Change in rules for the investor’s joint and several liability in the construction process | In Principle

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Change in rules for the investor’s joint and several liability in the construction process

A simplified procedure for notification of subcontractors, clarification of the rule on the investor’s objection to entrusting part of the work to a subcontractor, and limitation in the amount of the investor’s joint and several liability—all these changes are to go into effect on 1 June 2017.

On 9 March 2017 the Sejm adopted a bill amending the Civil Code and other acts with the aim of facilitating enforcement of claims by creditors. In particular, the act will change the rules for the investor’s and general contractor’s joint and several liability for the fees of subcontractors, contained in Art. 6471 of the Polish Civil Code. The change is intended to increase the legal certainty of participants in the construction process and encourage investors to choose contractors with more care. The rules defining when the investor’s joint and severable liability arises will be clarified. The amendment will also impose liability on the investor for work that was actually performed and whose scope was previously defined in detail. A limitation in the amount of this liability is also being introduced.

The current regulation on the joint and several liability of the investor and the general contractor generates numerous controversies and frequent discrepancies in the case law. It is also criticised for overbroad liability of the investor and a lack of transparency in the procedure for notification of the hiring of subcontractors. The current statute and the case law based on it often place the investor at risk of double payment, to both the general contractor and the subcontractor.

Simplified notification of subcontractors

The amendment simplifies the procedure for submitting notice of hiring of subcontractors. Currently, to notify the investor of a subcontractor, the investor must be presented with the subcontract or a draft of the subcontract together with the design documentation. Following the changes, it will be sufficient to present the investor a detailed specification of the construction work to be performed by the subcontractor (this may be done by either the general contractor or the subcontractor), or to specify in the general contract the scope of work to be performed by the specific subcontractor.

This simplification may speed up the construction process, as often the arrangements with the subcontractors delay commencement or preparation of the work. If the general contractor and the sub have already decided to cooperate but are only working out the details (e.g. the financial terms), these negotiations need not delay the overall launch of the project. On the other hand, the absence of a formal duty to conclude a contract with the subcontractor in order for joint and several liability to arise may lead to abuses by general contractors in their dealings with subs and generate disputes at early stages of projects. The practice will show whether the new solutions adequately protect subcontractors’ interests. The lack of a contract limits the subcontractor’s control or influence on the creation of joint and several liability for its fee. Notification could be made by the subcontractor itself, but the practical significance of such a declaration may be limited in the case of a dispute with the general contractor. It should also be anticipated that investors will not be eager to rely on the position of just one of the other parties, but will seek to confirm the information received from the general contractor or the subcontractor.

Moreover, an investor without influence over the shape of the contracts with the subcontractors, or access to those contracts, has less control over the legal relationships between the general contractor and the subcontractors, which are, after all, the source of the investor’s strict liability. The investor’s knowledge of the contracts with the subcontractors is often useful in disputes with the general contractor (particularly for interpretation of contracts, when the general contractor takes a different position in disputes with the subcontractors than it does in a dispute with the investor). But a plus of the amendment is that notification to the investor of the detailed scope of a subcontractor’s work will set the objective bounds of the investor’s liability to the subcontractor. This may mobilise general contractors to define more precisely in contracts with subcontractors the scope of work entrusted to third parties for performance. This could foster commercial certainty and limit disputes for example over claims for additional work.

Replacing the obligation of separate notification of subcontractors with an indication in the principal contract of the scope of work entrusted to subcontractors may also facilitate the construction process. At the stage of concluding the main contract the investor and the general contractor could be in a position to specify the scope of the subcontractors’ work and thus avoid the whole process of notification of subcontractors. But this solution will work only in situations where the specific subcontractors and the work to be entrusted to them are known at the stage of conclusion of the general contract, which is not always the case in practice.

Investor’s objection

The changes also affect the institution of the investor’s objection to a subcontractor’s involvement in the project. The formal rules for asserting an objection are clarified. The drafters wanted to bring greater transparency to this rule. However, the amendment does not refer to the substantive grounds for the objection, which could limit the disputes arising on this basis.

Under the amendment, the investor’s joint and several liability is excluded only by an objection made to both the general contractor and the subcontractor within 30 days after notification of the subcontractor, and to be valid it must be in writing. Current law uses the term “objection” but also uses the term “reservations,” generating discrepancies in interpretation of the legal consequences of these instruments.

Lack of objection within the statutory period will be deemed to mean the investor’s acceptance of joint and several liability to the subcontractor together with the general contractor. Only express action by the investor can exclude this effect. Express objection in the appropriate method and time will mean the absence of joint and several liability. This essentially boils down to presumed acceptance by the investor. The investor’s passivity after notification of a subcontractor will mean the investor’s consent to involvement of third parties in the construction process and thus shared responsibility for their fee.

Doubts may arise in practice as to whether joint and several liability arises in situations where the subcontractor was not notified to the investor in the method provided for in the statute, but for example has begun working. Such instances will no doubt be the subject of case law issued under the new regulations. Perhaps the direction taken by the amendment, clarifying the rules for notification of subcontractors, will rein in the liberality displayed by the Supreme Court and the lower courts to date, when they have found that mere tolerance of the subcontractor’s presence on the building site is deemed to mean the investor’s acceptance of liability for the subcontractor’s fee.

Limitation on the amount of liability

The amending act also introduces a limitation on the amount of the subcontractor’s fee covered by the investor’s joint and several liability. The upper limit of the investor’s joint and several liability is set at the amount of the general contractor’s fee for the analogous scope of work, as provided for in the general contract. The investor will thus be free of liability above that amount.

The Act of 9 March 2017 Amending Certain Acts to Facilitate the Pursuit of Claims, introducing the changes described above, is supposed to enter into force on 1 June 2017. The bill as passed by the Sejm has been forwarded to the Senate for its consideration.

Agata Jóźwiak, Dispute Resolution & Arbitration practice, Wardyński & Partners