Construction trusteeship, as mandatory collateral management of major private construction projects in Hungary, strives for protecting subcontractors against non-paying general contractor, by allowing direct payments from employer under certain conditions. How does it work in practice and what are the limits of subcontractor protection? We address these issues in this article.
Major construction projects involve more participants (the employer, the general contractor, the subcontractor) with sometimes competing interest. While employers and general contractors can protect their interest when negotiating the main contract with each other, subcontractors are largely exposed to non-negotiable contractual provisions reflected from the main contract into the subcontract.
In addition, given that they have no direct contractual relationship with the employer, subcontractors who duly executed the project works are also exposed to non-paying general contractors. In case of a longer contractual chain, where subcontractors have their own subcontractors, too, this can cause "debt of chain" which can block a whole industrial sector.
To avoid this, the construction trusteeship was introduced in Hungary1, which in major private construction projects, to provide protection for subcontractors.
Escrow Agent and Escrow Account, Subcontractor Register
The subcontractor protection, as main objective of the construction trusteeship is achieved through two essential means: the subcontractor register ("Subcontractor Register") and the escrow account ("Escrow account"), operated by an independent third party, the so-called escrow agent ("Escrow Agent").
Before the starting of the construction activity, the Employer, shall transfer the funds necessary for the realization of the construction project to the Escrow Account, which is handled exclusively by the escrow agent, for the whole duration of the construction project.2
All payments within the project shall be done through the Escrow Account, and shall be made only by the Escrow Agent in line with the strictly regulated conditions set forth by law, based on the data of the subcontractor register.3
The latter is an electronic register, forming part of the construction log-book, in which the participants of the construction project can make their respective entries in line with the project development (request for performance certificate, issuance of performance certificate, etc.).
Payment from Escrow Account
If based on an invoice a sum becomes due to the General Contractor, the Escrow Agent shall retain the amount corresponding to the claim of the subcontractor, participating in the performance of the General Contractor regarding the given invoice.4
The due amount can be paid to the General Contractor through the escrow account only if he certifies to the Escrow Agent, that the subcontractor, participating in the performance of the activity underlying the given invoice has been duly paid by him earlier.
In case the General Contractor fails to certify within 2 (two) business days that he paid his subcontractor, whose performance was acknowledged by him earlier by a performance certificate, then the Escrow Agent shall directly pay the amount retained to the subcontractor.5
Dispute between contractor and subcontractor
Above we described the ideal situation, when there is no dispute between the contractor and subcontractor in relation with the performance certificate.
However, life is not so simple always, and when the parties cannot agree on the amount of work executed by the subcontractor, and the General Contractor issues the performance certificate for a lower amount.
In this case the subcontractor shall call into question the performance certificate issued by the General Contractor by starting dispute resolution proceedings within 30 (thirty) days, and he shall simultaneously notify the Escrow Agent thereon.
If duly notified within the deadline, the Escrow Agent shall suspend the payment of the retained amount as long as the dispute resolution procedure is ongoing. Once a final decision is rendered in the litigation or alternative dispute resolution (e.g. mediation, arbitration) the Escrow Agent shall pay the amount retained in whose favour the decision was made.6
At the same time, in case the subcontractor misses the above deadline, then the Escrow Agent shall pay the retained amount to the General Contractor.7
Conditions of Subcontractor Protection
We highlight that the subcontractor protection described above is not "absolute", because it protects only subcontractors in case the following 3 (three) conditions are met8:
- it protects only subcontractors who are recorded to the given phase of the project in the subcontractor register ("registration-based")
- it is available only up to the amount of the funds available in the given phase of the project, and up to the general contractor's fee ("phase-based")
- subcontractor claims recorded earlier in the register shall take precedence over the claims recorded later ("order priority")
In the light of the above, subcontractors shall be keen on registering their activity on the project in the Subcontractor Register in a timely manner, and in case any dispute arises with the General Contractor, the above deadlines shall be borne in mind.
The aim of Construction Trusteeship in Hungary is to protect subcontractors from non-paying general contractors in major private construction projects. However only diligent subcontractor are protected, who registers themselves into the Subcontractor Register, and who comply with deadlines in case of any dispute arises with the general contractor.
Given that the provisions governing construction trusteeship in Hungary are complex, in case any payment delay occurs from the side of the general contractor, we suggest contacting a lawyer specialized in this field as soon as possible, so that the subcontractor protection can work in practice.
1. Government Decree 2009/191 (IX.15.) on construction implementation activity ("Construction Decree")
2. Article 18 of Construction Decree
3. Article 20 (1 ) of Construction Decree
4. Article 20 (4) a) of Construction Decree
5. Article 20 (5) a) of Construction Decree
6. Article 20 (4) b) and (6) of Construction Decree
7. Article 20 (5) b) of Construction Decree
8. Article 19 (1) of Construction Decree
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.