Two regimes for construction contracts

In practice, the parties often refer to any contract for a construction project as a construction contract. But many such contracts are not actually “contracts for construction work,” but “contracts for a specific work.”

Although in the construction industry the subject of the contract with the general contractor and contracts with subcontractors may be very similar, in Poland these contracts are generally subject to different legal regimes. A construction contract (particularly with the general contractor) is usually a “contract for construction work” (umowa o roboty budowlane), while the agreement with the subcontractor is often a “contract for a specific work” (umowa o dzieło).

Substance, not title

When entering into a subcontracting agreement, and sometimes also an agreement with the general contractor, the parties often refer to it as a contract for construction work, even though it is apparent from the provisions that it is actually a contract for a specific work. In such cases the courts will classify the contract according to its actual content, and not the erroneous title given to the contract. This can affect the legal consequences flowing from the contract.

The question then is how a contract for construction work differs from a contract for a specific work and what is the difference in their legal consequences.

Difference in subject matter

A contract for construction work is concluded between the investor and the contractor in writing. The general contractor is obligated to deliver the structure provided for in the contract, built in compliance with the design and principles of technical knowhow. The investor undertakes to perform the actions required by the applicable regulations (principally the Construction Law) connected with preparation for the work, particularly delivering possession of the construction site and providing the design, and subsequently is required to take over the structure and pay the contractor’s agreed fee.

In a contract for a specific work, the contractor (general contractor/subcontractor) undertakes to perform the work described in the contract and to deliver it to the client (investor/general contractor), and the client undertakes to accept the work and pay the contractor’s fee.

One of the main criteria differentiating a contract for construction work from a contract for a specific work is its connection to the Construction Law and the scale of the undertaking. The regulation defining a contract for construction work (Civil Code Art. 647) cross-references provisions of the Construction Law, e.g. concerning obligations of the investor such as organising the construction process by ensuring that the construction design is prepared (Construction Law Art. 18).

Thus if the construction works in question are conducted with the participation of such persons as the construction supervisor or designer, whose functioning by law involves conducting the construction process, this is one of the criteria determining that the particular contract is a contract for construction work within the meaning of Civil Code Art. 647.

This has been confirmed many times in the case law. As the Supreme Court of Poland held in its judgment of 7 December 2005 (Case V CK 423/05): “The fundamental criterion distinguishing between a contract for a specific work and a contract for construction work is the determination that the purpose is being pursued in compliance with the requirements of the Construction Law (Supreme Court judgment of 25 March 1998, Case II CKN 653/97, OSNC 1998 No. 12 item 207). As the Supreme Court explained in that judgment, the subject of a contract for construction work is an undertaking of greater dimensions and distinct characteristics, in physical and operational terms, which are generally connected with the requirement of design and institutionalised supervision.”

When the client doesn’t cooperate, it is easier to renounce a contract for a specific work

The parties’ obligation to cooperate in performance of the contract arises out of the terms of the contract or regulations of law. The related legal consequences, and in particular the right to renounce the contract if the other party fails to cooperate, are regulated separately for a contract for a specific work (Civil Code Art. 640). Other contracts, including contracts for construction work, are governed by general rules (Civil Code Art. 491).

Civil Code Art. 640 expressly regulates the right to renounce a contract for a specific work if there is a lack of cooperation by the client. Additionally, under Art. 639, the contractor may demand payment for a work when it was ready and able to perform the work but did not do so for reasons attributable to the client.

The contractor may exercise the right to renounce the contract and demand its fee for the unperformed work if it shows that the client had an obligation to cooperate but failed to do so. Based on the case law, the courts uphold the claims of contractors by finding various types of behaviour by the client to mean failure to cooperate.

In one of the most recent cases, the Supreme Court and the lower courts held that the client had failed to cooperate in performance of a contract to prepare design documentation in a situation where the client failed to present a modified architectural conception reflecting the remarks of the landmarks conservator and refused to sign an annex to the contract increasing the contractor’s fee because of the need to perform additional work (Supreme Court of Poland judgment of 20 June 2013, Case IV CSK 704/12).

More difficult to renounce a contract for construction work

Under a contract for construction work, if the investor fails to provide the cooperation necessary to perform the contract, the contractor may also attempt to renounce the contract. But this is more difficult because of the lack of a legal basis for contracts of this type comparable to Civil Code Art. 640 for contracts for a specific work.

The legal basis for renouncing a contract for construction work in this case is Civil Code Art. 491, which gives a party the right to renounce any bilateral contract (including a contract for construction work) if the other party is in delay in performance of the contract, after specifying an appropriate additional period for performance. The party renouncing the contract must prove that the other party did not perform a bilateral obligation.

Based on the fairly limited case law in this area, the court may treat the lack of cooperation by the other party as non-performance of a bilateral obligation. For example, as the Szczecin Court of Appeal held in its judgment of 25 July 2013 (Case I ACa 516/12): “Pursuant to the foregoing analysis of the factual circumstances, it should be found that there were grounds for the contractor to exercise its rights under Civil Code Art. 491 §1. The investor did not ensure financing of the project, did not indicate a financing limit by the contractual deadline, and refused to extend the deadline for performance of the contract.”

Therefore, the type of contract—a contract for a specific work or a contract for construction work—will determine the legal basis for renunciation of the contract when necessary cooperation by the other party (the investor) is lacking. While the law provides a separate basis for renouncing a contract for a specific work (Civil Code Art. 640), the contractor may renounce a contract for construction work only under general rules (Civil Code Art. 491). The regulations governing a contract for a specific work do not apply to a contract for construction work; rather, the regulations governing a contractor’s right to renounce a contract (Civil Code Art. 656) apply.

However, the investor’s right to renounce the contract—whether it is a contract for a specific work or a contract for construction work—is governed by the same regulations (Civil Code Art. 635, 636 and 644 in connection with Art. 656).

Time limitation on claims

A major difference between a contract for a specific work and a contract for construction work is the limitations period for claims under these two types of contracts. For a contract for a specific work, the law expressly provides for a two-year limitations period (Civil Code Art. 646). However, the chapter governing contracts for construction work does not indicate a limitations period. This means that claims of this type are subject to the general rules on limitations periods under Civil Code Art. 118 (Supreme Court of Poland resolution of 11 January 2002, Case III CZP 63/01). Because a contract for construction work is almost always concluded in connection with economic activity, it may be stated under Art. 118 that the limitations period is three years.

The two types of contracts differ not only in the length of the limitations period, but also in the way it is calculated. In the case of a contract for construction work a claim becomes time-barred 3 years after the date the claim became due, e.g. the payment deadline provided in the contract. But claims under a contract for a specific work become time-barred 2 years after delivery of the work, and not from the date the claim became due, which can also be problematic for an enterprise normally guided by the payment deadlines specified in invoices.

A party seeking to pursue its claims in court and erroneously believing that it concluded a contract for construction work, or unaware of how to calculate the limitations period, may miss the deadline for filing its statement of claim. A statement of claim filed more than two years after the delivery of the work under a contract for a specific work will be dismissed because the claim is barred by the statute of limitations, if the defendant asserts that defence.

Or maybe a subcontract?

An equally important issue is whether a given agreement may be classified as a subcontracting agreement within the meaning of Civil Code Art. 6471. If it is, then the general contractor and the investor are jointly and severally liable for the subcontractor’s fee.

A basic condition for classifying an agreement as a subcontracting agreement is that the subcontractor’s performance is covered by the project documentation so that it can be found that under the general construction contract, the work in question should be performed by the general contractor, but with the investor’s consent a portion of the work is assigned to the subcontractor.

It is stated that an agreement which covers elements that would have been performed by the general contractor itself if not entrusted to a subcontractor is a subcontracting agreement. This refers to work which the general contractor “performs” (or rather presents for taking over as performed) at the expense of work by another entity, which deserves to be paid for its work—hence the joint and several liability of the investor to pay for that work. As the Supreme Court has held, a condition for liability to arise under Civil Code Art. 6471 is “performance of a part of the general contractor’s consideration for the investor at the cost of the subcontractor, i.e. without receiving the fee due from the general contractor” (Supreme Court of Poland judgment of 17 October 2008, Case I CSK 106/08).

A characteristic distinction in this respect concerns contracts for a specific work involving installations or machinery that are to become an integral part of the structure. The subject of such agreement may be either production and delivery of specified equipment, or production and installation of the same equipment. The former will not be treated as a subcontracting agreement, but the latter might have a chance of being classified as a subcontracting agreement.

In summary, proper classification of a contract concluded in connection with work related to a construction project is fundamentally important for the rights and obligations of the parties. This will determine whether the limitations period is two years or three years, whether it will be relatively easy for the contractor to renounce the contract for non-cooperation by the client, and the entities to which it may direct its claims. Whether a given subcontract will result in the investor’s joint and several liability under the Civil Code requires separate analysis.

Małgorzata Cyrul-Karpińska and Aleksandra Łukowska, Infrastructure & Transport and Public Procurement & PPP practices, Wardyński & Partners