Contractual penalty for late payment or non-payment to subcontractors permissible | In Principle

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Contractual penalty for late payment or non-payment to subcontractors permissible

It is permissible to agree on a contractual penalty for non-payment or late payment of fees due to subcontractors, the Supreme Court of Poland held in its resolution of 30 June 2020 (case no. III CZP 67/19).

Protection of investors and subcontractors

The Supreme Court has confirmed that a provision may be included in the contract between the general contractor and the investor that the general contractor must pay the investor a stipulated contractual penalty if the general contractor is late in making payments to its subcontractors or fails to pay them. This instrument protects the investor from joint and several liability for the subcontractors’ fees (Civil Code Art. 6471).

A contractual penalty framed in this way mobilises the general contractor to settle with its subcontractors correctly and in a timely manner. The contractual penalty also protects subcontractors, as it imposes a sanction on the general contractor for not paying their claims. The penalty may be agreed upon not only in the case of non-payment but also in the case of late payment. However, it seems that in the event of a slight delay in payment, it would be reasonable to mitigate the contractual penalty and adjust the amount to fit the circumstances of the specific case.

Non-monetary nature of the claim

A contractual penalty may be agreed for non-performance or improper performance only of non-monetary claims (Civil Code Art. 483 §1). The Supreme Court confirmed that for purposes of the relationship between the investor and the general contractor, the general contractor’s non-payment or late payment of its subcontractors is a non-monetary claim. The general contractor undertakes to the investor that it will make timely payments to subcontractors. Therefore, the cash benefit does not occur between the investor and the general contractor, but in the relationship between the general contractor and the subcontractor.

Principle of freedom of contract and practical impact of the resolution

Although the Supreme Court has not yet issued the written justification for the resolution, it can be concluded from the operative wording of the resolution that the Supreme Court based the admissibility of such an agreed contractual penalty on the principle of freedom of contract, finding that Civil Code Art. 483 §1 does not preclude this possibility.

Although the resolution does not have the force of a legal rule, it is likely to have a significant impact on contract practice and the rulings of the lower courts. It will be difficult for general contractors to effectively challenge the validity of such contractual provisions, and investors will be keen to use an instrument that can help them avoid liability for subcontractors’ fees. And general contractors may also include such penalties in their subcontracts, for subcontractors who use sub-subcontractors, as this model may be extended analogously to further levels of participants in the construction process.

Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners