The difficult (?) case of an undeclared subcontractor | In Principle

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The difficult (?) case of an undeclared subcontractor

The amended regulations on joint and several liability of the investor to subcontractors of construction works have been in force for four years. With the stated aim of facilitating the payment of debts, they tightened the formal requirements for subcontractors seeking payment directly from the investor. Unfortunately, this has not been followed by a change in industry practice, as for various reasons formal notification of subcontractors often does not take place. Is the situation of undeclared subcontractors hopeless?

The 2017 amendment to Art. 6471 of the Polish Civil Code changed the rules of joint and several liability of the investor for the fees due to subcontractors from the general contractor. Previously the investor’s “consent” to engage a given subcontractor was required, but could take the form of failure to object within 14 days after notification of hiring of a subcontractor. After the amendment, the condition for the investor’s liability to arise is the notification itself, while the investor can also object to the notification.

At first glance this may look like an improvement to the situation of the subcontractor of construction works, but the overtone of the provisions is completely changed by two reservations: the notification must be made “before commencing performance of the works” (Art. 6471 §1), and, even more important, the notification must be made in writing under pain of nullity (Art. 6471 §4).

Change in rules, but not in practice…

In 2019, we wrote on this site about these changes, assessing at that time the new regulation relatively soon after it came into force, when it was not yet known how the practice would develop. Today, four years after the amendment, it can be said that the reality has not fully kept up with legislative changes, most often at the expense of subcontractors.

This mainly concerns cases where a general contractor fails to notify the subcontractors to the investor, while limiting the subcontractors’ direct contacts with the investor (or even prohibiting such contacts). Before the amendment, the courts often sided with subcontractors in such situations. The protection offered by the case law went far: in the seven-judge resolution of 29 April 2008 (case no. III CZP 6/08), the Supreme Court of Poland explicitly confirmed that the investor’s consent may be “expressed by any conduct that makes it sufficiently clear” and thus also by tolerating the subcontractor’s presence.

Thus, as proof of the investor’s “consent,” it was sufficient that the investor did not oppose the subcontractor’s participation, despite knowing that the subcontractor was involved in the project. A sufficient circumstance to assume that the investor had such awareness was, for example, entry of a subcontractor in the construction log, or even the presence of workers at the construction site wearing vests marked with the subcontractor’s logo or name.

… at the expense of subcontractors

After the amendment, the situation of an “undeclared” subcontractor is much more difficult. Although there have been few judgments (at least published ones) issued under the new wording of Art. 6471, it seems that the current wording of the provision does not leave room for continuation of the aforementioned line of case law. Consent is no longer relevant; what matters is the notification itself, which must be in writing under pain of nullity. It cannot be made orally or by implication. According to the literal wording of the provision, if there was no written notification, the investor’s joint and several liability does not arise.

Moreover, the investor’s liability is also precluded is notification of the subcontractor is made too late, even if made in writing. This notion is already confirmed by case law. For example, in its judgment of 24 September 2019 (case no. I ACa 796/19), the Wrocław Court of Appeal held: “Under the current state of law, Art. 6471 of the Civil Code specifies that the documentation is to be submitted before the subcontractor commences the construction works. This means that if a subcontractor commences the construction works at a time when the notification has not yet been submitted, it precludes the emergence of the joint and several liability of the investor … under the notification procedure.”

However, it seems that such a categorical position is unjustified, and it would be more appropriate to assume that liability does arise then, but only in respect of work performed after the notification. After all, there is no legal obstacle to employing new subcontractors or changing the scope of their work during the course of the project, so the provision should not discriminate against a subcontractor engaged earlier but notified too late, as compared to a subcontractor engaged later for the same scope of work but notified before commencement of the actual work.

However, regardless of these nuances, subcontractors face significant risks in the absence of formal notification to the investor, or defects in the notification.

A (not) hopeless case

One may seriously wonder whether it was really the legislative intent to worsen the position of the subcontractor so significantly, especially considering that the amendment of Art. 6471 of the Civil Code was introduced by an act whose title referred to “facilitation of debt recovery.” Nevertheless, unless the provisions are amended, for example as a result of pressure from the construction industry, the solutions to the existing problems must be sought within the current legal framework. And it should be stressed that such potential solutions exist, and at least in some cases allow for the subcontractor’s protection despite the lack of proper notification.

First of all, pursuant to Art. 405 of the Civil Code (or undue performance under Art. 410), a subcontractor may be entitled to a claim for recovery of unjust enrichment by the investor in a situation where the investor is the ultimate beneficiary of the work performed, i.e. where it increases the value of the investor’s property. The current case law also suggests such a fallback route for subcontractors. For example, the Supreme Court judgment of 27 November 2020 (case no. I CSK 752/18) states: “The lack of possibility to award a fee for construction works under Art. 6471 §5 of the Civil Code does not preclude allowing a claim on the basis of the provisions on unjust enrichment, provided that the respondent was enriched by their value.”

However, the use of this legal basis is not a simple substitute for joint and several liability. It must be shown that the enrichment occurred between the subcontractor and the investor, which will require an in-depth analysis of, for example, the value of the works, their impact on the value of the investor’s real property, and the ownership of the materials. Specific defences may also be raised against a claim for restitution of unjust enrichment or undue benefit which are not available to the investor when it is jointly and severally liable with the general contractor.

Another, less tested way requires searching for provisions in the agreement between the investor and the general contractor which foresee joint and several liability of the investor or otherwise express the investor’s obligation to pay subcontractors. If such provisions exist and it does not follow from them that written notification before commencement of works is an absolute prerequisite for payment, the subcontractor may claim that they render the subcontractor a third-party beneficiary of the contract within the meaning of Art. 393 of the Civil Code, the conditions of which have been fulfilled. In such a situation, as a third party for whom the payment by an investor was stipulated, the subcontractor could assert claims directly against the investor, relying on the wording of the general contract.

When the investor wants to help

Wider possibilities are created by a situation, not so rare at all, when the investor actually wants to pay the subcontractors, usually to maintain their financial liquidity and ensure continuity of the work. In such a situation, the basis for payment can be any of the legal constructions mentioned earlier, but there are other avenues as well.

In particular, under certain circumstances, an investor may establish that there was a transfer of performance (payment) due from the investor to the general contractor to be received by the subcontractor, with the effect that the investor was authorised to pay the subcontractor directly (instead of the general contractor) and the subcontractor was authorised to accept such performance. Most often this may involve a transfer of a portion of the consideration in an amount equal to the subcontractor’s outstanding fee. Importantly, a transfer is a unilateral legal act that a general contractor may perform in any way, also implied, resulting from its behaviour.

The investor may also assume a voluntary obligation to pay the subcontractor’s fee due from the general contractor, in particular by way of a surety agreement or cumulative debt accession agreement, which it may conclude directly with the subcontractor, without the general contractor’s consent. In such a situation, the payment to the subcontractor will also have a legal basis.

Regardless of the adopted solution, especially if it does so against the general contractor’s will, an investor willing to support a subcontractor should carefully analyse the situation from the legal perspective, especially in respect of conditions and admissibility of later recourse settlements with the general contractor, which may shape up very differently depending on the selected measure and the detailed circumstances of the case.

The prudent always notify

At the end of these considerations, it is worth recalling that the subcontractor’s fate lies essentially in its own hands, as according to Art. 6471 §1 of the Civil Code, the subcontractor has the right to notify the investor on its own, regardless of the will of the general contractor.

In practice, this is sometimes hindered due to the common assumption that the subcontractor will not contact the investor directly. Often, this expectation takes the form of an express prohibition in the subcontract. However, it appears that such provisions are invalid to the extent that they would prevent the subcontractor from making its own notification to the investor. Under pain of nullity, Art 6471 §6 of the Civil Code prohibits contractual provisions contrary to the statutory regulation of the investor’s joint and several liability. Moreover, pursuant to Art. 58 §1, contractual provisions prohibiting the subcontractor from notifying the investor could be deemed invalid due to their purpose of circumventing the law.

Since prevention is easier than cure, ultimately the best course of action for the subcontractor is to ensure that the investor is properly notified before the subcontractor commences work.

Maciej Zych, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners