Is subcontracting easier? The effects of the amendment of Art. 647¹ of the Civil Code two years after adoption | In Principle

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Is subcontracting easier? The effects of the amendment of Art. 647¹ of the Civil Code two years after adoption

Art. 647¹ of the Civil Code, providing for the investor’s secondary liability for the contractor’s debts to subcontractors, was introduced into the Polish legal system in 2003. In April 2017, the parliament amended it thoroughly in adopting the Act Amending Certain Acts to Facilitate Debt Recovery. Two years after implementation, we try to answer the question whether the title of the amending act corresponds to reality and subcontractors really have a better chance of receiving payment for their work.

Under current law, the investor is jointly and severally liable with the general contractor for payment to the subcontractor if the contractor previously notified it of the subcontractor (or the subcontractor provided notice of a further subcontractor) and indicated the scope of the works entrusted to the subcontractor, and the investor did not object within 30 days of notification. A separate notification is not necessary if a given subcontractor and the scope of work to be carried out are specified in the contract with the general contractor. This was not expressly provided for in the earlier regulations, but such a mechanism could be inferred from them.

From subcontractors’ point of view, the determination that the investor’s joint and several liability arises only after notification is certainly a negative change. The decisions under the previous law often recognised retroactive effect of consent. Now, as a precaution, a subcontractor must assume that works carried out before notification will not be protected.

The replacement of the requirement of the investor’s “consent” by a notification mechanism allowing objections to be raised also leads, albeit indirectly, to adverse consequences for subcontractors. Based on the previous legal situation, there was already well-established case law holding that the investor’s consent could be expressed in any way, including implicitly, which was very beneficial for subcontractors, as it significantly increased their chances in a court case. The current wording of Art. 647¹ of the Civil Code seems to exclude this solution, although there are some decisions of the lower courts supporting the previous line of ruling despite the change of regulations.

On the other hand, from the subcontractor’s point of view, it should be noted on the plus side that the notification may concern all construction works regardless of the legal qualification of the contract, and may also come directly from the subcontractor, and not, as before, only from the general contractor. However, on the other hand, the requirement to specify the detailed subject of the subcontractor’s works imposes an obligation on it to precisely define the scope of works even before commencement, which in practice can be very difficult (especially when the project is poorly prepared).

A certain inconsistency of the parliament is that, unlike in the analogous provisions on public procurement (Art. 143c of the Public Procurement Law), the literal wording of the provision excludes from the scope of the investor’s joint and several liability suppliers of materials and entities providing services closely related to construction works, such as design services and geological works. Although the decisions from the lower courts have increasingly broadened the concept of “subcontractor of works,” and the concept sometimes also includes suppliers of construction materials and service providers, it is a diverse and unpredictable concept. It is a pity that the parliament did not resolve this problem directly, in the wording of the act, and did not unify the rules governing the public and private sectors.

It should also be noted that under the current wording of Art. 647¹ §3 of the Civil Code, the fee agreed between the general contractor and the subcontractor, which may not exceed the fee provided for the contractor for the same scope of works in the agreement with the investor, sets the upper limit of the investor’s liability. This means that even if the subcontractor succeeds in increasing the agreed fee through negotiations or legal proceedings, the liability of the investor will remain at the original level, unless the investor accepts the notification of an extension of the scope of works or a change in fee.

Arguably a subcontractor could claim payment from the investor for additional works not covered by the notification under provisions on unjust enrichment, but this solution does not guarantee success and in principle is only possible if the investor has not paid the general contractor for those works.

The parliament’s abandonment of the previously planned requirement of written form under pain of nullity for contracts between the contractor and subcontractors, which also raised many doubts in practice, makes life easier for subcontractors. Currently, written form is used only for evidentiary purposes, which in any case does not apply in disputes between businesses. Thus, one could imagine that a subcontractor will notify the investor of an informal (oral or implicit) contract for additional or replacement works concluded with the general contractor. As long as the subcontractor indicates the scope of works and, in a possible trial, is able to prove that the general contractor commissioned it to perform the works, such a suit against the investor will have some hope.

The arbitrariness of objections to hiring a subcontractor is a significant practical problem for both the subcontractor and the general contractor. According to the justification of the draft amendment, an investor may object for any reason and thus evade joint and several liability. Under the new rules, practice has shown that investors eagerly exploit this possibility by opposing subcontractors often in the last days before the deadline, and multiple times for the same scope of works. This greatly weakens the position of the subcontractor and provides an additional argument for the subcontractor to protect itself in the contract with the general contractor in the event of objection from the investor. Hopefully, despite the different wording of the regulations, as under the old legal status the courts will require that an effective investor objection must be justified, although at this point it is difficult to determine whether that will be the case.

To sum up, it seems that the parliament’s objective was not to make life easier for subcontractors, but to balance the interests of investors and subcontractors and to eliminate the discrepancies that had arisen in the previous legal situation in the legal literature and in the case law. So far, experience has shown that none of these objectives have been fully achieved. However, the actual effect of the changes will only become apparent in the case law, which may make some adjustments to the direction taken.

Paweł Mazur, adwokat, Maciej Zych, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners