Subcontractors can’t always get paid directly by the contracting authority

Under Art. 143c(1) of the Public Procurement Law, the contracting authority is required to make direct payment to a subcontractor approved by the contracting authority if the subcontractor does not receive payment due from the general contractor. This regulation has provided greater protection to subcontractors under public contracts, but in certain situations it may be difficult to obtain this protection.

Subcontractors for supplies, services and construction works are entitled to the protection of Art. 143c(1) under the condition that they were appropriately notified pursuant to the requirements of the Polish Public Procurement Law. Direct payment can be sought by sub-subcontractors only in the case of construction works. Subcontractors may request payment directly from the contracting authority of fees owed them by the general contractor (or by the subcontractor, in the case of sub-subs) if the fee has become due and payable under the subcontract. These subcontractors may demand only the fee due after the contracting authority’s acceptance of the subcontract for construction works, or after submission to the contracting authority of a certified copy of the subcontract for supplies or services.

Most of the work is done but the payment is not due yet

In the case of construction works, the practice is to set the deadlines for payment of invoices after the contractor has performed most or all of the work. Typically, a final invoice can be issued only after the investor signs the final acceptance protocol. This practice may prove problematic for subcontractors wishing to seek direct payment from the contracting authority. It may turn out that the subcontractor has performed most of the work or incurred most of the related costs, but because of the general contractor’s failure to cooperate in the formal approval of performance of the work (refusal or delay in signing the acceptance protocol), there is no basis for issuance of an invoice by the subcontractor and thus no basis for seeking direct payment from the contracting authority. This is because the duty to make direct payment under Art. 143c(1) applies only to fees that are due and payable.

It is impermissible for the investor (or in this case the general contractor) to refuse to sign an acceptance protocol when the conditions for signing the protocol have been met. Under Art. 647 of the Civil Code and Art. 18(1)(4) of the Construction Law, the investor has an obligation to accept the works. In response to this problem, court decisions have recognised the possibility of preparing a unilateral acceptance protocol by the contractor for construction works (or in this case the subcontractor) when the investor groundlessly refuses to perform its duty to accept the works. It is permissible for the contractor to prepare a unilateral protocol of acceptance of construction works if payment of the contractor’s fee is conditioned on preparation of a protocol of acceptance (e.g. Supreme Court of Poland judgment of 1 July 1998, case no. II CKN 673/97). Preparation of a unilateral protocol of acceptance may thus provide grounds for a subcontractor to issue an invoice. Then, if the contractor does not pay the invoice, the subcontractor may seek payment from the contracting authority.

Claim for unjust enrichment

It may also happen that the general contractor goes bankrupt when the subcontractor has performed most of the work but the grounds for preparing an acceptance protocol have not yet arisen. As there is no basis for preparing even a unilateral acceptance protocol, the fee cannot be made due and payable. But the contracting authority has already obtained a benefit, because most of the work, which is part of the public contract, has been performed by the subcontractor. In that situation the subcontractor may consider asserting a claim against the contracting authority for unjust enrichment. (Under Art. 405 of the Civil Code, “Anyone who without a legal basis obtains a material benefit at the cost of another person is required to return the benefit in kind, or if that is not possible to return the value of the benefit.”)

Loss of status of subcontractor

Even if the subcontractor manages to obtain payment from the contracting authority of a few due and payable invoices not paid by the general contractor, this does not mean that this success will be repeated with respect to all overdue invoices. Under Art. 143c(7) of the Public Procurement Law, “The need for repeated direct payment to a subcontractor or sub-subcontractor, or the need to make direct payments totalling more than 5% of the value of the public contract, may provide grounds for the contracting authority to renounce the public contract.” If the contracting authority renounces the main contract for this reason, the subcontractor will lose its status as a subcontractor, and consequently the possibility of seeking direct payment from the contracting authority.

Inability to demand interest

It should also be borne in mind that the subcontractor will not obtain payment from the contracting authority of interest on the delay in payment of its fee. This is because the obligation under Art. 143c(1) of the Public Procurement Law does not cover interest charged to the general contractor, but only the principal amount of the fee that is due and payable. However, if the contracting authority delays performance of its own obligation to pay the subcontractor, the subcontractor can charge the contracting authority interest on delay in accordance with Art. 481 §1 of the Civil Code. The demand for interest will be permissible from the date when payment by the contracting authority becomes due, as specified in the demand for payment submitted by the subcontractor. A reasonable deadline for payment which the subcontractor may indicate for the contracting authority should be about 21 days from receipt of the demand. This is because before making direct payment to the subcontractor, the contracting authority must allow the general contractor at least 7 days from delivery of notice of the subcontractor’s demand to provide written remarks on the justification for direct payment of the subcontractor’s fee.

Katarzyna Śliwak, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners