Strict time limits in construction work contracts
For a long time in Polish business practice it has been unclear whether clauses in construction work contracts that require one party to notify the other of circumstances being grounds for seeking additional remuneration are effective. Clauses of this kind can be found in contracts concluded according to FIDIC standard forms of contracts produced by the Fédération Internationale des Ingénieurs-Conseils.
This issue was considered by the Supreme Court in a judgment of 23 March 2017 (V CSK 449/16), in particular clause 20.1 of a construction contract for building and finishing works for a sewage system, concluded according to FIDIC contractual standards. The clause stated that a contractor that concludes that it is entitled to additional payment of any kind under any clause in the contract conditions, or for any other reason connected with the contract, is required to notify the contract engineer. The contractor must provide a description of the event or circumstances giving rise to the claim within no more than 28 days of the time it learns, or should have learnt, of that event or those circumstances. If the contractor does not notify the contract engineer of the claim within this 28-day notification time limit, it forfeits the additional payment, and all liability for that claim on the part of the contracting authority is waived.
The contractor made a claim for payment for additional earthworks not included in the take-off, and – on the grounds of unjustified enrichment – for the cost of demolishing chamber made of reinforced concrete and dismantling a wooden palisade. These were works that were not covered by the contract. In general, the courts of the first and second instances found that the contractor’s claims were legitimate and did not concur with assertions made by the defendant that the contractor had failed to observe the 28-day notification time limit. They found clause 20.1 to be invalid due to providing for contractual modification of the institution of the statute of limitations and the associated time limits. The Supreme Court took a different view to that of the courts of lower instances regarding invalidity of clause 20.1. It found that the clause in question did not concern a time limit after which a claim became time-barred. The court stated that due to the clause the obligated party’s obligation to pay additional remuneration for extra works did not apply if no notification was served of the circumstances being the basis for the claim. The court took the view that this time limit was essentially a notification time limit within which the other party should be notified of the circumstances in question, otherwise the claims would be forfeited. The court drew a comparison between the legal nature of that time limit and the statutory time limit for a complaint and act of diligence provided for in Art. 563(1) of the Civil Code. The Supreme Court stated that strict contractual time limits that lead to forfeiture of rights if not observed cannot be contested on the grounds of the principle of freedom of contract.
On the other hand, the Supreme Court stated that effectiveness of that clause could be assessed under Art. 3531 of the Civil Code in conjunction with Art. 56 of the Civil Code. In each case, therefore, it must be determined whether this clause might be inserted in a manner contrary to the purpose and nature of that stipulation and the principles of community life. In the case in question, the Supreme Court found that even though the contractor had failed to observe the 28-day limit provided for in clause 20.1., it had legitimate claims. This was due to the circumstances: the contractor had notified the contracting authority that additional construction work was needed, and the contract engineer had approved the work and confirmed that additional remuneration was due on those grounds.
Also, the court said that clause 20.1 applied only to the contractor’s claims arising directly under the contract, but did not apply to claims based on provisions on unjustified enrichment. These provisions are a separate, statutory, non-contractual basis for liability.
This Supreme Court judgment continues to be disputed and a source of doubt in legal writings. There are viewpoints in favour and against. However, the view taken by the Supreme Court in the judgment of 23 March 2017 is shared by courts of lower instances in cases concerning construction work contracts. One example is a Cracow Appeal Court judgment of 14 February 2018 (I Aga 65/18). This judgment confirmed that use of clause 20.1 will be effective and valid.
When negotiating any construction work contract, not only based on the FIDIC standard contractual conditions, it is advisable to implement contractual clauses that require a disciplined approach on the part of the parties to timely notification regarding claims. Clauses of this kind should not provide for procedures that are too complex or time limits that are too short, thus excessively hindering contractors in meeting the obligation to give notification of circumstances regarding their claims. Otherwise, these clauses could be found to be contrary to the principles of community life and thus invalid. On the investor’s part, it is advisable to provide explicitly and unequivocally that the notification obligation applies equally to statutory claims, for example claims on the grounds of unjustified enrichment.
Sylwia Moreu-Żak, legal adviser, Real Estate, Reprivatisation & Private Clients practice, Wardyński & Partners