The fact that a suit is pending before an administrative court regarding the validity of a decision to charge runoff water disposal fees does not mean that the municipal runoff water disposal company must create an accounting provision in case it has to refund such fees.
Provisioning
In accordance with the Accounting Act, a provision is a liability whose maturity or amount is uncertain. Provisions must be recognised for highly probable or certain future liabilities whose amount can be reliably estimated, including in particular for losses on business transactions in progress, such as the outcome of pending litigation. However, not each lawsuit potentially giving rise to a liability will automatically trigger the requirement to recognise a provision. Each case should be carefully considered on its own merits.
Proceedings challenging the validity of a local council’s resolution defining fees for runoff water disposal
I believe that proceedings before an administrative court to invalidate a local council’s resolution defining fees for runoff water disposal are an example of a lawsuit which does not require the municipal company providing local runoff water disposal services to recognise a provision on that account.
Legal treatment of runoff water disposal fees
The issue with statutory grounds for local authorities to charge fees for the disposal of runoff water into their sewerage systems is of a relatively recent origin. It arose in 2018, which was when the Water Law Act of 20 July 2017 came into force, providing that runoff water should no longer be treated as wastewater (sewage). This change has generated, and continues to generate, litigation before both administrative and civil courts.
Currently there is no law governing the imposition of fees for the disposal of runoff water into local sewerage systems. This has caused many local authorities to rely on the general rule in Article 4(1)(2) of the Municipal Services Management Act in order to quantify such fees.
In doing so, they assume that a runoff water disposal fee should be treated as a service charge and that runoff water disposal should be considered to be a statutory local responsibility per se (zadanie własne) under Article 7(1)(3) of the Municipal Local Government Act, which is specifically related to sewage disposal and, in addition, is in the nature of a public service.
In accordance with Article 4(1) the Municipal Services Management Act, the local law-making authority has the power to quantify, or determine a method to quantify, fees or prices for public municipal services that or for use of public service buildings or facilities owned by local authorities, unless there are special regulations that provide otherwise. Thus, special regulations will take precedence, such as in cases where charges for certain public services are defined in dedicated statutory regulations that impose specific tariffs.
However, tariffs cannot be used for fees for disposal of runoff water as it does not qualify as wastewater (sewage) for the purposes of Article 2(8)(c) of the Collective Water Supply and Collective Sewage Disposal Act. Pursuant to the legal definition in Article 2(2) of that act, a tariff means a publicly promulgated schedule of prices or fee rates for collective water supply and/or collective sewage disposal, including the terms on which they are applied. As such, a tariff could define prices or rates (fees) for disposal of runoff water if runoff water was sewage.
In my opinion, abolishing the status of runoff water as sewage does not bar charging for services which, after all, continue to be performed notwithstanding the change in law.
Worth noting is the fact that these are not new services that would be unknown to Polish legislation. The imposition of this kind of fees used to be authorised, for example, under the Construction Minister regulation of 28 June 2006 on the determination of tariffs, the tariff approval application form and the charging terms for collective water supply or collective sewage disposal. Those fees constituted a price for the services.
Litigation before administrative courts
In the absence of dedicated law enabling local authorities to charge fees for runoff water disposal, they resort to the general rule in Article 4(2)(1) of the Municipal Services Management Act in order to pass resolution imposing such fees.
Local residents challenge the resolutions in courts and these hold that a runoff water disposal fee is in fact a public levy imposed on the owners of local properties. And municipal authorities may not charge public levies unless expressly authorised by statute. According to courts, with no law clearly enabling local councils to pass resolutions imposing such fees, any such resolution is bound to be invalidated (see judgment of Provincial Administrative Court in Opole dated 27 May 2021, case no. I SA/Op 72/21, and of Provincial Administrative Court in Gdańsk dated 14 January 2021, case no. III SA/Gd 716/20).
What actually is in essence of those court disputes is the nature of a runoff water disposal fee: is it a tax or a service fee? In this controversy, I take the side of local councils as they treat such disposal to be a public municipal service. In addition, runoff water disposal is a matter related to sewerage and as such statutorily a local responsibility per se. While this is the prevailing line of court authority, some courts do happen to deny such treatment of runoff water disposal (e.g. judgment of Provincial Administrative Court in Gliwice dated 14 April 2021, case no. III SAB/Gl 45/21).
Importantly, however, it is also the Supreme Audit Chamber that considers runoff water disposal to meet all the hallmarks of a statutory local responsibility per se which is in the nature of a public service.
The fact that a local council’s resolution authorising runoff water disposal charges (under Article 4(2)(1) of the Municipal Services Management Act) is successfully challenged as to its legal basis does not in itself automatically mean that the local authority has no right to impose such charges as a service fee (as has been confirmed by the above-cited authority of the Gliwice court, which treats collection of runoff water as a service for which a fee is due.)
A service being a municipality’s statutory responsibility per se does not mean the municipality has to provide the service free of charge. Accordingly, the approach where the operation of a runoff water system is a statutory local responsibility per se is not inconsistent with the right to impose fees on the inhabitants. As the Circuit Court in Białystok ruled in its judgment of 19 February 2021 [1]: “(…) the list of local authority’s responsibilities is open-ended while runoff water disposal is intended to meet the needs of the local community and as such is consistent with statutory local responsibilities per se. In accordance with an analysis of the applicable law, including primarily regulations on municipal services management, the treatment of some responsibility as a statutory local responsibility per se does not mean that such municipal service is to be free of charge. Admittedly, the absence of regulations that would govern the imposition of prices and fees for runoff water disposal services does generate plenty of concerns for local authorities across the country. But, approached rationally, the issue points towards a solution that is the universal principle under the Municipal Services Management Act, suggesting prices and fees for municipal services of public utility, unless special regulations provide otherwise (…).”
Invalidation of local council resolution – impact on provisioning requirements
Even as they have challenged the validity of local council resolutions authorising runoff water disposal fees, the above-mentioned judgments are not final and enforceable yet so the discussed legal uncertainty will remain with us for some time.
In the meantime, providers of runoff water disposal services continue to charge their fees pursuant to those challenged resolutions and currently have no legal grounds for ceasing to do so, at least not until the court disputes are finally resolved. Thus, it is the Supreme Administrative Court’s decisions that will drive the assessment of risk of the fees having to be refunded. But does that mean that the providers must fully provide for those fees already today? I don’t think so.
First of all, the court cases are not directly concerned with any obligation to repay the runoff water disposal fees that have been collected. What they are concerned with is only the legal basis for charging those fees in the first place.
The local inhabitants receive a service that involves the disposal of runoff water into the municipal storm water system. No law appears to prescribe that runoff or storm water disposal is a service to be provided free of charge. The mere finding of invalidity of a local council’s resolution authorising runoff water disposal fees does not automatically trigger the obligation to refund any such fees that have been charged because the finding does not negative the fact that the service has been performed.
In my opinion, an obligation of this kind will not arise, and hence will not need to be assessed for the purposes of obligatory provisioning under accounting regulations, until and unless local residents claim a refund of the fees. Then the amount of any such provision to be created will depend on the total amount of the local inhabitants’ claims.
Practical application
Whether a specific case is before an administrative or a civil court, the chances for a favourable outcome are typically estimated by the lawyer in charge of the litigation. This estimate will be conclusive for the given entity’s decision whether or not to provide for the liability that may arise from such litigation. Importantly, too, the specific provisioning requirements need to be consulted also with a statutory auditor where the entity is required by the Accounting Act to have its financial statements audited. Ultimately, it is the statutory auditor that will review the financial statements to determine if they offer a true and fair view of the financial situation, assets and results of the entity.
[1] Circuit Court in Białystok, 7th Commercial Division, judgment of 19 February 2021, VII Ga 510/20.
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