Conference report: “Commercial mediation with the public sector”

In January 2020 I had the pleasure to moderate the discussion during the conference “Mediation with the public sector”. The conference was hosted by the French-Polish Chamber of Commerce and the International Mediation Centre.

I would like to thank the panelists and conference participants for our discussions and constructive conclusions!

Below you will find a short report from this conference together with conclusions and recommendations.

State of mediation between the public and private sectors: progress and problems:

• The pro-mediation rules already work.
• No global data – out-of-court mediation and settlements are not publicly recorded.
• Positive and encouraging partial data.

Mediation with public sector:

• Mostly concern investments of both high value and of enormous importance for the economy and society:
  • Roads, Bridges, railway lines, public buildings and spaces, ICT projects which are necessary for the effective functioning of government authorities and municipal institutions.
• A court dispute in such situations almost always poses:
  • Large delays in achieving the public objective,
  • Increase (or even multiplying) the cost of its execution,
  • Significant expenditure on the dispute itself, ultimately burdening all citizens.

The legislative landscape of public-private dispute resolution:

• Mediation has been functioning in Polish civil procedure for 15 years,
  • Introduced by the Act of 28.07.2005 on amending the Act – Civil Procedure Code, provisions of which entered into force on 10.12.2005 (previously mediation in collective disputes and criminal procedures was introduced).
• Amendment of the CPC – Act of 10.09.2015 on amending certain acts in connection with the promotion of amicable dispute resolution methods. Accompanying lower-order acts, among others, which regulate the institution of so-called permanent mediators.
• Educational and dissemination activities using state and EU funds, and changes in regulations which facilitate mediation also in other areas of law.
• The result:
  • According to data from the Ministry of Justice, the so-called mediation rate (more specifically, the percentage of referrals to mediation by courts to the adequate impact of cases) grew steadily in the years 2014-2017 and (after a decline in 2018) again last year.
  • The current value estimated at less than 1.2% of cases possible to mediate still cannot be satisfactory.
• Act of 7.04.2017 on amending certain acts to facilitate debt recovery,
  • art. 54a to the Public Finance Act together with paragraphs to art. 5, 11 and 5 of the Act on Responsibility for breaching Public Finance Discipline.
    • Determination of the requirements at the fulfillment of which a public finance unit may conclude a settlement in the case of disputed civil law receivables
    • Indication that implementing such settlement is not a violation of discipline.
  • Work on the new Public Procurement Law, changes come into force at the beginning of 2021. Act of 11.09.2019, Section X. Out-of-court settlement of disputes.
    • Mediation with expressis verbis conciliation allowed and specified,
    • Under certain circumstances (appropriate value of the procurement and the dispute, lack of information about pre-litigation amicable attempts) the court must address them (naturally, the consent of the parties will ultimately decide on the actual participation).

The State Treasury Attorneys’ Office of the Republic of Poland (pl. Prokuratoria Generalna Rzeczypospolitej Polskiej):

• In 2018, compared to 2017 (when Article 54a of the Public Finance Act was only introduced), there was a threefold increase in settlements concluded with the public sector entities represented by it.
• In total, more than 80 settlements were reached, but it is worth remembering that this is often a dispute arising from the largest domestic investments – the sum of the settled claims amounted to about PLN 1.2 billion.
• In 2019, an increase was visible – the value of claims of similar disputes, which concluded with settlements, reached as much as 1.5 billion.
• The State Treasury Attorneys’ Office of the Republic of Poland conducts more than three thousand court cases annually (of which, à propos, about 90% wins), which accounts for about 3% of amicable settlement of disputes, so more than the mentioned ratio of (referrals to) mediation in the judiciary.
• The data of The State Treasury Attorneys’ Office does not take into account the origin of settlements, i.e. whether they were concluded in the course of mediation or through negotiations between parties without a mediator, in court or before trial.
• The State Treasury Attorneys’ Office of the Republic of Poland also has its own platform for mediation: The Court of Conciliation at The State Treasury Attorneys’ Office of the Republic of Poland together with the Mediation Centre.
  • Expression of support for mediation and amicable settlement of disputes, which should strongly encourage public entities to participate in these forms.

Warsaw City Hall (pl. Urząd Miasta Stołecznego Warszawy):

• Establishment of the Investor Cooperation Department.
• Among its tasks is a broadly understood explanation of the business issues to the clerk, and thus proving the dialogue between this largest municipal government in Poland and private entrepreneurs who work within its tasks.

General Directorate for National Roads and Motorways:

• This is a leader among public entities which uses conciliatory dispute resolution methods. Some of its regional branches already have extensive practice in using mediation, and since mid-2017, i.e. since the introduction of Article 54a to the Public Finance Act, the General Directorate for National Roads and Motorways has concluded about 60 settlements in infrastructure disputes.
• The General Directorate for National Roads and Motorways’ practical experience shows that in such cases there is always a prepared:
  • Analysis of whether to enter into a court dispute,
  • Risk assessment of such conduct,
  • Conditions for a possible settlement (to meet the requirements of Article 54a).
• Representatives of the General Directorate for National Roads and Motorways have also previously indicated that mediation and settlement are most beneficial for investment already at the stage of the occurrence of disputed matters during its implementation – when the case goes to court and from court to mediation, a number of additional costs and losses naturally occur.

Other examples:

• Solutions of the Ministry of Funds and Regional Development in the field of public-private partnership
  • The cooperation of sectors in the implementation and subsequent use of investments, even if, due to the long period of time (from just a few up to more than twenty years), could not be successful without amicable procedures and a concerted response to changes, which are inevitable with such cooperation.
• The Anglo-Saxon PPP model,
  • Several stages of work with discrepancies: from negotiations between the parties, through the participation of an independent expert, to – only at the end – arbitration or court.

Public procurement:

• The new Public Procurement law regulation comes into force in 2021.
• The new act in response to
  • Public decision-makers’ fear of settlement talks and concluding the settlement
  • Assurance remaining within the framework of overly understood public finance discipline and tender rigors has resulted many times in extending the completion of an important investment for society for many years, as well as in exceeding the necessary expenditure.
• Consideration to use mediation and settlements will be seen as an obligation of a cost-effective and reliable state and local government entities in the event of a dispute.

The most important problems of cooperation between contracting authorities and contractors resulting from the research conducted as part of the work on the new act are:

• Lack of communication and negotiations at the stage of planning and awarding the contract, then in the course of its implementation and the appearance of inevitable problems and risks, and further – in the resolution of the already formally occurring dispute.
• Hence the intention to base public procurement and, in particular, work with disputes arising against it on the grounds of
  • Partnerships,
  • Dialogue,
  • A fair and clear allocation of risks,
  • The joint responsibility for the implementation of the investment.
  • In this respect – also a clear indication of the amicable mode as the primary method to resolve contentious situations, with the protection of unit managers against the fear of “punishment for settlement”.
• Effectiveness of Public Procurement Law regulations is to be verified after some time, also with regards to facilitating mediation.

Responsibility for concluding a settlement and for its conditions adopted or proposed as the main brake of using mediation in the public spher:

• The solutions of Art. 54a of the Public Finance Act and the related provisions on liability for breaching them are a great facilitation to determine what control criteria to adopt, and thus what people who manage public institutions or perform tasks within their scope should do to not to be afraid of such liability.
• The creation and successive development of regulations on mediation and settlements should definitely be seen as a guideline for the legislator to properly apply these solutions.

• The fear of “Will I expose myself to liability by participating in mediation?” It should be replaced by a reflection: Did I duly consider using mediation as the potentially most cost-effective, purposeful, reliable and legal choice in this case?

Current trend:

• The private sector indicates a small number of settlements, whilst emphasizing that usually they only take place when the dispute is in the cause list.
• A court trial is often a “safety valve” for a civil servant or a state or local government manager.
  • At this stage, because they usually have a better idea of the chances of settling the case and then they decide to make a settlement in court.
  • The public sector is, as a result, more motivated to conclude a settlement seeing less chance of success in the process and usually only if it is the defendant.
• Private parties’ approach to mediation
  • The awareness of mediation as a standard method of working with a contentious situation is still too low,
  • It largely consists of the traditional call for an attempt at reaching a settlement – usually a non-negotiable demand for the full amount of the benefit, but more to the formal interruption of the limitation period than to actual negotiations.
    • In this respect, a painful increase in costs has been noted in the latest amendment to the Code of Civil Procedure, so this approach will have to be changed).
  • Private companies are more motivated to make seasonal settlements, just before the end of the financial year.

There is no certainty that the parties can do something good as a result of mediation or concluding the settlement:

• A settlement is a series of savings for both parties.
  • Interest
  • Decrease in generated value and functionality (e.g. unused buildings)
  • Additional unproductive costs
• Mediation is extremely important from the point of view of the civil servant’s responsibility for the conclusion of the dispute: there will be no generalisation of settlements, where for decision-makers, avoiding them will be the equivalent being ‘safe’ in the event of various inspections.
• According to representatives of construction companies and expert engineers, the popularisation of mediation and settlements is clearly positive.

Mediation and qualification of mediators:

• It is particularly important for them to have not so much legal preparation, but so-called soft skills and orientation, and preferably experience in technical matters and conditions of public-private cooperation.
• It is also necessary to be sure that in their work they will be truly independent, not involved in any conflict of interest.
• Real conciliation and mediation capacity limited by the proxies being unconvinced and the participants’ lack of preparation for the talks.
• The attitude, substantive preparation and decision making of mediation participants is crucial
• Mediation is not a simple procedural step or pro forma presence, but honest, solid and creative work on solving problems.
• Experienced mediators recommend that lawyers , decision-makers, engineers or other specialists in a given industry in mediation participate, and each of these groups has an important contribution to make to the work on solving a dispute.
• Mediation does not tolerate the rush in cases involving large and complex investments.
• Attempts to impose a schedule of talks unilaterally are not conducive to mediation.

Conclusions and recommendations:

• All legislative activities, including in particular Art. 54 of the Public Finance Act and the new Public Procurement Law, together with the accompanying activities of the Public Procurement Office, the State Treasury Attorneys’ Office of the Republic of Poland and the Supreme Audit Office, should be treated as an encouragement for more frequent, as it were, standard use of mediation or more broadly amicable settlement of disputes along with cooperation between public and private entities.
• Inactivity of state and local government units in this respect cannot be equated with security, as consideration of amicable methods should be considered as their duty
• The fear of settlements is definitely exaggerated – responsibility against this background occurs very rarely, and the regulations mentioned above provide a concrete framework for securing against it.
• The need to promote practical solutions in connection wth the ignorance of the public party, which has little experience in this area.
• The possibility to consult publicly available published criteria, messages and Supreme Audit Office’s post-audit statements.
• It is necessary for the private party to take into account that, in addition to business-like economic criteria, their public partners must be guided by the public interest and sometimes also take into account the political environment.
• It is crucial to promote the proper application of art. 54a.
  • The scope of the written opinion it requires and the choice of its authors should be flexible in relation to the scale and nature of the dispute.
  • However, under no circumstances should an opinion be limited to legal issues – the legitimacy and nature of claims and litigation risks are obviously necessary, but not sufficient.
  • Appropriate technical analysis and opinions of experts, economists, accountants, and especially specialists in a given field (e.g. contract engineers) are important.
  • Comparison of the effects of a settlement and the presumed decision of the court:
    • Costs of a new tender,
    • Changes in input prices,
    • Delays in the execution of works and investment,
    • Problems with financing (including eligibility of expenditure for EU funds),
    • The effect on local taxes and the local labour market.
  • Opinion is an element developed at the final stage of mediation or generally amicable work with a dispute. It is not necessary in order to enter into negotiations.
  • It is worthwhile preparing documentation on the grounds for entering into settlement talks, but this should not be a blockade to an amicable approach.
• When working with investment disputes, time plays a key role in the final effectiveness of the designed solutions.
• Settlement talks should be undertaken:
  • As soon as possible, when discrepancies appear,
  • When there have not yet been significant losses, breakdown in cooperation and obstacles to its continuation,
  • For the parties to invest in confrontation activities and stiffening positions.
• The contracting authorities and contractors must be prepared for mediation and settlement during the contract execution.
• “Claim bombing” doesn’t build trust.
• Both sides need to change their approach and even mentality: understand the obligation of the contracting authority and the contractor to co-pursue the public procurement, understand the need for constant dialogue, build as many confidence bridges as possible, and allocate natural risks in partnership.
• These activities should be documented on an ongoing basis so that they are transparent for possible controls. The difficulties of such an approach, which is generated by the conflict situation itself, help to minimise the participation of an impartial, neutral third party – i.e. a mediator.
• Proper preparation of the parties’ proxies is necessary for a settlement or mediation:
  • Exiting traditional procedural roles to work together with problems may not be easy, but it is necessary.
  • It indicates the modern approach of lawyers and corresponds to the new regulations.
  • Changing the priorities of a proxy means changing a certain philosophy of the profession.
• Currently, the court has a huge role to play in the amicable resolution of disputes.
• Under the new civil procedure, the judge is to guide the parties to a settlement and encourage out-of-court resolution of the dispute during the preparatory meeting (and at many other stages of the proceedings).
• The authority of the judiciary has been and should continue to be a significant incentive to seek compromise solutions and use mediation.
• To the review clauses already developed by the Public Procurement Office (which make it easier to modify conditions in the event of market changes) could be added:
  • If not the contract templates, at least templates of their new element, i.e. mediation clauses (or “multistep”), which normally provide for the amicable search for a solution, instead of immediately referring the dispute to the court for settlement.
• Training courses on mediation are available for representatives who precure both public and private contractors.
• A joint team of public institutions which deal with the execution and control of procurement, which would result in a distinction for state and local government units which use mediation most effectively. This would encourage private entities to work in partnership with award-winning contracting authorities.