A training fee or a hidden contractual penalty?

The subcontract for construction works provided for the following mechanism: should an employee be found to have breached health and safety regulations, the subcontractor would not face the usual contractual penalty, but would instead be obliged to send the offending employee on a compulsory, paid health and safety training course organised by the main contractor. The cost of the training was borne by the subcontractor. The training covered precisely those health and safety issues that had been breached, and the price of the training corresponded to the typical contractual penalty for that type of breach. The line between a creative solution and circumventing the regulations can sometimes be blurred. If the training is actually carried out – it takes place, with a programme, a trainer and participants – then the mere fact that its subject matter and price coincide with a typical contractual penalty does not in itself determine the outcome. The parties are free to agree on the remuneration for a service actually provided, and a breach of a particular standard may indicate a genuine need for training. If, on the other hand, the training exists only on paper – nobody actually conducts it and nobody takes part in it – then the term ‘training fee’ is irrelevant. What matters is what actually took place: a contractual penalty is concealed under the guise of training (Article 83 of the Civil Code). The result? The fictitious ‘training’ ceases to exist in the eyes of the law, and in its place the contractual penalty returns – which must then be assessed in the same way as any other penalty in a subcontract. This includes assessing whether it is not more severe than a comparable penalty provided for in the contract with the contracting authority (Article 463 of the Public Procurement Law). There is also a tax trap here. A contractual penalty is not subject to VAT, but a training service is. The contractor should therefore issue an invoice to the subcontractor and account for the tax, which they would not have done in the case of a standard contractual penalty. Clauses of this kind will become increasingly common. The market is looking for ways to circumvent the restrictions under Article 463 of the Public Procurement Law, and changing the name is the simplest way to do so. Before anyone introduces such a mechanism into a contract, however, it is worth asking directly: is there a genuine service behind this arrangement, or is it merely an attempt to circumvent the rules on contractual penalties?