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Less construction turmoil thanks to the new Pledge Law?

 
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Less construction turmoil thanks to the new Pledge Law?

Annemie Snick

Less construction turmoil thanks to the new Pledge Law?

Payment default of a general contractor leads up to now to many uncertainties for all involved parties, such as how can subcontractors be paid or continue the wharf, what are the rights of the owner? The New Pledge Law which is expected to enter into force at the latest on 1 January 2018 should address most of these concerns..

Direct claim

In 1990, the legislator introduced the direct claim to protect the subcontractor from the consequences of the insolvency of a  general contractor (Art. 1798 Civil Code).

It allows the subcontractor to require the customer by registered mail to pay directly the subcontractor instead of the general contractor. In such case the customer can no longer validly pay the general contractor. Failure to comply with these payment instructions from the subcontractor exposes the customer to a double payment obligation.

This direct claim exposes, however the customer in case of a dispute between the general contractor and its subcontractor. The subcontractor is namely allowed to claim for late interest and losses and is allowed to suspend the works in cause of payment default.
 

The new Pledge Law dated 11 July 2013

The new Pledge Law dated  11 July 2013 (Belgian State Gazette 2 August 2013) addresses this issue by adding an additional paragraph to Article 1798 of the Civil Code. This paragraph stipulates that in the case of a dispute between the subcontractor and the general contractor, the client  is entitled– or obliged (upon instructions of the general and subcontractor) to  pay the amount of the direct claim to the Deposit and Consignment Bank or to an escrow account held by  the subcontractor and the general contractor.

Such payment discharges the debt towards the general contractor and the subcontractor. The account or payment can only be released by court order or mutual agreement.

The new Pledge Law addresses an additional issue relating to insolvency of the general contractor.  It has been for a long time disputed whether or not a direct claim is allowed in case of insolvency of the general contractor.  The Pledge Law now follows Supreme Court.  A third paragraph will be added to Article 20.12 of the Mortgage Law providing that no direct claim is allowed in case of insolvency (concursus creditorum) of the general contractor.

This does not apply, however to a judicial reorganisation (new Art. 33, 3rd paragraph of the Continuity of Enterprises Law) allowing direct claim in case of judicial reorganisation.

 

In the case of bankruptcy of the general contractor, the subcontractor has only a preferential right on the amounts due for a period not exceeding five years after their due date by the customer to the main contractor.

This preferential right was originally limited to real estate works,  i.e. work related to immovable property.

The new Pledge Law broadens this preferential right to all claims  of subcontractors relating to all works (e.g. deliveries of specially manufactured materials).

The extent of preferential rights now matches the  one of the direct claim and hence now relates not only to immovable property but also mobile assets.  

 

The New Pledge is expected to enter into force no later than 1 January 2018.

See here the news relating to the issues around its entry into force.