement Law). However, the question of whether, with general succession, the knowledge and experience of the entity whose legal form has changed is also transferred requires clarification. The knowledge and experience of the contractor is necessary to meet the specific conditions for participation in a public procurement procedure.

Change of legal form of the contractor under the provisions of the Public Procurement Law

Public procurement law does not contain detailed provisions on the effects of a change in the legal form of a contractor during ongoing public procurement proceedings. The entire Act contains only one provision that refers to changes in the contractor’s legal form, but this provision relates to the stage of performance of the public contract, i.e. after the conclusion of the contract with the contracting authority. The above leads to the simple conclusion that as long as the change in legal form does not affect the contractor’s fulfilment of the conditions for participation in the procedure or the outcome of the tender evaluation, such action is not prohibited.

Changes in legal form may therefore be made both at the stage of evaluating bids submitted by contractors and after the conclusion of a contract for the performance of a public contract. The provisions of public procurement law do not exclude any possibility. However, a change in legal form at the stage of contract performance contains a certain restriction, which is a departure from the general succession provided for in the Commercial Companies Code. As a rule, in civil law relations, a newly established company is entitled to all the rights and obligations of its predecessor. Therefore, there is no need for a newly established company to conclude new contracts or amend contracts concluded before the change of legal form.

The exception mentioned above concerns the stage after the conclusion of a contract for the performance of a public procurement contract. Pursuant to Article 455(1)(2)(b) of the Public Procurement Law, “it is permissible to amend a contract without conducting a new procurement procedure […] when a new contractor is to replace the existing contractor […] as a result of succession, assuming the rights and obligations of the contractor, following a takeover, merger, division, transformation, bankruptcy, restructuring, inheritance or acquisition of the existing contractor or its enterprise, provided that the new contractor meets the conditions for participation in the procedure, there are no grounds for exclusion and this does not entail other significant changes to the contract, nor is it intended to avoid the application of the provisions of the Act […]. The replacement of the existing contractor in the contract may only take place in the event of universal succession, i.e. when one contractor assumes all the rights and obligations of the other. In the event of a change of entity, the new contractor must meet all the conditions for participation in the procedure and there must be no grounds for exclusion. A change of contractor on the basis of this provision may not entail other significant changes to the contract. The occurrence of significant changes to the contract should constitute the basis for the contracting authority’s decision to award a new contract.

The above-mentioned provision of the Public Procurement Law is the result of the implementation into the Polish legal system of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC, which allows for a change of contractor as a result of universal succession if the new contractor ‘meets the original criteria for qualification, provided that this does not entail other substantial modifications of the contract and is not intended to circumvent the application of this Directive.’ The above-mentioned directive also states that nothing prevents the successful tenderer performing the contract from undergoing structural changes such as internal reorganisations, takeovers, mergers and acquisitions.

Despite the fact that the Commercial Companies Code provides for the automatic succession of a newly established company to the rights and obligations of its predecessor, in accordance with public procurement law, a change of entity on the part of the contractor will be grounds for amending the contract with the contracting authority in the form of an annex. The above exception should be treated as a special provision in relation to the provisions governing general succession. A change of entity on the part of the contractor will be possible after the conclusion of the contract with the contracting authority if the newly established company meets the conditions for participation in the procedure as provided for in the Terms of Reference. As a result, although general succession will take place automatically in all contracts, in the case of public procurement contracts it will require an annex to the contract. The conclusion of the annex will be preceded by verification of the contractor by the contracting authority, which will be able to request the submission of evidence valid as at the date of submission, confirming that there are no grounds for excluding the contractor and that it meets the conditions for participation in the procedure.

A change in the legal form at the stage of evaluation of tenders is not restricted by any provisions of public procurement law. However, it is worth mentioning that despite this, the contracting authority may request the contractor to present evidence valid as of the date of submission (it may do so at virtually any stage of the procedure, in particular before selecting the most advantageous tender), if it becomes aware that the legal form of the contractor has changed.

Importantly, a change in the legal form of the contractor does not violate the principle expressed in Article 17(2) of the Public Procurement Law, which states that ‘the contract shall be awarded to the contractor selected in accordance with the provisions of the Act’. This is confirmed by numerous rulings of the National Appeal Chamber. The Court of Justice of the European Union also ruled on the issue of subjective changes to a public procurement contract in its judgment of 19 June 2008 in case C-454/06 Nachrichtenagentur GmbH v Republic of Austria. After analysing the grounds for the judgment, it can be concluded that changes to the subject matter of a public procurement contract are permissible if the change does not lead to the award of a new contract. A new contract is not awarded in the event of internal reorganisation of the contractor, as such changes do not significantly alter the provisions of the original contract. This was also confirmed in the opinion of the President of the Public Procurement Office, who stated that ‘the prohibition on changing the contractor of a public contract does not apply to cases of general succession resulting from a permitted transformation of an entity or inheritance, or cases of special succession by operation of law.’

Can the legal successor of a contractor rely on the knowledge and experience of its predecessor?

As indicated at the beginning of this article, it is necessary to consider the issue of transferring knowledge and experience to the legal successor of the original contractor. The ability to rely on knowledge and experience will be necessary when confirming that the conditions for participation in the proceedings have been met. Pursuant to Article 55¹ of the Civil Code, an enterprise is an organised set of intangible and tangible components intended for conducting business activity. The intangible components of an enterprise include the so-called know-how and the sum of the professional experience of its staff. In addition, other components of an enterprise not specified in the commented provision include, according to the doctrine, favourable factual situations and other economic values that are not subjective rights, in particular: clientele, reputation, goodwill, location, possession of property, expectations, production secrets, organisational system, market information, production and commercial experience, access to credit, and the degree of collectability of receivables. Some factors may be difficult to grasp, immeasurable or unquantifiable.

The case law of the National Appeal Chamber indicates that knowledge and experience are inextricably linked to the enterprise and cannot be traded separately from the enterprise; experience is a component of the enterprise as an entity and therefore shares its legal existence. The acquisition of an enterprise and the takeover of its human resources must take place with all the consequences associated with the fact that the acquisition of an enterprise leads to the acquisition of everything that constitutes the enterprise. In the event of the takeover of employees by the legal successor of the contractor, the transfer of knowledge and experience should not be questioned by the contracting authority.

From the above, it can therefore be concluded that, with the change in the legal form of the contractor, there is a transfer of intangible assets, in particular the knowledge and experience of the original contractor. The new contractor will be entitled to rely on the knowledge and experience acquired during the course of its predecessor’s business. This is primarily due to the fact that the newly established entity will operate through exactly the same set of tangible and intangible assets (enterprise) as its predecessor. There is therefore no risk that the contracting authority will consider that the new entity does not have the experience of its predecessor. This is also confirmed by the very wording of Article 455(1)(2)(b) of the Public Procurement Law, which assesses the conditions for transformation solely from a formal perspective and does not go into details concerning the actual transfer of knowledge and experience.

Summary:

• • a change of the legal form under the provisions of the Public Procurement Law and the Commercial Companies Code is not prohibited, regardless of the stage at which it is made;
  • a change of the contractor’s legal form at the stage of evaluating tenders is possible, however, it may be connected with the need to present evidence valid as of the submission date
  • a change of the contractor’s legal form after conclusion of the contract forces the contractor to conclude an annex to the contract with the contracting authority;
  • as a rule, as a result of the change in the contractor’s legal form, all rights and obligations are transferred to the newly established entity;
  • along with the transfer of all rights and obligations , there is also a transfer of knowledge and experience, as the contract will continue to be performed by the same enterprise, only conducted through a different legal form.

[1] Judgment of the National Appeal Chamber of 12 October 2009, ref. no. KIO/UZP 1216/09.

Author: Łukasz Laskowski, trainee advocate