What conditions can be imposed on the obligation to pay a fee to a construction contractor? | In Principle

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What conditions can be imposed on the obligation to pay a fee to a construction contractor?

In its judgment of 2 June 2021 (case no. II CSKP 7/21), the Supreme Court of Poland ruled on whether payment of the fee to a contractor for construction works can be conditional. This ruling is of great practical importance, as it comments on which contractual provisions regarding the fee are permissible and which are prohibited and thus invalid. This is essential reading for contractors and investors alike, providing valuable tips on how to frame construction contracts to ensure compliance with the regulations while affording proper legal protection.

The Supreme Court held that in a contract for construction works, it is not permissible to make the payment of the entire fee due to the contractor subject to a condition within the meaning of Art. 89 of the Civil Code, since payment of a fee is an essential substantive element of the contract (Civil Code Art. 647). In this sense, a condition is a future and uncertain event not dependent on the contractor’s actions (beyond its control).

In this context, the Supreme Court held invalid a contract provision requiring the contractor to present invoices charged to contractor and issued by subcontractors. There is no doubt that for various reasons, a subcontractor might fail to submit an invoice to the general contractor, which in that case would mean that the general contractor would not be in possession of such an invoice. The general contractor has limited influence over the subcontractor and its issuance of an invoice. Thus the Supreme Court rejected the possibility of making payment of the fee to the general contractor dependent on the behaviour of a third party (the subcontractor), which would be a future and uncertain event from the perspective of the parties to the construction contract. According to the Supreme Court, such a contractual provision was contrary to the nature of the legal relationship arising out of a construction contract (Civil Code Art. 3531 in conjunction with Art. 89), and thus invalid (Civil Code Art. 58 §§ 1 and 3). Therefore this condition should be ignored. This holding by the Supreme Court may come as a surprise to practitioners, as such provisions often appear construction contracts.

But on the other hand, according to the Supreme Court, there is nothing making the maturity of a claim for a fee for completed construction works dependent on the contractor’s submission of its own invoice. This is also in line with common practice and does not raise legal doubts.

The same applies to making payments by the general contractor to subcontractors, an action predominantly dependent on the contractor. Indeed, according to the Supreme Court, there is no basis for considering such a contractual provision contrary to the nature of the legal relationship. This solution is expressly adopted in the Public Procurement Law. According to Art. 143a(1)(1) of the Public Procurement Law of 29 January 2004, in force from 24 December 2013, in the case of contracts for construction works with a performance term longer than 12 months, if the contract provided for payment of the fee to the contractor in parts, a condition for payment by the contracting authority of the second and subsequent parts of the fee for delivered construction works was presentation of evidence of payment of the fee to subcontractors and sub-subcontractors involved in performance of the delivered construction works. A similar rule is contained in Art. 447(1) of the Public Procurement Law of 11 September 2019, effective as of 1 January 2021. As such a solution is expressly adopted by the parliament, it cannot be deemed contrary to public policy.

The issue of signing of the handover protocol as a basis for the contractor’s claim to become due and payable is more complex. The Supreme Court has already expressed its opinion on this issue on a number of occasions, adopting a position favourable to contractors (e.g. judgments of 26 February 1998, case no. I CKN 520/97; 7 April 1998, case no. II CKN 673/97; 14 February 2007, case no. II CNP 70/06; 18 January 2012, case no. II CSK 213/11; and 21 January 2015, case no. IV CSK 214/14). According to this case law, if the maturity of a claim for payment of a fee for construction works depends on the investor’s signing of the handover protocol for the works, and for reasons attributable to the investor the investor fails to comply with the obligation to accept the works, the investor is in default. Such behaviour by the investor does not affect the contractor’s claim. Thus the contractor is entitled to demand payment of the fee for the completed construction works, and its claim becomes due at the time when, after the contractor has fulfilled its obligations, the handover should take place (Supreme Court judgment of 12 March 2021, case no. V CSKP 14/21).

Besides, according to the Supreme Court, it is permissible to condition the maturity of a claim for payment of a fee on the contractor’s performance of incidental obligations (e.g. submission of as-built documentation) or certain acts of diligence (e.g. submission of a settlement of the work performed, or cost estimates). These actions are solely within the control of the contractor. Thus, within the meaning of Civil Code Art. 89, these are not conditions but prerequisites that must be met before it can be found that the claim for the fee has become due and payable.

Therefore, in assessing what contractual reservations related to the contractor’s fee are permissible, it is helpful to determine whether they are dependent on the contractor (e.g. issuance of an invoice by the contractor, or provision of as-built documentation), or whether they are beyond the contractor’s control and depend on the will and behaviour of third parties (e.g. invoicing by subcontractors). In light of the Supreme Court’s judgment of 2 June 2021, the permissibility of stipulating in the contract that the general contractor’s fee is payable upon acceptance of that part of the work by the investor, or upon obtaining an occupancy permit, may be questionable. These are activities performed by third parties in relation to the general contractor, although related to the contractor’s proper execution of the works. But as these circumstances were not discussed by the Supreme Court in that case, they may be subject to different interpretations.

Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners