PROJECT OWNER LIABILITY TO SUBCONTRACTOR UNDER UNJUST ENRICHMNET PROVISIONS OF CIVIL CODE – SELECTED ISSUES

Three distinct parties are usually involved in the delivery of a construction project: the project owner, the general contractor, and the subcontractor (or subcontractors). But whereas the relationship between the project owner and the general contractor on the one hand, and the relationship between the general contractor and the subcontractor on the other, are contractually based, there is no contract between the project owner and the subcontractor. To secure the subcontractor’s right to be paid for their work, however, the Polish law explicitly provides for a situation in which the subcontractor, in the event of the general contractor’s failure to pay, can seek payment directly from the project owner. The legal basis for that is the stipulation in Article 647¹ of the Civil Code that the project owner is jointly and severally liable with the general contractor for payment of the subcontractor’s fee. Article 647 lays out clear conditions for when the subcontractor is entitled to do that. But as we will see, Article 647 is not the only legal option available to the subcontractor to successfully seek payment from the project owner.  

Joint and several liability

It is accepted in legal doctrine that the project owner’s joint and several liability goes further than warranty liability, that a debt obligation clearly arises on the part of the project owner by force of law, and that the purpose of joint and several liability is to give the subcontractor as strong a legal means as possible of enforcing payment for their work.[1]

Under Article 647¹, the subcontractor is entitled to seek payment directly from the project owner 1) if there is an agreement between the project owner and the general contractor that explicitly names the subcontractor and details the scope of work that they will perform; or 2) if the general contractor, or the subcontractor, notified the project owner about the appointment of the subcontractor, and about the scope of work that they would perform, prior to the commencement of the work, and the project owner did not assert an objection to the subcontractor’s appointment within 30 days. Importantly, both the agreement and the notification must be put in writing.

If neither 1) nor 2) obtains, the project owner’s joint and several liability is cancelled.

Unjust enrichment

But joint and several liability is not the only legal basis that the subcontractor can use to seek payment directly from the project owner. Another is unjust enrichment, which is regulated in Article 405 of the Civil Code.

Unjust enrichment arises when a civil law person receives a benefit, i.e. is enriched, without an adequate legal basis at the expense of another person. The law imposes an obligation on the beneficiary, i.e. the recipient of the unjust benefit, to make restitution in kind or to pay a sum equal to the amount of the benefit received. So unjust enrichment is a source of civil liability separate from contract.[2]

Legal doctrine states that, whatever the means by which the benefit is unjustly conferred on the beneficiary, the liability is between the beneficiary and the impoverished party[3]. It distinguishes as many as six different types of unjust enrichment, depending on the entities involved[4]. The following two types best fit our case: using the services of the impoverished party (the subcontractor), and unjust acquisition of assets by the beneficiary (the project owner).

Under Article 405, to establish unjust enrichment, the claimant (i.e., the subcontractor in our case) has to demonstrate the following: impoverishment of the claimant; enrichment of the defendant (i.e., the project owner) and its amount; and a direct connection between the impoverishment and the enrichment.

Undue benefit as a form of unjust enrichment

But does the subcontractor always have to demonstrate these conditions? The courts have taken a different view.[5] Analysis of available court practice shows that the starting point is whether a benefit has arisen between the subcontractor and the project owner.[6] It appears, therefore, that the first legal route available to the subcontractor is to claim undue benefit and seek its restitution under Article 410 of the Civil Code.[7]

In a 2017 ruling[8], the Supreme Court stated that in a multi-party arrangement, what matters is who in fact provided the benefit and whether the beneficiary has a legal basis to retain the benefit, and not how the benefit was transferred […] the right to seek restitution under Article 410 § 2 of the Civil Code accrues among parties to the benefit, i.e. the relationship that is the legal cause of the gain, and not the relationship within which the gain took place.

Undue benefit is a form of unjust enrichment. It is clear from the above that invoking undue benefit requires fewer conditions to be fulfilled than unjust enrichment, and that these conditions are easier to demonstrate than e.g. the causal link between the subcontractor’s impoverishment and the project owner’s enrichment, or the amount of the enrichment.

This is not the end of the problem, though, for there are matters which the Civil Code does not regulate explicitly and over which controversies exist: 1) if the project owner has paid the general contractor, does this render the subcontractor’s payment claim towards the project owner ineffective? 2) does submission of a VAT invoice satisfy the requirement to demonstrate the amount of the project owner’s benefit? 3) is the subcontractor only entitled to seek payment of a sum equal to the cost of materials used? Despite these problems, however, legal doctrine and court practice both suggest that the subcontractor has a strong case to successfully seek payment from the project owner.

Conclusions

Undue benefit under Article 410 of the Civil Code always has application priority and is more favourable than unjust enrichment under Article 405 of the Civil Code where a benefit has arisen between two identifiable parties, i.e. in our case between the subcontractor and the project owner: that is, if the subcontractor has performed an action or omission towards the project owner, e.g. constructed a part of a building.

By Jan Akimenkow, trainee attorney-at-law

Originally published in PMR Construction Insight Poland, No. 3 (252), March 2022

[1] Cf. Kidyba, Andrzej (ed.), Kodeks cywilny. Komentarz. Tom III. Zobowiązania – część ogólna, 2nd edition, Warsaw 2014.

As the author points out: That is because the subcontractor performs the work for the benefit, not of the general contractor but of the project owner. It is the project owner, not the general contractor, who is the recipient (and the enriched entity). Thus, the transfer of value is between the subcontractor and the project owner.

[2] The difference is also evident in the civil legal process. But at the same time, these two legal bases are not mutually exclusive, and in line with the iura novit curiae principle, if the conditions of ex contractu liability are not fulfilled, unjust enrichment may be invoked. For a fuller analysis see: Partyk, Aleksandra „Wyrok nie może być niespodzianką dla stron,” LEX/el., Warsaw 2017. Cf. the Supreme Court ruling of 2 February 2011 II CSK 414/10.

[3] Gudowski, Jacek (ed), Kodeks cywilny. Komentarz. Tom III. Zobowiązania. Część ogólna, 2nd edition, Warsaw 2018.

[4] Cf. Kidyba, Andrzej (ed), op.cit.

[5] Cf. the following rulings: the Court of Appeals in Lublin of 18 May 2020 I AGa 57/20, the Court of Appeals in Warsaw of 7 March 2018 VII AGa 245/18, the Court of Appeals in Warsaw of 12 February 2018 VII AGa 68/18, the Court of Appeals in Lodz of 17 March 2018 I ACa 1380/17.

[6]  As the Supreme Court correctly stated in its ruling of 15 May 2014 II CSK 517/13: the mere fact of provision of an undue benefit justifies a claim for its restitution. In such a case, there is no need to establish whether, and to what extent, the recipient was enriched and the provider impoverished.

[7] As the Supreme Court correctly stated in its ruling of 29 November 2016 I CSK 798/15: Receipt of an undue benefit is a particular instance of unjust enrichment. . . The general conditions of unjust enrichment should be understood in a special way in the case of undue benefit, and the mere fact of provision of an undue benefit justifies a claim for its restitution. As a result, there is no need to establish whether, and to what extent, the benefit enriched the recipient and impoverished the provider.    

[8] Cf. Supreme Court ruling of 7 July 2017 V CSK 629/16.