Retention not the same as a security deposit
Despite its similar function, the general contractor’s retention of a portion of a subcontractor’s fee to secure its own claims cannot be equated with a security deposit. Consequently, the investor is jointly and severally liable for payment of such amounts to the subcontractor.
Security deposit and retention of a portion of the fee
One of the methods of securing proper performance of the contract and obligations under guarantee or warranty is a contractual right to set off a portion of the contractor’s fee. Typically this involves retention of 10–20% of each partial progress payment. In this manner, the amount of the security grows along with the progress in the work and the funds spent on the project by the party commissioning the work. But technically the amounts are not paid by the contractor into the employer’s account. In this respect, there is an evident difference between this method of securing claims and payment of a security deposit.
The essence of a security deposit is that the provider of the deposit transfers a specified sum to the account of the recipient of the security deposit, and the recipient has a right to satisfy its claims out of the deposit if timely performance is not made (but if timely performance is made, the security deposit must be returned). But retention of a portion of the fee due to the other party, as a form of security, does not contain the element of transfer of the funds to the secured party’s account. In the judgment of 12 September 2019 (case no. V CSK 324/18), the Supreme Court of Poland held that for this reason, there is no basis for equating a security deposit with retention of a portion of the fee for a certain period as security for proper performance of the contract. Just because retention performs a similar security function as a security deposit or bank guarantee does not mean that it has the same legal character. In other words, the withheld amount should be regarded as a part of the contractor’s fee, despite its security function.
Possibility of pursuing the investor for amounts retained as security
This issue is vital from the point of view of a subcontractor’s attempt to collect its fee directly from the contracting authority (if not paid by the general contractor). Sometimes the contracting authority would refuse to pay the subcontractor on the grounds that pursuant to the regulations on the investor’s liability for subcontractors’ fees (under both civil law and public procurement law), only payment of the subcontractor’s fee is protected, not other claims on behalf of the subcontractor (such as for return of a security deposit).
In the judgment cited above, the Supreme Court held that the amounts retained from the subcontractor’s fee for security maintain their character as a part of the fee (and not a guarantee). Consequently, the investor’s liability includes the duty to make direct payment to the subcontractor if after the end of the retention security period the subcontractor could not recover those amounts directly from the contractor who retained them. Thus subcontractors may pursue such claims under the aforementioned statutory regulations on protection of subcontractors, i.e. Art. 6471 §5 of the Civil Code and Art. 143c of the current Public Procurement Law (Art. 465 in the new law entering into force on 1 January 2021).
Dr Hanna Drynkorn, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners