Settlements with subcontractors in public procurement | In Principle

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Settlements with subcontractors in public procurement

The Public Procurement Law provides for rules autonomous from the Civil Code for settlements with subcontractors. The regulations apply independently of each other, but they are applied in parallel to contracts concluded under the public procurement regime.

The rules for paying subcontractors in both of these acts are convergent in many respects, but the Public Procurement Law is more detailed. In many places, it regulates issues that in private contracts are the responsibility of the parties, benefiting the party that is better able to secure its interests contractually.

The circle of subcontractors

One of the basic problems of settling accounts with subcontractors under contracts not subject to the public procurement regime is to establish the set of subcontractors covered by the investor’s joint and several liability, as the Civil Code does not resolve this issue and the case law is not uniform. More information on this subject can be found in the article “Is subcontracting easier? The effects of the amendment of Art. 647¹ of the Civil Code two years after adoption.

However, this problem does not occur in the case of settlements with public procurement subcontractors. The Public Procurement Law specifies that all subcontractors of construction works contracts should, as a rule, be treated equally. This was confirmed by the recent Supreme Court judgment of 20 September 2018 (IV CSK 457/17). The court pointed out that as a matter of principle, it would be unjustified to treat subcontractors of construction works contracts differently, because regardless of whether they perform construction works or services, or provide supplies, their works together constitute the subject matter of the contract. The court explained that the application of statutory protection under the Public Procurement Law depends on the subject matter of the agreement between the contracting authority and the contractor (award for public works), and not on the subject matter of subcontracting agreements. It boils down to a lack of differentiation in the situation of subcontractors regardless of what they perform under the main subject matter of the contract.

Direct payment mechanism

The Public Procurement Law also provides for a direct payment mechanism, which applies in private contracts only if the parties regulate it in the contract.

Pursuant to Art. 143c of the act, if a contractor, subcontractor or sub-subcontractor for public works fails to perform its obligation to pay, the contracting authority shall pay directly the entity that did not receive the due fee.

This provision applies to two groups of subcontractors and further subcontractors:

  • Subcontractors with whom the contractor has concluded a contract for subcontractor works accepted by the contracting authority, whose subject matter is construction works
  • Subcontractors of contracts whose subject matter is supplies or services.

A condition for including providers of supplies or services in the direct payment mechanism is that the subcontract has been submitted to the contracting authority. However, a contract for supplies or services does not have to be accepted by the contracting authority, as the act does not even provide for the procedure of acceptance of such types of contracts. But this provision does not apply to subcontractors whose existence the contracting authority has never learned about, which may apply for example to subcontractors of small-value contracts (below 0.5% of the value of the award) or subcontractors performing work within the scope for which the contracting authority indicated in the terms of reference that there is no obligation to submit supply or service contracts.

The provision on direct payments has raised considerable doubts in the case law. Until recently, it was commonly assumed that it resulted only in “the contracting authority’s right to make direct payment together with the obligation to exercise this competence.” With this approach, the subcontractor had no claim against the contracting authority for payment of the fee not paid by the contractor, even though the subcontractor was theoretically covered by the direct payment mechanism. The Supreme Court firmly rejected that position in the judgment of 20 September 2018 (IV CSK 457/17), indicating that Art. 143c of the Public Procurement Law is an independent legal basis for the contracting authority’s liability, and thus also covers, by virtue of the act, suppliers of materials and services, and consequently creates a claim on their part in this respect. The Supreme Court also stressed that this liability is joint and several liability. This finding was based on an amendment to the Public Procurement Law confirming the nature of the contracting authority’s liability (introduced by the Act of 7 April 2017 Amending Certain Acts to Facilitate Debt Recovery).

Procedure for payment of subcontractor’s fee

Before making a direct payment to subcontractors, the contracting authority must carry out a specific “investigation” into the legitimacy of their claims. In particular, it must give the contractor the opportunity to comment in writing on the legitimacy of such claims. The contracting authority will set a time limit of at least 7 days for submitting comments, and inform the contractor accordingly.

If the contractor submits comments, under Art. 143c(5) the contracting authority may find the subcontractor’s claim to be justified or unjustified and make a direct payment or not accordingly. If there are fundamental doubts as to the amount of the payment due or the entity to which the payment is due, the contracting authority may also deposit the amount requested by the subcontractor with the court.

The act does not specify which documents should be presented by the subcontractor demonstrating its entitlement to receive direct payment from the contracting authority, or by the contractor contesting this claim. There is also no established case law in this respect. Therefore, the request for payment addressed to the contracting authority must be accompanied by as much documentation as possible to counterbalance any potential reservations on the part of the contractor. Evidence of proper performance of works and an invoice, for example, concerning the execution of the contract, should be provided.

Consequences of negligence in settling accounts with subcontractors

The Public Procurement Law provides for a number of possible actions by the contracting authority after direct payment to subcontractors. The most natural consequence of direct payment to the subcontractor will be setoff of the amount paid to the subcontractor from the contractor’s fee, which is also applicable to contracts not subject to the public procurement regime.

However, the Public Procurement Law also provides for two additional sanctions that may be imposed on the contractor in such a case. First, the contracting authority has a statutory right to charge a contractual penalty (Art. 143d(1)(7)(a) of the Public Procurement Law). Another sanction is optional withdrawal from the contract by the contracting authority if it has to make multiple direct payments or payment of more than 5% of the value of the contract (Art. 143c(7)). In this case, the optional nature of the withdrawal means that exercise of the right of withdrawal lies within the discretion of the contracting authority. It may or may not be exercised in the event of specified misconduct on the part of the contractor in the settlement of accounts with subcontractors. However, withdrawal from the contract is possible only in the case of actual direct payment to the subcontractors, so it will not be applicable if the contracting authority deposits the relevant amount of money with the court.

Hanna Drynkorn, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners