Situation of contractors performing construction contracts in the private sector | In Principle

The pandemic may delay the performance of construction works and increase their costs. It may even make it completely impossible for a contractor to fulfil its obligations. But how this affects the contractors’ legal situation depends on the factual circumstances of the given case and the wording of the specific construction contract.

On 31 March 2020, the amendment known as the Anti-Crisis Shield was published in the Journal of Laws. It does not contain regulations directly interfering with contracts for construction works in the private sector. Only contracts concluded under the public procurement regime, which are not covered by this article, are subject to special statutory regulation.

Therefore, no regulations have appeared that would suspend the running of time limits for the performance of construction works. (Such a proposal was removed from the Anti-Crisis Shield draft, and the indirect impact on construction contracts of Art.15zzr introduced into the Anti-Crisis Act of 2 March 2020 is debatable.)

This means that the deadlines indicated in the material and financial schedules annexed to construction contracts are generally binding on contractors, and any disputes between the contractor and the investor must be resolved under the specific contract and on the basis of the Civil Code. However, some reservations have to be made.

Liability rules for non-performance of a construction contract

In most construction contracts, the contractor’s liability for non-performance or improper performance is based on the fault principle under Art. 471 of the Civil Code. This means that the contractor may defend against liability to the investor by demonstrating that it could not have performed the contract on time by exercising due diligence. In such a situation, proof of due diligence (no fault) should release the contractor from the obligation to pay contractual penalties for delay.

• Force majeure

Sometimes, the parties base the contractor’s responsibility on strict liability (assumption of the risk, rather than fault). However, in this case as well, unless the parties have agreed otherwise, the occurrence of force majeure (pandemic) as a reason for breach of contract by the contractor will release the contractor from liability to the investor for contractual penalties for delay.

Force majeure is an important instrument for a contractor’s defence, provided that it can prove the real contribution of the pandemic to non-performance or improper performance of the specific services under the construction contract. In the event of a court dispute, the burden of proving this will lie with the contractor. The contractor must demonstrate a causal link between the delay in performance of works and the consequences of the pandemic, such as the number of workers who have left Poland or are quarantined, on sick leave or the like.

It is not enough for the contractor to invoke, as a result of the pandemic, the closing of a factory producing building materials foreseen in the execution design, as it can be expected that the investor will blame the contractor for not ordering materials immediately from other producers as soon as problems arose with supply, or even as soon as there were media reports on the development of the epidemic. This argument could be used to show a lack of due diligence on the contractor’s part.

• Cost increases

However, in this example, the contractor may defend against the disproportionate costs of ordering materials from other suppliers, and invoke for this purpose, for example, Art. 632 §2 of the Civil Code. That provision may be applied by analogy to contracts for construction works where fees were set as lump-sum remuneration. Art. 632 provides:

Ҥ1. If the parties agreed on lump-sum remuneration, the person accepting the order cannot demand an increase in the remuneration even if the extent or cost of the works could not have been foreseen at the time the contract was executed.

“§2. If, however, due to a change in circumstances which could not have been foreseen, the performance of a specific work would expose the person accepting the order to a glaring loss, the court may increase the lump-sum remuneration or dissolve the contract.”

In our opinion, the current situation may give rise to a demand by contractors to increase the fee in the event of a significant increase in costs of materials and labour compared to the period before the pandemic occurred, which would lead to a glaring loss on the part of the contractor (i.e. a loss undermining the contractor’s calculation of the fee taking into account the normal contractual risk).

• Change in circumstances

Regarding contracts for construction works to which Art. 632 §2 of the Civil Code cannot be applied by analogy, it is possible to consider applying the rebus sic stantibus clause in Art. 357¹ of the Civil Code, since the COVID-19 pandemic and its consequences for the contractor may be regarded as an extraordinary change in circumstances which the parties did not foresee when negotiating the contract.

• Impossibility of performance

In exceptional circumstances, the contractor may allege the impossibility to provide services. For example, when it was not possible to order replacement materials from any other manufacturer by the deadline set for completion, such as patented solutions or bespoke materials designed specifically for execution of the structure, manufactured by only one supplier. The impossibility of performing services could also result from legal provisions prohibiting the execution of construction works, in order to limit the spread of the epidemic, if such restrictions were introduced into the Polish legal system (the current ban on gatherings does not apply to construction sites). Impossibility may also consist in an inability to obtain an occupancy permit for a structure in a situation where, under the contract, it is the contractor’s obligation to obtain such a decision and it is a condition for final handover of the facility.

In most cases, the impossibility described above will relieve the contractor from liability for non-performance of the undertaking for the duration of this impossibility. If, exceptionally, it turns out that the impossibility is permanent and objective in nature, provisions of the Civil Code with further-reaching consequences may be considered. For example, under Art. 495 §2, an investor may withdraw from the contract in its entirety, even in a situation where the impossibility of performance concerns only part of the contractor’s obligations, when the investor can prove that performance of only part of the works would be of no purpose for the investor in light of the nature of the contract or the aim of the contract intended by the investor and known to the contractor.

Preparation for dispute

Although the effects of force majeure, an extraordinary change of circumstances, or impossibility to provide services are governed by the provisions of the Civil Code discussed above, given the optional nature of these provisions, the parties may have modified them in the contract, directly or indirectly, which will require interpretation of the contract as a whole to determine the parties’ mutual intent and the purpose of the agreement (not necessarily based on the literal wording, under Art. 65 §2 of the Civil Code).

Therefore, the specific provisions of the contract and the factual circumstances will be decisive. It is essential to anticipate such situations at the stage of concluding contracts, and once they occur, to build strategies for future argumentation from the very beginning and gather evidence for possible disputes. It should be remembered that the commercial proceedings introduced in the autumn of 2019 greatly limit the possibility to introduce witness testimony, in favour of documentary evidence. This means that the contractor should first take care to archive the documentary evidence, with a view to strategies for future argumentation in possible litigation, mediation or negotiation.

It should also be remembered that pursuant to Art. 651 of the Civil Code, the contractor is obliged to notify the investor of “circumstances which may hinder the proper performance of the work.” For practical reasons, the notification must meet the form requirements referred to above. Thus the need to extend the performance dates or change the fee should be pointed out in a carefully considered way.

Risks of withdrawal from contract

If the contractor is unable to prove that it is not at fault by submitting relevant evidence, it must take into account the risk that the investor will effectively withdraw from the contract, even without setting an additional deadline for making up for the delays, charge the contractor contractual penalties, and even seek damages from the contractor in excess of the penalties.

• Right of withdrawal from reciprocal agreement

Apart from the provisions of specific construction contracts, Art. 492 of the Civil Code entitles the investor to withdraw from the contract without setting an additional deadline, even in a situation where the contract does not expressly provide for a right to withdraw. The investor may take advantage of this provision if it demonstrates the grounds indicated there, i.e. that performance of the works after the deadline would serve no purpose for the investor due to the nature of the obligation or the aim of the contract intended by the investor and known to the contractor. It follows that the investor may withdraw from the contract not only when the contractor’s works have become permanently unfeasible (Art. 495 of the code, discussed above), but even in a situation where the contractor’s performance would be possible again in the future (e.g. planned resumption of production of materials by the sole supplier), but only after the contractual deadline, and performance at that time would not be relevant to the investor.

At this point it should also be clarified that Art. 492 of the Civil Code is mandatory in the sense that its application cannot be extended in the contract, e.g. by moving from the basis of fault to strict liability (which does not exclude contractual regulations under Art. 395 of the Civil Code). The contractor’s demonstration that the delay is a result of the pandemic should result in the court finding that the investor’s withdrawal was ineffective and therefore penalties for delay were not due.

• Consequences of delayed works

Moreover, contractors should bear in mind Art. 635 of the Civil Code, which refers directly to a contract to perform a specific task and may also be applied to a contract for construction works. According to this provision, if a contractor delays completion of the work to such an extent that it is unlikely that it will be able to complete it within the deadline indicated in the contract, the investor may, without setting an additional deadline, withdraw from the contract even before the deadline for completion of works.

This provision is also optional in that the parties may exclude it or modify it in the contract, for example by introducing a contractual right to withdraw from the contract in certain circumstances and time limits. However, if analysis of the given contract shows that this provision has not been excluded and applies to the given relationship, its atypical nature should be clarified and the effects of its application should be determined in the specific factual circumstances.

This provision entitles the investor to break off the contract even before the deadline for contract performance, e.g. when the contractor fails to meet a partial handover deadline, when it suggests that the contractor is in delay in completion of the works to such an extent that it is unlikely that it will be able to complete the works by the deadline indicated in the contract. According to the prevailing position, the right to break off the contract arises even in a situation where the contractor is not at fault for delays, i.e. by exercising due diligence it could not have prevented the failure to meet the completion deadline.

One can foresee disputes between the parties as to whether in the specific circumstances the investor had a right to break off the contract under this provision when the contractor’s delay is due solely to the occurrence of force majeure or the investor contributed to the delay. If the contractor demonstrates that the investor had no grounds for effectively breaking off the contract, consideration may be given to applying the provisions of the Civil Code which in principle require the investor to pay the contractor the agreed fee. On the other hand, if the investor succeeds in effectively breaking off the contract, it will have to be decided what scope of work the withdrawal relates to (all or part of it) and under what circumstances the contract should be settled. In this case too, duly collected evidence and contractual provisions on withdrawal will gain practical importance. Therefore, it is important to ensure that the interests of the contractor are duly protected already at the stage of conclusion of the contract.

In short, it is essential in the contractor’s interest to carefully analyse concluded contracts for construction works, establish the factual circumstances furthering performance of the contract, make appropriate notifications, and properly document the impact of the pandemic on the contractor’s rights and obligations.

Maciej Machlejd, attorney-at-law, Construction practice, Wardyński & Partners