Defects and payment: Handover dilemmas
When is the investor required to pay for the performance of work? How do identified defects relate to this obligation, and when can handover be refused? These questions cause many difficulties in practice and are the basis for numerous, often very complex and long-running disputes. Recently, this issue was addressed by the Supreme Court of Poland. The interpretive direction it affirmed may help market players, including construction contractors, to whom these findings may apply by analogy.
As a rule, the obligation to pay the fee for performance of works arises when the work is properly delivered. Pursuant to Art. 643 of the Civil Code, the orderer is obliged to accept the work which the person who accepted the order hands over to the orderer as commissioned. However, it is not always easy to assess compliance with the contract, and if any defects are discovered in the work, the customer often refuses to accept delivery, and for this reason refuse to pay the fee. Then the parties come into conflict as to whether the refusal to accept the handover was reasonable. Such action by customers will be upheld only if the defects found are material. What types of failures can be considered material? Does “work performed in accordance with the obligation” mean “work free of any defects”?
A defect in a work constitutes a deviation from the contract, and its existence can be assessed on an individual basis in accordance with the provisions of the contract and for example the technical requirements for the work established in the contract. But in the opinion of the Supreme Court (judgment of 29 January 2021, case no. V CSKP 10/21), the existence of a defect is determined primarily by an objective assessment of the suitability of the work for use, and not by the subjective perception of either party. In contracts for performance, non-performance of an obligation may refer not only to lack of performance altogether, but may also cover a situation where the completed performance fails to satisfy the legitimate interests of the party commissioning the performance.
Thus, performance of an obligation whose quality differs greatly from the standard agreed by the parties (the content of the obligation) may be regarded as non-performance of the obligation. Consequently, for refusal to accept the work to be upheld, the defect found must be of particular importance, preventing the agreed functionality and usefulness of the work.
Therefore, the greatest practical difficulty is in assessing whether the defects found are indeed of this nature. In many situations, particularly at the litigation stage, this assessment may require technical support from experts, particularly court-appointed experts analysing technical elements.
If the defect found is not material, the orderer should accept the handover and cannot refuse to pay the fee. However, in such a situation, the customer is entitled to exercise other rights related to improper performance of the contract (e.g. liability for damages, or claims under guarantee or warranty). Therefore, a non-material defect is one that does not disable the functionality of the work and constitutes a deficiency (defect) of minor importance that can be remedied. Despite the existence of non-material defects, the work can be used normally. But as a rule, their occurrence does not deprive the contractor of the right to obtain a fee.
Although the judgment in question relates to a contract for a specific work (umowa o dzieło), the holding from the Supreme Court can be applied by analogy to contracts for construction works—the area within the construction sector where such handover problems are particularly relevant.
Agat Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners