The entire consortium is liable for payments to subcontractors

Liability to the contracting authority for payment of subcontractors’ fees is borne by all members of a consortium—even if the subcontract was signed with just one of the members. Amendments to the Public Procurement Law have reinforced this rule.

Large, complex public projects are often carried out by contractors operating in the form of a consortium. Art. 23 of Poland’s Public Procurement Law permits contractors to file a joint tender for award of a public contract. A consortium is not a separate legal entity, but sometimes it is treated like a single contractor under the public procurement regime.

Members of a consortium are entitled to decide as they wish on how they will perform their contract with the contracting authority. More specifically, they may divide the work among themselves and enter into agreements with subcontractors where the party to the subcontract is the member of the consortium which internally—under the consortium agreement—is responsible for that aspect of the work. It is lawful for a subcontract to be entered into by only one of the members of a consortium, and the case law of the National Appeal Chamber and the Supreme Court of Poland does not question that consortium members have this right.

As a rule, direct liability to the subcontractor for all of the financial obligations under the subcontract is borne only by the member of a consortium which is a party to the subcontract, and not by the other members of the consortium. This might appear obvious, but some subcontractors seem unaware of this rule when a dispute arises.

Nonetheless, all members of the consortium are secondarily liable to the contracting authority when failure to pay the fee of a subcontractor results in the contracting authority’s having to make payment to the subcontractor—including when the agreement with the given subcontractor was made by only one of the members of the consortium. This liability arises under Public Procurement Law Art. 141, which provides that contractors jointly tendering for award of a public contract are jointly and severally liable for performance of the contract.

The Supreme Court of Poland has held that if one of the contractors (participants in a consortium) under a contract awarded pursuant to the public procurement regime concludes an agreement with a subcontractor and fails to pay the subcontractor’s fee, and the investor pays the subcontractor, the consortium members are jointly and severally liable to the investor for reimbursement of its payment to the subcontractor (judgment of 17 September 2008, Case No. III CSK 119/08). The court reasoned that one consortium member’s breach of an agreement it has made with a subcontractor also constitutes failure to properly perform the main contract with the investor, and as such gives rise to contractual liability to the investor. As the court pointed out, the injury to the investor in such situation consists of the loss caused by the investor’s having to pay consideration to the subcontractor which the contractor was obligated to pay (Civil Code Art. 6471 §1). The claim for damages (an indemnity claim in this case) is directed against the other party to the main contract. If there is more than one party on the contractors’ side, and the law provides for joint and several liability of the contractors (Public Procurement Law Art. 141), the claim for damages is directed against all of them. Joint and several liability of the members of a consortium means that the contracting authority is entitled to pursue all or part of a claim against all or selected members of the consortium, as elected by the contracting authority (Civil Code Art. 366).

The 2008 judgment by the Supreme Court was issued on the basis of Civil Code Art. 6471 §1, i.e. regulations of the Civil Code providing for the civil liability of the investor to pay the fees of subcontractors for construction works. However, this holding has been newly codified and updated through an amendment to the Public Procurement Law which went into force on 24 December 2013, introducing:

  • A separate new procedure for direct payments to subcontractors for construction works (Public Procurement Law Art. 143c(1))
  • Mandatory setoff by the contracting authority against the general contractor’s fee of amounts paid to subcontractors under this procedure (Art. 143c(6))
  • Grounds for the contracting authority to renounce a contract with the general contractor because of the necessity for the contracting authority to make direct payment to a subcontractor (Art. 143c(7)).

It should be pointed out in this respect that unlike Civil Code Art 6471 §1, the new regulations in the Public Procurement Law refer not only to subcontractors for construction works, but also to subcontractors supplying goods or services which are part of a public procurement for construction works.

Pursuant to the regulations of the Public Procurement Law, to an even greater degree than before, failure to make timely payment to a subcontractor is a problem not only for the consortium member which signed the agreement with the given subcontractor, but an issue affecting all members of the consortium. Accordingly, when entering into a consortium agreement, the members should provide for appropriate security of their individual interests and rules for payment, including indemnity claims. And subcontractors should determine exactly whom they are signing an agreement with.

Małgorzata Cyrul-Karpińska, Infrastructure & Transport Practice and Public Procurement & Public-Private Partnership Practice, Wardyński & Partners