Direct payment and direct action by the subcontractor: what the project owner pays twice

An investor who has paid every interim payment application to its general contractor legitimately considers that the works have been paid for. Three weeks later, it nevertheless receives a copy of a formal notice sent by a technical trade subcontractor it never approved, followed by a summons for payment, while the general contractor enters collective insolvency proceedings. The question is then no longer whether the subcontractor has a right, but what the project owner (maître de l'ouvrage) still owed the main contractor on a specific date, and whether later payments can be set against the subcontractor. This guide follows the chronology of the mechanism, from the regime that applies depending on the nature of the contract to the exact moment when the exposure crystallises, and sets out the means of securing the position: approval of the subcontractor, the Article 14 guarantee and the delegation of payment.

Two regimes not to be confused: direct payment in public contracts, direct action in private contracts

Law No. 75-1334 of 31 December 1975 on subcontracting defines the operation in its Article 1: subcontracting is the operation by which a contractor entrusts to another person, called the subcontractor, by a subcontract and under its own responsibility, the performance of all or part of the works contract or of part of the public contract concluded with the project owner. The subcontractor therefore has no contractual relationship with the project owner. It is precisely to remedy the absence of that relationship that the law provides two protective mechanisms, whose conditions and effects differ radically.

Direct payment falls under Title II of the law, which deals with public contracts. Under Article 6, the direct subcontractor of the contract holder who has been accepted, and whose payment terms have been approved by the project owner, is paid directly by the project owner for the part of the contract that it performs. The text specifies that this payment is mandatory even if the main contractor is in liquidation (liquidation des biens), in court-supervised reorganisation (règlement judiciaire) or under a provisional stay of proceedings (suspension provisoire des poursuites), original terminology that the legislature has not updated. Article L. 2193-11 of the French Public Procurement Code deems any waiver of direct payment to be unwritten.

This regime is subject to a monetary threshold. Article 6 excludes direct payment where the amount of the subcontract is below a threshold set, for all the contracts covered by Title II, at 600 euros, a threshold that may be raised by decree of the Conseil d'État according to changes in economic circumstances. Article L. 2193-10 of the French Public Procurement Code takes up the same structure by referring to a threshold set by regulation: above it, the direct payment rules of public procurement apply; below it, the provisions of Title III of the 1975 law, that is, direct action.

The subcontractor's direct action is the Title III mechanism, which applies to private contracts. It is the one that exposes the private project owner, whether developer, property company, investor or institutional landlord, to a payment that it believed it had already made.

What public procurement adds upstream

In a public contract, Article L. 2193-3 of the French Public Procurement Code allows the contract holder to subcontract part of the services under its own responsibility, while reserving to the contracting authority the option of requiring that certain essential tasks of the contract be performed directly by the holder. The same article renders void, whatever their form, any clauses, stipulations and arrangements that would have the effect of defeating the chapter. Article L. 2193-4 makes recourse to subcontracting, at the award of the contract and throughout its performance, subject to a threefold requirement: declaration to the contracting authority, acceptance of the subcontractor, approval of its payment terms. The public authority therefore has a contractual filter that the private project owner must organise for itself in its works contract.

The triggering event: the formal notice, its copy, and the one-month period

Article 12 of the 1975 law sets out the trigger in terms that must be read literally:

The subcontractor has a direct action against the project owner if the main contractor fails to pay, one month after having been served with a formal notice, the sums due under the subcontract; a copy of that formal notice is sent to the project owner.

Three elements structure the chronology. First, a formal notice (mise en demeure) sent by the subcontractor to the main contractor, concerning sums due under the subcontract. Second, a copy of that formal notice sent to the project owner: this is the act that brings the project owner into the circuit, and it is the act that, as will be seen, fixes the base. Third, the lapse of one month without payment by the main contractor, which opens the exercise of the action.

The same article adds two substantive protections. Any waiver of direct action is deemed unwritten. And direct action subsists even if the main contractor is in liquidation, in court-supervised reorganisation or under a provisional stay of proceedings. In other words, the failure of the general contractor, far from neutralising the project owner's risk, is on the contrary the most frequent scenario in which it materialises.

The subcontractor who meets the conditions of Article 12 also benefits, by express cross-reference in that text, from the second paragraph of Article 1799-1 of the French Civil Code. The project owner must appreciate the practical scope of that cross-reference: as long as no guarantee has been provided and the contractor remains unpaid for the works carried out, the contractor may suspend performance of the contract after a formal notice that has remained without effect at the end of a period of fifteen days. The exposure is therefore not only financial, it is also a matter of timing: a stoppage of works on a critical trade package moves the discussion onto the ground of late-completion penalties, the delivery date and, for an asset sold off-plan (VEFA) or being refinanced, compliance with covenants.

The base of the risk: the date of receipt of the copy crystallises everything

Article 13 sets the two limits of direct action, and it is the article that mechanically determines the risk of double payment:

Direct action may relate only to payment corresponding to the services provided for by the subcontract and from which the project owner is effectively a beneficiary. The project owner's obligations are limited to what it still owes the main contractor on the date of receipt of the copy of the formal notice provided for in the preceding article.

Two cumulative ceilings emerge. The first concerns substance: only the services provided for in the subcontract and from which the project owner is effectively a beneficiary may be claimed. An item of work not carried out, a service foreign to the subcontract, an extra agreed between contractor and subcontractor but of no benefit to the works, all remain outside the scope. The second is financial: the project owner is liable only up to what it still owes the main contractor.

The decisive point, and the one most often misplaced in internal calendars, is the reference date. It is neither the expiry of the one-month period, nor the summons, nor the court decision: it is the date of receipt of the copy of the formal notice. At that moment, the balance due to the main contractor is fixed for the purposes of direct action. The whole of the project owner's strategy is therefore played out before that date, and all of its vulnerability begins after it.

The mechanism of double payment

The law does not expressly describe double payment. It creates the conditions for it. If the project owner, after receiving the copy of the formal notice, continues to pay the interim payment applications to the main contractor, it reduces its contractual debt to the latter but does not reduce the base fixed at the date of receipt of the copy. It is then exposed to paying a second time, to the subcontractor, sums that it has already paid. The detail of this reasoning, the allocation of payments and the assessment of the balance are matters for the courts, but the wording of Article 13 dictates its logic.

The operational response is simple to state and demanding to implement. Receipt of a copy of a formal notice must trigger, on the same day, three acts: stopping payments to the main contractor up to the sums claimed by the subcontractor, drawing up an agreed statement of the balance due under the main contract at that date, and a physical check of the reality of the subcontracted services from which the works benefit. A finance department that lets an automatic payment date pass within that window turns a legal risk into a dead loss.

Approval and acceptance (Art. 3): what the text requires, what it does not make a condition

Article 3 of the law places the obligation on the contractor, not on the subcontractor. A contractor who intends to perform a contract by using one or more subcontractors must, at the time of conclusion and throughout the duration of the contract, have each subcontractor accepted and the payment terms of each subcontract approved by the project owner. The contractor must provide the subcontract or subcontracts to the project owner when the latter so requests.

The wording at the time of conclusion and throughout the duration of the contract has a practical consequence that many project owners overlook: approval of the subcontractor is not a formality for the start of the site. Each substitution of a trade package, each subcontractor brought in during performance, each revision of the payment terms of an existing subcontract calls for a fresh acceptance and a fresh approval.

The sanction provided for by Article 3 must be read precisely, because it is frequently inverted. Where the subcontractor has not been accepted and the payment terms have not been approved, the main contractor will nevertheless remain bound to the subcontractor but may not rely on the subcontract against the subcontractor. The sanction therefore operates against the main contractor. It does not deprive the subcontractor of its direct action: Article 12 does not make direct action subject to acceptance or approval. A project owner who relies on the absence of approval as a line of defence is on the wrong ground. Approval is a tool for knowing and controlling the site, not a condition of admissibility that can be raised against the subcontractor.

Why approval nevertheless remains the first lever

Knowing the exact list of subcontractors, the amount of each subcontract and its payment terms makes it possible to calibrate retentions, to monitor the main contractor's actual payments and to anticipate the balance exposed to direct action. The private project owner who does not have this map discovers its exposure when it is already fixed. The request for communication of the subcontracts, expressly provided for by Article 3, is a right that must be exercised in writing and documented.

The project owner's personal obligations (Art. 14-1)

Article 14-1 imposes active duties on the project owner in building and civil engineering works contracts. If it becomes aware that a subcontractor is present on the site without the obligations defined in Article 3 or Article 6, and those defined in Article 5, having been fulfilled, it must serve formal notice on the main contractor or the subcontractor to discharge those obligations. The text specifies that these provisions apply to public and private contracts.

Second limb: if the accepted subcontractor, whose payment terms have been approved by the project owner under the conditions defined by decree of the Conseil d'État, does not benefit from the delegation of payment, the project owner must require the main contractor to prove that it has provided the guarantee.

Two clarifications complete the scheme. These obligations do not apply to a natural person building a dwelling to occupy it personally or to have it occupied by a spouse, ascendants, descendants or those of the spouse: the investor, the property company, the developer and the construction-sale civil company (société civile de construction-vente) obviously do not fall within this exclusion. In addition, since the version in force on 1 January 2006, the second paragraph also applies to the industrial subcontract where the project owner knows of its existence, notwithstanding the subcontractor's absence from the site, and the third paragraph likewise applies to industrial subcontracting.

Article 14-1 does not specify the sanction attached to its breach. The dispute then moves onto the ground of the project owner's liability to the unpaid subcontractor, an assessment that is a matter for the courts. For an institutional project owner, the stakes are less theoretical than they appear: the traceability of the formal notices sent to the main contractor and of the guarantee documents requested is, in practice, the only item of evidence available when the question arises several years after acceptance of the works.

Guarantee, delegation of payment and assignment of receivables: securing the position upstream

Article 14 establishes the guarantee in principle. On pain of nullity of the subcontract, payment of all sums due by the contractor to the subcontractor under that subcontract is guaranteed by a personal and joint and several payment guarantee obtained by the contractor from a qualified institution approved under conditions set by decree. The text provides an alternative: the guarantee need not be provided if the contractor delegates the project owner to the subcontractor within the meaning of Article 1338 of the French Civil Code, up to the amount of the services performed by the subcontractor. The cross-reference has pointed to Article 1338 of the French Civil Code since Ordinance No. 2016-131 of 10 February 2016, which came into force on 1 October 2016: precedent clause banks that still refer to the former numbering must be revised. The drafting of the construction subcontract, from approval to the Article 14 payment guarantee, is covered in detail in our guide devoted to that contract.

For the project owner, the choice between guarantee and delegation is not neutral. The guarantee externalises the risk onto a qualified institution and leaves the project owner outside the payment circuit. Delegation brings it into the circuit voluntarily, but gives it control of the flow and the possibility of setting off directly, up to the services performed. In an operation with a high degree of subcontracting, delegation on the main trade packages and a guarantee on the secondary ones make a clear combination.

Article 13-1 closes a bypass route often used when financing the operation. The main contractor may assign or pledge the receivables arising from the contract made with the project owner only up to the sums due to it for the works it carries out personally. It may assign or pledge the whole of those receivables only on condition that it first obtains, in writing, the personal and joint and several guarantee referred to in Article 14 for the benefit of the subcontractors. A project owner notified of an assignment covering all the receivables under the contract must therefore require proof of the prior guarantee: failing that, it is exposed to paying the assignee while remaining exposed to the subcontractors' direct action. The conditions of the Dailly assignment of a professional receivable and the defences that the assigned debtor may raise against the assignee are dealt with separately in our dedicated article.

Finally, Article 15 locks the whole scheme: any clauses, stipulations and arrangements that would have the effect of defeating the provisions of the law are null and of no effect, whatever their form. No clause waiving, capping or neutralising direct action inserted in the main contract or in the subcontract withstands this text. Securing the position comes through organising payment flows and guarantees, never through drafting an exclusion clause.

The project owner's decision timeline

The following chronology summarises the decision points, from the contract to acceptance of the works.

• On signing the works contract: require prior declaration of every subcontractor, an obligation to communicate the subcontracts, systematic proof of the Article 14 guarantee or the putting in place of a delegation of payment, and make any assignment or pledge of the contract receivables subject to proof of the guarantee under Article 13-1.
• Each time a new participant enters the site: check its status, start the procedure for acceptance and approval of the payment terms, and serve formal notice on the main contractor to regularise if the situation so requires under Article 14-1.
• At each interim payment application: reconcile the amount paid to the main contractor with the progress of the subcontracted packages, and record the balance remaining due under the main contract.
• On receipt of a copy of a formal notice: immediately suspend payments to the main contractor up to the sums claimed, fix in writing the balance due at that date, and check that the services concerned are provided for in the subcontract and that the works effectively benefit from them.
• During the one-month period: ask the main contractor for proof of payment or for its guarantee to be called, and assess whether a negotiated direct settlement would be preferable to litigation.
• If collective proceedings are opened against the main contractor: bear in mind that direct action subsists and that direct payment remains mandatory in public contracts, and deal with the interplay with the proceedings without assuming that they neutralise the subcontractor's claim.

Conclusion: the risk is dealt with before the copy, never after

Double payment is not a penalty, it is the arithmetical consequence of a date. Article 13 fixes the project owner's exposure at receipt of the copy of the formal notice; everything paid to the main contractor afterwards is paid at its own risk. The defences usually raised, absence of approval, waiver clause, collective proceedings against the general contractor, are ineffective: Article 12 does not require approval, Article 15 annuls contrary clauses, and Article 12 expressly maintains direct action despite the contractor's failure. The only useful ground is that of the two ceilings in Article 13: the reality of the services provided for in the subcontract from which the works effectively benefit, and the exact amount of the balance due on the day the copy was received.

The operational consequence is clear. Before signing your next works contract, have the subcontracting clause, the guarantee or delegation of payment arrangements and the receivables assignment clause audited by an adviser independent of the project's design team, and put in place an internal procedure that automatically blocks any payment to the main contractor as soon as a copy of a formal notice is received. One day's delay in that block costs the amount of the payment concerned.

Frequently asked questions

Does the subcontractor's direct action require that it has been approved by the project owner? No. Article 12 of the law of 31 December 1975 makes direct action subject only to the main contractor's failure to pay one month after formal notice, with a copy sent to the project owner. Acceptance of the subcontractor and approval of its payment terms fall under Article 3, which places this obligation on the contractor and sanctions its breach by preventing it from relying on the subcontract against the subcontractor. An unapproved subcontractor therefore keeps its direct action against the project owner in a private contract.

On what exact date does the project owner risk paying twice? From receipt of the copy of the formal notice provided for in Article 12. Article 13 limits the project owner's obligations to what it still owes the main contractor on that precise date. It is therefore neither the expiry of the one-month period, nor the summons, nor the judgment that fixes the base. Payments made to the main contractor after that receipt expose the project owner to a second payment to the subcontractor.

Can a clause in the contract exclude the subcontractor's direct action? No. Article 12 deems any waiver of direct action unwritten, and Article 15 renders void, whatever their form, any clauses, stipulations and arrangements that would have the effect of defeating the provisions of the law. In a public contract, Article L. 2193-11 of the French Public Procurement Code likewise deems any waiver of direct payment unwritten, and Article L. 2193-3 annuls clauses defeating the chapter on subcontracting.

What is the difference between direct payment and direct action? Direct payment, provided for in Title II of the 1975 law and in Articles L. 2193-10 et seq. of the French Public Procurement Code, concerns public contracts: the accepted direct subcontractor whose payment terms have been approved is paid directly by the project owner for the part of the contract that it performs, without prior formal notice. Direct action under Title III concerns private contracts and requires that the main contractor has failed to pay for one month after formal notice. In a public contract, where the amount of the subcontract is below the regulatory threshold, the Title III rules apply, Article 6 of the law referring to a threshold of 600 euros.

Does the liquidation of the general contractor remove the risk for the project owner? No, quite the opposite. Article 12 specifies that direct action subsists even if the main contractor is in liquidation, in court-supervised reorganisation or under a provisional stay of proceedings. Article 6 likewise provides that direct payment is mandatory in those situations. The main contractor's failure is the scenario in which direct action is most often exercised, and the one in which the project owner no longer has any useful recourse for reimbursement.

Must the project owner require the Article 14 guarantee? Yes in the case covered by Article 14-1: if the accepted subcontractor, whose payment terms have been approved, does not benefit from the delegation of payment, the project owner must require the main contractor to prove that it has provided the guarantee. Article 14 itself sets the substantive rule: on pain of nullity of the subcontract, the sums due to the subcontractor are guaranteed by a personal and joint and several guarantee obtained from a qualified approved institution, unless the project owner is delegated to the subcontractor within the meaning of Article 1338 of the French Civil Code, up to the services performed.

Can an unpaid subcontractor stop the works? Article 12 makes the provisions of the second paragraph of Article 1799-1 of the French Civil Code applicable to a subcontractor meeting its conditions. As long as no guarantee has been provided and the contractor remains unpaid for the works carried out, the contractor may suspend performance of the contract after a formal notice that has remained without effect at the end of a period of fifteen days. For an operation subject to a delivery constraint, this fifteen-day period is often more critical than the one-month period for direct action.