In today's alert, we will once again address the topic of construction contracts and address the issue of securing the proper performance of these contracts – establishing a security deposit and retaining a portion of the fee. These terms are often confused and used interchangeably, although the differences between them are fundamental to the joint and several liability of the investor and the general contractor towards subcontractors.
To best understand the differences between these concepts, it's worth starting with understanding the essence of a security deposit. According to established case law a security deposit involves the depositor transferring a specified amount to the borrower's account, and the borrower is then entitled to satisfy their interest within this amount if the service is not completed on time or is performed contrary to the contract . If the service is properly completed, the borrower returns the deposit to the depositor (usually in the nominal amount). This means that only the borrower (general contractor or investor) is obligated to return the deposit – therefore, as a rule, joint and several liability does not arise here, as the deposit is not part of the remuneration. It should also be noted that "the structural feature of a security deposit is the transfer of ownership of funds from the assets of the entity providing the deposit (subcontractor) to the assets (general contractor)" (see, among others, Supreme Court judgment of May 25, 2016, file no. V CSK 481/15). This means that for a given cash flow to be considered a security deposit, the person obligated to pay it must physically transfer part of their assets to the transferee's estate, for a specific purpose and under agreed-upon terms. Furthermore, from a tax perspective, a security deposit does not constitute a definitive gain or a definitive expense, as it is refundable (see judgment of the Provincial Administrative Court in Białystok of 23 December 2013, file no. I SA/Bk 489/13).
The second commonly used method of securing proper performance of a construction contract is a mechanism involving retention of funds, which, because the deposit is not part of the remuneration, involves deducting a certain portion of the contractor's remuneration – typically approximately 10% – from each subsequent partial payment. Consequently, the security amount regularly increases as the work progresses. Technically, however, no funds are transferred to the account of the beneficiary of the performance security (see the Supreme Court judgment of September 12, 2019, file reference V CSK 324/18) – the retained amount remains part of the remuneration due to the contractor . Therefore, it merely postpones the due date of the contractor's remuneration, which can be used by the investor to satisfy claims under the construction contract. Therefore, the investor is obligated to make direct payment to the subcontractor if, after the expiry of the security period withheld funds, the subcontractor was unable to recover these amounts from the general contractor who retained them. As for the retention of the amount, in the event of a dispute, the investor will be jointly and severally liable with the general contractor for this amount.
To sum up, in construction contracts the concepts discussed today should be applied precisely so that in the event of a potential dispute there is no doubt as to whether a given amount constitutes a deposit or a retained part of the remuneration, and in the event of a dispute everything will depend on the construction of the given contractual provisions.
We cordially invite you to continue following our articles – next week, as part of this series, we will present you the topic of provisions in construction contracts regarding copyright.
At the same time, we would like to inform you that on April 28, 2022, a draft regulation of the Minister of Development and Technology regarding the interest rates used to calculate contributions to the Developer Guarantee Fund . According to the regulation, the rate for open escrow accounts is to be 0.45% , which is less than half the rate provided for in the new Development Act. For closed escrow accounts, the proposed rate is to be 0.1% , the maximum permissible rate. The regulation is scheduled to come into effect on July 1, 2022. The draft is currently undergoing review.
In turn, with regard to the draft act intended to postpone the entry into force of the new development act, the Sejm called on the applicants to supplement the justification for the project and there is not even a form number for this project yet.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of May 10, 2022
author:
