IT agreements in public procurement – what needs to change?

Authors
Sebastian Pietrzyk
Bartek Tomaszewski

It goes without saying that the pandemic has turned our lives upside down. Covid-19 has definitely reshaped both our private lives and the way enterprises operate in Poland and around the globe.

Business has begun its relocation into the digital realm in terms of daily management (e.g. meetings are now often held on Zoom or Teams), document workflow (everything is collected and processed in the digitized world) and sales channels (the use of online platforms is already very common and still keeps getting increasingly popular).

Have public authorities and entities obliged to apply the Public Procurement Law also recognized the need for digital transformation and remodeling of their business operations, including the implementation of more digital solutions and tools? We believe that they have. Has this been followed by openness towards broader cooperation with IT solution providers? Not necessarily…

This is clear e.g. from the draft contracts created by contracting authorities, which form part of the public procurement documentation. Below we would like to point out a few areas, with examples of clauses found in draft public procurement contracts, which form a barrier for an IT integrator to join a project, thus preventing the submission of an effective bid and potential cooperation with the contracting authority.

Transfer of copyrights

One of the main barriers is the contracting authority’s expectation that the contractor will transfer proprietary copyrights to works created or delivered as part of the performance of the agreement.

Upon the execution of the handover report, the Contractor transfers, and the Contracting Authority acquires, all proprietary copyrights to the works, as defined in the Copyright and Related Rights Act of February 04, 1994, created or delivered by the Contractor (the “Works”), especially the Report, along with the right to adapt them or any part thereof (derivative copyrights), as well as the exclusive right to freely distribute and use such adaptations (the right to exercise derivative copyrights). Together with the rights to the Works, the Contractor transfers – to the Contracting Authority – the ownership right to the date storage devices on which it has transferred the Works.

The expectation that the contractor will transfer proprietary copyrights to the works created or delivered by the contractor during the performance of the agreement often results from the fact that contracting authorities spend too little time on the actual and legal analysis of the circumstances related to the products that the contractor supplies. They believe (wrongly, in our opinion) that a clause based on which proprietary copyrights “to everything delivered by the Contractor” pass to the contracting authority is in the contracting authority’s interest and ensures that the contracting authority effectively obtains intangible rights to the works, along with complete legal protection.

This assumption is wrong for at least two reasons::

  • First of all, when performing services, contractors often use materials or IT tools that were developed by them before; this applies to documentation and software elements created before or alongside the implementation of the project for the contracting authority. Contractors use such “standard works” in the for various projects, not exclusively for a specific contracting authority. Consequently, they do not want to be deprived of proprietary copyrights to these works. If this happened, in most cases [1] the contractor would not be entitled to effectively continue using and managing its rights to these works without the contracting authority’s consent.
  • Secondly, IT solutions and IT services provided by contractors may contain elements (works/products) of third parties, i.e. individuals/entities other than the contractor. A typical example is the activity of an integrator that integrates an IT system whose base is a computer program of another entity, or uses a data warehouse to which rights are also held by an entity other than the contractor. In such a case, expecting the Contractor to transfer proprietary copyrights to works that do not belong to it would be considered an excessive requirement [2]. to say the very least. No responsible contractor will undertake to transfer rights that it has not effectively acquired, and even if it does undertake to do so, such a transfer will be ineffective [3].

Ensuring the delivered solution’s/product’s compliance with applicable laws

Sample clause:

„The contractor undertakes to perform the Agreement in a timely and adequate manner, with professional due diligence, in accordance with applicable laws and standards, and without any breach of third-party copyrights.”

It might seem that such a clause reflects the contractor’s obvious obligation and is neutral towards the contractor; after all, any professional contractor complies with applicable laws, and should not be concerned about such a contractual provision. However, a closer look allows us to see that this is not only about the contractor’s obligation to abide by the laws that apply to the contractor but also (or even especially) those that apply to the contracting authority.

Let’s think of an example in which the contracting authority is an entity operating in the medical sector, i.e. one that is regulated by special laws. The contracting authority (with the support of its legal advisors) should know these regulations better than anyone else, and should meet the requirements resulting from them in its daily business operations. An IT service provider, even though it operates in a particular sector and has experience with the products used therein, is not in a position to guarantee that the product offered complies with the regulations governing the contracting authority’s business operations. An IT service provider operates primarily in the IT space, frequently also developing and consulting on business strategies, but is not familiar with the regulatory field. To put it briefly, IT companies are not law firms that constantly monitor and analyze legislative changes. Of course, some IT companies (whose internal policies allow them to do so) engage law firms to cooperate on a given project, and can thus meet the contracting authority’s expectation that the IT solutions offered by the contractor will be consistent with legal requirements applicable to the contracting authority. However, we think that such a model is not cost-effective (while submitting a bid, the contractor would also need to add the cost of legal services and valuate the risk of accepting responsibility for such an obligation), which – given the fact that the price is still the main selection criterion in many public tenders – automatically reduces its chance of winning the contract. It would be more effective if the contracting authority (that has the knowledge and resources necessary for a legal analysis) converted the relevant legal requirements into specific technical, IT, business and any other requirements that apply to the project, instead of encumbering the contractor with obligations that go far beyond the scope of its business object. In case a new legal requirement arises during the project / agreement performance, and has a direct impact on the product made by the IT contractor, the solution is to use an update tool, i.e. the change request procedure.

Contractual right of rescission

“The Contracting Authority will have the right to decide whether the rescission covers all or part of the Contract (partial rescission). When exercising the rescission right, the Contracting Authority shall indicate whether the rescission applies to the entire Contract and is retroactive, or whether it applies only to part of the Contract and takes effect as of the date specified in the rescission notice. If no such information is provided, the rescission will be deemed to have a retroactive effect and to cover the entire Contract. If the Contracting Authority indicates (in the rescission notice) that the rescission only concerns part of the Contract, the Contracting Authority shall also specify whether and which Products made as part of the Contract it wants to retain. The right referred to in the first sentence of this clause will be held by the Contracting Authority regardless of whether or not the specific Product has been completed by the Contractor, or whether or not it has been formally accepted by the Contracting Authority. If the Contracting Authority retains any Products, the Contracting Authority shall pay the Contractor a fee for the Products retained by the Contracting Authority. Such a fee shall be determined on the basis of the Contract and – if the above turns out to be insufficient (e.g. in the case of unfinished Products) – in relation to the progress status of the completion of the Products and their suitability for the Contracting Authority. The contractual right of rescission can be exercised by the Contracting Authority until 2030.”

The parties’ decision to go their separate ways during the performance of the contract (otherwise than as a result of the contract’s expiration) is definitely the last resort – after all, the contracting authority and the contractor did not become involved in the implementation of a public project, allocating adequate funds and resources (including personnel), in order to subsequently decide to discontinue the performance of the contract. For the purposes of this article, we disregard extreme came; instead, we are trying to show that a highly one-sided and “aggressively” structured rescission clause in favor of one party (in most cases, the draft contract gives such a possibility primarily to the contracting authority) is not really in the interest of any party.

This is due to the fact that a significant portion of public projects in the IT field, especially those performed in the “time & material” model (fee for the performance of services), cannot be performed by a reasonable contractor in the case of an excessive financial, business, legal and reputational risk.

What are the main risks for an IT contractor in our opinion?

  • The contracting authority’s possibility to rescind the contract with respect to properly performed services and received products / accepted stages, etc.
  • A very long period in which the contractual right of rescission can be exercised.

It is not our intention to determine [4] the effectiveness (or lack thereof) of specific contractual clauses regarding rescission. We would only like to point out that if the draft contract provided by the contracting authority includes a rescission right which the contracting authority may exercise in the case of a delay in the contractor’s performance of services e.g. in the seventh month of the contract term, and the services in the months preceding the rescission were performed properly and the contractor received the fee for them (e.g. paid monthly on the basis of time sheets of the contractor’s staff), the full rescission of the agreement (ex tunc) would be an extremely unfavorable scenario for the contractor.

In addition, the contractor’s option to use such a contractual right of rescission creates a state of significant business uncertainty and a huge accounting/tax chaos as the contractor is obliged to return the fees received from the contracting authority and is often not entitled (since the contract explicitly precludes such a possibility) to seek the contracting authority’s payment of a fee in return for the use of certain solutions received from the contractor (e.g. in the form of a license), or the use of products delivered to the contracting authority. If the rescission clause also makes it possible to rescind the agreement retroactively, e.g. within a period of 3 years from the agreement completion date, this is certainly a serious obstacle preventing potential contractors from submitting their bids and performing a contract under such conditions.

Communication with the contracting authority at the tendering stage

Unfortunately, not all contractors that submit bids in public procurement procedures in the broadly-defined IT industry properly analyze the provisions of draft contracts. Some probably assume that such an agreement is a non-negotiable template imposed by the contracting authority, with no modification possibilities. Others might be guided by the well-known (not only in public procurement) principle of “We will worry about that later.”

However, we would definitely encourage a thorough analysis of the future contract. This will allow you to submit a properly calculated bid and mitigate / get rid of many risks associated with the subsequent performance of the contract. We do not claim that you can eliminate all of them, but at least those that are crucial in the sector in which a given contractor operates.

We also strongly recommend open communication in both directions because the interests of the contracting authority and the contractor should coincide, at least when it comes to the efficient and adequate performance of a public contract. Needless to say, the Public Procurement Law does not provide for “business meetings” but at least makes it possible to arrange a meeting of contractors at the initiative of the contracting authority. Such a meeting, (in many cases more than one would be necessary) should not only serve as a ground for expressing one’s opinions and arguments but should instead act as a platform that allows the parties to develop a cooperation model that is effective and transparent, at the same time evenly distributing the parties’ rights and obligations.

In the first part of this article, we presented sample (and somewhat extreme, in our opinion) clauses that make some contractors decide against participating in a tender and submitting a bid despite the fact that the IT solutions they offer are innovative and virtually tailor-made for the contracting authority. Do such contractors have any tools to modify those clauses? From the formal point of view, they have several solutions to choose from.

A fairly common tool is “questions about Terms of Reference.” However, they may turn out to be useless if a contractor’s substantiated opinions and comments on the contractual provisions, sometimes with suggested changes or additions, are only met with a brief response from the contracting authority: (i) “as in the ToR”;, (ii) “we do not agree”, (iii) “the contracting authority will keep the provisions of the contract unchanged.”.

We perfectly understand that the responsibility for the organization of a public tender and for the use of public funds might be huge, but the lack of reaction or even some consideration on the comments made by contractors does not reduce this responsibility at all. We believe that, in fact, the responsibility gets even bigger. We are by no means saying that such behavior is the rule among contracting authorities. We could say that in a large part of public procurement processes, the contracting authority talks to the market and communicates with contractors in such a way as to clearly explain why certain solutions adopted by it (including contractual provisions) are necessary and right within the framework of a specific IT project. We would like to encourage all contracting authorities to engage in such communication because it will certainly help avoid many unnecessary discussions at the project implementation stage, including ones about early termination.

Having said that, we would like to promote the principle of even greater involvement and understanding of processes among both contracting authorities and contractors. The latter would definitely like to know the actual needs of their client (especially one with whom/which they have not worked before) prior to entering into a public contract.

Dispute with the contracting authority

Sometimes the contractor has no other choice but to file an appeal with the National Appeals Chamber against unfavorable or unlawful provisions included in the draft contract. This is because it is difficult to get to know the arguments of the contracting authority in any other way. Comments like “no changes” might indeed convey the key message but are definitely not sufficient for anyone to understand all the intentions of the other party to the contract.

The currently binding version of the Public Procurement Law expressly provides for the possibility to object to the draft contract. In the past, this was not entirely clear (at least that’s the conclusion one can draw from the inconsistent rulings of the arbitrators of the National Appeals Chamber) whether contractors were entitled to file appeals that only concerned the draft contract. As of today, there is no such doubt any longer. We wish to point out that the scope of an appeal does not have to be limited exclusively to the so-called prohibited clauses listed in the Public Procurement Law. If, in the contractor’s opinion, a contractual clause is inconsistent with the Public Procurement Law and/or other regulations, the contractor has every right to seek assistance from an independent authority, i.e. the National Appeals Chamber.

 

We can see that appeals regarding contractual provisions are less common than ones against the public procurement procedure. This is not just about statistics but also about what we can refer to as the “judicial approach.” Disputes over contractual provisions very often enter highly specialized grounds, which is definitely the case when it comes to IT projects and related implementations. In the first part of this article, we highlighted selected aspects (e.g. proprietary copyrights) that need to be pointed out to arbitrators and other participants during appeal proceedings. We frequently go beyond an analysis of whether the contracting authority has violated a specific law, and enter the realm of business estimation of risks, liability, costs and project structure / nature. For some lawyers, including arbitrators, this might feel like being outside a comfort zone, evoking a desire to avoid an in-depth examination of the “problem.” We understand that appeal proceedings are first and foremost supposed to be smooth and efficient. There is a ten-day time limit to file an appeal, a hearing is usually held within two weeks, and gets completed within a day. When compared to cases in common courts of law in Poland, the processing times above may seem unimaginably fast.

However, we believe that the principle of speed in resolving disputes at the National Appeals Chamber cannot override proper and fair consideration of the case, including the use of experts.

We believe that an appeal to the National Appeals Chamber is very often the only way to present one’s opinions and arguments. Many contractors are apprehensive about such a solution because of the potential consequence that they refer to as “compromised relations with the contracting authority.” It is difficult to debate the subjective conviction of this kind but in our opinion and based on our experience, the exact opposite is true. Those contractors that have pursued their rights in the manner provided by applicable laws have managed to maintain or establish relations of a more permanent and valuable nature.

In extreme cases, some contractual provisions may be invalidated, especially based on the Competition and Consumer Protection Act – if found to be an abuse of the dominant position. But this is a completely different issue that deserves its own article, perhaps also in “Zamawiający” magazine.

Summary

Summing up, we wish to make it clear once again that as long it does not contradict the nature of the legal relationship and does not constitute a violation of applicable laws, the parties are free to form mutual obligations in any way they want.

Solutions such as the transfer of proprietary copyrights to the Contractor’s works created in the course of the contract performance, the undertaking to comply with applicable laws, and the rescission right are all perfectly lawful and can be adopted.

Our goal is to point out that the use of certain contractual clauses, e.g. ones quoted in this article, without a proper critical analysis may pose a much greater risk to the effective implementation of the project than the development of mutually favorable conditions of cooperation between the parties. Our opinions are based (among others) on practical experience, i.e. situations in which some contractors did not pay much attention (to put it very mildly) to the draft contract, thus failing to fully analyze the risks related to its performance. This lack of basic diligence in the preparation of a bid allowed them to express their readiness to handle the project at a relatively low price. Everything had been going well for the parties and especially for the contracting authority until the first problems emerged with the implementation of services in a proper manner, i.e. in accordance with the scope
and level of quality specified in the agreement. Despite unilaterally favorable (for the contracting authority) contractual clauses, it was not always possible to hold the contractor accountable, e.g. because it was an entity without an established position in the market and without adequate financial resources.

We are by no means claiming that only large IT corporations have the right to participate in public tenders and that they can guarantee proper performance of the agreement. What we are saying is that:

  • the contracting authority should take time to analyze the arguments raised by contractors that object to clauses which are strongly one-sided, don’t match a given project or simply expose the contractor to huge financial and tax risks. These arguments are largely the result of a meticulous analysis of the potential risks associated with the performance of a given public contract on the basis of the contractual rules determined unilaterally by the contracting authority;
  • the introduction of mechanisms intended for ongoing communication between the parties, and prompt reactions to improper performance of the contract form a highly effective model for the selection of a reliable contractor and successful project implementation.

Footnotes

  1. Of course, there are various solutions giving some flexibility in this regard, e.g. granting a broad back-license.
  2. We skip considerations about the resale or back-licensing mechanism.
  3. 3. Based on the principle of nemo plus iuris in alium transferre potest quam ipse habet [no-one can give what they do not have].
  4. It is not possible here to analyze in detail the concept of the contractual right of rescission and its effects, which is shaped by the Civil Code Act and the Copyright and Related Rights Act.

Article 433 [Abusive clauses] A draft contract cannot contain provisions involving:

  1. the contractor’s liability for delay, unless justified by the circumstances or scope of the contract;
  2. contractual penalties for the contractor’s action that is not directly or indirectly related to the scope of the contract or its proper performance;
  3. contractor’s liability for circumstances for which the contracting authority is exclusively responsible;
  4. the contracting authority’s ability to limit the scope of the contract without specifying the minimum value or size of the parties’ services.

 

The article, “IT agreements in public procurement – what needs to change?”, was published in the May – June issue of “ZAMAWIAJĄCY” magazine. Feel invited to download the full article as a PDF file (Polish language only).