Construction Law 2023

Last Updated June 08, 2023

Poland

Law and Practice

Authors



Norton Rose Fulbright provides the world’s pre-eminent corporations and financial institutions with a full business law service, with more than 3,000 lawyers and other legal staff based in Europe, the United States, Canada, Latin America, Asia, Australia, the Middle East and Africa. Recognised for its industry focus, Norton Rose Fulbright is strong across all the key industry sectors: financial institutions; energy, infrastructure and resources; consumer markets; transport; technology; and life sciences and healthcare. The team in Poland at Norton Rose Fulbright Dyczkowski and Partners, LP has over 45 lawyers in Warsaw who advise a range of global financial institutions and corporates, as well as major Polish companies and governmental organisations, drawing upon the firm’s European and global capabilities to offer clients a full business law service. The team provides Polish and international advice on banking and finance, corporate (including M&A, private equity and securities), real estate, construction, energy, restructuring and regulatory matters.

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:

  • the scope of works to be subcontracted (“pushed” down the tier) is explicitly envisaged in a construction contract concluded by an employer, or
  • the fact of subcontracting certain works is notified by a (sub)contractor to a tier-up employer and such employer did not object to that fact in writing,

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.

  • Self-built, ie, the investor is also a contractor responsible for execution of all the construction works (is a tier-1 and tier-2 entity, usually having also no or very few of the subcontractors from tier 3). Such system is popular in private housing (when the owners and future inhabitants execute the project themselves) but can sometimes also be seen in the residential sector with local/low-scale residential developers.
  • Few contractors, ie, the investor appoints few contractors (each a tier-2 contractor) for different scopes of work – leaving the entire management, co-ordination and liability for the construction site on the investor’s side. The system is rarely seen, apart from in the private housing sector.
  • General contractor, ie, the investor appoints one contractor who is fully responsible for executing, managing and co-ordinating the construction works and delivering the completed project. This type is a market-standard throughout the sector, being the preferred type on the investor’s as well as the contractor’s side almost without exception.

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:

  • first-ranking mortgage on the property to be developed;
  • registered pledges on the shares in the investor (PropCo);
  • assignments of receivables under CAR insurance policies;
  • assignments of the warranties, guarantees, securities and performance bonds under the construction contract; and
  • conditional assignments of the employer’s rights and obligations under the construction contract in case the employer defaults under the loan agreement.

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.

  • Open book– This requires the general contractor to evaluate and contract any variation works based on the open-book mechanism, providing full visibility of the tendering process to the investor.
  • Unit prices/market prices Unit prices work in a stable and foreseeable market and, if attached to the contract itself, the costs of variation will be established based on the same unit prices of elements/materials as the “standard” scope of works. As the construction market is hardly stable and foreseeable now, the practice is of somewhat historical importance. Market prices refer to prices at the time of the variation so they should reflect the market at the time. As there is no objective way or source for establishing such prices in an efficient manner, additional provisions on appointing a construction expert to settle the likely dispute usually follow.

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:

  • execution of actions necessary for the commencement of the construction works (note the scope is vague and in fact depends on the scope agreed under the construction contract);
  • payment of the agreed remuneration; and
  • take-over of the completed construction works/project.

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.

  • Environmental decision – the general acts of law provide a categorised list of projects, dividing them into:
    1. projects which do not require environmental assessment;
    2. projects which might potentially impact the environment; and
    3. projects which might potentially highly impact the environment.

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.

  • Zoning permit – required if no zoning plan (general act of law) is adopted for the site. The zoning 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.
  • Construction permit – the permit approving the construction design and allowing the construction works to be executed. The construction permit requires legal title to the land and is addressed to the investor. It is provided by the investor to the general contractor.
  • Use/occupancy permit (notification) – the permit confirming the development has been developed in accordance with the construction permit (and design) and allowing use of the completed development. The use permit may be addressed only to the investor; usually the general contractor obtains the use permit based on power of attorney granted by the investor within its scope of works.

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.

  • Obligatory test and inspections conducted by or with respective authorities within the procedure for issuing the use permit – successful completion of the test and inspections is required in order to obtain the use permit for the project.
  • Contractual test and inspections are allowed if they relate to the development as a structure and checking whether the development operates correctly and has no defects (eg, discharge of water from fire protection system). When they involve checking suitability to use for a particular operation or starting the operations (trial of investor’s operations, eg, by commencing production or start-up of its technology), they may constitute commencement of use of the development without the use permit and, as such, be in violation of law.

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:

  • obtaining the use permit,
  • completing the entire scope of works without any major defects; and
  • having tidied the site.

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:

  • all risks for accidental loss/damage are shifted to the investor; and
  • warranty/guarantee periods commence.

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.

  • (Statutory) warranty – statutory liability of the general contractor for physical and legal defects; the standard term is five years. Between two professional entities the period of warranty may be shortened or the warranty may be (and sometimes is) excluded entirely.
  • (Contractual) guarantees – a voluntary declaration of the guarantor concerning the quality of the goods/elements, their suitability or fitness for use during an agreed period; made by the general contractor for specific periods, varying depending on the element of the project.

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:

  • replace and/or repair at the contractor’s cost;
  • reduce remuneration;
  • rescind the contract;
  • claim contractual penalties/damages.

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:

  • the works and materials;
  • transfer of permits to the investor (if applicable);
  • transfer of IP rights to any designs under the construction contract and contracts with the subcontractors;
  • transfer of rights, warranties and securities under the contracts with the subcontractors.

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.

  • The situation in which a party in breach of a contract is required to indemnify the non-breaching party if the latter incurs any liability towards third parties as a result of that breach. Such situation is simply one of instances of the general rules of liability and is usually not specifically covered in construction contracts.
  • The situation in which a party – on a risk basis and irrespective of its own fault – agrees to indemnify the other party against claims raised by a third party in connection with performance of the contract. Quite often, construction contracts include the general contractor’s obligation to indemnify the investor against any claims raised by neighbours of the site or subcontractors.

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:

  • retention – the investor retains some amount (usually up to 5%) from each payment made to the general contractor as a cash deposit, to be used in cases of general contractor’s default;
  • bank guarantee/insurance guarantee – “irrevocable, unconditional and payable on a first demand” guarantee issued by EU-based bank or insurer, providing security in case of any general contractor’s default (including insolvency), usually issued for the amount of 5–10% of the contract price; and
  • corporate guarantee (suretyship) – used less frequently than the other two, in practice giving the investor a second entity to enforce its claims against. The enforcement requires full court proceedings.

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:

  • general business liability insurance, covering also personal injuries and death – the amount of the insurance may be correlated to the contract price/value of the project in large projects;
  • property insurance, covering loss, damage, or theft of the general contractor’s property; and
  • CAR/EAR insurance, for the amount equal to the contract price, with the investor as a co-insured party.

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.

  • General contractor’s breach, connected with improper or non-performance of works or other material obligations. The rescission usually results in claims for contractual penalties or damages.
  • Investor’s breach, usually connected with no or untimely payments of the contract price. The rescission may lead to contractor’s claims for damages (note: any contractual penalties stipulated for that occasion will be invalid, as performance of monetary obligation cannot be sanctioned with contractual penalty).
  • Other grounds, which involve long stop date for force majeure events or the investor resigning from proceeding with the project, provided it pays the entire agreed contract price.

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:

  • the Court of Arbitration of the Polish Chamber of Commerce in Warsaw; and
  • the Court of Arbitration at the Polish Confederation of Private Employers.

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.

Norton Rose Fulbright Dyczkowski and Partners, LP

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+48 22 581 4900

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Norton Rose Fulbright provides the world’s pre-eminent corporations and financial institutions with a full business law service, with more than 3,000 lawyers and other legal staff based in Europe, the United States, Canada, Latin America, Asia, Australia, the Middle East and Africa. Recognised for its industry focus, Norton Rose Fulbright is strong across all the key industry sectors: financial institutions; energy, infrastructure and resources; consumer markets; transport; technology; and life sciences and healthcare. The team in Poland at Norton Rose Fulbright Dyczkowski and Partners, LP has over 45 lawyers in Warsaw who advise a range of global financial institutions and corporates, as well as major Polish companies and governmental organisations, drawing upon the firm’s European and global capabilities to offer clients a full business law service. The team provides Polish and international advice on banking and finance, corporate (including M&A, private equity and securities), real estate, construction, energy, restructuring and regulatory matters.

Upcoming Amendments to the Spatial Planning Regime – New Solutions and Their Impact on the Construction and Real Estate Market

Planned amendments

The current spatial planning regulations were adopted in 2003 and have been modified numerous times since then. Several years ago, a completely new draft of a spatial planning and building code was developed and drafted. It was supposed to replace the current spatial planning and building regulations. However, work on the code was discontinued before its draft was submitted to the Sejm (the lower chamber of the Polish parliament) and the spatial planning reform was put on hold for several years. Recently, the Polish government decided to modify the current spatial planning regime by means of a very comprehensive bill that is currently being processed in the Sejm and will likely be adopted before the parliamentary elections in the autumn of 2023.

The bill amending the Spatial Planning Act may play a significant role in changing the spatial planning regime and may have a serious impact on the real estate market, the construction process and – in particular – on the residential sector.

Purpose of the bill

The bill is supposed to increase the level of public participation in the adoption of local spatial planning legislation, to prevent uncontrolled urban sprawl and chaotic development (as a result of the issuance of numerous zoning decisions) and to ensure residents have access to social infrastructure such as schools or green spaces, and thus to improve the everyday functioning of cities and larger agglomerations. One of the aims of the bill is to introduce a new system of co-operation between municipalities and private investors. According to the bill, private investors will be able to apply for the adoption of integrated investment plans dedicated to their developments. As part of an understanding reached with a given local municipality, investors may also be obliged to complete public purpose investments for the benefit of the local community, which will be carried out if an appropriate agreement is signed between an investor and the municipality.

Current status of spatial planning

Currently, local planning in Poland takes place based either on a local spatial development plan or on zoning decisions. A local spatial development plan is an act of local legislation adopted in a special procedure in which a draft is prepared, agreed with various authorities and consulted with the local community. The plan is based on an underlying document – a zoning study, ie, an internal strategic document prepared for the municipality which outlines the directions of future development. A local spatial development plan should be coherent with the zoning study and should provide for areas with specific functions (eg, housing, services, public roads, green spaces) and set out their development parameters (such as percentage of green spaces, development density, building dimensions, shapes of roofs, etc). The plan consists of the text of the resolution (in which particular zones are described and development parameters are defined) and a graphical attachment (which shows the location of various zones and areas).

If a local spatial development plan has not been adopted, an investor wishing to obtain a construction permit must first apply for a zoning decision (or a decision on the location of a public purpose investment – in the case of such specific developments). A zoning decision is addressed to a specific investor and relates to a specific area defined by the investor (one or more plots of land). It is issued on the basis of a spatial planning analysis carried out by a spatial planner. A new development should have a function and dimensions which are coherent with the surrounding developments, but importantly a zoning decision does not have to be coherent with the local zoning study. Other requirements such as sufficient technical infrastructure, access to a public road and appropriate agricultural soil class (valuable classes of soil are protected) must be satisfied.

In any case, a construction permit is issued on the basis of a local spatial development plan or a zoning decision. The design of a planned development should adhere to the zoning parameters set out in the aforementioned spatial planning documents, and compliance with these parameters is always verified by the authority issuing the construction permit.

The process of adopting a local spatial development plan is time-consuming and expensive. In can be particularly expensive for small municipalities that do not have dedicated staff and have to rely on external contractors for spatial planning analyses and work. Large cities usually have spatial planning departments and professionally trained staff with appropriate qualifications, but preparing a plan in large cities involves much more work (due to the larger area which needs to be analysed, the many existing developments, existing infrastructure, and the complexity of issues to be taken into account). The work involved in the process usually gives rise to controversies among different market players such as investors, local communities and associations, and other competent authorities (eg, responsible for nature conservation, monument preservation). In many municipalities in Poland there are large areas for which plans have not yet been adopted and, as a result, these areas have had to be subject to various zoning decisions in order to be developed. The fact that zoning decisions cover only small areas of land has, in some cases, resulted in chaotic development, uncontrolled urban sprawl and a lack of adequate local public infrastructure (proper access roads, pavements, schools, public green spaces) after many years. On the other hand, such zoning decisions allowed investors to obtain construction permits without having to wait for the adoption of a local spatial development plan, which process sometimes takes many years (especially in large cities). This allowed large areas to be developed and certainly had an impact on the real estate market and the economy as a whole.

In order to meet social expectations and to improve the standards of spatial planning, the government prepared a draft bill amending the Spatial Planning Act which introduces certain new solutions, some of which have never been used in Polish spatial planning before.

General spatial development plan

First of all, the bill introduces a new document – a general spatial development plan – which will replace zoning studies. Zoning studies can be hundreds of pages long (especially in large cities) and contain a lot of information about the local municipality, which may not necessarily be relevant to investors or even the municipality itself. In addition, zoning studies are not considered binding legislation and therefore the structure of the documents is rather unusual (they are written in descriptive rather than legal language), which makes it even more difficult to extract relevant legal information from them. That is why it is envisaged that general spatial development plans will have a simplified form. General spatial development plans will be adopted by local municipalities in a similar manner to zoning studies, subject to some procedural changes. However, they will be regarded as acts of local legislation and their structure will be typical for local legislation. The plans will contain only relevant information, such as the boundaries of planning zones and their basic parameters, as well as spatial planning standards to be applied when adopting the local spatial development plan. In a general spatial development plan, it will also be possible to define, within the borders of the municipality, “inner city development areas” (where specific exceptions regarding the density of development may apply) and “supplementary development zones” (in relation to which zoning decisions may still be issued); however, neither of these areas will be mandatory.

Local spatial development plans

The bill is also supposed to modify some provisions relating to local spatial development plans – mainly the procedures for their adoption. As a result of the bill, it will be possible to adopt local spatial development plans and general spatial development plans at the same time (as opposed to the procedure applicable to zoning studies, which studies are supposed to be adopted before local spatial development plans). The bill also sets out clear parameters defining the extent of consistency between general spatial development plans and local spatial development plans (functional profile, biologically active area, development intensity, built-up area).

However, one of the most important procedural changes is the possibility to adopt local spatial development plans in a simplified procedure, which will only be possible in the cases specified in the amendment (eg, plans for renewable energy installations or minor changes to existing plans). This may be useful in the case of small changes favourable for investors, which can be introduced faster than at present. As part of the simplified procedure, it will not be possible to submit applications and opinions before the commencement of spatial planning work, and consultations with other authorities and local communities will take place at the same time. This should speed up the whole process. However, such a procedure requires the approval of the local voivode (the local representative of the government that oversees municipalities).

Local spatial development plans that have already been adopted will remain in force. If such a plan will have to be amended, it will have to be consistent with the general spatial development plan (if one has been adopted).

Large commercial buildings and renewable energy installations will only be able to be developed on the basis of local spatial development plans. This is an important change as in the past many renewable energy installations were developed on the basis of zoning decisions. This change may affect the availability of land for large-scale PV installations in the future.

Spatial planning standards

The bill also introduces municipal spatial planning standards which should be included in general spatial development plans. They serve as guidelines for future local spatial development plans and zoning decisions, and specify the minimum permissible distances of residential areas from public green spaces (and their minimum areas) and elementary schools, but may also include distances from other infrastructure (such as kindergartens, libraries or pharmacies), at the discretion of the municipality. Each plot of land will have to be located within an appropriate distance in order to be designated for residential purposes in the local spatial development plan. In the case of zoning decisions, appropriate infrastructure and green spaces must already be in place, whereas in the case of local spatial development plans, it will suffice that they be planned within an appropriate distance. These standards can be modified to a certain extent by local municipalities.

Zoning decisions

As mentioned above, significant changes will be made to zoning decisions. According to the bill, they will only be issued in relation to supplementary development zones defined in the general spatial development plan (subject to certain exceptions, such as infrastructure, gas stations and some minor developments). However, supplementary development zones are not mandatory and a municipality may not create them. The requirements for introducing such zones will be provided in a separate regulation issued by the competent ministry. Another difference as compared to current regulations is that zoning decisions should be consistent with the general spatial development plan. The function of surrounding areas will no longer need to be analysed by the spatial planner when issuing a zoning decision, as the function will have to be coherent with the general spatial development plan (except in the case of the alteration, expansion or vertical extension of a development). In addition, according to the bill, a minor change in a development for which a construction permit is not required in certain cases will also not require a zoning decision.

It will be possible to issue zoning decisions in accordance with currently binding regulations until 31 December 2025 (if a zoning study is still in force) and after this date only if a general spatial development plan has been adopted (however, ongoing procedures are supposed to be subject to current regulations) and only in relation to non-obligatory supplementary development zones. Zoning decisions will serve as a basis for applying for a construction permit only for five years after their issue (this will not apply to zoning decisions issued under the previous regulations and which became final before the amendment comes into force).

Integrated investment plans

The bill introduces another new solution in the form of so-called integrated investment plans. Similar mechanisms have already been introduced in the past, but to a limited extent – in the case of housing developments and revitalisation. An integrated investment plan will be adopted as a result of a special procedure, in which the investor will prepare a draft of the plan and file a motion for its adoption. The contents of the plan will be further negotiated and the details of co-operation between the municipality and the investor will be regulated in a spatial planning agreement. The municipality will not be able to make any amendments to the final version of the integrated investment plan and its adoption (in unchanged form) by the municipality will be conditional on the spatial planning agreement coming into force.

A spatial planning agreement will have to be concluded in the form of a notarial deed and may include an obligation of the investor (or a third party) to carry out complementary investments. Such investments may, for example, consist in participating in the construction of a school, a kindergarten, network infrastructure, organising green spaces or providing municipal affordable housing for rent. The agreement may also require the transfer of real property to cover the costs of the integrated investment plan or the costs of complementary investments. Of course, this may increase the cost of developments planned by investors, but it may be the only way to complete a development in a location desired by an investor, for which no local spatial development plan has been adopted or in the case of which the local spatial development plan does not allow for a given type of development. In general, such plans are more likely to be required for large-scale projects involving multiple functions and for the development of large areas. The process may be more time-consuming and costly than obtaining a zoning decision under currently binding regulations. It will also be more dependent on local politics, as the plan will be adopted by the municipal council (unlike a zoning decision, which does not require the involvement of the council).

Risks ahead

The bill has not yet been adopted and therefore it can still be amended or it may be scrapped altogether, which seems unlikely given the upcoming elections in autumn 2023. The intentions of the bill are well-founded, as Poland suffers from spatial chaos and urban sprawl, which issues continue to grow. That said, the solutions proposed in the bill are controversial and may not solve the underlying problems.

First, the deadline for the adoption of general spatial development plans is very short (ie, 1 January 2026) and it is very unlikely that municipalities will be able to adopt them in time, especially given that many large cities have been working on amendments to their zoning studies for many years. The lack of general spatial development plans will effectively make it impossible to develop any areas not covered by local spatial development plans (in most cases it will only be possible to issue zoning decisions on the basis of a general spatial development plan and only if supplementary development zones have been created) and could halt investments for years to come. This may significantly reduce the availability of land for new developments and may have an impact on prices of land. On the other hand, the currently binding plans will remain in force and will serve as land bank for new developments until new plans are introduced.

Reducing the availability of zoning decisions as a spatial planning/permitting tool may prevent uncontrolled urban sprawl and chaotic development, but it will make spatial planning less flexible. Zoning decisions are a solution that is not perfect from a spatial planning perspective, but one which is quite favourable for investors. Thus, the bill will certainly have an impact on the availability of land for new developments. The end result could be an increase in prices of land and a slowdown in new investments.

What is more, some municipalities may try to slow down the process of adopting local spatial development plans and force investors to rely on integrated investment plans, and may expect that investors participate in the completion of complementary investments. As zoning decisions will no longer be widely available, a complementary investment may be used as a “payment” for allowing new investment projects to be located in areas for which a local spatial development plan has not been adopted. In some cases, this may significantly increase the cost of new developments. As there is no certainty around whether an integrated investment plan will be adopted (the municipal council can either adopt it or not), certain costs incurred by investors may simply be wasted: even if an investor drafts an integrated investment plan in accordance with the spatial planning agreement, there is no guarantee that the municipal council will ultimately adopt it. This will be especially important at times of local elections, which can completely change the composition of the council and therefore prolong the development process (as investors will wait until elections are decided, to limit their exposure to risk).

As the bill introduces spatial planning standards and other solutions aimed at preventing urban sprawl, the availability of land designated for residential purposes will be significantly reduced. While a short distance to social infrastructure may be a very desirable situation, such a requirement could lead to the abandonment of some planned projects. It is also likely that these standards (even though they can be modified to some extent) will be too stringent . This will have an impact on the price of land and housing units in the future. New urban districts will be better organised and may function better, but they will certainly be more expensive.

The bill is poorly structured and introduces structural changes to existing primary legislation in a way that significantly reduced its clarity. As a result, it will force investors to rely heavily on legal advice. Combined with the high level of uncertainty surrounding the newly introduced changes, this will further reduce legal certainty in general, as there is no practice in applying the new rules and no interpretation of them by courts and administrative bodies.

To sum up, the bill is controversial. It is meant to solve present spatial planning problems caused by existing regulation; however, the solutions proposed by the legislator may raise concerns as to decreased flexibility for investors, increased procedural costs, impact on availability of land and on prices, and, finally, the bill ultimately becoming a very complicated piece of legislation. It is to be hoped that the bill will be reconsidered, as at least some points may have a negative impact on the market.

Norton Rose Fulbright Dyczkowski and Partners, LP

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NortonRoseFulbrightWarsawOffice@nortonrosefulbright.com www.nortonrosefulbright.com/en-pl
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Law and Practice

Authors



Norton Rose Fulbright provides the world’s pre-eminent corporations and financial institutions with a full business law service, with more than 3,000 lawyers and other legal staff based in Europe, the United States, Canada, Latin America, Asia, Australia, the Middle East and Africa. Recognised for its industry focus, Norton Rose Fulbright is strong across all the key industry sectors: financial institutions; energy, infrastructure and resources; consumer markets; transport; technology; and life sciences and healthcare. The team in Poland at Norton Rose Fulbright Dyczkowski and Partners, LP has over 45 lawyers in Warsaw who advise a range of global financial institutions and corporates, as well as major Polish companies and governmental organisations, drawing upon the firm’s European and global capabilities to offer clients a full business law service. The team provides Polish and international advice on banking and finance, corporate (including M&A, private equity and securities), real estate, construction, energy, restructuring and regulatory matters.

Trends and Developments

Authors



Norton Rose Fulbright provides the world’s pre-eminent corporations and financial institutions with a full business law service, with more than 3,000 lawyers and other legal staff based in Europe, the United States, Canada, Latin America, Asia, Australia, the Middle East and Africa. Recognised for its industry focus, Norton Rose Fulbright is strong across all the key industry sectors: financial institutions; energy, infrastructure and resources; consumer markets; transport; technology; and life sciences and healthcare. The team in Poland at Norton Rose Fulbright Dyczkowski and Partners, LP has over 45 lawyers in Warsaw who advise a range of global financial institutions and corporates, as well as major Polish companies and governmental organisations, drawing upon the firm’s European and global capabilities to offer clients a full business law service. The team provides Polish and international advice on banking and finance, corporate (including M&A, private equity and securities), real estate, construction, energy, restructuring and regulatory matters.

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