With almost ten years of hindsight we can safely say that although the construction trusteeship system created to prevent circular debt in the construction industry has essentially lived up to expectations, the system still has some unresolved flaws. What’s more, the taking effect of the new Civil Procedure Code  this January will present a further challenge for the system.

A 2009-year government decree, establishing the construction trusteeship system, requires developers to use a construction trustee for all building projects that are governed by the law on public procurements, or which meet or exceed the community threshold for public procurements (currently around EUR 5.5 million). The construction trustee has a dual role. Firstly, it ensures that the funds needed to cover the construction work are available – either in the form of cash deposited by the developer, or from other sources of finance – and, secondly, it distributes the contracting fees, proportionately to the work performed, between the various participants in the project (general contractor, subcontractors, other participants). The two most important “weapons” at the disposal of the trustees – which are usually banks or special institutions set up for this purpose – are the withholding of unpaid subcontractor fees from the amount payable to the general contractor and the suspension of general-contractor payments if the subcontractor’s performance is in dispute. In other words, if the general contractor has verified the performance of its subcontractor but has not paid for it, then the trustee may deduct the unpaid amount from the general contractor’s fee, and pay it directly to the subcontractor.

Although the system usually succeeds in ensuring that the participants in construction projects really do receive the contracting fees that are due to them, a number of complications have arisen in everyday use.

Is there a trustee or not?

Surprising as it may sound, in many cases a subcontractor involved in a construction project may not know whether or not the project has a trustee. This is because the subcontractor is not necessarily aware of the total value of the project, and whether the project value exceeds the statutory threshold. It is important for subcontractors, therefore, to find out, at the time of taking on the job, whether or not the project has a construction trustee, and if it does, provisions relating to this must be written into the service contract.

What happens if the general contractor’s performance is contested?

Under the logic of the construction trusteeship system, it makes no difference whether the general contractor verifies completion towards the subcontractors; the trustee can only pay the subcontractor from the general contractor’s fee or withhold a part of the general contractor’s fee on the subcontractor’s behalf if payment of the fees related to the given stage of completion have become due towards the general contractor as well. In other words, until a particular stage of the work has been successfully completed and certified between the developer and the contractor, subcontractors participating in that stage cannot expect the trustee to pay them out of the general contractor’s fee.

This creates a particularly unpleasant situation for a subcontractor if a dispute arises between the developer and the general contractor regarding whether or not a stage in the work has been properly completed – and for this reason the general contractor does not receive a certificate of completion for the given stage. The subcontractor has no way of influencing the outcome or settlement of such a dispute, but can only hope that it is resolved as soon as possible. Things can get even more complicated if the dispute between the developer and the general contractor leads to one of the parties terminating the general construction agreement. In such cases, the parties face a long, drawn-out litigation process, and until this is concluded – trustee or no trustee – the subcontractors will not be getting their money.

30 days goes by in a flash

There is also a strict timing limitation on the use of the construction trustee system. If a conflict arises between the general contractor and a subcontractor as to whether the subcontractor’s performance is satisfactory, the subcontractor has 30 days to initiate legal proceedings for settlement of the dispute. If it fails to do this, the block on payments to the general contractor is lifted, and the trustee will pay the amount withheld as a result of the disputed performance to the general contractor. To put it another way, the subcontractor loses its safety net.

In today’s world, 30 days is a terribly short time in which to file a dispute settlement lawsuit. This is because the new Civil Procedure Code makes it very difficult to submit a petition that conforms to all the requirements of content and form. In this light, subcontractors will need to act very efficiently if they don’t want to find themselves without the security offered by the trusteeship. It should be borne in mind that in this regard it is not sufficient to launch a procedure at the Performance Verification Agency (TSzSz); the subcontractor must file a suit with a court, an arbitration board or a mediator for the settlement of the dispute. And the 30-day deadline for filing a claim effectively leaves no time for a TSzSz procedure first, so there’s a good chance that companies will miss out on the benefits afforded by this kind of procedure (quicker procedure, preliminary enforceability, etc.) either.

Completion certificate is the key

Clearly, the trusteeship system can only provide a substantive and effective guarantee of payment for subcontractors as long as there are no differences of opinion regarding the quality of the work performed and the issuance of certificates of completion. On the one hand, this gives the persons authorised to issue certificates of completion (mainly technical inspectors) a more important role. On the other hand, it puts the spotlight on the service agreement, and how it deals with disputes of this nature between the parties; for example, whether it permits the evaluation and issuance of a certificate of completion by an independent expert.