Differently in the handover protocol than in the contract: No defects as a condition of payment

In the judgment of 26 April 2019 (case no. V CSK 80/18), the Supreme Court of Poland held that it is not contrary to the nature of a construction contract to condition the payment of fees on the absence of defects in the structure. Therefore, the parties’ terms requiring payment only after a faultless handover protocol has been obtained are permissible. However, in the Supreme Court’s opinion, such objections may also be included in the terms of the handover protocol. The court approved the possibility for the parties to invoke reservations made in the handover protocol, which constitute additional provisions in relation to the contract.

The parties to the dispute which went to the Supreme Court concluded a contract for construction works. The project was delayed, and numerous problems occurred during execution. Finally, the parties prepared a handover protocol, stating that the works were properly performed, with the reservations provided for in the comments to the protocol.

Indeed, the conclusions and closing remarks of the protocol recognised that due to problems in the commissioning and operation of certain installations, a separate invoice would be issued for those works. This was to be done once the installation had reached full functionality and efficiency, and provided that it worked without any failures during a two-week test period.

The Supreme Court found that such a reservation in the handover protocol was legally effective. It found that when signing the handover protocol, the parties could modify the scope of the legal relationship between them and the terms of payment to the contractor. The court held that the determination in the protocol that the payment was to be made after two-week failure-free operation of the installation should be considered admissible from a legal perspective.

In the opinion of the Supreme Court, such a reservation did not mean that the installation could not have any defects at all before the investor could be required to pay. However, it found that even if the parties had expressly agreed to do so—indicating that the object of the contract was not only to achieve functionality, but also to be free of any defects—this would be legally permissible. In the court’s view, such an objection is not contrary to the nature of the legal relationship arising out of a contract for construction works. The Supreme Court reasoned that the existence of defects in the structure cannot be considered an inherent aspect of that legal relationship.

The Supreme Court also pointed out that the behaviour of the investor, who made the payment of the contractor’s fee dependent on the actual functioning of the installation, did not constitute a breach of the creditor’s obligation under Art. 354 §2 of the Civil Code to cooperate in performance of the obligation.

This judgment is important, as it is common practice for construction companies to include reservations and payment provisions in handover protocols which do not directly reflect the existing terms of the parties’ contract. This practice is an ongoing response to problems arising at the construction site and streamlines the construction process (as it does not require amendments to the contract). Also, it allows for partial acceptance and settlement of works that can already be considered properly performed. At the same time, it creates the possibility to settle works suffering from defects and faults after curing them, without blocking acceptance of parts of the works already performed properly. Thus, this practice promotes the proper financing of projects and the ability of the general contractor and its subcontractors to carry out further work.

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