Retention of a portion of the subcontractor’s remuneration as a security for proper performance of the contract and the investor’s joint and several liability

In construction contracts, including those concluded between a general contractor and a subcontractor, it is common practice to retain a portion of the remuneration as security for the proper performance of the contract, and subsequently for the warranty and guarantee period.

The parties usually refer to this mechanism as a security deposit and the relevant contractual provisions are typically structured in such a way that the investor or contractor is entitled to withhold or deduct from the invoices issued by the contractor or subcontractor a specified percentage of the agreed remuneration (e.g., 10% of the net amount). The parties also agree that the retained amount (provided it is not used to satisfy any claims of the investor or contractor) will be refunded in part after completion and final acceptance of the works, and the remaining portion after the statutory warranty and guarantee period.

But does the inclusion of such provisions in a subcontract trigger the investor’s joint and several liability for the payment of the amounts retained from the subcontractor’s remuneration under Article 647¹ § 1 of the Civil Code?

The answer is not straightforward.

To determine whether the subcontractor’s claim against the contractor for the release of the retention amount falls within the scope of the investor’s joint and several liability (Article 647¹ § 1 of the Civil Code), it is crucial to establish whether the retention agreed between the contractor and subcontractor constitutes a part of the remuneration for the work performed (see e.g., the Supreme Court judgment of 25 January 2022, case no. II CSKP 131/22).

According to the well-established case law of the Supreme Court and lower courts, the legal nature of such a retention must be assessed based on the content of the specific contract and requires an individual examination in light of the contractual provisions.

The courts generally agree that if the retention is based on the subcontractor’s consent to the contractor withholding part of the remuneration for a specified period to potentially satisfy claims arising from improper performance or warranty obligations, it does not have the characteristics of a proper security deposit or performance bond. In this case, we are dealing with a de facto postponement of the payment deadline, which does not waive the investor’s joint and several liability for the payment of remuneration for works performed by the subcontractor. The mere use of the terms security deposit” or “guarantee deposit” in the contract does not automatically mean that a proper security deposit arrangement has been created.

A true security deposit has the nature of a causal, accessory obligation with the features of an irregular deposit. In this arrangement, the party providing the bond transfers a specific amount of money to the account of the beneficiary, who may then satisfy their claims in case of non-performance or, if the obligation is properly fulfilled, must return the bond.

Therefore, withholding part of the remuneration due to the other party cannot be considered a performance bond, since there is no transfer of funds to a separate account held by the party entitled to enforce the performance guarantee (see e.g., the Supreme Court judgment of 4 December 2019, case no. I CSK 577/18; and the Supreme Court decision of 11 May 2022, case no. I CSK 1526/22).

It is thus essential to include in construction contracts, including subcontracts, such provisions regarding performance security that will not raise doubts at the stage of settlement and that will adequately protect the interests of all parties involved in the construction investment process.