FIDIC provisions on liability for defects should be adapted to Polish law | In Principle

The construction industry rightfully tries to limit modifications to the FIDIC general conditions to essential issues. One of them is the rules for the contractor’s liability for defects in the structure. Failure to address this in the particular conditions can lead to disputes.

Under Polish case law, the investor may refuse to accept delivery of a structure only if it has a material defect, i.e. a defect preventing use of the structure. If there are defects but the building can still be used, the investor must tolerate the presence of the contractor’s construction team and the conduct of repairs while the building is being used.

FIDIC conditions regulate the procedures connected with completion of the main construction works similarly. The time when the employer takes control of the structure (together with the risk of loss or damage to the works, which is borne by the contractor during the course of the works) is the day following issuance of the taking-over certificate by the contract engineer. Outstanding work and defects to be remedied by the contractor are indicated in the taking-over certificate.

Thus, whether or not the construction contract is prepared on the basis of FIDIC general conditions, acceptance of delivery of the structure by the investor typically does not mean that the contractor’s work is truly over.

In the Polish practice of applying FIDIC contract conditions, acceptance of delivery within the meaning of the civil law is typically equated with issuance of the taking-over certificate by the engineer, and the delivery protocol, referring to the Polish regulations, is attached to the certificate. This helps avoid doubts concerning the consequences that may be ascribed to this event under Polish regulations.

A different concept is also found in the legal literature, under which issuance of the taking-over certificate does not extinguish the obligation and cause the warranty periods to begin running. Under this approach, these consequences do not arise until issuance of the performance certificate (J. Strzępka, “Selected Issues of Applying FIDIC International Contract Conditions,” Commercial Law System vol. 5). But this approach is rarely used in contracts.

Selection of either of these solutions will depend mainly on the intention of the parties, or rather the preferences of the entity drafting the contract.

The taking-over certificate and the performance certificate are documents deriving from the Anglo-Saxon legal system and do not have counterparts in the Polish legal system. Because of the consequences of their issuance provided for in FIDIC, these solutions do not exactly correspond to Polish regulations, but only indicate the proper method for modifying the general conditions.

Most importantly, however, either of these conceptions may be regarded as permissible under Polish law, because they fall within the scope of freedom of contract.

But serious doubts are raised when juxtaposing the rules for the contractor’s liability for defects as provided for in FIDIC and under Polish law.

Contractor’s liability for defects under FIDIC and Polish law

Under the FIDIC contract terms, the contractor’s obligation—depending on the book (this article refers to the “Yellow Book” and the “Red Book,” which are most often used in Poland)—is to design and build and to remedy defects, or only to build and to remedy defects. Thus remedying defects is always part of the contractor’s obligation. Liability for defects is provided for in FIDIC clause 11, as part of the institution of the defects notification period. Under the standard wording of the FIDIC conditions, this period begins upon issuance of the taking-over certificate, and according to the form for the enclosure to the offer published by FIDIC it lasts 365 days. During this period the contractor will perform outstanding work and remedy defects, after which the performance certificate will be issued, releasing the contractor from all obligations related to the contract.

These procedures differ significantly from Polish regulations governing liability for defects in the subject of the contract.

Under the Polish Civil Code, remedying of defects does not occur as part of performance of the contract, but after performance of the contract is completed. The consequences of the occurrence of defects in the subject of the contract are considered on the basis of regulations on warranty for defects and guarantee of quality. Warranty is a regime that applies by operation of law from the time the structure is delivered, while granting of a guarantee by the contractor is optional.

If the particular conditions do not modify the FIDIC general conditions, the nature of the contractor’s liability for defects will depend on the interpretation that is followed.

The dominant view in the legal literature and the case law regards the defects notification period as a contractual modification of the warranty for defects. Under Civil Code Art. 558 §1, the parties may expand, limit or exclude warranty liability. In that case the investor will be entitled only to the rights provided in the contract, for the time provided in the contract. For example, the warranty period here would be 365 days, instead of the 2-year period provided by statute.

But there is a different view that should also be considered, under which the institution of the defects notification period cannot be equated with warranty or the standard FIDIC rules regarded as a modification of the statutory rules for warranty, because a basic rule of liability under the warranty for defects is the lack of knowledge of the defect at the time of delivery of the structure. If the investor knew of the existence of the defect at the time of delivery, the contractor’s liability is excluded (Civil Code Art. 557 §1) (Sztrępka, above). Under this conception, the defects notification period is deemed to be an element of the contractor’s contractual obligation which is not regulated under Polish law but functions alongside and independently of the regime of liability under warranty for defects.

Because these two interpretations lead to very different consequences, particularly with respect to the period of liability for defects, these rules should be clarified in the particular conditions to the contract, specifying their relation to the contractual provisions.

Draft the guarantee as early as possible

It should also be stressed that if the FIDIC general conditions remain unmodified, the investor will not be entitled to rights under a guarantee of quality. Under prior law as well as the new rules of the Civil Code in force from 25 December 2014, liability under a guarantee of quality is a contractual regime which arises only if the contractor grants a guarantee to the investor. Under Civil Code Art. 557, a guarantee is granted by submission of a guarantee declaration which defines the obligations of the guarantor and the rights of the buyer. (The sales terminology here results from the successive cross-references in the regulations governing the warranty for construction works to the regulations governing a contract for a specific work, and in turn to the regulations governing sales contracts.)

If the contractor does provide a guarantee declaration but does not specify the conditions governing the guarantee, the code provisions will apply. But, unlike the case of the warranty for defects, the rules for liability under a guarantee of quality are not very extensively developed in the Civil Code, and therefore it is worthwhile for the parties to precisely define the conditions for the guarantee in the contract.

The guarantee is not granted until delivery of the structure, but the specimen for the document should be drafted prior to signing of the contract. Because remedying defects in a structure can entail significant costs, the risk of incurring liability for the costs, within the scope specified in the guarantee document, should be calculated into the price for which the contractor offers to perform the work.

If the contract requires the contractor to provide the investor with a guarantee but does not specify the terms of the guarantee, the contractor must assume only the obligations provided by statute in this respect. If the investor wants to adjust the conditions of the guarantee to suit the characteristics of the structure in question and regulate them differently than as provided in the statute, a specimen for the wording of the guarantee should be annexed to the main contract or included in the tender documentation.

Drawing up a specimen of the guarantee at the stage of contract signing does not exclude changes to the wording during contract performance, for example as a result of disclosure of previously unknown properties of the structure for which the contractor decides to issue a guarantee, or as a result of the investor’s acceptance of risk for solutions departing from the original assumptions set forth in the contract.

It should be borne in mind, however, that in the case of contracts financed out of public funds, the rules governing permissible modifications to contracts concluded under the public procurement provisions, set forth in Art. 144 of the Public Procurement Law, must be followed. Expansion of the scope of the guarantee will then depend on the will of the contractor, because its obligation is limited to the wording agreed at the time the contract was signed.

Preparing a specimen of the guarantee at the stage of signing of the main contract provides the investor certainty as to the minimum rights it will be given by the contractor upon delivery. There is no such certainty when the wording of the guarantee is not negotiated until after signing of the contract—for example shortly before delivery.

Hanna Drynkorn, Infrastructure, Transport, and Public Procurement & Public-Private Partnership practices, Wardyński & Partners