Turkish Law Blog
Implications of Article 647(1) of Polish Civil Code: Guideline for Construction Companies Planning to Enter to Polish Construction Market
This article aims at providing some guidelines to the foreign construction companies that plan to enter into Polish construction market about the famous Article 647(1) of the Polish Civil Code which regards to “joint liability” of investor for payment of remuneration due to the subcontractor for construction works performed by him. Rather than discussing the Article 647(1) from legal point of view, this article will focus on its implications within the organization of construction companies.
Article 647(1) of Civil Code refers to all the contracts the subject matter of which is performance of construction works independent from the name or type of the contract as long as at least some part of it concerns the performance of construction works.
The last version of Article 647(1) in force and its free translation in English are given below.
- Inwestor odpowiada solidarnie z wykonawcą (generalnym wykonawcą) za zapłatę wynagrodzenia należnego podwykonawcy z tytułu wykonanych przez niego robót budowlanych, których szczegółowy przedmiot został zgłoszony inwestorowi przez wykonawcę lub podwykonawcę przed przystąpieniem do wykonywania tych robót, chyba że w ciągu trzydziestu dni od dnia doręczenia inwestorowi zgłoszenia inwestor złożył podwykonawcy i wykonawcy sprzeciw wobec wykonywania tych robót przez podwykonawcę.
- Zgłoszenie, o którym mowa w § 1, nie jest wymagane, jeżeli inwestor i wykonawca określili w umowie, zawartej w formie pisemnej pod rygorem nieważności, szczegółowy przedmiot robót budowlanych wykonywanych przez oznaczonego podwykonawcę.
- Inwestor ponosi odpowiedzialność za zapłatę podwykonawcy wynagrodzenia w wysokości ustalonej w umowie między podwykonawcą a wykonawcą, chyba że ta wysokość przekracza wysokość wynagrodzenia należnego wykonawcy za roboty budowlane, których szczegółowy przedmiot wynika odpowiednio ze zgłoszenia albo z umowy, o których mowa w § 1 albo 2. W takim przypadku odpowiedzialność inwestora za zapłatę podwykonawcy wynagrodzenia jest ograniczona do wysokości wynagrodzenia należnego wykonawcy za roboty budowlane, których szczegółowy przedmiot wynika odpowiednio ze zgłoszenia albo z umowy, o których mowa w § 1 albo 2.
- Zgłoszenie oraz sprzeciw, o których mowa w § 1, wymagają zachowania formy pisemnej pod rygorem nieważności.
- Przepisy § 1–4 stosuje się odpowiednio do solidarnej odpowiedzialności inwestora, wykonawcy i podwykonawcy, który zawarł umowę z dalszym podwykonawcą, za zapłatę wynagrodzenia dalszemu podwykonawcy.
- Postanowienia umowne sprzeczne z treścią § 1–5 są nieważne.
- The investor is jointly and severally liable with the contractor (general contractor) for payment of remuneration due to the subcontractor for construction works performed by him, the detailed object of which has been reported to the investor by the contractor or subcontractor before proceeding with these works, unless within thirty days from delivery to the investor of the notification, the investor reported the subcontractor and contractor of his objection to performance of the works by the subcontractor.
- The notification referred to in § 1 is not required if the investor and the contractor specified in the contract, concluded in writing under pain of nullity, a detailed subject of construction works performed by the designated subcontractor.
- The investor is liable for payment of a subcontractor’s remuneration in the amount specified in the contract between the subcontractor and the contractor, unless this amount exceeds the amount of remuneration due to the contractor for construction works, the detailed subject of which results respectively from the report or the contract referred to in § 1 or 2. In this case, the investor's liability for the payment of the subcontractor's remuneration is limited to the amount of the remuneration due to the contractor for construction works, the detailed subject of which results respectively from the application or the contract referred to in § 1 or 2.
- Reporting and objections referred to in § 1, must be made in writing under pain of nullity.
- The provisions of § 1-4 shall apply mutatis mutandis to the joint and several liability of the investor, contractor and subcontractor, who has entered into a contract with a further subcontractor, for payment of remuneration to a subcontractor.
- Contract provisions contrary to the provisions of § 1-5 are invalid.
Such clauses widely exist in other countries’ law systems and in some cases they are known as “direct action clauses” such as Article 1798 of Belgian Civil Code. The specific point of Article 647(1) is that it allows the subcontractor to initiate its direct claim with no level restrictions as specified in § 5 of the Article contrary to what many other law systems do.
The requirements as per the provisions of Article 647(1) can be summarized as follows:
- In order to keep the investor jointly and severally liable for payment of subcontractor’s remuneration, detailed object of the subcontract must be reported to investor by contractor or subcontractor before proceeding with the execution of the work, unless the subcontractor is a designated subcontractor with defined scope of work as included in the agreement between contractor and investor.
- Investor has a right to provide his objection within thirty days from the receipt of the notification
- Once the notice was given and investor has not provided any objection, then investor becomes jointly and severally liable with contractor for payment of a subcontractor’s remuneration in the amount specified in the contract between the subcontractor and the contractor.
- Reporting and objections must be made by writing.
Complying with all above requirements requires a complete subcontracting / subcontracts administration organization. Big construction projects (over 100M€ Projects) usually require substantial subcontracting, and further sub-subcontracting activities being independent from the subcontracting strategy followed. Due to the structure of construction sector in Poland, majority of the contractors apply “star contracting strategy” (subcontracting as per disciplines). However, even though “tiered subcontracting strategy” (subcontracting the works as complete packages composed of various disciplines) is applied, contractor would have to establish a team not only to conclude the subcontracting, but also to receive, to review and to present to the investor the contracts entered into between subcontractor and its further sub-subcontractors, to obtain and to record investor’s objections if any. This cycle shall be repeated for each amendment of the contracts too. Besides, to minimize the chance of receiving investor’s objections, contractor would be forced to conclude the subcontracts with much more precise definition of object of the work.
A clear spread sheet of subcontracting plan containing clear definition of object of the work, information about subcontractors, and of their further sub-subcontractors (2nd, 3rd, 4th, and further tier subcontractors), records of notice to investor and investor’s objections, remunerations and their payment status, must be prepared, and updated on regular basis. Since, it is common that the same specific sub-subcontractor would enter into contracts with different subcontractors, the follow-up can be much more complicated than anticipated at the beginning.
Many contractors include specific clauses into their subcontract drafts obliging the subcontractors to present the statement from their sub-subcontractors of being dully paid with the aim of reducing the risk of payment being blocked by investor due to direct claim from any level-subcontractor issued to investor. A similar statement is requested to perform the close-out of subcontracts.
Administration of all these activities within a short time without creating any delays in the payments to subcontractors, and without affecting the company’s cash flow negatively requires an organization formed by competent personnel.
Another important aspect of Article 647(1) is how it is handled by subcontractors. It encourages the subcontractors to have a tendency of treating the investor as a decision making authority, therefore they do not hesitate to raise their contractual disputes to investor. This psychological side-effect of the article was not probably considered when drafted by the law-makers, however in reality subcontractors consider the investor as a last resort to raise their claim. The investor redirects them to the contractor which brings additional function to the contractor; to act as an informal mediator.
Usually, construction companies do not foresee a well-formed large subcontracting / subcontracts administration staff in order to reduce their indirect costs. Thus, once the need of complying with a.m. requirements appears, there happens an unforeseen increase in indirect cost.