On 9 December 2021, the Supreme Court of Poland issued a resolution (case no. III CZP 26/21) examining liquidated damages in construction contracts. In construction, liquidated damages are particularly common, generating serious disputes even threatening the completion of projects. In practice, this instrument is mainly used by investors, and the problem usually affects general contractors and subcontractors.
Due to the great popularity of liquidated damages (not only in the construction sector), the Supreme Court of Poland has repeatedly expressed its opinion on controversies related to their use and the interpretation of legal provisions in this respect. This time, the issue was the limits of contractual freedom and the possibility of reserving liquidated damages for improper performance not of the construction works themselves, but of activities related to the preparation of works. Thus, the court focused on the earlier stage of the contract for construction works.
The case involved liquidated damages in connection with non-performance or improper performance of duties prior to commencement of the construction works, but necessary to prepare for the works, rather than the main contractual obligation.
Two questions were presented to the Supreme Court for consideration:
- Is it possible to stipulate liquidated damages for improper performance of these obligations in the form of a specific percentage of the contractual fee for each day of delay, without specifying the maximum amount of liquidated damages?
- Can Art. 484 §2 of the Civil Code (“If the obligation has been substantially performed, the obligor may demand a reduction in liquidated damages; the same applies if liquidated damages are grossly excessive”) be applied by analogy as the legal basis for reduction of the obligee’s liquidated damages?
The Supreme Court responded that it is permissible to reserve liquidated damages in the event of non-performance or improper performance by the obligee of an action without which the obligor’s performance under a construction contract cannot be satisfied. Therefore, the liquidated damages do not have to be related to non-performance or improper performance of the main obligation under the construction contract. Also, the preparatory activities necessary for the construction works themselves may be covered by the contractor’s (or subcontractor’s) liability for liquidated damages.
In addition, the Supreme Court held that the maximum amount of liquidated damages need not be expressed in monetary terms. It is sufficient that it can be determined based on the contract and in light of the circumstances of the case. The most commonly used limitation in contracts is an indication of a percentage of the contractual fee as the limit of liquidated damages.
In another resolution, also issued on 9 December 2021 (case no. III CZP 16/21), the Supreme Court held that it is permissible to reserve liquidated damages for delay in performing an obligation in the form of a specified percentage of the agreed fee for each day of delay, even if no deadline for accrual of the liquidated damages or their maximum amount has been set.
Agat Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners