A very interesting theme has recently emerged in our practice concerning regulated activities and situations where such activities are carried out by entities without the appropriate authorisation. However, I am not referring to the consequences of a public law nature, usually in the form of administrative and sometimes even misdemeanour or criminal sanctions. I would like to look at the consequences that the absence or loss of the relevant powers has on the ability to perform the contracts concluded.
We live in such a complex and complicated economic reality that no one is surprised anymore that a large part of the economy functions in a more or less regulated form. While ideas of complete deregulation sometimes appear at the antipodes of political thought, it can be considered that there is currently a consensus that part of the strategic sectors of the economy operate in a formula that gives the state authorities the possibility to control, interfere, grant and also take away the necessary powers. This is how the energy, armaments or water supply industries have operated for years. Authorisations to carry out specific activities have also been a necessary component of the waste industry for years, and the entire industry operates on the basis of permits which regulate the emissions of plants.
I am deliberately simplifying the issue by lumping together entries in registers of regulated activities, concessions, permits or permissions granted for the operation of a specific installation. Regardless of the manner in which the entitlements in question are obtained, their absence results in the given entity being unable to continue operating within the regulated scope and its counterparties losing the possibility of cooperation with it.
It is worth looking at specific cases in this regard. Imagine an installation for the production of steel castings. Due to the carbon intensity of this activity, the operator has an integrated permit that specifies the permitted emission levels as well as the technologies that must be used in the installation to reduce these emissions. The operator contracts casting orders, and its contractors placing the order are convinced (and usually assured by the operator) that the installation has an integrated permit or another permit allowing it to operate legally. If the permit is not in place, the installation will not be able to operate legally and therefore will not be able to fulfil the order.
Another example would be an entity entering into a contract for the sale of electricity in a PV installation it operates (so-called PPA). When entering into the contract, his counterparty will certainly expect that the generator has a generation licence or an entry in the register of small installations (depending on size). The absence of a licence (or registration) will mean that the installation will not be able to deliver the agreed amount of energy and the contract itself will be useless to the customer.
Lack of authorisation at the time of concluding the contract
What, then, is the market standard of professionalism in verifying that a contractor has the relevant administrative decisions? It seems to be quite high. However, a distinction must be made between a situation where the contractor is misled, a situation where it fails to exercise due diligence in examining the other party to the contract, and a situation where the authorisations are lost as a result of specific circumstances.
In the first case, the question arises as to whether effective misleading is possible. If we are dealing with an entity that should be listed in a publicly available register (e.g. electricity producers), misleading the other party as to the possession of the relevant rights is difficult and places a greater burden on the other party, which failed to verify the contractor despite being able to check publicly available data. However, if the information is not publicly available or is out of date due to a failure to update the register, the liability of the other party is significantly reduced or even completely waived. Furthermore, in such situations, the content of statements made to the other party should always be assessed in the context of the possession of all legally required consents, authorisations and permits to perform the subject matter of the contract.
From a legal perspective, this situation can be assessed in several ways. On the one hand, there is case law stating that this is simply a problem for the contractor and if they cannot perform the task entrusted to them due to a lack of appropriate qualifications or authorisations, they are simply liable for damages. In such circumstances, however, the sequence of events usually causes enormous losses on the part of the misled party, in particular due to the inability to perform its own tasks, which often have a lot to do with the public utility sector (energy or waste management). In such circumstances, the disruption of cooperation due to non-performance causes a cascade of consequences that go beyond the relationship between the two entrepreneurs. A good solution on the part of the misled party would certainly be to take steps to exit the toxic contractual relationship by invoking the conclusion of the contract under the influence of error.
It may also be considered whether a situation in which one of the parties has no legal possibility to perform its part of the contract constitutes a so-called original impossibility of performance. This is a situation in which it is clear from the outset that the performance of the contract will be impossible (legally or physically). If the contractor cannot perform the contract from a legal perspective, such a contract may be considered impossible. In such a situation, the Civil Code provides for a sanction of invalidity and such a contract cannot be remedied in any way. The literature does indicate that impossibility can only be objective, i.e. it cannot relate to the situation of a specific contractor, but this is not a unanimous view.
Loss of authorisation during the performance of thecontract The situation is different if the contracting party had the relevant authorisation, but lost it during the performance of the contract. Here, the degree of culpability of the party that lost the authority to perform the contracted activity will play a key role. If the counterparty is liable for their loss then they will most likely also be liable for non-performance of the contract to their counterparty. A good example in this respect would be the situation of an entity that had a permit to process mixed municipal waste, but conducted its operations in a way that violated fire safety rules. As a consequence, his permit has been revoked by the competent authority and his contractors (including, above all, entities collecting waste from property owners) can no longer supply him with waste despite their binding contracts.
If, however, the loss of the authorisation was due, for example, to a change in the law which would declare the waste treatment technology in question unacceptable, the entrepreneur’s liability would no longer be so clear-cut. Then we could speak of a consequent impossibility of performance (although also in this case it is often indicated that it must be an objective impossibility – unrelated to the conditions of a specific entity). Such impossibility, in turn, results in termination of the obligation without mutual compensation. Since the technology in question is no longer legally permissible, any operator of such an installation can no longer carry out its previous activities through it. Under such conditions, the condition of the objective character of the obstacle is fulfilled and the parties – rightly – do not have to worry about possible claims for damages. This is also in relation to the general principles of liability for damages – since no one is at fault for the cessation of contract performance, no one should be liable for damages in such a situation either.
The above considerations are only an introduction to a discussion of all the possible consequences of not having the necessary authority to carry out regulated or environmentally burdensome activities. Nonetheless, the topic is extremely interesting and certainly any such case will pose a real conundrum for the lawyers dealing with it.
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