Contributed By Norton Rose Fulbright
The construction market is regulated in principle by the following acts:
Templates of standard construction contracts (eg, FIDIC) are rarely used in Poland. They were popular in the 2000s and early 2010s, mainly with public employers, in particular when developments were co-financed with EU funds.
Construction Contract and Its Parties
Provisions of general law regulating construction contracts apply to any contract covering execution of construction works – defined as construction, reconstruction, assembly, renovation or demolition of a structure (part thereof). In that sense, the employer is simply a party commissioning certain works against remuneration, and the contractor is a party performing such works – irrespective of the place in the tier of entities involved in a project.
Considering the construction project in its entirety, different parties involved in it can be tiered in the following way:
1. the investor – the ultimate employer or beneficiary of the development;
2. (general) contractor – a contractor employed directly by the investor;
3. subcontractor(s) – entity(-ies) employed by the (general) contractor for certain scope of works;
4. further subcontractor(s) – entity(-ies) employed by the subcontractor for certain scope of works.
Investor: The Concept
The following is of particular note in this hierarchy. Provided:
that employer is jointly and severally liable for payment of remuneration to such subcontractor.
For instance, if a subcontractor (tier 3) notifies the general contractor (employer of subcontractor, tier 2) on subcontracting works to further subcontractor (tier 4), the general contractor is jointly and severally liable with the subcontractor for paying remuneration due to the further subcontractor.
This might be the case when the investor, usually being the owner of the land/project and addressee of permits, is not a party to a contract named “construction contract”, as professional investors (especially real estate funds) cannot or do not agree to bear the risks connected with the place in the project.
Investor: substitute investors, development managers, etc
Therefore, especially when the investor is an entity (it may be a real estate fund or a business building its own facility) with no experience, know-how or interest in the construction process as such, it is usual for the investor to appoint a substitute investor or a development manager with the required means and expertise to deal with the project and indemnify/be contractually liable (to varying extent) for managing and paying all the contractors.
In those circumstances it is usual that only the substitute investor/development manager concludes a contract named “construction contract”, but this does not change or waive the liability of the investor or its place in a tier as described above. In such a case, the substitute investor or development manager would be in tier 2 and the actual contractor performing construction works would fall under tier 3.
Varying slightly depending on the sector, the market has a good mix of international general contractors being present in Poland (with a strong presence of German and Nordic contractors) and well-established Polish entities.
Contractor or General Contractor?
There are three general types/systems for developing projects in Poland.
General Contractor’s Obligations
Once the construction site is handed over to the general contractor, the general contractor is liable for “any damage occurring thereon on general principles”. Such liability, stemming directly from the Civil Code, is usually extended under the construction contract as a risk-based liability for (almost) all circumstances on and off the site, ranging from all aspects of health and safety issues (including liability for accidents and injuries), safety of the works, to damage to neighbouring plots or community complaints.
The subcontractors of all branches and trades usually perform majority of the actual construction works. Varying depending on the sector and complexity of each project, the subcontractors are generally recruited amongst Polish entities.
Most subcontractors in Poland are small or medium-sized enterprises or sole traders, with a few larger entities operating in the market. Their rights and obligations towards the general contractor correspond to those of the general contractor towards the investor.
Usually contracts between the general contractor and its subcontractors envisage stronger deadlines, parallel or higher penalties and more termination rights in favour of the general contractor as compared to the construction contract between the general contractor and the investor. This provides the buffer necessary for the general contractor to meet the deadlines and penalties under the main construction contract.
Construction projects in Poland are generally funded through debt capital provided by commercial banks. Most international banks have branches in Poland, so there is little chance of an international investor not being able to finance its project with its chosen, preferred bank from its country of origin. Considering bank regulations, as well as specifics of collaterals granted under the facility agreement, it is more common for a Polish branch to grant the facility.
Large-scale infrastructure projects are often financed with the use of EU funding or through issuing bonds.
Notwithstanding the above, private debt providers seem to get more interest from investors, especially as their loan-to-value requirements are not as strict as those of commercial banks.
No financier is a party to a construction contract and no direct rights or obligations of the financier result therefrom. Apart from requiring the investor to include in the construction contract provisions on assignability of the entire contract or certain rights thereunder at least to the financing entity or full step-in rights of the financier, financiers have little or no interest in the construction contract itself.
Financing construction projects usually involves establishing the following securities in favour of the financiers:
The most common practice in the general contractor and fixed-price system is to define the scope of the general contractor’s obligations and the project as such by simply stating “any and all which will be required to complete the project”, with the project defined by referring to the following.
Construction Permit
The construction permit and the construction design approved by such administrative decision defines the basic scope of works and relates to its compliance with general provisions of law relating to, eg, health and safety, fire regulations, manner of use, permitted number of parking spaces or other ancillary facilities, and manner for supplying utilities.
Technical Specification and Plans
The technical specification provides more detailed requirements for the project, usually designed specifically for the needs or whims of the investor or future user of the development (eg, starting from the colour of the façade or interiors, fit-out requirements and standards, to detailed and bespoke fire protection systems or adjustments to production/operation technology).
It is not uncommon for the technical specification to be agreed between the investor (future user of the project) and the general contractor within the tendering procedure. Especially in builds dedicated to a particular user (eg, hotel operator, production facility), the requirements of the user are so particular the pricing of the project cannot be made before agreeing on the specification first.
Execution Designs and Other Detailed Projects
Such designs cannot change the construction design nor the technical specification but leave enough room for agreeing some very detailed solutions. As such designs deal with “how/where/at what height to install”, they are prepared by the general contractor and, upon approval by the investor, constitute part of the general contractor’s scope of works.
Variations to the Scope of Works
It is standard practice to include variation provisions, entitling the investor, in a semi-automatic procedure, to add (“positive” variation), omit (“negative” variation) or substitute anything previously agreed under the contract. The variation is unusually one-sided – the general contractor is usually entitled to request a change, with such request not being binding on the investor.
Costs of Variation
Different solutions for evaluating the construction costs may be observed.
Such construction costs are increased by general contractor’s overhead – usually fixed or capped in the construction contract. In case of positive variations, the only limitation is investor’s pocket and time constraints. In case of negative variations, these are usually capped so that the development retains the minimal value for the general contractor’s time and effort.
In the professional market, the vast majority of builds require obtaining a construction permit. It is usually the investor who delivers the construction design and, therefore, appoints a designer.
In the sense of applicable law, the designer is a natural person (not an enterprise) who prepares and signs the construction design and is liable for its compliance with the law. Further, the designer bears liability for the construction works to be executed in accordance with the construction design approved in the granted construction permit. The designer therefore plays an autonomous role in the construction process and is entitled, inter alia, to demand suspension of the construction works if they are being conducted in breach of the design/permit. The designer also plays a key role in assessing whether a change in the construction works is a major or minor one, and if an amending construction permit will be required. In respect of public investors (especially in infrastructure projects), it is not uncommon to have design & build contracts executed.
The main obligations of a general contractor include execution of the works with due care and diligence, within the agreed timeline, in accordance with applicable laws, construction permit and design, in a manner compliant with health and safety regulations, and appointing site manager and (if needed) works/trade managers.
The scope of the investor’s obligations comprises:
Usually, the scope also includes provision of the construction design to the (general) contractor. If fit or if so imposed by the construction permit, the investor shall also appoint the investor’s supervisor (a role autonomous to architect supervisor, investor, project monitor, or the general contractor).
Otherwise, the parties may agree on their respective rights and obligations based on the freedom of contract.
In general, the risks related to the site rest with the investor. However, a common practice is for the investor to deliver to the general contractor any information and reports it has on the status of the site and possible site limitations or obstacles, as well as to allow the general contractor to investigate the site itself during the tendering process. All that with the purpose of shifting the risk connected with potential obstacles and site limitations to the general contractor and limiting its claims for additional remuneration or time extension resulting from such circumstances. Notwithstanding the above, in many cases (eg, pollution, archaeological finds) the investor would still be a liable party for remedying such issues, based on general law.
Permits required to complete a project vary depending on the scale and nature of such project. However, in general, the basic permits involve the following.
The environmental permit does not require legal title to the land and can be addressed to any entity. It is provided by the investor to the general contractor.
Until the project is handed over to the investor, the general contractor bears all the risks connected with the state of the construction works, including those relating to accidental loss or damage. Following the delivery, all risks and maintenance obligations fall to the investor. In some cases, the investor executing a separate maintenance contract with the producer/provider of certain elements of the project is a prerequisite for extended guarantee periods for that element.
Apart from the general contractor being liable for completing the construction works, no other functions or responsibilities fall to the general contractor.
Tests and inspections may fall into the following categories.
The investor is obliged to take over the project from the general contractor once the project is completed. The construction contract defines what “completion” means in respect of the individual project, but in general it involves the general contractor:
Assessing whether completion has occurred is done during the investor-general contractor inspection of the project, concluded by the signing of the hand-over report. The report usually includes a list of all minor defects of the works which the general contractor shall remedy after signing of the hand-over report. Together with signing of the hand-over report, the general contractor hands over all instructions, manuals, guarantee/warranty cards, keys, etc to the investor.
At the moment of signing of the hand-over report:
Signing of the hand-over report is also one of the conditions (if not the only one) for final payment (settlement) of the construction contract.
Once the hand-over report is signed between the investor and the general contractor, both the warranty and guarantee periods commence.
The usual practice is to agree detailed procedure for raising claims, remedying the defects and liability if not remedied. The primary remedy of the investor in case of defects of the works is demanding replacement or repair by the general contractor at its cost. In case of contractor’s default, the investor may:
In general, the general contractor’s remuneration can be established either: (i) as a lump sum/fixed remuneration, or (ii) based on unit prices with some overhead, and settled once the entire project is finished. Although a fixed price mechanism seems to be prevailing, sometimes some mix of different mechanisms is found in contracts. Also, various open-book or guaranteed maximum price mechanisms have gained much popularity.
Usually, the contract price is payable in tranches (after a milestone is achieved) or monthly, based on the progress of works. The contract price typically entails remuneration for, among others:
Smaller projects may entail remuneration based on estimated costs plus margin, time-based rates, unit prices, fixed prices or any mix of them.
Usually, the general contractor’s remuneration is paid in tranches (after a milestone is achieved) or monthly, based on the progress of works. Late payments are subject to statutory interest and may entitle the general contractor to use the payment security and/or terminate the construction contract.
Payment Security
The (general) contractor has a statutory right to demand the investor delivers a payment guarantee in the form of bank guarantee, insurance guarantee, bank letter of credit or a suretyship granted by a bank – for the full amount of the contract price. Such right cannot be waived or changed, and the investor cannot rescind the construction contract where the general contractor demands presentation of such payment guarantee. The investor’s failure to present such guarantee is grounds for the general contractor to rescind the construction contract.
Unless otherwise agreed under the contract, the parties share the costs of such guarantee equally. Provisions on the split of costs cannot limit or make illusory the contractor’s right to demand the payment guarantee.
Usually, the construction contract regulates certain procedures and requirements for invoicing. Typically, the contractor is entitled to issue an invoice after the investor accepts the given part of the works/status report.
Each construction contract needs to include at least the project delivery deadline. Apart from that, the contracts usually include other milestones: eg, commencement of the construction works deadline, deadline for delivery of the use permit, or other. Defaulting such milestones is usually connected with contractual claims by the investor against the general contractor, eg, contractual penalties. Contracts usually also include detailed weekly time schedules of all the works.
Apart from more or less courteous warning notice procedures, in the case of general contractor’s delay the investor is usually entitled to claim contractual penalties. That is, unless the general contractor is not liable for the delay, based on terms and conditions of the contract. Depending also on the provisions of the construction contract, the investor is usually entitled to execute substitute performance (self-remedy) rights, at the cost and risk of the general contractor, and – ultimately – rescind the contract.
Contractual Penalties
It is usual for each contract to stipulate contractual penalties – in case of delays or other material violations of parties’ rights and obligations. The amounts of the penalties usually range from 5% to 10% of the contract price in case of delays, with certain maximal cap agreed.
Penalties are due in case of a default, regardless of any actual damages incurred by the party. Without specific contractual provisions to the contrary, if a party is entitled to contractual penalty it cannot claim further, additional damages.
Damages
With no penalties in the contract or irrespective of the penalties if the contract so stipulates, the parties may be entitled to claim (additional) damages based on general principles of the Civil Code. As in some cases evidencing of an actual damage may be problematic, the parties usually opt for contractual penalties, with the possibility of claiming additional damages.
Substitute Performance
The investor usually is entitled to exercise substitute performance of defaulted obligations of the general contractor, at the general contractor’s cost and risk. Unless explicitly provided by the contract, such rights may only be exercised with the court’s consent.
Rescission
The ultimate right of each party to the contract in case of default, the rescission right is usually warranted for major violations or should all other claims fail and the default persists.
Polish law knows only two types of liability: (i) liability for not exercising due diligence (“fault based” – the general prevailing rule, unless explicitly otherwise agreed in the contract); and (ii) liability for not delivering the expected result (“risk based”).
When the liability of the general contractor is based on its fault, it is generally superfluous for the contract to provide any extension of time provisions (however, they usually are included). The general contractor is liable only for acts or omissions under its control so any extraordinary/unforeseen circumstances would extend the time of the project without any negative consequences on its part.
When the liability of the general contractor is based on risk, the contracts include an enumerative list of circumstances allowing the extension of time for completing the project without any negative consequences on its part, eg, force majeure, archaeological finds, etc.
Irrespective of type, the burden of proof will always rest on the general contractor.
Polish law does not define force majeure but the concept itself, together with subsequent impossibility (impossibility to perform originating from circumstances which occurred after concluding a contract) of performance of obligations, are known to the Polish legal system.
To avoid any doubt and to introduce a clear procedure in case of force majeure events, the majority of construction contracts include specific provisions on force majeure events, procedure for their notification, and remedial actions to be undertaken by the general contractor.
Unforeseen circumstances are constitutive grounds of force majeure and form part of the force majeure event.
Disruption as such is not a term used or known to legal acts or transactional practice in Poland. Generally, an event which could fall under that term would fall within the ambit of a force majeure event.
The one case envisaged by general law that could be classified as “disruption” is extraordinary change in circumstances (rebus sic stantibus): if, due to an extraordinary change in circumstances, performance of an obligation “entails excessive difficulties or exposes a party to a serious loss which neither party foresaw when executing the contract, the court may […] designate the manner of performing the obligation, the value of the performance or even decide that the contract be dissolved”.
As cited, the provision of law regulates the competences of a court, not the parties. It is therefore disputed whether such competence can be waived under the construction contract.
Pursuant to mandatory law provisions, liability for wilful misconduct may not be contractually excluded by the parties.
Concepts of wilful misconduct and gross negligence also exist under Polish law. Unlike wilful misconduct, the statutory rules concerning liability for gross negligence may be excluded in a contract and usually are, as the line between gross negligence and “simple” negligence is not clearly visible under Polish law.
Note only wilful misconduct can be understood in two ways: (i) when a party knowingly intends to breach an obligation (requires intent); or (ii) when a party foreseeing the possibility of such a breach, agrees to it (requires prudence).
It is possible for the parties to contractually limit their liability. Usually, construction contracts envisage caps on contractual penalties, eg, for late delivery of works or in case of termination of the contract. Occasionally, construction contracts allow for general contractor’s overall liability cap of up to 100% of the contract price. The parties may exclude liability for particular types of loss, such as lost profit. A party is not allowed to claim for damages exceeding the amount of contractual penalty unless the construction contract explicitly stipulates otherwise.
Under Polish law, indemnity can be understood in two ways.
By the General Contractor
In order to secure proper performance of the construction contract (either during the construction or guarantee period), the following securities are the most common:
By the Investor
The (general) contractor has a statutory right to demand the investor delivers a payment guarantee in a form of bank guarantee, insurance guarantee, bank letter of credit or a suretyship granted by a bank – for the full amount of the contract price. Such right cannot be waived or changed, and the investor cannot rescind the construction contract where the general contractor demands presentation of such payment guarantee. The investor’s failure to present such guarantee is grounds for the general contractor to rescind the construction contract.
Unless otherwise agreed under the contract, the parties share the costs of such guarantee equally. Provisions on the split of costs cannot limit or make illusory the contractor’s right to demand the payment guarantee.
In the professional market, it is standard practice for the general contractor to maintain:
The insolvency (or restructuring) of either the general contractor or the investor does not give rise to an automatic termination right of the construction contract. The insolvency administrator can choose whether or not to fulfil the contract and respective claims would be settled within the insolvency (or restructuring) proceedings (with no preference). Any provisions granting termination rights in case of insolvency (or restructuring) are invalid by operation of law.
Polish law is unfamiliar with the concept of risk sharing. Instead, it uses the concept of contributory negligence in the damage caused. The only aspects of risk sharing that occur may be found at the initial stages of agreeing on the contract, when pricing and technical specification are established, if the investor agrees to cover certain costs, eg, on a provisional/estimate basis.
Typically, there are no specific provisions regarding personnel in construction contracts. Some contracts include lists of key personnel to be involved in the project or enlist qualifications which people in certain positions should have.
Specific qualification and licensing requirements apply for crane operators, site managers, structural engineers, etc. The contractor must ensure that these individuals meet the requirements for as long as they participate in the development.
Polish law does not envisage any limitations on subcontracting; however, the parties are free to agree otherwise in the construction contract. It is not uncommon for the investors to be vested with the right to reject a potential subcontractor or to impose on the general contractor an obligation to terminate the contract with a subcontractor in certain cases.
Construction contracts in Poland envisage elaborate provisions concerning intellectual property rights. As market practice, upon the acceptance of works the general contractor is expected to transfer to the investor intellectual property rights to the designs and works created under the construction contract and contracts with subcontractors (if applicable) against remuneration, which is usually included in the construction contract price.
The transferred IP rights usually include economic copyrights within the specific fields of use, derivative rights and rights to grant consents for adaptations of and modifications of such works.
It is common for the contractors to obtain from the authors of works waivers of claims in which, among others, the latter undertake not to exercise their personal IP rights; in such cases the contractors grant indemnities to the employers against any claims of the authors relating to the violation of personal IP rights.
Contractual Penalties
A standard part of each construction contract, penalties may be stipulated to the benefit of any party for any breach of the contract apart from default in any payment obligations. Penalties are due in case of a default, regardless of any actual damages incurred by the party. Without specific contractual provisions to the contrary, if a party is entitled to contractual penalty it cannot claim further, additional damages.
Damages
With no penalties in the contract or irrespective of the penalties if the contract stipulates so, the parties may be entitled to claim (additional) damages based on general principles of the Civil Code. As in some cases evidencing of an actual damage may be problematic, the parties usually opt for contractual penalties, with the possibility of claiming additional damages.
Substitute Performance
The investor is usually entitled to exercise substitute performance of defaulted obligations of the general contractor, at the general contractor’s cost and risk. Unless explicitly provided by the contract, such rights may only be exercised with the court’s consent.
Rescission
The ultimate right of each party to the contract in case of default, the rescission right is usually warranted for major violations or should all other claims fail and the default persists.
As in general the contractual penalties exclude the possibility of pursuing additional damages, it might be the case that parties to a contract restrict remedies available to them by not including such additional damages. On the other hand, the substitutive performance rights usually expand the possible remedies on the investor’s side, as the substitutive performance is by operation of law allowed with court’s consent only.
Polish law does not provide for a general “sole remedy” mechanism and therefore the concept is not used in Poland. The only similarity may be found when contractual penalties are stipulated – unless otherwise explicitly agreed under the contract, they exclude the possibility to pursue additional damages.
Damages in Poland consist of two elements: (i) actual loss (damnum emergens); and (ii) lost profits (lucrum cessans). Note the concept of consequential damages is not present in that definition.
Exclusion of lost profits for either/both parties is usually one of the key topics of negotiations and the results vary. It is usually a good marker of the market – if and which party accepts the exclusion of lost profits.
Any retention or suspension rights are usually excluded under the contract, especially on the general contractor’s side.
Provisions of general law provided several grounds for rescinding the construction contract. Despite that, most contracts usually comprehensively provide bespoke grounds for termination, modifying or supplementing the general grounds for recission.
The rescission grounds may be divided into three groups.
For the rescission right to be validly stipulated, the respective provisions need to provide for a deadline in which the rescission rights might be exercised.
In general, when a rescission right is exercised, each party should return to the other party what was received. In case of construction contracts, such return is simply not possible, so – not without some judicial disputes – it is assumed that the investor shall always pay the general contractor any part of remuneration which should be due for the works actually performed and the general contractor shall leave all works and elements without further claims for other compensation. As a remnant of historical disputes, contracts usually detail the entire manner and procedure of settlement in case of rescission.
Most construction disputes are settled by common courts. The type of common court will depend on the value of the construction dispute. Unless the parties agree otherwise, the construction dispute will be settled by the common court having jurisdiction over the registered office of the defendant.
Arbitration clauses are fairly common in construction contracts, and the two most popular arbitration tribunals in Poland are:
A party may obtain an interim injunction issued by a common court, even if arbitration proceedings are pending regarding the same claim. Technical and commercial issues are often resolved by expert determination.
Mediation and other ADR forms are not uncommon, but they play a marginal role in the construction industry.
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