Restrictions on investor’s joint and several liability | In Principle

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Restrictions on investor’s joint and several liability

The joint and several liability of the investor on a construction project for the fees of the subcontractors under Polish law is particularly strict. Thus owners of construction projects should note the statutory solutions (recourse claims by investors and limitations in subject matter and amount introduced in the amended Civil Code) and the permissible use of contractual clauses to soften this liability regime.

Under Art. 6471 §5 of the Civil Code, the investor bears joint and several liability with the general contractor for payment of fees for work performed by subcontractors. Under this rule, the subcontractor may seek payment directly from the investor. The investor’s assertion of a lack of contractual privity with the subcontractor is no defence to this liability.

The investor’s joint and several liability applies only to subcontractors’ fees for construction work, and does not apply to subcontractors’ claims for supply of goods or services or other unrelated claims.

This provision of the Civil Code is mandatory, meaning that the parties cannot regulate the investor’s liability differently in their contract, and any contractual provisions purporting to modify the joint and several liability of the investor and the general contractor would be invalid (but as discussed below, clauses providing some protection to the investor may be used). This rule is expressly provided for in Civil Code Art. 6471 §6. This solution is designed to protect the interests of subcontractors.

Investor’s consent

For the investor’s joint and several liability with the general contractor for a subcontractor’s fee to arise, the subcontractor must be approved by the investor. The investor must also consent to conclusion of a further subcontract between an approved subcontractor and a sub-sub. The investor expresses its consent following presentation for its approval of the contract concluded with the subcontractor (or a draft of the contract), which must be in writing.

But the investor’s consent to hiring of a subcontractor need not be express; consent may be implied from:

  • The investor’s failure to assert an objection or reservations in writing within 14 days after it is presented with the general contractor’s contract with the subcontractor or the subcontractor’s contract with a sub-sub, or
  • Behaviour by the investor demonstrating its knowledge and acceptance of the subcontractor—for example tolerating the subcontractor’s presence on the construction site, entries in the construction log, accepting delivery of work performed by the sub, or the like.

It follows that the notion of the investor’s consent is interpreted broadly.

Risk of double payment

Unfortunately, the investor’s and general contractor’s joint and several liability to subcontractors for payment of their fees for construction work entails a risk of double payment by the investor—first to the general contractor for its fee and then to the subcontractor for its fee—if the general contractor fails to pay the subcontractor despite receiving payment from the investor. Payment of the general contractor’s fee does not release the investor from the obligation to pay the subcontractor if the sub is not paid by the general contractor. Under Civil Code Art. 366 §2, the investor remains jointly and severally liable to the subcontractor until the sub’s claim is satisfied. The investor cannot assert as a defence against liability to the subcontractor that it has satisfied the general contractor, who should then have pass on part of its fee to the subcontractor.

It follows that the investor’s obligations to the general contractor and the subcontractors are independent. On one hand, this is disadvantageous for the investor, because of the risk of having to pay twice for the same work. On the other hand, the independence of the two obligations of the investor provides a certain benefit in the event that the investor seeks recourse against the general contractor. The independence of the two obligations means that the investor’s loss in the form of payment to both the general contractor and the subcontractor is not a condition for the recourse claim. The investor can seek recourse against the investor even if it has not yet paid the general contractor’s fee. The investor can also set off its recourse claim against the fee due and payable to the general contractor.

Recourse claims by investor

The drafters of these code provisions intended for the loss arising out of double payment for the same construction work to be made up through a recourse claim by the investor against the general contractor as the other jointly and severally liable party. But the solution set forth in Civil Code Art. 376 §1 is not applicable here. Under that provision, the amount of a recourse claim is determined by the substance of the legal relationship between the two jointly and severally liable debtors, and if that issue is not addressed between them, then the debtor who has performed the obligation may demand contribution from the other debtor in equal portions. If that provision were applicable, the investor could recover from the general contractor only half of the fee it paid to the subcontractor.

Instead, Civil Code Art. 518 §1(1) applies, providing a much more advantageous solution for the investor. Although, like Art. 376 §1, this provision is also of a compensatory nature, it more broadly privileges the creditor asserting a recourse claim as it allows the claimant to enter into the rights of the satisfied creditor (i.e. the subcontractor) up to the total amount paid to the creditor.

The investor’s payment of the subcontractor’s fee is viewed in the case law as satisfying another person’s debt (i.e. the general contractor’s debt). It is the general contractor who is a party to the subcontractors’ agreements, and the duty to pay the subcontractors rests primarily on the general contractor. The investor’s consent to conclusion of the given subcontract is a condition for the investor’s assumption of liability for the obligation that is originally an obligation of the general contractor. Consequently, upon payment of the debt of the other person (the general contractor), the investor acquires the claim up to amount of the fee it has paid and assumes the rights of the satisfied creditor (the subcontractor). The investor acquires the claim under Civil Code Art. 518 §1(1) by virtue of paying the creditor. The subcontractor’s consent to the payment or assignment of the claim is not required.

But the possibility of asserting a recourse claim does not ensure the investor complete protection. If the general contractor is insolvent, the possibility of recovering the payment is excluded for obvious reasons. The investor’s inability to seek reimbursement of the fee it has paid to the subcontractor does not exclude the investor’s liability under Civil Code Art. 6471 §5. The courts ruling on cases of this type have rejected the investors’ argument that this solution violates principles of public policy.

Possibility of setting off fees paid to subcontractors

The Civil Code regulations on obligations enable the subcontractors’ fees paid directly by the investor to be set off against the fee owed by the investor to the general contractor.

Under Civil Code Art. 498, setoff may be made if:

  • Two persons are mutually debtors and creditors to one another
  • Their claims are for payment of money, and
  • The claims on both sides are due and payable and may be enforced before the courts or other state authority.

This situation exists if the investor has not yet paid the general contractor’s fee, which it is due and payable, but the investor has paid the subcontractor’s fee directly sought by the sub. In that situation, if the general contractor seeks payment of its fee, the investor may assert the defence of setoff. An effective assertion of setoff results in discharge of the offsetting claims of the investor and the general contractor.

Permissible contractual provisions protecting the investor’s interests

To ensure the investor the possibility of exercising the right of setoff, it is worthwhile for the investor to include in its agreement with the general contractor a provision entitling the investor to withhold payment of the general contractor’s fee in certain circumstances, e.g. if the general contractor is in poor financial condition. Then, when the general contractor seeks payment of its fee before the subcontractors demand payment by the investor, the investor can withhold from the general contractor’s fee an amount equal to the amount the general contractor owes its subcontractors.

It is also worthwhile for the investor to include in the agreement with the general contractor an obligation for the general contractor to include with its request for payment statements by the subcontractors that their due and payable claims against the general contractor through the end of the settlement period have been paid. Presentation of statements by the subcontractors that they have been paid in full should also be a condition for payment of the general contractor’s final invoice to the investor on the project.

Another solution protecting the investor is to include a provision making payment of the general contractor’s fee conditional on the general contractor’s providing security for the subcontractors’ claims, such as a bank guarantee.

But these clauses will apply only when the investor has not yet paid the general contractor’s fee in full. If a subcontractor for construction work demands payment from the investor after the investor has already paid the general contractor’s fee, the investor will have to pay the subcontractor as a party jointly and severally liable under Civil Code Art. 6471 §5, even though it has already performed its obligation to the general contractor.

Limitation on investor’s liability through amendment of the Civil Code

Changes to the Civil Code entering into force on 1 June 2017 pursuant to the Act of 9 March 2017 Amending Certain Acts to Facilitate Enforcement of Claims will limit the investor’s joint and several liability in terms of both subject matter and amount.

Under the amended wording of Civil Code Art. 6471 §1, the investor will be liable only for the construction work performed by the subcontractor whose detailed scope was notified to the investor by the general contractor or the subcontractor before beginning performance of the work, or was previously defined in the agreement between the investor and the general contractor. The investor will retain the option of objecting to the performance of work by the subcontractor, within 30 days after presentation of the subcontractor.

The investor’s liability for payment of the subcontractor’s fee will also be limited to the amount that the investor would be required to pay the general contractor for the same scope of work that was actually performed by the subcontractor. The limit in the amount of the investor’s liability to subcontractors will thus be determined by the amount of the fee for that work which the investor undertook to pay in the agreement with the general contractor. If the general contractor agreed to pay the subcontractor more, the investor will not have to pay the subcontractor for the excess.

Katarzyna Śliwak, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners