No payment guarantee in contracts for construction works with the State Treasury | In Principle

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No payment guarantee in contracts for construction works with the State Treasury

As of 16 October 2023, as an investor, the Polish State Treasury no longer has a statutory obligation to provide payment guarantees under Civil Code Art. 6491 §1. This lack of security for contractors can be expected to cause new problems in public procurement.

A new provision

Art. 6491 §1 of the Polish Civil Code directs the investor to provide a payment guarantee for construction works if the contractor requests it. In July 2023, §11 was added to Art. 6491, stating that §1 does not apply if the investor is the State Treasury. The new regulation entered into force on 16 October 2023, and by virtue of Art. 16 of the amending act of 13 July 2023 applies to contracts that have been concluded but not yet performed, unless the contractor requested a payment guarantee prior to the effective date of the act. If the contractor requested a payment guarantee, then the previous provisions apply.

Criticism failed to convince the parliament

During the legislative process, Art. 6491 §11 was added despite serious criticism. Commentators unanimously found the arguments in the explanatory memorandum to the bill to be unpersuasive. The drafters argued that as the State Treasury is by definition solvent, there is no need for it to provide payment guarantees. It was also argued that the new rule would be financially beneficial to the State Treasury, which will no longer have to bear half of the cost of providing the guarantee.

Is this provision constitutional?

However, adoption of this new rule does not resolve the question of whether it is constitutional to favour the State Treasury over other entities (local government units, companies, other legal entities and individuals), which are still obliged to procure a payment guarantee at the request of a construction contractor.

Pursuant to Art. 64(2) of the Polish Constitution, “Everyone, on an equal basis, shall receive legal protection regarding ownership, other property rights and the right of succession,” while according to Art. 32(2), “No one shall be discriminated against in political, social or economic life for any reason whatsoever.”

Reasonable doubts exist as to whether Civil Code Art. 6491 §11 was added in violation of these provisions. Conducting exactly the same economic activity—construction of facilities—now differs significantly depending on whether the investor is the State Treasury or another entity. The right to demand a payment guarantee is a form of property right—a claim under a contract for construction works. In the current state of law, there is no doubt that a claim for payment of a fee due from an entity other than the State Treasury is subject to much stronger legal protection. This differentiation is not justified by the mere solvency of the State Treasury. Most investors are solvent, and the purpose of introducing payment guarantee provisions into the Civil Code was a concern for contractors, not a concern for the solvency of investors. The payment guarantee functions as a tool for securing timely payment of the contractual fee—it is explicitly stated in Civil Code Art. 6491 §11 that the guarantee is issued “to secure timely payment of the agreed fee.” That the State Treasury, as an investor, is solvent, in no way ensures timely payment of the contractor’s fee.

In view of these constitutional doubts, it cannot be ruled out that the constitutionality of Art. 6491 §11 will be challenged before the Constitutional Tribunal.

Repeal of a statutory obligation does not remove a contractual obligation

Exclusion of Civil Code Art. 6491 §1 in contracts for construction works in which the investor is the State Treasury does not mean that the investor will never have an obligation to provide a payment guarantee.

When the State Treasury is an investor alongside other contracting authorities (i.e. when there is a consortium on the investor’s side), the contractor will retain the right to demand a payment guarantee from the other contracting authorities, and if it is not provided, the contractor can withdraw from the entire contract under Art. 6494 §1.

Also, when the obligation to provide a payment guarantee has been carried over directly into the contract (which sometimes happens in practice), the addition of Art. 6491 §11 will not remove the contractual obligation to provide this security. Statutory provisions are restated in a contract to make them part of the contract independent of the applicable law. In this regard, Art. 6491 §11 is an optional provision in the sense that the State Treasury can still voluntarily provide security for contract performance, and can undertake to do so.

Finally, any contractor in a contract where the investor is the State Treasury can still request the investor to provide a payment guarantee. Providing a guarantee is an ancillary benefit that the obligor may always offer to the contractor. But if no such obligation is provided for in the contract (including the specimen of the contract in the procurement documentation), providing such security will be voluntary. Thus refusal to provide it cannot be deemed the breach of an obligation that could lead to sanctions even in the form of withdrawal from the contract. Although Civil Code Art. 6494 §1 is not expressly excluded with respect to the State Treasury, it is clear that since Art. 6491 §1 is excluded from application to the State Treasury, the contractor will not be allowed to withdraw from the contract due to the State Treasury’s failure to provide a payment guarantee.

Nor was Art. 6494 §3 repealed, a standalone provision not related exclusively to the situation described in Art. 6494 §1 regarding presentation of a payment guarantee. The contractor may still assert a claim under Art. 6494 §3 if the State Treasury, as the investor, creates obstacles to performance of the contract, for example by failing to cooperate properly.

Return to the application of Art. 491 §1

Excluding the obligation to provide a payment guarantee in contracts for construction works with the State Treasury will not cause disputes over the implementation of such projects to disappear. In the explanatory memorandum to the amending bill, the drafters correctly pointed out that payment guarantee provisions have often been relied on as grounds for the contractor to withdraw from the contract, as in practice contractors did indeed make such demands and if they were not met, renounced the contract. Despite its severity, the advantage of this legal solution was that the court had no difficulty in determining whether the withdrawal was effective or not. It was enough to determine whether a payment guarantee was provided.

The inability to invoke Art. 6494 §1 will not prevent contractors from withdrawing from the contract when there is a conflict with the State Treasury as the investor. Failure to pay the fee will constitute grounds for withdrawal from the contract after exhausting the route of Art. 491 §1, i.e. after issuing a demand for payment within a short period, under pain of withdrawal from the contract. Similarly, a lack of cooperation on the part of investor will allow withdrawal pursuant to Civil Code Art. 640, although it must be admitted that there is no complete consensus on this issue in the legal literature and the case law.

Consequently, it only seems on the surface that the amendment makes the situation of the parties to a contract for construction works executed with the State Treasury more favourable to the investor. The old disputes over withdrawal from a contract for construction works under Civil Code Art. 491 §1 or 640 will resurface, and the situation of the parties will be much less certain than in the case of withdrawal from the contract due to failure to submit a payment guarantee. Additionally, until this regulation is examined by the Constitutional Tribunal, or even by a common court pursuant to Art. 8(2) of the Constitution, there is no assurance that the State Treasury’s refusal to provide a guarantee will ultimately be lawful. In view of these many doubts, the addition of Civil Code Art. 6491 §11 cannot be regarded as a favourable change even for the State Treasury, which was clearly the intended beneficiary of the change.

Dr hab. Marcin Lemkowski, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners