The institution of direct payment to subcontractors was introduced into the Civil Code (CC) in order to protect entities participating in the implementation of construction projects. Pursuant to Article 647¹ of the CC, an investor may be jointly and severally liable for remuneration due to a subcontractor, provided that the subcontractor’s participation in the performance of the works has been formally reported to the investor and the investor has not raised an effective objection.
This solution undoubtedly aims to protect subcontractors, i.e. those participants in the investment process whose economic position seems to be generally the weakest. From the investor’s perspective, however, it is a source of significant financial and legal risks. Failure to exercise due diligence when considering a subcontractor’s request for such payment may result in the need to pay the same remuneration twice, i.e. both to the subcontractor and to the main contractor. In addition, even if the funds are paid correctly to the subcontractor, failure to exercise due diligence in settlements and deductions may still result in the general contractor attempting to pursue claims against the investor.
The purpose of this article is to present the most significant risks associated with making direct payments and to indicate mechanisms that limit the investor’s risk in this area.
Joint and several liability of the investor for the remuneration of subcontractors under the Civil Code
The rules governing the investor’s liability for the payment of remuneration due to subcontractors for construction works performed are regulated separately in the Civil Code and in the Public Procurement Law. Pursuant to Article 6471 of the Civil Code, the investor is jointly and severally liable with the contractor for the payment of remuneration due to the subcontractor for construction works performed by the subcontractor, the detailed subject of which was reported to the investor by the contractor or subcontractor prior to the commencement of such works.
Therefore, under the Act, the investor bears joint and several liability of a guarantee nature for another party’s debt arising from a subcontracting agreement. Although the investor is not in a contractual relationship with the subcontractor, he is still jointly and severally liable for the obligations arising from the contractor’s agreement with the subcontractor. This solution interferes with the classic model of construction settlements between the investor and the general contractor.
The prerequisite for the investor’s joint and several liability is that the contractor or subcontractor notifies the investor of the detailed scope of the works to be performed by the subcontractor before commencing their performance. The notification must be made in writing under pain of nullity. However, pursuant to Article 6471 § 2 of the Civil Code, notification is not required if the investor and the contractor have specified in a contract, concluded in writing under pain of nullity, the detailed scope of construction works to be performed by a designated subcontractor. The notification of the participation of subcontractors in the performance of the works may therefore take place both at the stage of concluding the contract – as a result of mutual agreement between the parties – and in the course of its performance – unilaterally by the contractor or subcontractor. However, the condition is that the notification must be made before the subcontractor commences the works.
As a result, the investor may pay the subcontractor the remuneration due for the performance of the works under the subcontracting agreement, invoking joint and several liability under Article 6471 of the Civil Code. However, this decision requires the investor to exercise particular care and to properly verify the validity of the subcontractor’s potential claim.
Key risks for the investor associated with direct payment under Article 647¹ of the Civil Code
When analysing the risks on the part of the investor in connection with making payments directly to the subcontractor, the obvious risk of making an unjustified payment should be pointed out first. This risk arises from the possibility of making a payment in a situation where the subcontractor’s claim does not exist or is unjustified. This may result, for example, from the failure to properly notify the investor of the subcontractor and the scope of its work, and thus the lack of joint and several liability on the part of the investor, as well as situations where the work has not actually been performed, is defective or exceeds the scope of the notified contract.
The effect of paying the subcontractor’s remuneration in such circumstances will be that the investor will not be able to be released from its obligations towards the general contractor.
The general contractor will therefore retain the right to demand full payment of remuneration for the performance of the subject of the contract between it and the investor. The investor therefore risks double payment of the same amount, as well as potential problems related to recovering funds unduly transferred to the subcontractor. Undoubtedly, depending on the scale of the investment and the associated costs of its implementation, this may result in potential losses of up to several million pounds on the part of the investor.
The analysis of the validity of a direct payment request received from a subcontractor must therefore always take into account the principle that such payment does not release the investor from the obligation to settle accounts with the general contractor if the payment was made unjustifiably. The investor must, of course, also take into account the fact that failure to make payment to the subcontractor in a situation where it is fully justified will probably mean that the subcontractor will take legal action against the general contractor and the investor. In such a situation, any premature payment to the general contractor without verifying the claims of potential subcontractors may also give rise to the risk of double payment.
Even a payment to a subcontractor that is justified in the given circumstances may still give rise to other risks on the part of the investor. This is because payment by the investor of the remuneration due to the subcontractor does not automatically release the investor from the obligation to pay the remuneration due to the general contractor under the construction contract.
In light of Article 6471§ 1 of the Civil Code in conjunction with Article 376 of the Civil Code, after fulfilling the obligation towards the subcontractor, the investor, as a joint and several co-debtor, acquires, as a rule, its own recourse claim against the jointly and severally liable general contractor. The investor must therefore take active steps to satisfy this claim, including by offsetting it against the general contractor’s claims or by way of a separate action, or in any other manner permissible in the given situation.
This is also confirmed by the case law of the Supreme Court, which in one of its rulings indicated that in the light of this regulation, the investor is obliged to pay the subcontractors their due remuneration even if it has already paid the entire remuneration due to the contractor, and is not exempt from paying the entire remuneration due to the contractor simply because it has paid the remuneration due to subcontractors pursuant to Article 6471 § 5 of the Civil Code. (as stated by the Supreme Court in its judgment of 11 January 2008, ref. no. V CSK 179/07, OSNC-ZD 2008, No. D, item 100)
At this point, it is also worth noting a minority view appearing in case law, according to which the mutual relations between the parties to the construction process are different when, although the investor has performed a service on behalf of the contractor to the subcontractor in respect of remuneration, but has obtained the full material equivalent of this service under the contract between him and the contractor, and at the same time the contractor’s claim for remuneration on this account has expired (cannot be pursued). In such a case, the investor is no longer entitled to any recourse claim against the contractor under Article 376 of the Civil Code. This is because his economic interest has already been fully satisfied, and granting the recourse claim would lead to unjust enrichment on his part (Article 405 of the Civil Code) at the expense of the contractor’s assets. In essence, he would obtain a benefit in the form of construction works or part thereof free of charge (cf. the judgment of the Court of Appeal in Poznań – 1st Civil Division of 12 April 2023, I AGa 158/22). According to this view, in situations such as those described above, the Court considers that there is, as it were, an automatic set-off, as the claims of the Investor and the General Contractor are mutually extinguished as a result of the payment made to the subcontractor. It should be noted that the decision not to take further action by the investor based on this position carries unnecessary risks. In order to properly secure its interests, the investor should seek to formally set off mutual claims with the general contractor or sign an appropriate agreement with it in this regard.
After making the payment, the investor should therefore take active steps to formally secure their claims by documenting the payments made, informing the general contractor of the payment and its basis, and submitting a statement of set-off where legally possible.
An additional risk associated with making direct payments may also be a potential breach of the provisions of the contract with the general contractor. Construction contracts often provide for extensive settlement procedures, the breach of which may constitute grounds for the investor’s liability towards the contractor. In this regard, the most commonly used mechanism is the obligation to consult the general contractor on the subcontractor’s request and to allow the general contractor to take a substantive position on these claims. Violation of this procedure may result not only in an unjustified increase in the risk of making an unjustified payment, but also in a breach of the provisions of the contract and possible related consequences specified therein.
When deciding to pay a subcontractor’s claim, the investor should also duly examine whether there are any further subcontractors involved in the investment. In such a case, the investor’s risks are identical to those associated with making an unjustified payment to the general contractor or subcontractor. This risk is particularly significant in complex investments involving multiple subcontractors and further subcontractors.
How can the Investor limit the risk associated with making a direct payment to a subcontractor?
In the case of direct payments to subcontractors, the key issue is to adequately secure the investor’s legal interests.
The most important basis for limiting the investor’s potential liability is a thorough verification of subcontractors’ claims. Each payment request submitted by a subcontractor should be assessed in terms of the effectiveness of the subcontractor’s notification, the amount of outstanding remuneration and the compliance of the request with the remuneration specified in the subcontract and the scope of work of the subcontractor reported to the investor. This verification should cover not only the documents held by the investor, but also, as a rule, the process of consulting the claim with the general contractor and obtaining their substantive opinion on the matter, or their consent to the fulfilment of such a request.
Contractual safeguards in relation to the general contractor are also important in this respect. As a rule, even before concluding the contract, the investor should analyse all risks in this regard and include appropriate provisions in the draft contract. These should include at least the contractor’s obligation to present certificates or evidence of payments made to subcontractors, together with partial or final invoices. It is also reasonable to introduce clauses allowing for the deduction of amounts paid directly to subcontractors from the remuneration due to the general contractor in an automatic and informal manner. It is also worth providing for appropriate contractual penalties in the contract, which will be payable to the investor in the event of the contractor concealing the participation of subcontractors in the implementation of the investment or failing to immediately inform the investor of changes to subcontracting agreements, especially with regard to the subcontractor’s remuneration.
It is also particularly important to develop and properly implement internal procedures for the deduction of receivables. It is worth paying attention to the proper verification of the enforceability of the investor’s and general contractor’s claims in this regard, the issuance of the necessary debit notes, as well as the sending of the necessary requests for payment, and only then the preparation of an unambiguous statement by the investor on the set-off.
In order to ensure full protection for the investor, it is also necessary to keep careful records, especially for the purposes of potential further litigation. Careful collection of evidence confirming the procedure for reporting subcontractors, any objections in this regard, any information about changes in the scope of subcontracts, or confirmations of settlements made by the general contractor may be of key importance in any court proceedings. Such documentation constitutes evidence of the investor’s due diligence and subsequently facilitates the demonstration of the legitimacy of the actions taken.
Undoubtedly, ongoing cooperation with legal and financial advisors is also a beneficial factor in limiting potential legal risks on the part of the investor. Professional support at every stage of the investment allows for the proper drafting of a given contract, careful assessment of payment requests received, and compliance with all contractual and statutory requirements when making payments to subcontractors and subsequently when offsetting the claims of the investor and the general contractor.
Summary
Although direct payment to the subcontractor plays an important role in securing the legitimate interests of the participants in the construction process, it entails serious financial and legal risks for the investor. The most significant risks include the risk of double payment for construction work performed and the inability to effectively set off one’s recourse claim against the contractor. It is possible to minimise these risks during the course of the investment, provided that the investor takes active measures to secure the proper wording of contractual provisions, properly verify the subcontractors notified and the subsequent payment requests received, and ultimately satisfy their own claims.
