As announced, today's article is the first in a series in which we will analyze selected aspects of construction contracts and their content. We begin with a key issue for many investors: the institution of joint and several liability of the investor and general contractor towards the subcontractor under the provisions of the Civil Code. This mechanism has significantly contributed to eliminating a common and highly unfavorable phenomenon in the construction industry, whereby the general contractor deprives the subcontractor of payment of its due remuneration. Under certain conditions, discussed below, it is possible to pursue payment of remuneration under the construction contract from the investor, a third party that was not a party to the contract concluded between the general contractor and the subcontractor.
It's worth recalling that the legal institution in question – Article 647 (1) of the Civil Code – was introduced into the Civil Code quite a while ago, under the Act of February 14, 2003, amending the Civil Code and certain other acts. It was then significantly amended by the Act of April 7, 2017, amending certain acts to facilitate the recovery of receivables. Other rules will apply to construction works conducted under public procurement law, but we will not be analyzing these today.
Joint and several liability of the investor and the contractor towards subcontractors is only possible under the conditions strictly defined in the aforementioned provision. First, the contractor or subcontractor must notify the investor of the detailed scope of work before commencing the work . The investor then has a 30-day deadline to object to the subcontractor's performance of the work. The 30-day deadline begins on the date the notification is delivered to the investor. Both the notification and the objection to the notification must be in writing to be valid . Failure to comply with written form will invalidate the notification or objection. Therefore, if the subcontractor's written notification is observed but the investor fails to submit a written objection (expressed only by email, for example), the investor will not have the right to effectively avoid payment to the subcontractor.
Article 647(1) §2 of the Civil Code provides an exception to the notification requirement referred to above, according to which notification is not required if the investor or contractor have specified in their contract the detailed subject of construction works to be performed by the designated subcontractor. However, the contract must be in writing, under penalty of nullity.
The essence of joint and several liability is that the group of entities obligated to pay the subcontractor's remuneration is expanded to include the investor. Therefore, the subcontractor may demand payment of all or part of the remuneration from all jointly and severally liable parties, from some of them, or from each of them individually. Therefore, it is the subcontractor's choice whether to request payment from the investor or the general contractor (contractor) with whom it concluded the construction contract. Most often, this choice is made by the investor, who should also include safeguards in the construction contract for such a circumstance (e.g., the right to withhold payment to the general contractor until clarification, the right to pay directly to the subcontractor and reduce the general contractor's remuneration).
The investor's liability for paying subcontractors' fees is limited to the subcontractor's fees , but not to the amount the investor is obligated to pay the contractor for work performed under the contract. Therefore, if the amount of fees due to the subcontractor exceeds the amount of fees owed to the contractor by the investor, the latter will be liable only for the fees owed to the contractor. Therefore, the subcontractor will have to claim the remaining fees from the contractor. Furthermore, the investor is not liable for interest accrued to the contractor or contractual penalties, which the subcontractor can only claim from the contractor (see, among others, the Supreme Court judgment of September 5, 2012, file reference IV CSK 91/12). However, this does not exclude the subcontractor from demanding interest from the investor if the investor, after being requested to pay by the subcontractor, delays payment. In such a case, interest will be due from the date of expiry of the payment deadline set for the investor by the subcontractor in the letter requesting payment (see, among others, the judgment of the Court of Appeal in Poznań of 4 October 2018, file reference number I AGa 161/18).
Beyond the scope of today's article, however, are issues related to subcontractors seeking reimbursement from the investor for performance bonds. This topic will be discussed in a separate article.
We also emphasize that the provisions described above apply accordingly to the joint and several liability of the investor, contractor, and subcontractor who has entered into an agreement with a sub-subcontractor for the payment of remuneration to the sub-subcontractor. In such a case, the sub-subcontractor is entitled to demand payment of the remuneration due both from the contractor with whom it has a construction contract, to which the objection referred to above has not been raised, and from the subcontractor, contractor, and investor (provided that a notification is made), as all these entities will be subject to joint and several liability towards the sub-subcontractor.
Importantly, this provision is mandatory , meaning that the parties cannot exclude or otherwise adversely modify the liability arising from this provision in their contract. Therefore, if the parties attempt to exclude the application of this provision in their contract or modify its wording, such provision will be invalid, and the described provision will continue to apply in its place. This is clearly indicated in Article 647 (1) of the Civil Code, §6 of the provision in question.
In summary, the investor's joint and several liability mechanism allows subcontractors to obtain due remuneration for completed construction works from the investor in situations where the general contractor refuses or delays payment. However, for this liability to arise, the formal notification procedure must be followed and the investor must not object to the agreement concluded with the subcontractor. Crucially, the investor is obligated to pay the subcontractor's remuneration, even if they have already paid the general contractor for the work.
Next week, staying on the topic of construction contracts, we will focus on contractual clauses related to contractual penalties.
Together with Rzeczpospolita and the Polish Association of Developers, we invite you to a training session entitled "The Development Industry in the Face of the New Development Act." The aim of the training is to discuss the changes that developers must prepare for starting July 1, 2022, following the entry into force of the new act. Details can be found at konferencje.rp.pl .
This article is for informational purposes only and does not constitute legal advice.
Legal status as of March 28, 2022
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