Contract security - protection against a dishonest contractor

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Before signing a contract, ask yourself whether it protects you sufficiently in case the other party fails to comply with it. It is also worth introducing a security for the contract, which will allow a simpler and faster termination of the contract with an unreliable contractor, receive compensation from him or enforce the receivables.

Is this agreement valid?

Even the best content of the contract can be negotiated and it is of little use when errors turn out to be invalid.

It is worth checking whether the person who signs the contract on behalf of the contractor is authorized to do so. Most often, errors relate to contracts with limited liability companies.

Limited liability company as a rule, it is represented by the management board.It may consist of one or more persons. If the management board is composed of more than one person and the articles of association do not provide for anything else, the signature of one management board member under the contract is not enough! The company must be represented by at least two members of the management board or by a member of the management board and its commercial proxy (special representative). If the agreement is signed by only one member of the management board - it will be invalid. It should be remembered that the matter may be regulated in a different way in the articles of association, e.g. by stipulating that each member of the management board may represent the company independently.

Therefore, before signing the contract, it is necessary to check in the National Court Register who can represent the contractor. This can be done online in a search engine.

Penalty

Contractual penalties make it much easier to obtain compensation, e.g. for untimely performance of works, failure to remove defects, failure to deliver goods or required documents. They are reserved for non-performance or improper performance of non-pecuniary obligations (Article 483 of the Civil Code). However, they can also be a trap for either party. Why?

The contractual penalty is to replace the compensation. They are often reserved, for example, for each day of delay in the performance of the contract, e.g. for the handing over of the work, completion of the order or construction works.

If the contractual penalty was not entered into the contract, in the event of delay, compensation could be demanded only for the so-called general rules. This would mean, inter alia, the need to prove that the contracting authority has suffered a loss due to the delay. The amount of this damage would also have to be proved in court, as well as its connection with improper performance of the contract by the contractor. As a rule, the court in such cases must appoint an expert. In many cases, it is difficult to prove the damage. There is no such problem with contractual penalties, a simple rule applies: "There is improper performance of the contract, a contractual penalty is due in the amount specified in the contract". So what could a trap be?

  • if the contractual penalty is too high - it significantly increases the risk on the side of the contract, which may be subject to penalties. Defending against the contractual penalties is difficult.

  • if the contractual penalty is too low, and at the same time it is not stated in the contract that it is possible to demand compensation in excess of the reserved penalty - this may be a way to avoid liability for improper performance of the contract at a cheap cost.

Example 1.

The contract for construction works stipulated that for each day of delay there is a contractual penalty of 0.01% of the contract value. The value of the contract was PLN 1 million. Therefore, the contractual penalty for each day of delay is only PLN 100. The delay was one month, for which a contractual penalty of PLN 3,000 was charged. However, as a result of this delay, the contracting authority suffered a much greater loss - as much as PLN 30,000, as it was unable to commence operations on the scheduled date. As the contract does not stipulate that he may demand damages greater than the contractual penalty, he cannot claim more than PLN 3,000 from the contractor, even though the damage is much greater.

Consent of the contractor's spouse to conclude the contract

When concluding a contract, it is worth thinking about what will happen if the contractor does not perform the contract, the case will go to the court, and then to the bailiff. Will the bailiff then recover the money due?

A contract with a natural person conducting business activity is secured by obtaining a written consent of the contractor's spouse to conclude the contract. This applies to those contractors whose marriage is joint property of marriage. This security is not very often found outside of contracts concluded by banks, but anyone can use it.

What does this contract security provide? Most contracts concluded without the consent of the spouse are valid. However, obtaining such consent increases the chances of the debt recovery by the bailiff.

Thanks to the written consent of the contractor's spouse to conclude the contract, it will be possible to carry out bailiff enforcement from the entire joint property of the spouses (i.e. property covered by the marital joint property). Without such consent, bailiff enforcement could only be carried out against the personal property of the debtor and some, not all, joint assets of the spouses. This is due to Art. 41 of the Family and Guardianship Code.

Warranty for defects: check that it has not been deactivated!

What if the items bought by the entrepreneur are defective? Provisions of the Civil Code on the warranty for defects in things come to the rescue (Art. 556 et seq. Of the Civil Code). On their basis, the seller is liable under the warranty for defects found within two years from the delivery of the item.

It is worth checking in the sales contract whether it does not contain adverse changes in liability for defects with warranty. The Civil Code allows the liability to be extended under warranty, but also to limit it or even completely exclude it (Art. 558 of the Civil Code).

In the event that the buyer is a consumer, the exclusion or limitation of liability under the warranty is only exceptionally permissible. But when the buyer is an entrepreneur, the contract may even exclude the seller's liability for warranty defects, which is of course very unfavorable for the buyer. It is worth checking it, for example, when buying things "on a business" basis via the Internet. It happens that the regulations of online stores include cheaper prices, excluding liability with the warranty for buyers who are not consumers. In practice, most buyers do not read the regulations carefully, but mark the "box" that they accept the content of the regulations.

Responsibility for paying subcontractors

With a construction contract, there is a risk that the investor will have to pay twice for the same: once to the contractor, and the second time - to the subcontractor employed by the contractor. Why?

In order to protect subcontractors, a provision was introduced to the Civil Code (Art. 647 [1] of the Civil Code), according to which the investor is jointly and severally liable with the contractor (general contractor) for the payment of remuneration due to the subcontractor for construction works performed by him. Thus, the subcontractor may demand payment directly from the investor, despite the fact that it was not the investor that concluded the contract (only with the general contractor).

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The investor is responsible for paying the subcontractor if:

  • the detailed subject of construction works has been reported to the investor by the contractor or subcontractor prior to commencing the performance of these works; if the investor receives such a notification, he may submit an objection to the subcontractor and contractor against the performance of these works by the subcontractor within 30 days; or

  • the contract between the investor and the general contractor specifies the detailed subject of construction works performed by the designated subcontractor; then the submission of works is no longer necessary, and the investor cannot object to them.

In order to protect himself against the risk of paying subcontractors, the investor may either refuse to accept the work by subcontractors or secure himself in the contract. The security of the contract may consist, for example, in:

  • the general contractor's obligation to present the balance of settlements with subcontractors,

  • agreeing that the investor will pay part of the remuneration due to the general contractor to the subcontractor's account,

  • making the payment of the general contractor subsequent installments of remuneration conditional on the submission of settlements with subcontractors.

Contract security - down payment or down payment?

Sometimes, in the contracts, one of the parties undertakes to pay a certain amount in advance.

We can then deal with an advance or a down payment. They have different effects and different risks for the parties to the contract.

Advance

  • amount paid towards wages or prices

  • if the contract is performed, it is included in the remuneration or price

  • if the contract is not performed, the advance payment should be returned, unless the contract stipulates otherwise

  • a non-returnable advance payment is not possible in contracts with consumers.

Deposit

  • the amount paid at the conclusion of the contract to the other party; it can also be transferred by bank transfer

  • if the contract is not performed by the party that made the down payment, the one who received the down payment may withdraw from the contract and keep it

  • if the contract is not performed by the party that received the down payment, the one who gave the down payment may withdraw from the contract and demand a refund of the amount constituting the double of the down payment.