Nominated or Not -- Basic Rules of Subcontracting in Poland
It is difficult to imagine a complex infrastructure project without the participation of subcontractors. In Poland, where large projects are often contracted to foreign companies, local subcontractors play an important role. This was also the case prior to the EURO 2012 football championships, when subcontractors were heavily engaged in the construction of roads and railways necessary to secure access to the newly built football stadiums. However, the EURO 2012 also resulted in a wave of bankruptcies and liquidations of Polish subcontractors, who suffered due to payment withholding, warranty deposits, contractors’ bankruptcies and lack of financial liquidity along the supply chain.
That is why the state decided to intervene. In order to protect subcontractors from pressure from larger companies, the Polish parliament enacted an amendment to the civil code, whereby it introduced provisions allowing subcontractors to claim payment directly from the employer (Article 647 of the Polish Civil Code). If the employer accepts a subcontractor, the investor becomes liable for payment of any outstanding remuneration which the main contractor failed to pay (joint and several liability of the employer and the main contractor). Certain conditions apply, of course, meaning that the subcontractor has to prove that (i) it was indeed a subcontractor of construction works approved by the ordering party, (ii) it properly performed the works and (iii) the main contractor failed to make the payment despite it being due. Though the second and third premise would usually be quite straightforward in terms of evidence one needed to present in court, the first one resulted in a divergent jurisprudence.
Seemingly, everything was quite easy. Article 647 of the Polish Civil Code required that the employer, having been presented with the subcontracting agreement or its draft, did not object to the contractor engaging the subcontractor within 14 days from the day on which the ordering party was presented with the subcontracting agreement or its draft. After the lapse of the abovementioned period, the subcontractor became an “approved” subcontractor. An “approved” subcontractor could, in turn, invoke the joint and several liability of the employer to sue the employer for payment of any outstanding remuneration. In practice, employers would often name main contractors as co-defendants in court in order to benefit from information or evidence in possession of the contractors which would otherwise be outside the employers’ reach (e.g. whenever payment was withheld due to the questionable quality of the works performed by the subcontractor).
However, courts quickly came to the conclusion that the above mechanism unfairly treated subcontractors, especially these further down the supply chain. Whether a subcontractor became approved or not was under the total control of the maim contractor who was not obligated (unless otherwise stipulated in the subcontracting agreement) to inform the employer about the engagement of a particular subcontractor, nor to present the ordering party with a copy of the subcontracting agreement. Consequently, many subcontractors found themselves unable to claim payment directly from the employer only once their case was already in court. If, in the meantime, the main contractor became insolvent, there was essentially no recourse available to the subcontractor.
Therefore, courts accepted other forms of “approval” of subcontractors in their jurisprudence, some of which departed significantly from statutory requirements. Hence, acquiescence and lack of objection to the subcontractor’s physical presence on site (the so-called “practical acceptance”) were also admitted by certain courts. Other held on to the conservative approach, compliant with all requirements of Article 647 of the Polish Civil Code. This led to significant divergences in jurisprudence, almost geographical in nature. For instance, courts in Eastern Poland were more prone to adhering to the conservative line of reasoning, while courts in Warsaw and Western Poland were more willing to accept liberal arguments. The latter court would more often hold employers liable for payment in cases in which this would not be apparent from the pure wording of the applicable law.
It is to be noted that nominating subcontractors by the employer is a very rare practice in Poland. Hence, Clause 5 of the FIDIC conditions of contract is usually crossed out in publically funded projects, and the choice of subcontractors is the contractor’s to be made.
June 2017 saw the introduction of another amendment of Article 647 of the Civil Code. One of the arguments used by proponents of the change was that subcontractors have it difficult predicting whether – at the end of the day – they will be granted protection. Jurisprudential divergences were to be blamed. However, it seems that the true motivation was to limit the circumstances in which employers would have to bear the consequences of contractors’ conduct. Since the majority of big infrastructure projects in Poland are organised by public employers, it lies in the interest of the state to lower the number of cases in which the state treasury pays subcontractors’ remuneration, with little or no chance of claiming it back from the contractor. This is why, under the currently applicable Article 647 of the Polish Civil Code, the contractor has to notify the employer about the detailed scope of works commissioned to a given subcontractor prior to commencing these works, and the employer has then thirty days to object to these works being commissioned to the said subcontractor. The notification can also be made by the subcontractor itself. The employer’s liability is capped at the amount of contractual remuneration due to the subcontractor unless the remuneration due to the main contractor for the same scope of works is lower, in which case the employer’s liability is capped at the lower amount.
The changes seem minor. It is evident, though, that they are aimed at making it easier for employers to object to the engagement of subcontractors and, hence, preclude their joint and several liability for payment of subcontractor’s remuneration. The time period within which the objection can be raised has more than doubled (from 14 to 30 days), and the employer bases its consent on a detailed scope of construction works, which limits the scope of its liability to remuneration for these works only. Reasons of the amendment also suggest that its drafters hoped it would limit the number of cases in which courts allow employer’s liability based on acquiescence or practical acceptance. Therefore, the amendment favours the conservative approach.
It is doubtful whether the changes will in any way improve the situation of subcontractors. Rather, subcontractors (especially these further down the supply chain) will face more difficulties when attempting to claim payment from employers, since investors now have more arguments to limit their liability. Allowing subcontractors to directly submit a notification (instead of counting on the contractor’s behaviour) is only an illusive remedy, and in case the statutory requirements indeed become uniformly strictly applied by courts, the new law might actually deteriorate subcontractor’s situation and increase the number of bankruptcies among smaller construction companies.
Whether such will be the results of the new Article 647 of the Polish Civil Code remains to be seen, as the changed provision applies to subcontracting agreements signed after it entered into force. Subcontractors should, nevertheless, be wary of the wording of the contracts they enter into and ensure that these include a detailed scope of subcontracted construction works which can be presented to the employer prior to commencement of the works, as well as provisions obligating the contractor to make a formal notification of the subcontractor to the ordering party.