The parliament has granted subcontractors a high level of protection. The provisions on joint and several liability are strict for the investor and often in practice mean a risk of double payment for the same thing: the first time to the general contractor and the second time to the subcontractor. Therefore, the investor should be able to recover from the general contractor the sums paid directly to subcontractors.
The investor, the general contractor, and the subcontractors have a common goal: to complete the project. Unfortunately, this is usually where the elements connecting them come to an end. The common goal often becomes obsolete during the construction process, especially in the event of a serious conflict between the parties. During the construction process, important interests of its participants clash, which often leads to disputes.
The method and speed of their resolution depend mainly on the good will of the parties. However, to avoid relying on good will, it is necessary to protect oneself properly and in advance. The investor, as the host of the construction project, has a special role to play there. After all, it is the investor who is responsible for preparing the construction contract and should frame it in a way that provides the investor adequate protection, but does not become a trap for the contractors. This may help to avoid problems with the completion of the project and thus lengthy litigation giving rise to a high degree of uncertainty. The most efficient projects are those involving entities open to dialogue and amicable handling of matters.
In the process of settling with subcontractors, the attitude of the general contractor will be of particular importance. Therefore, an investor operating outside the public procurement regime should carefully choose a partner, and it may have cooperated with the contractor for several years. It is important that, apart from experience and appropriate preparation, the general contractor is in good financial condition. Financial problems of the general contractor may bring the investor many difficulties (in the course of the project and settling with the subcontractors).
The possibility of pursuing recourse against a contractor is not uniformly recognised in the case law and legal literature. The strictest position says that without separate contractual reservations, on the basis of the Civil Code itself, there is no such recourse. Some take the view that the investor is entitled to reimbursement of half of what it paid to subcontractors. The most advantageous position for the investor gives it the possibility of full reimbursement of amounts paid directly to subcontractors.
In order to avoid any risks associated with these discrepancies, it is best to explicitly provide for the possibility of reimbursement in the contract. In addition, it may be stipulated that the general contractor is also obliged to reimburse the investor for other costs incurred in relation to subcontractors’ claims, e.g. costs of court proceedings, interest, legal fees for the subcontractor’s claim, etc. This will allow the risk of litigation with the subcontractor to be passed to the general contractor and give the investor greater comfort in assessing the subcontractor’s claims.
Statutory setoff and contractual setoff
Setoff, which should also be expressly provided for in the contract, will also be a good instrument for recovering sums paid directly to subcontractors. Setoff will be possible if the investor has not yet paid the general contractor all its fees. According to the Civil Code, the possibility of setoff arises only when the claim (the investor’s claim) presented for setoff is already due. This means that the investor makes a setoff against the general contractor’s fee only after a direct payment has been made to subcontractors. It is also important to remember to follow the formalities and to send a notice of setoff to the contractor. The effect of the setoff will occur only when the contractor is served with this document.
To speed up the possibility of setoff, it is worth considering modifying the statutory rules of that institution in the contract. However, in this case, care is required to avoid exposure to an accusation of ineffectiveness of the contractual terms. A provision that setoff is possible as soon as the subcontractors have made their claim to the investor would be beneficial for the investor.
If an investor chooses to make a setoff, it should not delay. It may turn out that the fee of the general contractor (with whom the investor wants to set off sums paid directly to subcontractors) will be attached by a bailiff executing on behalf of the general contractor’s other creditors. In such a situation, the investor is obliged to pay the bailiff the fee due to the general contractor and can no longer exercise the claim itself. The bailiff will then pass on the proceeds to another creditor.
Therefore, other entities may anticipate the investor’s moves and prevent the investor from asserting setoff to satisfy its claim. The situation is different if setoff by the investor precedes the execution seizure. Then, the investor only has to declare to the bailiff that the seized claim does not exist, because it was extinguished by setoff. These problems will be very likely in the case of a general contractor with financial problems (lack of assets, loss of liquidity, numerous court and enforcement proceedings in progress). In such situations, investors are served with an avalanche of attachments by bailiffs of general contractors’ fees. Therefore, the investor’s sluggishness in asserting setoff may have irreversible and very painful consequences for the investor.
Guarantee deposit and the risk of its seizure by the bailiff
A guarantee deposit (5% of the value of each invoice to be paid, retained by the investor to cover, among other things, subcontractors’ claims) is also a useful instrument. This is money that the investor actually has and it is easy to use.
However, the possibility of enforcement seizure of the deposit withheld by the investor is not uniformly recognised in practice. The bailiffs often refer to its legal nature and claim that it constitutes a part of the fee due to the contractor, which will become due only in the future (when the prerequisites for the return of the deposit are realised). Therefore, they accept the admissibility of an enforcement seizure of the deposit. Such a seizure will deprive the investor of that security measure, which is something to be aware of.
Bank (insurance) guarantee will secure recourse
Therefore, a bank or insurance guarantee will be a more effective instrument to recover sums paid to subcontractors. In addition to warranty or guarantee claims, it should also cover claims for the reimbursement of direct payments. The investor should ensure that the guarantee is unconditional, payable on first demand, divisible, and concluded with a reputable entity, in an appropriate amount and duration. The contractor should be obliged to extend it and supplement it to the agreed amount if the investor draws on it before the end of its validity period.
The investor should have a right to draw on the guarantee as soon as the claim is made by the subcontractor, and not only after the claim has been paid. The investor may also secure the right to accept the terms of the guarantee in advance and to extend it at the contractor’s expense if the contractor fails to perform its duty and does not ensure its continuity. A contractual penalty for not renewing the guarantee within a specified period may also help to mobilise the general contractor to extend the guarantee.
Ad hoc guarantee
A bank or insurance guarantee may also be useful when a subcontractor has filed a claim with the investor, but the investor cannot resolve the claim on the merits. This will be the case, for example, when the assessment of the claim requires special knowledge, or analysis of the complex problem of project delays. In such situations, general contractors often agree to provide a new bank guarantee to protect the investor against the particular subcontractor’s claim, under pressure of suspending payments to the contractor. Such a guarantee should cover at least the aggregate amount of the principal claim with interest for a period of three years and the foreseeable litigation costs. The duration should be at least three years, i.e. at least equivalent to the limitation period of the subcontractor’s claim. This solution ensures continuing liquidity of settlements with the general contractor and thus promotes the completion of the project. At the same time, it helps to pass on the risk of losing the court case to the subcontractor.
Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners