Legal Mechanisms for Adapting Contracts to Changing Economic Conditions in Professional Dealings

Over the last few years, there have been significant changes in the economic market that have destabilised the economic situation in the country. The prices of natural resources and energy have been increasing significantly, as well as the cost of labour and the inflation rate. Contracts concluded for many years or where the performance of the obligation is remote from the date of agreement may not reflect previously made assumptions. Losses caused by market instability can affect each party and expose them to unforeseen problems. There are many reasons for this. One of the most important is ever-increasing inflation, which reduces purchasing power and adversely affects the prices of goods and services. Price rises affect not only electricity or fuel, but also basic products such as food. Considering the statistics provided by the Central Statistical Office

‘The Central Statistical Office (hereinafter, CSO) is a central organ of government administration; competent in matters of statistics is the President of the CSO who performs his tasks with the help of public statistical services’ (definition indicated in accordance with Article 23 of Law on Public Statistics Act of 29 June 1995, Journal of Laws of 2021, item 955).

As already indicated, the unstable economic situation may significantly affect contractual provisions, making them inadequate over time. Hence, it is necessary to shape the legal relationship in a way to secure, as fully as possible, the interests of the concerned parties. In accordance with the principle of freedom of contract expressed in Article 353¹ of the Civil Code, the parties entering into a contract may arrange the legal relationship as they wish, as long as the content or purpose thereof does not contradict the nature of the relationship, the law, or the principles of social coexistence.

Article 353¹ of Polish Civil Code of 23 April 1964, Journal of Laws of 2020, item 1740. Hereinafter, CC Act.

In practice however, despite the lack of doubt as to the benefits associated with including such clauses in the contract, in many cases these reservations are omitted or inappropriately drafted. This problem is common, particularly among smaller entrepreneurs, and most likely results from a long-standing market stability, which ensures certainty of relations and reduces the risk of unforeseen losses. In addition, the matter of indexation clauses itself is a legal institution, which the legislator has formulated quite commonly using general principles of law as a basis and giving the parties broad freedom in constructing their provisions. However, such extensive liberty has at the same time contributed to the greater disorientation of entrepreneurs while creating contracts and securing their own interests. Currently, the problem of proper construction of valorisation clauses in Polish law has been noticed by the legislator, who proposed a model clause under the Public Procurement Law, which allows to avoid possible construction errors and can serve as an inspiration for other entrepreneurs.

Considering the above, it can be concluded that the issue of contractual valorisation clauses is, despite appearances, a subject which raises many practical problems. Many entities on the market somehow got used to the status quo in trading and often unreflectively have concluded subsequent contracts without taking into consideration fluctuations and changes in the economy. This phenomenon is particularly alarming in the professional trade, which due to its nature should be characterised by a high level of competence and foresight. Therefore, considering inflation predictions and market destabilization, indexation clauses should be widely used to provide greater certainty in trade, especially among professional entities, who should implement new solutions and benefit from the knowledge of experts in this field.

In contract law, the basic rule for the performance of monetary obligations is the principle of nominalism, which indicates that in the majority of cases performance is accomplished by the payment of a nominal sum

Article 358¹ § 1 of CC Act.

Modifications adapting the content of the contract to the actual conditions are of great practical importance and prevent potential conflicts between the parties. Above all, they ensure equality between contractors by securing their interests in the same way and by equalising the level and distribution of risk. The inclusion of a clause in the contract will not allow one party to improve its position at the expense of the other party, which will not receive an amount appropriate to the one previously agreed upon. What is more, this mechanism will work both in the case of increasing and decreasing the amount of remuneration so each of the parties is protected in the same way. The contractual valorisation shall ensure performance of the obligation in accordance with its original content in a manner corresponding to its socio-economic purpose, principles of social coexistence, and established customs, if they exist in this respect.

Article 354 of CC Act.

The valorisation mechanism may refer to various value measures, and the parties are free to construct it. One of the most commonly used is the gold clause,

Zdzisław Gawlik, ‘Umowne Klauzule Waloryzacyjne’ [‘Contractual Valorisation Clauses’] (1991) 4 ‘Rejent’ 62.

Practice has shown that adequate formation of an adjustment clause and its adaptation to a specific contractual relationship raises many problems. The issue of including provisions securing the interests of the parties seems to be an obvious matter, but not for all entrepreneurs. Many of them treat the negotiations in this respect as a waste of time and try to avoid or shorten them to the minimum. In practice, there are still traders who do not understand the importance of such provisions and the fact that they are drafted only as a precautionary measure, in case of unforeseen situations, and not for a period of stability and certainty. Also, frequently those precautionary clauses do not reflect the reality and provide little protection against potential losses. This state of affairs may result from, inter alia, misconceptions regarding the drafting of such reservations and not detailing them sufficiently or, possibly, from a lack of universality in use, which consequently contributes to less knowledge in this area. Currently, as already mentioned, during times of unstable market situations, such clauses should be commonly included in contracts, especially those of a long-term nature. This necessity, which responds to the needs of entrepreneurs in the market, has also been recognised by the legislature. At the beginning of 2021, the provisions of the new Public Procurement Law came into force,

Public Procurement Law Act of 11 September 2019, Journal of Laws of 2021, item 1129. Hereinafter, PPL Act.

The example of a model valorisation clause in the Public Procurement Law seems to be an appropriate one to analyse and use in a situation where an entity encounters certain problems while constructing clauses of this type for its own purposes. There are several reasons for this. First, this is a clause expressing the rationality of the legislator, who with knowledge of the entire legal system and the mechanisms it contains, creates new solutions that may be replicated within the indicated limits. It is assumed that the solutions proposed by him are the best possible proposals and are coherently connected with the entire legal system, despite its breadth and diversity. Therefore, it is certain that the regulations will apply to reality and will not be affected by any constructional errors. Also, the Public Procurement Law itself refers in its content to the provisions of the Civil Code in Article 8 § 1,

Article 8 of PPL Act.

As has already been indicated, the obligation to include indexation provisions expressed in the PPL applies to construction work contracts or other service agreements concluded for a period longer than twelve months. The clauses incorporated in the contracts are to specify the principles that will be applied in the event of changes of the prices of materials or costs related to performance. Article 439, Section 2 of the PPL indicates obligatory elements that should be included in these types of provisions.

The first element is the necessity to indicate the level of change in the price of materials or costs, which will entitle the parties to demand a change in remuneration. Most often, it is expressed as a percentage, and not as a sum, for the sake of greater clarity and adequacy of such provisions.

Jerzy Bieluk Katarzyna Zadykowicz-Sokół, ‘Umowa o Roboty Budowlane w Kodeks Cywilnym i Prawie Zamówień Publicznych. Komentarz Praktyczny z Orzecznictwem. Wzory Pism’. [‘Contract for Construction work in Civil Code and Public Procurement Law. Practical Commentary with Case Law. Contract Templates’.] 2nd edn (C.H. Beck 2020) 439–65.

Another mandatory element is the need to indicate a starting date, which will be a reference point for determining the change in remuneration. The selected time will be the date on which the change will enter into force. It is worth emphasizing, that despite the legislator's indication of a specific assumption in the provision that agreements shorter than a year should maintain their durability, it cannot be excluded that the need for valorisation may occur earlier and the obligation relationship may be modified within a shorter period of time.

Ibid 16.

The legislator also formulates the necessity to define a way how to determine the change in remuneration. The act proposes two gauges to assess the level of changes in the prices of materials or costs, which are necessary for the performance of the contract, and which alteration entitles the parties to demand a modification of the amount of remuneration. The first one is an index, which allows the parties to track price changes, such as the already mentioned consumer price index published in the announcements of the President of the CSO, which compares the prices of given materials and services on the market and how their value alters over time. The legislator also allows for the indication of another basis, which substantively demonstrates the level of modification in the prices. An example of such reference may be the catalogues of material expenditures, which specify unit billing outlays needed to prepare cost estimates or indexes published in periodically issued guides by commercial specialist publications, such as Sekocenbud.

Ibid 21.

Another requirement is to specify the manner in which the changes in the prices of materials or costs will affect the expense of performing the contract itself. This method must be objective so as to give a clear idea of how the final costs have been affected. In order to apply an indexation, a change in market prices alone is not sufficient; it is also necessary to establish how this modification of price affected the cost of performance because not every alteration of prices has an adequate impact on the amount of costs incurred in the performance of a contract.

Ibid 20.

The article must also specify the periods during which the contractor's remuneration may be changed, which in practice means a necessity to regulate the frequency with which it will be possible to request a change in compensation. This will ensure the flexibility of the clause and allow for its real application, especially in case of multistage and long-lasting projects. For example, the parties may agree to change the remuneration after the completion of a part of the project, or during one of its stages, or for the future, in relation to those services which have not yet been performed.

The last set obligation is to determine the maximum number of changes in the remuneration. A properly determined amount should consider the duration of the contract and price fluctuations, including a prediction of their changes. These factors will effectively determine the maximum value of the contract modification, which is of great importance for the business of the contracting party, who has certain budgetary constraints and will have to acquire supernumerary funds to cover additional expenses caused by price changes.

Ibid 20.

Including the above elements will lead to the formulation of a clause that will remarkably protect the interests of parties in case of price changes. While the issues concerning the determination of the level of changes in the prices or the indication of the manner of how to determine their modification by making a reference to certain yardsticks are commonly taken into account, relatively rarely do parties have problems with their correct formulation. While the issues concerning the indication of initial dates as reference points or the firm determination of the manner in which such changes are to affect the cost of the contract are not such obvious elements and are often omitted or formulated in a blanket manner that may be interpreted differently. Following the statutory model created by the professional and adapting it to one's own needs will help to avoid the difficulties in application of the clause in reality. It will also help to effectively safeguard against those contingencies that non specialists may not foresee. The following clause, based on the previous discussion, may serve as an example of a provision drafted in accordance with the above principles:

The Ordering Party provides for the possibility to change the amount of remuneration specified in § 1 of the Agreement in event of a change in the price materials or costs related to their execution of the order by 20% in comparison to the level of prices of materials or costs determined on the day of submitting offers. The initial date for establishing the change of remuneration shall be the date when the prerequisite occurs, i.e. the price of materials or costs related to order completion increases by 20%. Any possible change in the Contractor's remuneration shall be based on a change in the price index for construction and assembly production, established by the President of the Central Statistical Office. A request for modification of the remuneration due to material price changes can be submitted not earlier than after 6 months from the date of conclusion of the agreement. Any subsequent changes to the remuneration will be possible with reservation that they are no more frequent than 3 months. The request shall set out the factual and legal grounds for the claim and shall contain a precise calculation of the amount of remuneration to be paid after adjustment, in particular showing the link between requested amount of remuneration increase and the impact of the price change. Total maximum value of the remuneration change, allowed by the Ordering Party as a result of the application of an indexation, is 4% of the remuneration. The adjustment shall apply exclusively to the subject matter of the agreement which has not yet been performed by the Contractor and has not been accepted by the Ordering Party before the date of submission of the application.

Inspired by the regulations of an exemplary contract associated with the PPL, see: <https://www.platformazakupowa.pl/file/get_new/2d77ad3c11e93cf0c4197f6529ea56e8.pdf> accessed 14 November 2021.

Finally, it is also worth mentioning that the indexation clause from Article 439 is not the only provision of this kind included in the PPL. Another one, introducing the necessity to include indexation clauses, is the Article 436 Section 4 Letter b, which in the case of agreements concluded for a period exceeding 12 months, imposes an obligation to include rules regarding the modification of the amount of the contractor's remuneration, in the event of a change of the provisions of law influencing the costs and performance of the contract. The legislator mentions there that the changes may concern, among others, the rate of tax on goods and services, excise tax, the amount of the minimum remuneration for work, the amount of the minimum hourly rate, the rules of being subject to social insurance or health insurance or the amount of the contribution rate for such insurance, as well as the rules of collecting and the amount of payments to employee capital plans.

Article 436 section 4 letter b of PPL Act.

The above-mentioned analysis is based on considerations regarding the inclusion of an indexation clause in the contract in case of the occurrence of unforeseen changes in the market. However, quite often in practice, the parties are not so cautious and do not provide any contractual regulations that would allow for the modification of the relationship. This does not mean, however, that the contractors do not have other legal possibilities to restore the contractual balance and are nevertheless obliged to provide the performance that does not reflect the original assumptions. In the Civil Code, the legislator has provided certain clauses that allow judicial modification of the contractual relationship if the relevant prerequisites are met. Focusing strictly on the professional trade, the considerations in this respect will concentrate on the content of clauses under Articles 357¹ and 632 § 2 of the Civil Code. Such a narrow scope results from exclusions established by law with regard to the professional entities, which are supposed to have greater knowledge in this field and should also be more proficient, due to the activities undertaken in trade, and consciously reckon with potential consequences of their actions. In principle, among these types of entrepreneurs, mistakes in constructing contracts are less frequent due to their experience and knowledge in a given matter; however, this is not always the case. A significant difference in market practice can be observed, especially between large internationally operating entrepreneurs and smaller ones, who are often just entering the business and learning how to operate in a new environment. Hence, professionals have a noncontractual possibility to modify the performance, but it is limited due to their special position. Excluded in this case is the valorisation clause set out in Article 358¹ of the Civil Code, which allows the court to change the amount or manner of fulfilling a monetary performance in the event of a significant change in the purchasing power after the obligation has arisen.

Article 358¹ of CC Act.

The first solution available to the entrepreneurs is to apply the rebus sic stantibus clause provided in Article 357¹ of the Civil Code. Pursuant to its content, four prerequisites must be jointly fulfilled in order to effectively seek judicial modification of a performance. In this case, specifications refer to the occurrence of an extraordinary change of relations, unforeseen by the parties, which will be causally connected with the occurrence of excessive difficulties in performing the obligation or connected with the threat of an abnormal loss for one of the parties.

Article 357¹ of CC Act.

The application of the rebus sic stantibus clause is not the only judicial possibility to restore the contractual balance. In professional trade, demands for the modification of contract may also be based on Article 632 § 2 of the Civil Code, referring to the valorisation of a lump sum remuneration. By way of an exception, the code clause allows for the court modification of the performance by increasing the lump sum or terminating the contract in the event of an unforeseen change in relations that threatens the ordering party with an abnormal loss.

Article 632 § 2 of CC Act.

Both solutions have their advantages and disadvantages. They should be assessed not only from a comparative perspective, contrasting the two clauses with each other, but also from a broader point of view by considering their relevance against the background of contractual agreements, pursuing the same objective of modifying inadequate performance.

The code institutions discussed above are characterised by considerable similarity. This coincidence is primarily due to the identical purpose of these institutions, which is to valorise the benefit in the event of changes in the market. The prerequisites indicated in the provisions themselves are outlined in a very similar way with only minor differences resulting from the level of details in the provision and the circumstances to which it is applied. Moreover, Article 632 § 2 of the Civil Code constitutes lex specialis in relation to Article 357¹ of the Civil Code.

Judgement of Supreme Court [2012] I CSK 333/11. Legalis 526889.

Considering the above, it is not possible to unequivocally state which of the clauses more comprehensively allows the modification of the contractual relationship in professional relations in case of unpredictable changes in the market. Once the judicial valorisation is necessary, each case should be analysed separately in terms of the requirements of the regulations, so that the interests of the parties to the contract may be best protected.

On the other hand, when comparing court-imposed and contractual valorisation, the conclusions are in favour of the parties’ own regulation in case of market changes. In principle, the main reason for formulating such a conclusion is the issue of the parties’ freedom to shape contractual provisions and thus to adapt them to their own requirements and expectations. This aspect of freedom may be analysed from various perspectives that involve separate issues. First, a contract that is mutually constructed by the parties allows them to express their will as fully as possible and adjust the provisions to their preferences. The parties may, for example, independently determine the level of market changes, which will oblige modifications in the scope of the obligation relationship or set a measure of value, as a reference point, for establishing the amount of modified consideration. Such provisions may be of any nature whatsoever but, by no means, may contravene applicable law. In the case of court proceedings, however, the prerequisites are strictly outlined by the legislator, which means that it will be necessary to prove that there has been a very significant change in relations involving an abnormal loss that the parties did not foresee when entering into the agreement. Each of the code clauses regulates these prerequisites in a very similar way, but it is certain that from a practical point of view, these requirements are quite stringent and often difficult to fully meet and then prove during the court proceedings. Also, the attention should be brought to the issues relating to the resolution of the case. In the event of contractual clauses, the parties are the source of the solution to the problematic situation, as they shape the relationship at their own discretion and if certain conditions are met, they implement a specific solution that is certain for them. By contrast, a court judgement will not always meet the expectations of the parties. It is possible for the court to dismiss the claim or resolve the case in a manner that differs from that requested by the plaintiff (for example, increase the remuneration by a smaller amount than requested). In principle, in the case of the rebus sic stantibus clause, in conjunction with the adopted opinion of the Supreme Court,

Resolution of Supreme Court [1998] I CKN 972/97. Legalis 338656.

Another, very obvious, premise in this respect is the temporal issue, which speaks unequivocally in favour of contractual indexation clauses. Code solutions explicitly refer to settling a case through court proceedings, which are, as a rule, a longer and more expensive way. The court, in the event of either party bringing an action against the other for modification or termination of an obligation, must analyse the case and its relevant circumstances and, at the same time, consider the interests of each party and the principles of social coexistence. The more complicated the case is, the longer the proceedings will take. Moreover, each procedure involves additional costs related to, inter alia, attorney's fees and the need to complete all formalities, which may prove time-consuming. Having to wait a long time for the case to be resolved may entail losses on the part of the trader and adversely affect his financial liquidity. Contractual relationships are characterised by timeliness in their execution and the date of their realisation is also not accidental, since it is often chosen because of the need to fulfil other obligations or to finalise certain stages of an assumed plan, which, in the absence of particular elements, may not be realised. The lapse of time in this case works to the disadvantage of the parties and their situation. Unlike a court valorisation clause, the contractual provisions in this respect operate automatically and affect the amount of remuneration as soon as circumstances defined by the parties arise. The reaction to the change is immediate, as its terms have been agreed upon in advance and the solution meets the parties’ objectives and at the same time stabilises their situation in the contractual relationship.

Contractual adjustment clauses should be widely used while contracting, particularly in conditions of market destabilisation and growing inflation, which we are currently witnessing. Despite this obviousness and the many advantages resulting from the use of clauses, this is not a common practice for all entrepreneurs in the market. Contracts quite often lack pertinent formulations that would more appropriately protect the interests of the parties. Contractual provisions adjusting the value of benefits are of great practical significance and ensure the certainty and stability of trade. In terms of basic issues, it may be pointed out that they update the legal relationship in the case of changes that make the parties’ provisions outdated, thus helping to avoid potential conflicts in the future and allowing for a quick, predetermined reaction to changes, which is not guaranteed by the court valorisation provided in the Civil Code in Articles 357¹ and 632 § 2. Introducing a valorisation clause into the concluded agreement makes it possible to comply with the principle of equality of the parties by securing their interests on an equal basis and taking into account the fact that losses may occur on either side. A legal relationship shaped in this way, including a clause in the event of changes in the future, allows for a more complete implementation of the pacta sunt servanta principle, as it contains mechanisms that update and thus allow the fulfilment of the benefit in the exact amount agreed by the parties.

The valorisation clauses should be drafted in a way that is clear to the parties and allows for a straightforward reference to reality. Without these features, the clauses would be of a blank nature and impossible to use in practice. Because of the systematic nature of the law and the numerous links between its branches, it is permissible to adapt from other provisions in drafting one's own contractual provisions. An appropriate model in this case would be the discussed clause from Article 439 of the PPL Act, which contains a catalogue of obligatory elements of an indexation clause, which needs to be included in contracts for construction works or other services concluded for a period longer than 12 months. This regulation is relatively new and in force for only one year, which suggests that the legislator saw a legitimate need to regulate this matter on a statutory level. Taking this into account, it can be argued that the previous lack of regulation was ineffective, and the mere invocation of the principle of freedom of contract did not sufficiently solve practical problems related to the use of valorisation clauses. Therefore, due to the validity of the problem in the proper drafting of the contractual provisions, the content of this provision should be taken into account especially in professional trade, which will prove a high degree of reliability of entities and allow for safer execution of the contract.

Practice has repeatedly shown that the lack of valorisation mechanisms may cause contractors to abandon investments due to the excessive costs of their implementation and a lack of ability to adapt them to market realities. On the other hand, it contributes also to the increase in the number of companies declaring bankruptcy, especially in the construction sector, due to their inability to fulfil their obligations. In addition, it can be noted that it is much more beneficial for the ordering party to adjust the remuneration rather than to conduct a new tender procedure because the previous contractor did not meet his obligation. Moreover, in this respect, the additional costs of a court procedure to obtain compensation for a lack of performance of a concluded contract must be taken into account, which, undoubtedly, will take a lot of time and resources. The same reasons speak in favour of using indexation clauses outside the public procurement system. The correct market practice of properly drafting clauses and then incorporating them into the text of the contract is irreplaceable. In view of the above, the widespread inclusion of indexation clauses in contracts could significantly reduce negative phenomena of this kind, which will favour the market and trading certainty and also will have a positive impact on the overall economic situation.