Pursuing claims against Polish road authority under special act of Parliament | In Principle

Subcontractors for road projects in Poland may still seek payment from the General Directorate for National Roads and Motorways (GDDKiA) under a special act of Parliament from 2012. A recent amendment to the special act allows subcontractors which are large enterprises to seek payment from GDDKiA under the same terms as SMEs.

A special act of the Polish Parliament—the Act on Payment of Certain Unsatisfied Claims of Businesses Arising Out of Performance of Public Contracts of 28 June 2012—sets forth the rules for payment by the General Directorate for National Roads and Motorways (GDDKiA) of the principal amount of claims to enterprises which entered into a contract with the general contractor in connection with performance of certain public procurement contracts for construction work awarded by GDDKiA. The special act covers subcontractors for construction work and suppliers of materials and services functionally connected with performance of contracts for road construction projects in Poland.

Protecting SMEs against insolvent general contractors

The special act was adopted by the Parliament in response to a situation in which many subcontractors in road construction projects, particularly SMEs, were not receiving payment because they relied on general contractors which were mostly large enterprises but not always in strong financial condition, and some of which subsequently became insolvent. The special act allowed subcontractors to seek payment from GDDKiA, drawing on the security for contract performance provided to GDDKiA by the general contractor for each road project.

Originally the special act provided protection only to small and medium-sized enterprises and micro-enterprises, but pursuant to a judgment of the Constitutional Tribunal in June 2013, that limitation was stricken from the special act and ceased to apply from 9 July 2013 forward. This holding was codified in an amendment to the special act which went into effect on 16 July 2014 and entitles subcontractors which are large enterprises to seek payment from GDDKiA in certain cases.

Restrictions on seeking payment from GDDKiA

The special act applies only to public contracts for construction work which were awarded prior to 3 August 2012 or for which the proceeding for award of the contract was commenced before 3 August 2012. This means that the special act does not apply when the contract was originally awarded prior to that date, but then had to be awarded again (for example as a result of renunciation of the contract), i.e. announced and awarded to new contractors, after that date, in order to complete a project interrupted as a result of the previous contractor’s failure to complete the work. Nor does the special act apply to more recent procurements going forward.

The special act applies only to subcontractors and providers of services or construction materials which were direct subcontractors of the general contractor and had concluded a contract with the general contractor. The special act does not extend to sub-subcontractors, and the amendment to the special act does not change this. The special act also does not cover enterprises which could seek payment under regulations providing for joint and several liability of the investor for the fees of subcontractors, i.e. declared and approved subcontractors for works. Nonetheless, there is nothing preventing subcontractors which were not declared or approved under Civil Code Art. 647¹ from being paid under the special act.

There must be a functional connection between the performance provided by the subcontractor and the procurement. In other words, the works, services or supplies agreed between the subcontractor and the general contractor must further the realisation of the given public procurement. This is important, because often agreements for example for supply or materials or services are structured as framework agreements for supplies or services for any projects conducted by the general contractor. Then the portion of the supplies, for example, which were performed for the project covered by the procurement and subject to the special act would have to be separated out.

Payment under the special act covers only the principal amount of the claim, i.e. the fee for the work or the price of the materials, without interest, damages or penalties.

Moreover, the payment applies only to the principal claim in its existing amount. This means that the scope of liability of GDDKiA will be affected by any type of settlement reached between the general contractor and the subcontractor resulting in discharge of the debt in whole or part, postponement of the payment deadline, or scheduling of repayment in instalments. Because the special act serves a guarantee function, the scope of GDDKiA’s liability for the principal claim cannot be greater than the current amount of the general contractor’s debt to the subcontractor—reflecting their settlements.

Procedure and deadlines for asserting claims

In order to obtain payment from GDDKiA, a subcontractor must present documents evidencing the existence of its claim and lack of payment. GDDKiA may pay an advance of up to 50% of the amount due.

First, at the stage of asserting the claim and obtaining an advance from GDDKiA, the subcontractor must present the contract and one of three other documents:

• A written statement by the general contractor acknowledging the claim
• A non-final ruling issued in a judicial proceeding against the general contractor, or
• A list of creditors in a bankruptcy proceeding (if the claim against the general contractor was asserted in a bankruptcy proceeding).

Then, at the stage of payment of the remainder of the amount, the subcontractor must present:

• A legally final judicial ruling or settlement concluded before the court in a proceeding between the subcontractor and the contractor, with an enforcement clause
• A list of claims in which no objection has been filed to the specific claim under Art. 256 of the Bankruptcy & Recovery Law, or
• A list of claims, including the claim in question, approved by the judge-commissioner in the bankruptcy case.

These requirements mean that the actual amount of the principal claim is verified in a judicial or bankruptcy proceeding, and GDDKiA merely verifies the other formal requirements provided for in the special act. From a practical point of view, the verification in the judicial proceeding largely depends on the initiative of the defendant or debtor in bankruptcy and any objections it may assert to the amount of the claim (including, for example, any defence of setoff).

The upper limit of GDDKiA’s liability to subcontractors is the amount of the security for proper performance of the contract which was provided by the general contractor with respect to the specific procurement and not yet released again to the general contractor by GDDKiA. The amount of the security is a maximum of 10% of the fee for work performed by the general contractor, and typically this is the amount of the security required by the contracting authority.

Therefore if multiple subcontractors seek payment from GDDKiA and their combined claims exceed the amount of the security, their claims will be satisfied pro rata up to the amount of the security.

GDDKiA may announce in a nationwide newspaper a 21-day period for asserting claims. If the value of the claims asserted exceeds 3% of the total value of the contract, then it is mandatory to establish and announce such 21-day period. Then GDDKiA will prepare a list of subcontractors which meet the conditions for payment and notify them of their inclusion in the list. Under GDDKiA’s practice so far, subcontractors’ claims which are not included in the list are also notified of the negative decision.

The special act does not specify the consequences of failure to assert claims within the 21-day period or assertion of a claim after the deadline. However, Art. 9 of the special act provides that a list of subcontractors will be drawn up a second time only if the amount of the claims included in the first list is less than the amount of the security—and thus only when the upper limit of GDDKiA’s liability has yet to be consumed.

Therefore, claims against GDDKiA asserted after the 21-day period are considered only if the pool of funds for payment based on the amount of the security has not been exhausted. In such case, the practice of GDDKiA is to establish and announce another period for filing claims. But if it is determined after drawing up the list that the claims asserted within the 21-day period will exhaust the limit of GDDKiA’s liability, the late claims will not be considered and will lapse.

Amendment for large enterprises

In the judgment of Poland’s Constitutional Tribunal of 18 June 2013 (Case No. K 37/12), the tribunal held that Art. 4(1) of the special act was unconstitutional insofar as it provided that the only subcontractors permitted to pursue claims against the General Directorate for National Roads and Motorways under the special act were SMEs and micro-enterprises. The special act unconstitutionally discriminated against claimants on the basis of their size.

Following the constitutional ruling, the Parliament passed the Act of 30 May 2014 Amending the Act on Payment of Certain Unsatisfied Claims of Businesses Arising Out of Performance of Public Contracts. The amendment was published at Journal of Laws Dz. U. 2014 item 929 and went into effect on 16 July 2014.

The special act as amended no longer identifies the businesses which may file claims under the act by reference to definitions of micro, small and medium-sized enterprises. In enacting the amendment, the intention of the Parliament was to treat all subcontractors in road construction projects equally.

Two procedures for payment under the amendment

The amendment contains two different sets of provisions, for procurement proceedings in which the list of claims against GDDKiA by subcontractors was already closed when the amendment entered into force and those in which the period for filing claims was still open and would not expire until after the amendment entered into force.

In the former case, funds were already paid out to subcontractors under the prior wording of the special act. Lawmakers had to decide what to do with lists of subcontractors entitled to payment of claims under existing lists of claims. It was decided that there was no basis for invalidating existing lists of claims. Instead, under the amendment, large subcontractors which meet the conditions for payment of their claims by GDDKiA but for whom the deadline for submitting claims has already passed will be paid “under the existing rules.” This means that enforcement of claims against GDDKiA will require drawing up a new list of subcontractors pursuant to Art. 5(3) and Art. 9 of the special act. A necessary condition for drawing up a new list is that the funds from the limit for security of performance of the contract have not yet been exhausted. Newly asserted claims by subcontractors will be satisfied in full if the funds left over from the security are sufficient to do so. If not, subcontractors on the new list will be satisfied pro rata.

Lawmakers also recognised that there could be periods for submitting claims which were still open when the amendment went into effect. The principle of equal treatment would not be well-served if SMEs had the full 21 days to fulfil the requirements of the existing act while larger subcontractors were only given a handful of days to do so. Therefore, under Art. 2(2) of the amended special act, if the deadline had not yet passed when the amendment went into effect, the period for large enterprises to file claims would be extended by 21 days. At the end of the extended period, GDDKiA will prepare a list of subcontractors of all sizes and notify those included in the list.

The Parliament justified its decision not to reopen proceedings for payment that were already completed by reference to the one-off nature of the act. The Constitutional Tribunal also recognised in the justification for its ruling that the special act was designed to address a specific social issue connected with the insolvency of subcontractors involved in performing public contracts for road construction. The tribunal pointed out that after the payments are made by GDDKiA, the mechanisms established by the special act will cease to be an operative element of the legal system, and will not be applicable in the future. The drafters of the amendment to the special act also indicated that Art. 3 of the special act provides for the scope of applicability of the act and does not provide for any procedures to be followed if the scope changes. It was also pointed out that the ruling by the Constitutional Tribunal does not itself create law, and thus the amendment of the special act lies within the discretion of the Parliament, and the judgment does not provide grounds to set aside existing lists of subcontractors entitled to payment by GDDKiA or to claw back any amounts already paid out to them. In other words, the amendment and the expanded set of subcontractors which may seek satisfaction of their claims by GDDKiA are not retroactive when it comes to claims already satisfied.

Money may trickle down to sub-subs

It was pointed out in the justification for the amendment that the sum of guarantees subject to the operation of the special act is about PLN 1.35 billion, of which some PLN 270 million has already been paid out. Even though each project has its own limit for payments to subcontractors, the amendment appears to provide large subcontractors a chance to obtain satisfaction of their claims arising out of performance of contracts for construction work awarded by the General Directorate for National Roads and Motorways.

Moreover, payments to large subcontractors may translate into payment of their own subcontractors. While sub-subs are not entitled to demand payment directly from GDDKiA under the special act, the system for asserting claims in a certain sense forces subcontractors to make payments to their own subcontractors when they receive funds from GDDKiA. This is because when the immediate subcontractor obtains an advance from GDDKiA and seeks payment of the remaining balance, it must show that it is not in arrears in paying its own subcontractors or that the funds from the advance were used to pay the sub-subs.

Małgorzata Cyrul-Karpińska and Joanna Florecka, Infrastructure & Transport and Public Procurement & Public-Private Partnership practices, Wardyński & Partners