The International Compendium of Construction Contracts: A country by chapter review 9783110712728, 9783110712483

Table of contents :
Foreword
Preface
Contents
Editor’s Note
Author Profiles
Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China
Czech Republic
Ecuador
England and Wales
France
Germany
Hong Kong
India
Italy
Japan
Latvia
Lithuania
Mexico
New Zealand
Nigeria
Norway
Peru
Poland
Portugal
Russia
Saudi Arabia
Scotland
Singapore
South Africa
South Korea
Spain
Sri Lanka
Sweden
Republic of China (Taiwan)
Turkey
United Arab Emirates
United States of America
Tables
Index

Citation preview

Phillip Greenham and the Society of Construction Law Australia (Eds.) The International Compendium of Construction Contracts

The International Compendium of Construction Contracts A Country by Chapter Review

Edited by Phillip Greenham and the Society of Construction Law Australia

Phillip Greenham, Arbitrator specialising in construction, infrastructure, mining and resources matters, Previous Chair of the Society of Construction Law Australia The Society of Construction Law Australia is a not for profit organisation promoting the education, study and research as well as thought leadership in the field of construction law both in Australia and overseas.

ISBN 978-3-11-071248-3 e-ISBN (PDF) 978-3-11-071272-8 e-ISBN (EPUB) 978-3-11-071278-0 Library of Congress Control Number: 2021930708 Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. © 2021 Walter de Gruyter GmbH, Berlin/Boston Typesetting: jürgen ullrich typosatz, Nördlingen Printing and binding: CPI books GmbH, Leck www.degruyter.com

Foreword Construction, both building and engineering, has been and continues to be a major driver of economies throughout the world. For well over 100 years, standard form contracts have been deployed to provide some uniformity of approach in respect of projects both large and relatively small. They provide a familiarity for parties and consultants working with the parties which enables them to budget and price for the project in question. Although there are some standard forms which are familiar worldwide, such as the FIDIC suite of contracts, many countries have developed their own contracts which are more familiar to users within those countries. It is high time that there was readily available research into the standard forms in use throughout the world, such that, particularly, organisations embarking on or bidding for projects in these countries, which do not have familiarity with the standard forms in use within or the law of specific countries, can have a readily available and intelligent resource for them to be briefed about the scope of and difficulties associated with the standard forms in use within the countries in question. Phillip Greenham has now, in this major work, provided that resource. He has secured contributions relating to numerous countries and from each of the inhabited continents. The legal systems covered are those from the civil and common law backgrounds. For each country, the topics covered include the description of the legal system, key aspects of the construction industry in the particular country, essential legal principles upon which contract law is based, the impact of statute, an explanation of the standard forms mostly in use and, importantly, commentary on the sort of key issues that come up time and again in relation to construction contracts. Dispute resolution is also raised, which can be of importance in particular in countries where there is a statutory adjudication system in place. All the contributors are recognised specialists in their own right in the countries whose legal systems are considered in this book. Over the last 40 years, in particular, lawyers have specialised in construction law and specialist input like this is vital. This should be a “go to” book for all consultants, contractors, sub-contractors and those involved with developments in any of these countries extensively covered by this work. The basic understanding of construction law and its ramifications in these different countries is essential. Sir Robert Akenhead England

https://doi.org/10.1515/9783110712728-202

Preface Construction of major infrastructure and facilities in many countries is increasingly international, often funded by multilateral development banks (MDBs) and constructed by overseas contractors with a supply chain involving many countries. There is an infrastructure deficit in many countries, either because of the needs of an increasing population, inadequate facilities in less-developed countries or ageing and poorly maintained facilities in developed countries. Available financial resources for construction are rarely adequate and obtaining value for money is imperative. Whilst there are global challenges in procuring constructed facilities that satisfy the owners’ and contractors’ expectations, there are also shared solutions that produce successful projects. The common issues challenging the successful delivery of a construction project are essentially the same in any country: managing the risks and completing the scope of work on time, within the budget and to the required quality without dispute. Notwithstanding individual differences between countries, the success factors for a construction project are essentially the same. In this writer’s view, these are to: – Invest sufficient time to get the form and terms of the contract right before it is signed. – Sign the contract before work is started. – Operate the contract in accordance with its terms. – Execute the project in accordance with the terms of the contract. – Establish and maintain good communications between the contracting parties and the contract administrator throughout the project. – Address and deal with unforeseen issues as they arise during the project whilst contemporary information is available. These success factors all relate to the contract, the legal mechanism for delivery of a construction project. All construction contracts define, to a greater or lesser extent, each party’s rights and obligations and allocates the risks inherent in constructing any project. Construction law in jurisdictions subject to the rule of law is founded on the universal principles of freedom of contract and pacta sunt servanda. It is submitted that these universal principles and the common challenges and shared solutions of construction have produced a lex constructionis, an international law of construction. Such a lex constructionis is a subset of the lex mercatoria (the law merchant). Support for a lex constructionis can be found in the following: – contemporary statements identifying the lex mercatoria in a practical way that can be applied to specific situations; – the widespread use of international standard form construction contracts; – universal acceptance of international arbitration as a final and binding method of dispute resolution that can be enforced in most jurisdictions. https://doi.org/10.1515/9783110712728-203

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Lex mercatoria There are two modern statements of the lex mercatoria: – the UNIDROIT Principles of International Commercial Contracts; and – the TransLex Principles.

UNIDROIT Principles The UNIDROIT Principles (UP) were developed by an eminent panel of international lawyers drawn from the 63 member States of UNIDROIT. This is an international organisation based in Rome dedicated to modernising, harmonising and coordinating private commercial law between States. The UP comprises a set of a-national principles that apply to the formation, validity, interpretation, performance and termination of commercial contracts. These general rules for international commercial contracts are not derived from any particular national law but embody contractual principles which are, or can be recognised by, the laws of any country, whether common law or civil law. The UP and explanatory notes on each clause are available on the UNIDROIT website. The UP have been applied in various ways by many hundreds of arbitral tribunals and courts around the world. The first edition of the UP in 1994 contained 120 articles, the 2004 edition 185 articles and the 2010 and 2016 editions 211 articles. The editions after 1994 responded to contemporary developments by adding new chapters on set-off, assignment of rights and limitation periods (2004), and a new chapter on the plurality of obligors and obligees in the 2010 edition.

TransLex Principles The TransLex Principles are a recent expression of what Klaus Berger refers to as the “creeping codification of the lex mercatoria”. The TransLex Principles are based on compilation of a list that “reproduces all those rules and principles of the new lex mercatoria as black-letter law which have been accepted in international arbitral and contract practice together with comprehensive comparative references.” They are stated to be an autonomous legal system. The TransLex Principles are maintained in an online database, easily accessible to practitioners in any jurisdiction. The 143 Principles are contained in 14 chapters that, in addition to provisions relating to contracts, contain chapters on unjust enrichment/restitution, corporations, expropriation, international arbitration and private international law. The online database contains 1,408 full text comparative references and 2,193 contract clauses relevant to the Principles (as at September 2020). In addition, there is a

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bibliography containing 1,025 entries on transnational law, a collection of contemporary materials on transnational and arbitration law, and an archive comprising of 62 rare historical documents on arbitration and alternative dispute resolution (ADR). The TransLex Principles embrace both general principles of law as an abstract set of principles, and the legal and/or commercial convictions of the international community of merchants. The sources for the development of these Principles include public international law, uniform laws, the general principles of law, rules developed by international “formulating agencies”, un-codified customs and usages, standard form contracts and published arbitral awards. As with the UP, the TransLex Principles are of a multifunctional nature and may be used, inter alia: – to determine the applicable rules in a dispute if the parties have chosen “general principles of law”, “the lex mercatoria” or the like; – by arbitrators to determine the applicable law if the parties have not made a choice of law; – to allow for an autonomous interpretation of and gap filling in international conventions and other uniform law instruments; – to allow for the “internationally useful” construction of domestic law and international disputes; – to ascertain the disputed meaning of clear legal terms of transnational commerce, e.g. ‘force majeure’, ‘hardship’ etc.; and – to provide legal know-how about modern commercial law to developing and transition countries.  

Standard form contracts As is clear from the chapters in this book, standard form construction contracts are ubiquitous; they also have a long history. Standard form contracts in England date from Sir Joseph Bazalgette’s contracts for the London sewer system in the 1860s, the model used for over 100 years and used in the Institution of Civil Engineers (ICE) contracts from 1945. The American Institute of Architects and the National Association of Builders negotiated and co-sponsored a standard form contract in America in 1888. The first of these standard form contracts defined a contractual relationship in which the Contractor was subservient to the Engineer who supervised the contract; the Contractor had to carry out any additional work directed by the Engineer, who would decide whether the Contractor was entitled to additional time or payment. The Engineer determined any dispute raised by the Contractor. From the mid-19th-century on, contracts became increasingly one-sided, virtually extinguishing all of the Contractor’s rights and making the Engineer the sole arbiter of disputes. Not surprisingly, this often resulted in the Contractor focusing on claims which often lead to disputes and litigation.

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Notable recent changes in the provisions of standard form contracts are an emphasis on balanced risk allocation in accordance with the Abrahamson Principles, and removing the Engineer’s conflicted role of arbiter of disputes. Modern standard form contracts typically encourage dispute avoidance by requiring better communications, early warnings, formal contract management procedures and improved risk management. They usually provide for a hierarchy of ADR methods in an endeavour to provide for resolution of disputes at less cost and in less time than litigation or arbitration. Dispute Boards have proved very successful in dispute avoidance and in resolving disputes expeditiously and at less cost than arbitration. The New Engineering Contract (NEC) first issued in 1993 and now in its fourth edition appears to be the first attempt at developing a standard form contract on a different basis to traditional forms. The NEC suite of contracts embody modern project management principles and practices and uses simple procedures and language to minimise disputes and enable the procedures to be learned and taught easily. The processes in NEC contracts were designed to reward cooperative instead of adversarial attitudes and behaviour. They have been used successfully in a number of countries in addition to the UK, where they are now the preferred form of contract for Government projects.

FIDIC contracts The most widely used international contracts at present are those published by the International Federation of Consulting Engineers (FIDIC); the first edition was based on the Institution of Civil Engineers (ICE) standard form, and FIDIC contracts still basically follow the form originated in the 1860s where the Engineer administers the contract on behalf of the Employer. FIDIC contracts are drafted by a Contracts Committee with international representation and are reviewed by friendly reviewers from many different countries and jurisdictions. They are based on a fair allocation of risks and rewards. Although they have a common law heritage, they are used in many countries, both civil law and common law jurisdictions. Because of their genesis from the common law ICE contract, they are more detailed than typical construction contracts in civil law jurisdictions which rely on Civil Codes for many legal rights and obligations. It is submitted that the detailed articulation of the contracting parties’ rights and obligations in FIDIC contracts as the outcome of the drafting process is a significant contribution to lex constructionis. The Contracts Committee has distilled common practices in international construction contracting into a form that is broadly consistent with domestic law in many countries which are therefore widely accepted. FIDIC contracts are adopted in the procurement documents of many Miltilateral Development Banks (MDBs). A FIDIC contract comprises the General Conditions as published by FIDIC, as amended by Particular Conditions to comply with the governing law of the contract,

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and the law of the site where the works are performed. The extent to which the FIDIC contracts contribute to lex constructionis may be gauged from the limited extent to which Particular Conditions essential for conformity with local law are required. A recently published book on the international application of FIDIC contracts contains chapters on 18 jurisdictions from around the world, each written by a locally experienced construction law practitioner. Each chapter identifies issues that require Particular Conditions necessary to comply with the governing law of the contract, the law of the site where construction takes place, and whether or not the “seat” of the dispute resolution is in the jurisdiction. Seven of the jurisdictions covered by the book require no Particular Conditions for conformity with the governing law of the contract, 14 of the jurisdictions require no Particular Conditions for conformity with the law of the site, and only two require Particular Conditions for conformity with the jurisdiction’s laws of dispute resolution. The comprehensive scope of FIDIC contracts, their development by an international Contracts Committee, their use in many countries of the world with different legal systems, and their endorsement by MDBs, all contribute to their status as a widely accepted international norm.

International commercial arbitration Freedom of contract allows parties to select arbitration to finally resolve disputes, rather than to litigate in court. Arbitration is usually preferred over litigation for construction disputes because of features such as confidentiality, and the exercise of party autonomy to tailor a suitable process and select the tribunal. For international disputes, international arbitration is also preferred as it avoids any perceived home country bias in domestic courts. The importance for lex constructionis through the adoption of the 1958 New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) by over 160 countries cannot be overstated. The New York Convention ensures that international arbitration is accepted in the majority of countries as a binding method of dispute resolution, so that court proceedings can be stayed to permit arbitration, and arbitral awards can be enforced in most jurisdictions. International arbitration is well suited to the resolution of international construction disputes. International arbitral tribunals typically comprise practitioners from different jurisdictions and legal systems, and there are many international Arbitrators with expertise in handling complex construction disputes and their extensive technical documentation. International arbitration is well supported by a number of international organisations. These organisations promote principles, rules and procedures that are widely accepted as international norms, independent of legal systems. A considerable degree of international comity in arbitration law is evidenced by the 116 jurisdictions that have based their arbitration law on the UNCITRAL Model

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Law. This uniformity of arbitral law, coupled with respected international organisations that promote rules and procedures and administer international arbitrations, is a significant contributor to lex constructionis.

Proposed principles of lex constructionis There are three theories of the meaning of lex constructionis that can be derived from the broader category of lex mercatoria: 1. A “mass” of rules and principles for the law of construction, devoid of any internal consistency or systematic quality; 2. The totality of usages that are refined according to the needs of construction; and 3. An independent, supranational legal system. The first two theories are of some value in identifying common principles but will be limited by domestic application. It is submitted that the third theory promises the most value in promoting best practice international construction that promotes international trade and technology transfer and better value for money – less expensive projects, fewer disputes and fewer insolvencies. In this writer’s view, the third theory is supported by a conjunction of modern developments that make such a supranational system possible. As discussed above, these developments comprise the articulation of the new lex mercatoria, widely used and accepted international construction contracts, and the application of international arbitration to finally resolve disputes. One of the criticisms that could be directed to the proposed (or any) principles of lex constructionis is that they cannot cover all situations, nor can they necessarily be applied in their entirety in many situations. The following discussion of principles in the context of lex mercatoria is equally applicable to the proposed principles of lex constructionis. General principles do not necessarily have pre-set conditions for application. Instead, they merely constitute ‘rules of optimal application’, which means that they may be complied with in varying degrees. The required degree of compliance depends not only on the actual but also on the legal options open to the target group. Application of general principles therefore requires a substantial process of weighing up contradictory principles and rules. General principles are therefore always subject to a continual discussion about the effectiveness and scope. The following proposed principles have been formulated taking into account the unique features of construction projects and construction contracts, the Abrahamson principles of balanced risk allocation, the FIDIC General Conditions and the FIDIC Golden Principles. It is believed that if these principles are followed to the extent possible, both the Employer’s and the Contractor’s legitimate expectations can be fulfilled.

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Overarching principles 1. 2. 3.

Pacta sunt servanda. Rebus sic stantibus – doctrines or rules relating to changed conditions. The parties must act in accordance with good faith and fair dealing in construction contracts.

Scope 4. The contract defines, in writing, the original scope of work and the known conditions at the site. 5. The Employer has the right to instruct Variations consistent with the original scope of the contract, and the Contractor has the obligation to carry out all such Variations. 6. Construction works must be carried out so as to protect the health and safety of workers. 7. Construction works must not adversely affect the environment or the interests of third parties. 8. Subject to any contractual requirements, the Contractor selects the methods and timing of the works. Risk 9. Each risk is allocated to the party best able to manage and control it and the consequences if it eventuates, or to the party who will derive any benefit or suffer the least consequences if the risk eventuates. 10. A party is not allocated risks that it cannot insure for or has insufficient financial resources to bear. 11. The Contractor is responsible for the works whilst it is in possession of the site. Time 12. The parties have a reasonable time to perform their obligations and exercise their rights. 13. The Contractor provides the Employer with prompt and adequate notice of any unexpected conditions that affect its performance, the occurrence of any risk events and any claims. 14. The Employer provides the Contractor with prompt and adequate notice of the occurrence of any risk events that affect the Contractor, instructions and responses to claims. 15. The Contractor is liable to pay damages if it does not complete the works by the contractually agreed date.

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Cost 16. The Employer has adequate financial resources to complete the contract. 17. The Contractor provides security for its performance. 18. The Employer pays the Contractor its contractual entitlements promptly. Quality 19. The Contractor either rectifies defects in its works or pays damages to reinstate the works to the contractually specified quality. Disputes 20. Unresolved disputes are finally determined by arbitration.

Conclusion The foundations of lex constructionis already exist: a lex mercatoria, international contracts that can be implemented in any jurisdiction and international arbitration of disputes in accordance with widely accepted laws and rules that results in final awards that can be enforced in most jurisdictions. It is submitted that the proposed twenty principles of lex mercatoria can promote projects that provide better value for money, promote international trade and greater comity between nations whilst fulfilling the parties’ legitimate expectations. They are however, only principles and “are therefore always subject to a continual discussion about the effectiveness and scope.” The closest approach to a lex constructionis that is as an independent, supranational legal system not subject to the vagaries of a particular jurisdiction may be achieved by: – UNIDROIT Principles or Translex Principles as the governing law of the contract; – Use of an internationally accepted standard form of contract such as FIDIC; and – International arbitration as the final method of dispute resolution. Dr Donald Charrett September 2020

Contents Editor’s Note Author Profiles

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Ricardo E. Barreiro-Deymonnaz Argentina 1 Andrew Stephenson Australia 33 Thomas Frad Austria 63 Benoît Kohl, Rony Vermeersch and Mitch Windsor Belgium 85 Thiago Moreira and Caio Gabra Brazil 109 Sharon Vogel, Bruce Reynolds and Helmut Johannsen Canada 145 Oscar Aitken and Javiera Muñoz Chile 171 Maoyuan Zhu, Jiong Zhang and Frederick Hui China 195 Oldřich Baroch Czech Republic

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Clement P. Harrington and Juan Carlos Mejia Ecuador 251 Tony Marshall, Mark Crossley, Richard Bailey and Keith Kirkwood England and Wales 273 Christophe Lapp, Lucille Montaut and François Muller France 329

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Claus H Lenz and Stefan Osing Germany 355 Glenn Haley Hong Kong

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Jayesh H and Chaitra Srinivas India 415 Marco Padovan Italy 461 Naoki Kanayama, Takashi Ogura, Naoki Iguchi and Kaori Sugimoto Japan 519 Ivars Pommers and Ineta Kanepe Latvia 551 Evaldas Klimas Lithuania 585 Daniel Antonio del Río Loaiza, Jesus Colunga and Monica Paulina Mora Avila Mexico 615 Sarah Sinclair New Zealand

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Ugonna Ogbuagu and Adefoworola Tokan-Lawal Nigeria 677 Geir Frøholm Norway 723 Jaime Gray, Jonnathan Bravo and Guillermo Alarcón Peru 735 Mirella Lechna-Marchewka and Hanna Drynkorn Poland 759 Margarida Olazabal Cabral, Catarina Brito Ferreira, Mara Rupia Lopes and Lourenço Limão Oliveira Portugal 789

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Artashes Oganov, Dmitry Bogdanov and Ophelia Amirova Russia 817 Thomas Wilson and Dara Sahab Saudi Arabia 849 Shona Frame Scotland 869 Ho Chien Mien Singapore 939 Anton van Langelaar, Patrick Lane, Barend Smit, Vino Naicker, Shaun Chamberlain and Nonhle Dlamini South Africa 999 Byung-Woo Im and Kay-Jannes Wegner South Korea 1025 Alfonso Iglesia, Alberto Fortún, Ricardo Echevarría, Carlos Gallego, Miguel Angel Malo and Gonzalo Jiménez de Andrade Spain 1051 Asanga Gunawansa, Ananda Ranasinghe, Raj Selvaskandan and Mohan Kumaraswamy Sri Lanka 1097 Hans Dahlberg Kolga and Elin Bergman Sweden 1137 Sean Liu, Luke Hung and Ankwei Chen Republic of China (Taiwan) 1167 Yasemin Cetinel, Muhammet Bembeyaz and Ayşe Selcen Özcan Turkey 1213 Thomas Wilson and Dara Sahab United Arab Emirates 1245 Donald G Gavin, Wendy Kennedy Venoit, Ashford Alison, Troy L Harris and Lawrence M Prosen United States of America 1261

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Tables Table of Contracts 1315 Table of Issues 1317 Index

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Editor’s Note The Society of Construction Law Australia was formed in 2009. The formation of the Society was inspired by the Society in the United Kingdom which was formed in 1983. There are now kindred Societies in more than 13 countries. A key characteristic of each of the Societies is the focus on multi-disciplinary participation for the benefit of the construction industry and the community generally. It was this cross border and multi-disciplinary dynamic which motivated me, when, in 2013, I was a member of the Board of the Society in Australia, to conceive of this Compendium. The Compendium is a tangible manifestation of the vision of the Society – that is “to promote the education, study and research in the field of construction law and related subjects in Australia and overseas”. The success of the Society in Australia, and the growing footprint of kindred Societies around the world, is evidence of the collegiality and collaboration which pervades the construction industry. This collegiality and collaboration is across disciplines, across countries, across cultures and across financial interests. My sense is that this collegiality and collaboration is more pronounced in the construction industry than in many other industries. The very existence of this Compendium is evidence of this collegiality and collaboration. Perhaps it is the similarity in the physical, financial and organisational challenges that confront a construction project that fosters this collegiality and collaboration. Perhaps it is the human need for, and interest in, the built environment. This collegiality and collaboration, together with the similarity in the physical, financial and organisational challenges are no doubt one of the drivers of the evolution of a lex constructionis. This evolution is discussed in the Preface which has been kindly provided by Dr Donald Charrett. The production of this Compendium has brought into stark focus that, whilst there are differences between jurisdictions, the similarities are far more common and significant. The Compendium has been many years in the making. At times it seemed as if the project would wither on the vine. However, the Society has enjoyed the support of many contributors over many years. It is the stamina and generosity of these contributors which are the reason the Compendium now comes to be published. The Compendium covers 39 countries drawn from all parts of the world and all types of legal systems. There are a number of other Country by Chapters, but none which use the most commonly used construction contract in each jurisdiction as the pivot point for the discussion. My objective was to provide a ready reference to the key issues dealt with by a variety of construction contracts in a variety of jurisdictions in the belief that we can all learn from how our colleagues approach matters and the continual stirring of the melting pot which is becoming lex constructionis will benefit the industry and our communities.

https://doi.org/10.1515/9783110712728-205

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The authors of each chapter were asked to follow a standard template. Given the different circumstances in each jurisdiction this was not always possible or sensible. However, there is a high degree of similarity between the chapters. Whilst each of the authors are expert in their field, the comments and the observations made by the authors in their respective chapters should not be regarded or relied upon as legal advice and should not be used or quoted in the context of any court or arbitration procedures. It is appropriate that the Society recognises the particular support and assistance of a number of people and organisations. These are: – the various Societies of Construction of Law around the world; – the International Construction Projects Committee of the International Bar Association for providing the authors for many of the chapters and for continuing encouragement; – the Melbourne Law School, for arranging the text to be reviewed by law graduates with a view to achieving commonality of style and a quality text; and – Professor Mohan Kumaraswamy, who provided timely encouragement and discipline and assisted in the identification of a publisher. It should be noted that the Society of Construction Law Australia and the Society of Construction Law in the United Kingdom have generously supported the cost of bringing the Compendium into existence. Whilst I am most grateful to each of the chapter authors, the responsibility for any blemishes are of course my own. Phillip Greenham Previous Chair Society of Construction Law Australia September 2020

Author Profiles Argentina Contributor: Ricardo E. Barreiro-Deymonnaz Ricardo is a founding partner at Barreiro. Oliva. De Luca. Jaca. Nicastro, Abogados, based in Buenos Aires, Argentina, where he leads the construction, engineering and infrastructure law pratice. Ricardo is co-Chair of the International Construction Projects Committee of the International Bar Association (IBA), Council Member of the Section of Energy, Environment, Resources and Infrastructure Law of the IBA, founding member and President of the Argentine Society on Construction Law (SADEC), and fellow of the International Academy of Construction Lawyers. He is consistently listed as a thought leader and global elite construction lawyer by Who’s Who Legal.

Australia Contributor: Andrew Stephenson Andrew is a partner of Corrs Chambers Westgath and is the Practice Group Leader for the firm’s Projects Practice. Andrew has a particular focus on matters involving technology, engineering, construction, infrastructure and international arbitration. He has successfully run some of Australia’s largest arbitrations and litigation. He is the Australian correspondent for the London-based International Construction Law Review. He is a Senior Fellow at the University of Melbourne Melbourne Law School. He lectures in the Masters Program on dispute resolution.

Austria Contributor: Dr. Thomas Frad Thomas Frad ([email protected]) is a partner and cofounder of the Austrian law firm KWR Karasek Wietrzyk Rechtsanwälte GmbH (www.kwr.at). He has practised construction law since 1995 and has been a partner at KWR for 16 years.

Belgium Contributor: Benoît Kohl Benoît Kohl is Of Counsel at Stibbe in Brussels and is a professor at the Univeristy of Liege and the University of Paris II, teaching construction law and contract law. Benoît studied law at the University of Liege and also obtained an LL.M in commercial law from Cambridge University. Benoît advises clients on all construction and real eshttps://doi.org/10.1515/9783110712728-206

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tate law matters, dealing with both contractual matters as well as appearing before courts and in arbitral proceedings. Benoît is currently President of CEPANI, the Belgian Center for Arbitration and Mediation, and was previously President of the European Society for Construction Law. Benoît also often acts as an arbitrator for construction disputes, and writes extensively on Belgian construction law. Contributor: Rony Vermeersch Rony Vermeersch is a partner at Stibbe in Brussels and is an internationally recognised construction and real estate lawyer, working for all sides of the construction and real estate industries. He focuses on both contentious and non-contentious construction work, as well as projects and dispute resolution work. Rony is well-versed in the leading forms of contracts used domestically and internationally, including forms published by FIDIC and NEC. Moreover, he advises on innovative ways of successfully bidding for and closing public-private partnerships and Private Finance Initiative (PFI) project delivery. Rony has experience with all types of construction projects, including airports, ports, roads, rails, power generation, waste facilities, warehousing, and accommodation. Contributor: Mitch Windsor Mitch Windsor is an associate at Stibbe in Brussels. Mitch is qualified as a solicitor in England & Wales, and is also a member of the Brussels Bar since 2017. He specialises in construction law with a focus on contentious and non-contentious aspects of major infrastructure and energy projects, working with clients throughout the entire project lifecycle. Mitch is fully familiar with the major suites of standard-form contracts used internationally, including the FIDIC and NEC suites.

Brazil Contributor: Thiago Moreira Thiago Moreira is a partner and head of the construction practice at Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga. He holds an LL.M in Construction and Arbitration from the Robert Gordon University, Aberdeen Business School and has worked for the Inter-American Development Bank in Washington, DC. He is currently Co-Chair of the Projects Execution Sub-Committee of the International Bar Association and member of the Society of Construction Law. He has vast experience in the draft and negotiation of onshore and offshore contracts, equipment supply contracts, contracts typical to the oil and gas, energy and logistics industry (e.g. charter agreements, EPC Contracts, O&M agreements, FPSOs, DPUs and platform construction contracts, and equipment supply contracts), as well as project development and infrastructure-related transactions.  

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Contributor: Caio Gabra Caio Gabra is an associate at Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga. He is an admitted student to the LL.M in International Economic Law, Business and Policy at Stanford University (Class of ‘22). He is former-Vice-President of the Brazilian Association of Arbitration Students. Caio often assists clients in the draft and negotiation of a variety of contracts related to the construction and development of infrastrucrure assets. He also represents clients in domestic and international construction arbitration proceedings.

Canada Contributor: Sharon Vogel Sharon Vogel ([email protected]) is a partner at Singleton Urquhart Reynolds Vogel LLP (www.singleton.com) and Co-Chairs the firm’s Construction and Infrastructure Practice Group. She is a Senior Fellow and Lecturer for the University of Melbourne’s Melbourne Law Masters Program, fellow of the Chartered Institute of Arbitrators, board member of the Society of Construction Law North America, co-vice chair of the Disputes Sub-Committee of the International Bar Association, and a fellow of the American and Canadian Colleges of Construction Lawyers. She is ranked Band 1 by Chambers, ranked in the Lexpert/ALM Leading 500 Lawyers, and is a Global Elite Thought Leader in North America by Who’s Who Legal. Contributor: Bruce Reynolds Bruce Reynolds ([email protected]) is a partner at Singleton Urquhart Reynolds Vogel LLP (www.singleton.com), where he is Co-Chair of the firm’s International Construction Projects Group. He specializes in the negotiation, mediation, arbitration and litigation of construction disputes, including contractual disputes, insurance claims, liens, surety bond claims, product liability issues, and architects’ and engineers’ errors and omissions issues. In addition, he advises clients on construction projects in Canada, the United States and overseas. Bruce is also widely recognized for his public policy work within the construction sector. Contributor: Helmut Johannsen Helmut Johannsen ([email protected]) is counsel at Singleton Urquhart Reynolds Vogel LLP (www.singleton.com). His transactional and dispute resolution practice focuses on all aspects of law related to construction, engineering and procurement. In addition to being a Lawyer and Arbitrator, Helmut previously worked as and still remains a Registered Professional Engineer with a background in geotechnical, structural and municipal engineering.

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Chile Contributors: Oscar Aitken and Javiera Muñoz of Carey & Compañía Mr. Aitken is a lawyer from Universidad de Chile, with an LL.M from the University of Michigan. He is partner of Carey and co- heads it’s construction and engineering group. Mr Aitken is also an arbitrator of the Arbitration and Mediation Center of the Santiago Chamber of Commerce and chair of the Chilean Society of Contruction Law. Mrs. Muñoz is a lawyer from Universidad Católica de Chile working as an associate at Carey’s engineering and construction team. With more than 270 legal professionals, Carey is the largest law firm in Chile. Its various corporate, litigation and regulatory groups include highly specialized attorneys and practice areas covering all areas of law including a leading engineering and construction area. This article has been prepared for academic discussion purposes only and is not to be construed as containing legal advice of any nature.

China Contributor: Maoyuan Zhu Mr. Zhu has served as the Chair of the Real Estate and Construction Department of Zhong Lun Law Firm for many years. He provides a full range of real estate and construction advice. Maoyuan Zhu is a very well-known name in the area, and he is often seen in complex and prominent projects. Mr. Zhu has been continuously recommended by Chambers and Partners as a Senior Statesperson and Eminent Practitioner in both the real estate and construction law areas of China for more than 10 years. Contributor: Jiong Zhang Mr. Zhang is a senior partner in Beijing’s Zhong Lun Law Firm and has been focusing on all aspects of real estate and construction areas for 20 years. He is recognised as a leading lawyer in construction law areas in China by Chambers and other institutions. He has extensive experience in the construction project tendering process, whole process construction management and dispute resolution, etc. Mr. Zhang is also an active practitioner in overseas infrastructure projects. Contributor: Frederick Hui Mr. Hui is a litigation partner based in the Hong Kong Office of Zhong Lun Law Firm. He is qualified to practise law in Hong Kong and England & Wales. He is a solicitor advocate qualified to advocate in arbitral tribunals and all levels of courts in Hong Kong. Aside from advising on general commercial disputes, he also advises on construction disputes involving ship buildings, oil platforms, hotels, commercial buildings, resorts, power stations and residual buildings.

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Czech Republic Contributor: Oldřich Baroch Oldřich Baroch ([email protected]) is a managing partner in the Czech law firm Baroch Sobota. He has practiced construction law for 20 years.

Ecuador Contributor: Clement P. Harrington Clement Harrington ([email protected]) is a Civil Engineer with more than 40 years experience in management of infrastructure projects in the developing world (Latin America, Africa and Asia), specializing in contract management, dispute avoidance and resolution. He is currently an independent professional in the ADR field. Contributor: Juan Carlos Mejia Juan Carlos Mejia ([email protected]) graduated as abogado from the Catholic University of Ecuador, holds a doctorate in law from Universidad Andina Simon Bolivar. He has been associated for many years with the Arbitration and Mediation Centre of the Quito Chamber of Commerce both as director and president of this institution, and currently acts as an arbitrator in the Chamber. He recently formed part of the independent review commission that was tasked with evaluation of the National Court judges.

England and Wales Contributor: Tony Marshall Tony Marshall ([email protected]) is a former partner and now senior counsel who has practised contentious and non-contentious construction and engineering law at Hogan Lovells for nearly 40 years. A past chair of the International Construction Projects Committee of the International Bar Association and “widely recognized as an expert in a range of construction-related matters” (Chambers Global 100), he helps clients to handle issues arising during projects and to avoid and resolve claims and disputes. Contributor: Mark Crossley Mark Crossley ([email protected]) is a counsel knowledge lawyer at Hogan Lovells. He updates clients and his internal team on recent construction and engineering law and industry developments, including the latest cases, contract drafting changes, new legislation, and how best to manage projects and to avoid and resolve claims and disputes.

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Contributor: Richard Bailey Richard Bailey ([email protected]) is a partner specialising in construction and engineering at Goodman Derrick LLP, where he leads the construction group. He advises UK and international clients on non-contentious and contentious construction matters and has been chair of the UK Society of Construction Law and the European Society of Construction Law. Contributor: John Wright John Wright ([email protected]) is an arbitrator, adjudicator, mediator and dispute board member of John Wright ADR Ltd who currently sits on panels worldwide. A member of the International Chambers for Arbitrators, Mediators, Adjudicators and Dispute Board Members, and on the FIDIC President’s List of Approved Dispute Adjudicators, he has chaired the International Construction Projects Committee of the International Bar Association. Contributor: Keith Kirkwood Keith Kirkwood ([email protected]) is a consultant at Bennington Green Ltd and a well-respected figure with over 40 years’ experience in the building and civil engineering industries. He is a Fellow of the Royal Institution of Chartered Surveyors, the Chartered Institute of Arbitrators and the Chartered Institute of Civil Engineering Surveyors, and a past chair of the UK Society of Construction Law.

France Contributor: Christopher Lapp Christophe Lapp is a founding partner of the Paris based International law firm Altana. He is an experienced arbitrator, practicing also mediation and DAB, and a lecturer at Paris II University (Panthéon Assas). Referenced as a leading individual in several areas of expertise (Arbitration & Mediation, Construction, Litigation, Public Law), he has an extensive experience notably in multi-jurisdictional litigations, complex technical dispute resolution, contract management. He is invested in several law and construction organizations: Fellow of International Academy of Construction Lawyers, Member of FNTP [French National Federation of Public Works], ASA [Swiss Arbitration Association], Association Henri Capitant… Contributor: Lucille Montaur Lucille Montaut is a senior associate in Altana having an international cursus. She got specialised in dispute resolution, mediation and arbitration, and she has an experienced practice of public law, draft of construction contracts, of multi-jurisdictional litigations and of infrastructure and construction areas.

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Contributor: François Muller François Muller is a partner of Altana, he is ranked in Construction law and Public law, his main practices are dispute resolution, mediation and arbitration, as well as business litigation and public procurement. He is an active member of AFA (French Arbitration Association) and DRBF (Dispute Resolution Board Foundation), and a lecturer in International Construction Contracts PhD at Paris II University (Panthéon-Assas).

Germany Contributor: Claus H Lenz Claus H. Lenz, FCIArb, ([email protected]) is the owner of the law firm LDR Lenz Dispute Resolution in Hamburg, Germany. His long lasting expertise in the field of construction and engineering projects includes negotiation of contracts and paricipation in any kind of dispute settlement or dispute avoidance proceedings, as counsel but more often as mediator, Dispute Board member or as arbitrator. Claus served as a Co-Chair of the International Construction Projects (ICP) Committee of the International Bar Association (IBA). He is regularly listed as a leading construction lawyer and is ranked as the “most highly regarded” construction lawyer in Germany in Who’s Who Legal 2020. Contributor: Dr Stefan Osing Dr. Stefan Osing became partner of Heuking Kühn Lüer Wojtek in 2001. Dr. Stefan Osing is a recognized specialist in construction law (Fachanwalt für Bau- und Architektenrecht) and ranked as Thought Leader in Who’s Who legal 2020 Dr. Stefan Osing is head of the real estate- and construction law department and ythe litigation department in Heuking Kühn Lüer Wojtek’s Dusseldorf office. He and advises German and international clients in relation to energy- and infrastructure projects as well as large buildings such as cinemas, shopping centers or hotels. He acts as counsel and arbitrator in international arbitration proceedings as well as in litigation. Dr. Stefan Osing is a frequent speaker on issues of international construction and arbitration matters at international events and conferences. He regularly publishes on construction issues and is a member of the International Bar Association.

Hong Kong Contributor: Glenn Haley Glenn Haley is a Partner in the International Arbitration and Construction Disputes team at Bryan Cave Leighton Paisner LLP in Hong Kong. Glenn Haley has 35 years’ experience in all aspects of major projects, infrastructure and the construction and engi-

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neering sectors, in both contentious and non-contentious matters. He also has represented government and semi-government bodies in the implementation of numerous large-scale infrastructure developments, including airports, rail projects, bridges, roads, tunnels, power generation projects and commercial structures. Glenn has lived and worked in Hong Kong for the past 30 years, handling matters throughout the Asia Pacific region. The author gratefully acknowledges the assistance and contribution of Carolina Carlstedt (Registered Foreign Lawyer), Sharon Chan Hiu Lam (Associate) and Barry Wong Hon Ting (Associate) in the International Arbitration and Construction Disputes team at Bryan Cave Leighton Paisner LLP in Hong Kong.

India Contributor: Jayesh H Jayesh H ([email protected]), co-founder of Juris Corp, has been recognised for his extensive experience in EPC and diverse corporate transactions including private equity transactions, M&As, leveraged buy-outs, acquisition financings, joint ventures & takeovers. He has made a name for himself in handling complex disputes & enforcement actions. He advises clients in arbitrations governed by various substantive laws. His expertise, in-depth knowledge and a holistic approach helps in identifying the core issues in disputes and aids in strategizing the litigation. He is the member of Key Advisory Groups set up by Indian Ministry of Finance and contributed to drafting of legal framework on Financial Resolution and allied areas, including ironing out the Bilateral Netting of Financial Contracts Act, 2020. Jayesh is is the first Indian to be inducted from India to the Panel of Recognised International Market Experts in Finance (“P.R.I.M.E. Finance”), which is a panel of over 200 elite financial, legal and dispute resolution experts. Jayesh is a member of Mensa. Contributor: Chaitra Srinivas Chaitra Srinivas ([email protected]), senior associate at Juris Corp, is enrolled with the Karnataka State Bar Association. Chaitra has more than 5 years of experience in the field of litigation, construction arbitration and insolvency matters. She practices before the courts and tribunals in Bengaluru and Mumbai.

Italy Contributor: Marco Padovan Marco Padovan was born in Venice in 1958. After admittance to the Bar in 1983, he started practising law with a major American law firm and then joined the Legal De-

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partment of the European Investment Bank (EIB) in Luxembourg. From 1993 until 1995 he represented the EIB in the Board of Directors of the European Bank for Reconstruction and Development (EBRD) in London. From 1995 until 2000 he was Chief Counsel at the EIB first dealing with Italy and then with the 150 non-European countries where EIB is active. In 2000 he came back to Italy to lead the Project Finance Practice Group of a major American law firm. From September 2001 until December 2002 he was a partner of a leading Italian Law Firm. In December 2002 he founded his own Law Firm, “Studio Legale Padovan”. He is a member of the Milan Bar. He concentrates on project finance, financial and securities matters, construction law, private equity, energy and oil law, international trade and finance law. He lectures on Construction Law at the Master School “Fratelli Pesenti” of Politecnico di Milano. He regularly teaches law for various training centres.

Japan Contributor: Dr. Prof. Naoki Kanayama Naoki Kanayama ([email protected]), BA at Knox College (cum laude) and DEA de droit privé de Paris I, is a Professor Emeritus at Keio University Law School and an independent arbitrator. Contributor: Dr. Prof. Takashi Ogura Takashi Ogura ([email protected]), LL.B at The University of Tokyo, MCL at George Washington University, Ph. D. at Kobe University, is a Professor at Doshisha University Faculty of Law after 36 years of experience in Taisei Corporation, a Tokyo based construction contractor. He is qualified as an attorney at law (New York) and has served as the representative of Japan at the Dispute Resolution Board Foundation (DRBF) from 2019. Contributor: Naoki Iguchi Naoki Iguchi ([email protected]) is a partner at Nagashima Ohno & Tsunematsu. He studied law at the University of Tokyo (LL.B,LL.M.) and Stanford Law School (LL.M.). He has served as the representative of Japan at the Dispute Resolution Board Foundation (DRBF), Director of the International Academy of Construction Lawyers (IACL) and Co-Chair of the International Construction Project Committee of the Inter-Pacific Bar Association (IPBA). Contributor: Kaori Sugimoto Kaori Sugimoto ([email protected]), LL.B and LL.M at the Hitotsubashi University and LL.M at University of Pennsylvania Law School, is a counsel in the international construction/infrastructure projects and arbitration team at Nagashima Ohno & Tsunematsu.

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Latvia Contributor: Ivars Pommers Ivars Pommers is the partner leading the Real Estate practice of Ellex in Latvia. Ivars has a wealth of experience in all aspects of real estate, construction and environment law. For more than 15 years, Ivars has been consulting foreign investors and Latvian companies in significant business areas. Ivars has also led complex acquisition and restructuring transactions. He is a member of the Legal Committee of the Latvian Chamber of Commerce and Industry, and also as an advisor is an associate member of the National Alliance of Real Estate developers. Contributor: Ineta Kaņepe Ineta Kaņepe is a real estate associate at Ellex in Latvia and has over 25 years of professional experience, working as an in-house lawyer for various companies operating in a wide range of industries, including real estate development. During her professional career, Ineta has provided legal assistance in a variety of legal matters, including contract law, employment law, commercial law, public procurement law, etc.

Lithuania Contributor: Dr. Evaldas Klimas Evaldas Klimas ([email protected]) is a Partner at the law firm WALLESS in Lithuania (www.walless.com). He has practised construction law since 2005 and after successful completion of a PhD on construction law at Vilnius University (Lithuania), gives Real Estate and Construction Law lectures at Mykolas Romeris University (Lithuania).

Mexico Contributor: Daniel Antonio del Río Loaiza Partner of Basham Ringe y Correa, S.C. in Mexico in real estate, corporate law and mergers and acquisitions, environmental law compliance, banking, cross-border investments, health, foreign investment and international contracts. Leading lawyer in multiple national and international corporate transactions. Board member and assistant secretary-treasurer of the Legal Practice Division of the International Bar Association (IBA). Contributor: Jesus Manuel Colunga Victoria Partner of Basham Ringe y Correa, S.C. in Mexico in real estate, hospitality, corporate and mergers & acquisitions. Member of the board of World Services Group. Participa-

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tion in the planning and implementation of local and international corporate transactions. Solid experience in local and cross-border hospitality structures and transactions, including management and franchise agreements. Contributor: Mónica Paulina Mora Ávila Associate of Basham, Ringe y Correa, S.C. in the real estate, corporate and M&A areas of the firm in the Mexico City Offices. Focuses her practice in Corporate, Contractual, M&A, Foreign Investment and Real Estate areas, in national and transnational operations.

New Zealand Contributor: Sarah Sinclair Sarah Sinclair is a senior partner and Chair of the Board at MinterEllisonRuddWatts, New Zealand. Sarah is a highly-regarded construction and infrastructure specialist. She has extensive experience acting for both Government and private sector clients in large-scale, complex infrastructure projects. Sarah has been on the Board of Infrastructure New Zealand since 2012 and is an officer of the International Construction Projects Committee of the International Bar Association. She was recently appointed to the inaugural board for New Zealand Infrastructure Commission, Te Waihanga.

Nigeria Contributor: Ugonna Ogbuagu Ugonna Ogbuagu ([email protected]) is a senior associate in ǼLEX’s Dispute Resolution, Corporate/Commercial and Infrastructure Groups. He has dispute resolution and transactional experience in general commercial matters as well as construction projects. He is routinely involved in the negotiation, mediation, litigation and arbitration of general commercial disputes as well as construction disputes. Ugonna also advises clients in the implementation and management of various infrastructure projects. He has led full and red-flag due diligence reviews in M&A transactions involving real estate assets, and advises clients on commercial and real estate matters. Contributor: Adefoworola Tope Tokan-Lawal Adefoworola was an associate in ǼLEX’s Dispute Resolution, Corporate/Commercial and Infrastructure Practice Groups. While she was with the Firm, she regularly advised various clients on various commercial transactions and infrastructure projects. Also, she regularly represented clients in mediation, arbitration and litigation proceedings arising from commercial disputes and infrastructure projects.

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Norway Contributor: Geir Frøholm Geir is since 2016 partner in SANDS and co-head of the constructions law department after almost 20 years as partner in Schjødt and general counsel by Skanska Norge. His expertise; construction law, infrastructure, PPP (Private Public Partnerships) and planning and building law. He represents international and domestic contractors, investors and advisors and also Accredited mediator by CEDR and Certified mediator by The Norwegian Bar Association.

Peru Contributor: Jaime Gray Jaime Gray ([email protected]) is founding partner of NPG Abogados, he was the first president of the Peruvian Society of Construction Law and was co-chair of the International Construction Projects Committee of the IBA. He is also a Fellow of the International Academy of Construction Lawyers, Peruvian Representative of the Dispute Resolution Board Foundations (DRBF) and member of the FIDIC Capacity Building Committee. Jaime has been recommended as an expert in construction law and infrastructure by Who’s Who Legal, The Legal 500 and Chambers & Partners. Jaime is professor of the Postgraduate Programme of Construction Law at UPC and Universidad del Pacífico. Contributor: Jonnathan Bravo Jonnathan Bravo ([email protected]) – FCIArb, FAMINZ, FMIArb, is Of-Counsel of NPG Abogados, holds an LLB from Pontificia Universidad Católica del Perú, a Postgraduate Diploma in International Arbitration and an Investment from Universidad del Pacífico and MSc in Construction Law and Dispute Resolution from King’s College London as a Chevening Scholar awarded by the UK Government. He is professor of the Postgraduate Programme of Construction Law and the Master’s Degree in Construction Management at UPC and professor of Construction Law and Infrastructure at the Pontificia Universidad Católica del Perú School of Law. Contributor: Guillermo Alarcón Guillermo Alarcón ([email protected]) is Senior Associate of NPG Abogados, holds an LLB from PUCP, a Masters in Construction Law from The University of Melbourne, a Postgraduate Diploma in International Arbitration and Investment from Universidad del Pacífico and a Postgraduate Diploma in Business Administration from the same university. He is a member of the Peruvian Society of Construction Law and has extensive experience advising contractors, clients and public entities in a number of infrastructure projects.

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Poland Contributor: Mirella Lechna Mirella Lechna-Marchewka, L.L.M is an attorney-at-law and partner at Wardyński & Partners. She advises on public procurement law, infrastructure and transport projects, PPP transactions, and environmental matters. She participates in major infrastructure projects involving national and local authorities. She is experienced in preparing and implementing projects based on FIDIC contract conditions. She graduated at the University of Nottingham (UK) with a degree of Masters of Laws in the Public Procurement Law and Policy. She is a member of Inter-Pacific Bar Association and founding member of the Public Procurement Law Association. Contributor: Hanna Drynkorn Hanna Drynkorn, PhD is an attorney-at-law at Wardyński & Partners. She advises at various stages of the real estate development process, particularly on implementation of infrastructure projects based on FIDIC contract conditions. She provides legal support in proceedings for award of public contracts, as well as PPP projects. She also completed a course of study on American law offered in conjunction with the Chicago–Kent College of Law, and postgraduate studies on FIDIC contracts at the Wrocław University of Technology. She is a member of Polish Association of Consulting Engineers and Appraisers (SIDiR) – SIDiR exclusive representative of the European Federation of Engineering Consultancy Association (EFCA) in Poland.

Portugal Contributor: Margarida Olazabal Cabral Margarida Olazabal Cabral is a partner at Morais Leitão Galvão Teles, Soares da Silva & Associados, SP, RL and concentrates her activity on several areas of administrative law, mainly in areas related with public contracts. Margarida has experience with pre-contractual matters (public tenders), as well as with the execution of public contracts on behalf of public entities and private companies. In recent years a major part of her activity has also been dedicated to public private partnerships. Contributor: Catarina Brito Ferreira Catarina Brito Ferreira is a partner at Morais Leitão, Galvão Teles, Soares da Silva & Associados, SP, RL acting mostly in the areas of corporate and commercial law. Catarina has acted as legal advisor in several mergers, acquisitions and disposals of companies, including among others, the acquisition and disposal of companies with head offices in Portugal and outside Portugal, on behalf of domestic and foreign clients in various sectors, with particular emphasis on energy and infrastructures. Most of her work has in fact been developed in the energy law area, having provided legal advice

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not only in the context of M&A transactions, but also in public tender bids and specializing in energy law regulation. Contributor: Mara Rupia Lopes Mara Rupia Lopes, associate at Morais Leitão, Galvão Teles, Soares da Silva & Associados, SP, RL member of the administrative and public law team. Mara focusses her activiy on the regular assistance to clients in the most diverse areas of administrative law, public procurement, concessions, public works and Public-Private Partnerships. Contributor: Lourenço Limão Oliveira Lourenço Limão Oliveira, associate at Morais Leitão, Galvão Teles, Soares da Silva & Associados, SP, RL member of the corporate and M&A team, also focusing on energy and infrastructure projects.

Russia Contributor: Artashes Oganov Artashes Oganov is a partner and Head of the Real Estate & Construction Practice of CMS Russia. Artashes has extensive experience of working on a broad spectrum of real estate projects. He has advised clients on both domestic and cross-border M&A transactions involving commercial and residential property, joint ventures in the real estate sector, secured financing for construction and acquisition of properties, commercial and industrial construction projects. Artashes’ expertise also covers complex lease projects, including the lease of “future” real estate, “build-to-suit” lease arrangements and sale-leaseback projects. Artashes has taken part as the lead lawyer in numerous full and limited due diligence reviews and regularly advises clients on general corporate, commercial and land law issues. Contributor: Dmitry Bogdanov Dmitry Bogdanov is a senior associate of the Real Estate & Construction Practice of CMS Russia. His practice focuses on real estate, construction, contract and corporate law. Dmitry assists clients in drafting and negotiating agreements, including office and land plot leases, sale and purchase agreements and construction contracts and has taken part as the lead lawyer in numerous full and limited due diligence reviews. Dmitry also provides comprehensive day to day legal support to clients in connection with construction of industrial property and setting up production activities in Russia. He regularly advises foreign investors in the areas of EPC projects, Greenfield and Brownfield development projects in various regions of Russia.

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Contributor: Ophelia Amirova Ophelia Amirova is a junior associate of the Real Estate & Construction Practice of CMS Russia. Ophelia specialises in advising clients on real estate, construction and corporate law issues. Ophelia has been involved in performing due diligence, preparing and negotiating commercial real estate transactions (M&A deals, lease, mortgage), negotiating of the establishment, management and liquidation of joint ventures.

Saudi Arabia Contributor: Thomas Wilson Thomas Wilson is a partner at Squire Patton Boggs. He is the head of the Firm’s construction and arbitration practices in the Middle East. Thomas represents public and private owners, international contractors, and original equipment manufacturers in resolving disputes over the construction and operation of infrastructure assets. Tom has considerable experience resolving disputes through arbitration and alternative dispute resolution and serves as advocate in arbitration proceedings of all types, and in the DIFC Courts. Contributor: Dara Sahab Dara Sahab is an associate at Squire Patton Boggs working in the Firm’s construction and arbitration practices. Dara is a Saudi lawyer.

Scotland Contributor: Shona Frame LLB(Hons); DipLP; NP; FCIArb; HonFRIAS Shona is a Partner in the Infrastructure Construction and Energy Disputes team at CMS Cameron McKenna Nabarro Olswang LLP and specialises in construction and infrastructure dispute resolution. She has dual accreditation by the Law Society of Scotland as a specialist in Construction Law and in Arbitration Law. She is regularly involved in providing strategic advice on the management and resolution of complex construction and infrastructure disputes. Shona’s sector experience includes infrastructure (roads, bridges, airports, interconnectors); PFI projects (schools, hospitals, waste, sewage treatment, water treatment, waste to energy); marine (coastal defences, harbour); commercial developments (shopping centres, offices, hotels, retail, conference centres, housing, leisure centres); education (university and college campus developments, research facilities) and utilities.

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Singapore Contributor: Ho Chien Mien Ho Chien Mien ([email protected]) is Co-Head of the Construction & Engineering Practice at Allen & Gledhill LLP, a full-service commercial law firm in Singapore. With over 20 years of experience practising construction law, Chien Mien has worked on both contentious and non-contentious cases involving some of the largest building and infrastructure projects in Singapore and the Asia Pacific Region. Chien Mien is also consistently recommended as a key practitioner for his work in Construction, Projects and Energy by several leading publications. Clients interviewed by those publications have praised him for his high intellect, adaptability, and ability to “provide alternative solutions which are not immediately apparent”. Chien Mien sits on the main panel of arbitrators for the Singapore International Arbitration Centre and the Asian International Arbitration Centre. He is also an accredited Senior Adjudicator with the Singapore Mediation Centre, and a Fellow of the Singapore Institute of Arbitrators. In 2018, he was among the inaugural batch of select practitioners to be recognised as a Senior Accredited Specialist in Building and Construction Law by the Singapore Academy of Law.

South Africa Contributor: Anton van Langelaar Anton van Langelaar PrEng PMP FAArb(SA) is a dispute avoidance and resolution practitioner. In addition to being a professional engineer and project manager, he is an accredited adjudicator, mediator and arbitrator, and a dispute board and contracts specialist. His formal education includes engineering, project management, mediation, adjudication, arbitration and financial management qualifications. Contributor: Patrick Lane Patrick MM Lane SC BA LLB (Wits) specializes in construction law, including all aspects of construction claims and contracts for both employers and contractors. He is senior counsel of the High Court of South Africa, admitted in England and Wales, and a member of 39 Essex Street, London and the Maisels Group, South Africa. Contributor: Barend Smit Barend HJ Smit Pr LArch ([email protected]) is a technical director in the global engineering, management and specialist technical services consultancy company Aurecon. He has practised in the environmental management field as a landscape architect for 27 years, primarily in Africa and the Middle East, and has been a director since 2008.

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Contributor: Vino Naicker Vino Naicker PMP ([email protected]) is an associate at consulting company Mott MacDonald. He has been involved with project management and construction management for 20 years. Contributor: Shaun Chamberlain Shaun Chamberlain BSc ([email protected]) is a civil engineer with 12 years of experience in the construction industry. He is a section manager in the multidisciplinary engineering consulting firm SMEC in South Africa. Contributor: Nonhle Dlamini Nonhle Dlamini PrTechEng PrCPM PMP AAArb MSc(Eng) is a senior civil and structural engineering technologist and project manager with 13 years of experience in the construction industry. Her formal education includes engineering and project management. In addition to this, she has a keen interest in Alternative Dispute Resolution matters.

South Korea Contributor: Byung-Woo Im Byung-Woo Im is a partner of Kim & Chang’s International Arbitration & Cross-Border Litigation Practice, International Practice, Aerospace & Defense Practice and International Trade & Customs Practice. Mr. Im has extensive experience representing foreign and domestic clients in numerous international commercial arbitration cases, including cases conducted under the rules of the ICC, SIAC, HKIAC, LCIA and KCAB. Mr. Im also advises clients on both contentious and non-contentious matters in all stages of overseas and domestic infrastructure and construction projects. He has participated in negotiations and drafted project documents, including concession agreements and construction contracts in large infrastructure or construction projects in various jurisdictions including South Korea, UAE, Saudi Arabia, Qatar, Thailand and Vietnam. Contributor: Kay-Jannes Wegner Kay-Jannes Wegner is a partner of Kim & Chang’s International Arbitration & CrossBorder Litigation Practice and Construction & Engineering Disputes Practice, and is leading Kim & Chang’s European Arbitration Desk. Mr. Wegner represents clients in international arbitration disputes arising out of wide ranging subject matters including construction, power projects, telecommunications, pharmaceuticals, and joint ventures and has experience sitting as arbitrator in international disputes.

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Mr. Wegner is German and English qualified. In March 2017, he was awarded a Commendation by the Minister of Justice of the Republic of Korea in recognition of his service to the promotion of the arbitration industry in Korea.

Spain Contributor: Alfonso Iglesia, Cuatrecasas Alfonso Iglesia is a partner in Cuatrecasas and head of the Litigation & Arbitration Group. He has extensive experience as a lead lawyer in Spanish and international arbitration and court proceedings, specialising in construction and engineering law and in civil liability. In the area of construction and engineering law, he has represented Spanish and foreign companies in national and international projects, advising them on all aspects from the contract negotiation phase to defending them before the courts of justice or in arbitration, including negotiation procedures, mediation, expert determination and disputes boards. Contributor: Alberto Fortún, Cuatrecasas Alberto Fortún is a partner in Cuatrecasas. He specialises in international arbitration and alternative dispute resolution. He advises Spanish and foreign companies involved in international arbitrations related to international energy and construction projects. He has also represented private investors against public authorities, particularly in Africa and Latin America. He has participated in more than 100 arbitrations and ADR’s (including expert determination and dispute boards). Contributor: Ricardo Echevarría, Cuatrecasas Ricardo Echevarría is a partner in Cuatrecasas. He has extensive experience in public and private works contracts. In the real estate sector, he has participated in several sales and purchases of shopping centers, office buildings, industrial sites and hotel complexes. He has also participated in different judicial and arbitration proceedings related to his field of specialty. Contributor: Carlos Gallego, Cuatrecasas Carlos Gallego is a partner in Cuatrecasas. He has extensive experience in litigation on non-contractual liability of public entities and procurement with various public sector entities. He also has extensive experience in port concessions, advising large concessionaires on container terminal spaces and for ro-ro traffic in major ports of general interest. Contributor: Gonzalo Jiménez de Andrade Astorqui, Cuatrecasas Gonzalo Jiménez de Andrade Astorqui is a partner in Cuatrecasas. He has extensive experience in disputes concerning the procurement of public and private works, as

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well as in conflicts arising in the field of construction and infrastructure. He also has experience in matters relating to administrative concessions, public property (ports, waters, roads, etc.), forced expropriations and patrimonial responsibility of public administrations, also participating in disputes arising from the law of obligations and contracts. Contributor: Miguel Angel Malo, Cuatrecasas Miguel Angel Malo is a counselor at Cuatrecasas. He specialises in the law of civil, contractual and non-contractual liability, with special dedication to engineering and construction law. He is an expert in Comparative Contract Law, Lex Merchandise and Uniform Law.He has represented private entities in both state courts and national and international arbitration courts.

Sri Lanka Contributor: Asanga Gunawansa Dr. Asanga Gunawansa holds a Ph.D. in law from the National University of Singapore and an LL.M in International Economic Law from University of Warwick, England. He is an Attorney-at-Law of the Supreme Court of Sri Lanka, with over 26 years of experience as a lawyer. He is currently heading the Colombo law Alliance, a Law Chamber which specializes in legal aspects of Project Financing, Public Private Partnerships, Public procurement Law, Construction Law, Environmental Law and Arbitration. He is an Adjunct Associate Professor of the University of Moratuwa. Dr. Gunawansa has published several books including the Case Book Series on Asia Pacific Construction Law and a Book on Infrastructure Development in the Water Sector. Contributor: Ananda Ranasinghe Dr Ananda Ranasinghe holds a degree in Engineering. He also acquired Masters Degrees in Construction Management, Structural Engineering and Law from University of Colombo & University of Wales. He was a Visiting Lecturer at University of Peradeniya and University of Moratuwa. He is also an Attorney-at-Law. For his PhD, he specialized in the application of Arbitration in the construction industry. He is a Fellow member of the Institution of Engineers (Sri Lanka), Institution of Civil Engineers (UK) and Institution of Structural Engineers (UK) and a Past President of Institution of Engineers (Sri Lanka). Contributor: Raj Selvaskandan Mr. Rajaratnam Selvaskandan is an Attorney-at-Law of the Supreme Court of Sri Lanka, and counts over 37 years of experience in numerous jurisdictions, including Hong Kong and the United Kingdom.

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Mr. Selvaskandan soon after qualifying joined the Attorney General’s Department as a State Counsel in October 1983. After immigrating to Hong Kong he joined and became a Partner at Philip K.H. Wong & Co. (presently known as Philip K.H. Wong, Kennedy Y.H. Wong & Co), a Law Firm in Hong Kong. In 2004, returning to Sri Lanka, he helped restructure Varners as a corporate oriented full service law firm and currently serves as a Senior Partner at the Firm. he has been involved with providing legal services and project management services to many a large scale development and constructions projects in Sri Lanka. Contributor: Mohan Kumaraswamy Professor Mohan Kumaraswamy obtained his B.Eng.(Civil) from Sri Lanka, while his M.Sc., Ph.D. and D.Sc. are from UK. Having been at The University of Hong Kong for 21 years, he is now an Honorary Professor there and at the University of Moratuwa, Sri Lanka. He has been a Visiting Professor at National University of Singapore, Curtin University, Australia and IIT Madras. Previously, he worked on designs, construction, and Project Management; and has conducted consultancies for the World Bank etc. He is active in professional institutions, industry development bodies, international research bodies and journal editorial boards, including as Editor-in-Chief of a journal and a book series; publishes widely and practices as an Adjudicator and Arbitrator.

Sweden Contributor: Hans Dahlberg Kolga Hans Dahlberg Kolga ([email protected]) is a partner and head of the Construction Contracts group at Setterwalls Law Firm in Stockholm, Sweden. Hans has been involved in many construction projects and construction disputes in Sweden and elsewhere. He also lectures on construction law and is an established arbitrator. Contributors: Elin Bergman Elin Bergman ([email protected]) is an associate in the Construction Contract group. In short time, Elin has gained considerable experience and in depth knowledge of Swedish construction contracts. She has also become a very much sought after name by Setterwalls’ clients due to her effective and straight forward approach to all parts of the matters.

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Republic of China (Taiwan) Contributor: Sean Yu-Shao Liu Sean Liu is a partner at Lee, Tsai & Partners, Attorneys-at-Law. Sean is an experienced litigator working on a wide variety of legal issues and specializing in construction, antitrust, unfair competition and commercial disputes. Sean is activley involved in public discussion of legal policy, notably laws and regulations involving fintech and start-up fundraising and has been a member of the Taiwan FinTech Association. Contributor: Luke Hung Luke Hung is an associate partner at Lee, Tsai & Partners, Attorneys-at-Law. Luke is a Taiwan attorney who has assisted in several infrastructure, Mass Rapid Transit, public and private projects and construction disputes in Taiwan. He specilizes in intellectual property law, government procurement law and construction law. Contributor: Ankwei Chen Ankwei Chen is an associate partner at Lee, Tsai & Partners, Attorneys-at-Law. Ankwei is a US attorney who has assisted in several transnational commecial arbitration matters before the ICC as well as commercial litigation in US federal courts. He specializes in intellectual property law and technology law.

Turkey Contributor: Yasemin Cetinel Yasemin Cetinel is the founding partner of Cetinel Law Firm, in Istanbul. Yasemin is a graduate of Galatasaray University, Faculty of Law and she holds a post-graduate diploma on International Commercial Arbitration from University of London Queen Mary and Westfield College. She is registered before the Istanbul Bar Association. Her area of practice covers mainly international commercial and investment arbitration as well as public procurement matters and international construction law. Yasemin is a member of International Bar Association, London Court of International Arbitration, Stockholm Chamber of Commerce, International Chamber of Commerce, ArbitralWomen, British-Turkish Businessmen Association and International Public Private Partnership Association. Contributor: Muhammet Bembeyaz Muhammet Bembeyaz is a graduate of Istanbul University Faculty of Law. He is a licensed attorney at law registered to Istanbul Bar Association and an associate of Cetinel Law Firm since 2016. He takes part in international arbitration, investment arbitration and dispute adjudication board procedures and focuses on international construction projects on as-

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Author Profiles

pects of contract management and pre-contract risk analysis. Muhammet is a member of CiArb, ICC YAF, Young ICCA and London Court of International Arbitration Young International Arbitration Group (LCIA YIAG). Muhammet is a native Turkish speaker and he has full professional proficiency in English. Contributor: AYŞE Selcen Özcan Selcen Özcan is a licensed attorney at law registered to Istanbul Bar Association and an associate of Cetinel Law Firm since 2016. Selcen has graduated from Ankara University Faculty of Law in 2013 and completed her LL.M. degree in European Law from Leiden University, the Netherlands in 2014 as a Jean Monnet Scholar of 2013–2014. She has another LL.M. degree in public international law from Galatasaray University as of 2019. Her fields of work include international commercial arbitration, international investment arbitration and dispute adjudication board procedures, aspects of negotiation and management of construction contracts in various construction projects as well as pre-contract risk analysis. She is admitted to Istanbul Bar Association and is a CIArb Associate and a member of DRBF, ArbitralWomen, ICC YAF, Young ICCA, LCIA YIAG, and Young ISTAC. Selcen is a native Turkish speaker. She has full professional proficiency in English and limited proficiency in German.

United Arab Emirates Contributor: Thomas Wilson Thomas Wilson is a partner at Squire Patton Boggs. He is the head of the Firm’s construction and arbitration practices in the Middle East. Thomas represents public and private owners, international contractors, and original equipment manufacturers in resolving disputes over the construction and operation of infrastructure assets. Tom has considerable experience resolving disputes through arbitration and alternative dispute resolution and serves as advocate in arbitration proceedings of all types, and in the DIFC Courts. Contributor: Dara Sahab Dara Sahab is an associate at Squire Patton Boggs working in the Firm’s construction and arbitration practices. Dara is a Saudi lawyer.

United States of America Contributor: Donald G Gavin Donald G Gavin ([email protected]) is an Arbitrator and Mediator at Gavin ADR, LLC in McLean, Virginia USA and has an LL.M., J.D. and BS Econ, and has been

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selected as a Fellow of the Int. Acad. of Const. Lawyers; Am. College of Const Lawyers; Am. Bar Foundation; and Sect. of Public Cont. Law of the ABA; and he is a Past National Chair of Sec. of Pub. Cont. Law of the ABA. Contributor: Wendy Kennedy Venoit Wendy Kennedy Venoit ([email protected]) is a partner in the Construction & Public Contracts Group at Hinckley Allen & Snyder LLP in Boston, MA; holds J.D. and BS Econ/Spanish degrees; is qualified to practice law in NY, NJ, MA, NH and CT; is a Fellow of the American College of Construction Lawyers; and is a former Chair of the American Bar Association Forum on Construction Law. Wendy serves as both an advocate and arbitrator in US-based and international construction disputes involving power, oil & gas, alternative energy, and vertical construction projects. Contributor: Alison Ashford Alison Ashford ([email protected]) is a partner at Seyfarth Shaw LLP and is CoChair of the Construction Practice. Alison has practiced in the Asia Pacific and North American regions. Contributor: Troy L Harris Troy L Harris ([email protected]) is Principal of Harris Arbitration, based in Detroit, Michigan USA. He holds a B.A., M.A., J.D., and Ph.D. and is admitted to practice in Michigan (USA) and Ontario (Canada). He is co-author of International Construction Arbitration Handbook (Thomson West 2020), now in its 13th edition. Contributor: Lawrence M Prosen Lawrence M. Prosen is a partner in the Engineering and Infrastructure team at Kilpatrick Townsend & Stockton LLP, residing in its Washington, D.C. and New York City offices. He also leads the firm’s Government Contracts group. Holding a degree in Architecture, Larry has extensive experience in constriction litigation. He is also a member of the American Arbitration Association’s panel of neutrals and has been an advocate in many arbitrations and mediations. Larry practices extensively in all aspects of government contracts, including claims, appeals, bid protests and regulatory compliance.

Ricardo E. Barreiro-Deymonnaz

Argentina 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 7.

Context 2 The Country 2 The Legal System 3 The Economy 6 The Construction Industry 7 Size and Nature 7 Participants 8 Work, Health and Safety 9 Protection of the Environment 10 Quality Assurance 11 Construction Contracting Dynamics 11 Legal Underpinnings of Contracts 12 Freedom of Contract 12 Legal Framework 13 Public Policy 13 Statute Law 14 Implied Contract Terms 15 Construction of Contract Terms 15 Private and Public Procurement 16 Government Involvement 18 Legislation and Regulation 18 Codes of Practice 20 Licensing of Professionals and Contractors 20 Construction Contracts 21 Available Contracts 21 Amendment of Contracts and Bespoke Contracts Key Issues 23 Overview 23 Fit for Purpose 23 Late Completion 24 Force Majeure and Latent Conditions 27 Limitation of Liability 28 Duration of Exposure and Time Bars 29 Dispute Resolution 30

https://doi.org/10.1515/9783110712728-001

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

1.1.5.

1.1.6.

Argentina is a federal constitutional republic and representative democracy located in southeastern South America, covering most of the southern cone. It is bordered by Bolivia and Paraguay to the north; Brazil to the northeast; Uruguay and the South Atlantic Ocean to the east; Chile to the west; and the Drake Passage to the south. With a mainland area of 2,780,400 km2, Argentina is the eighth largest country in the world1; the second largest in Latin America, and the fouth largest Spanish-speaking nation by population2. Argentina is a federation of 23 provinces and one autonomous city, Buenos Aires. Provinces are divided for administration purposes into departments and municipalities, except for the Province of Buenos Aires, which is divided into partidos. The Autonomous City of Buenos Aires is divided into communes. The federal government has limited powers as set out under the Constitution of Argentina. Provinces (and the City of Buenos Aires) retain all powers not delegated to the federal government. Provinces have the same form of government adopted by the nation, and provincial laws must not contradict the Constitution. Beyond this, provinces are fully autonomous, enact their own constitutions and legislation, freely organize their local governments and own and manage their natural and financial resources. Government is regulated by a system of checks and balances defined by the Constitution, and replicated by provincial constitutions. The seat of federal government is in the City of Buenos Aires. The federal government is composed of three branches: (a) Legislative: The bicameral Congress, made up of the Senate and Deputies chambers, makes federal law, approves treaties, and has the power of the purse and of impeachment, by which it can remove sitting members of the government. The Chamber of Deputies represents the people and seats are apportioned among the provinces by population every tenth year. The Chamber of Senators represents the provinces, with each province having three seats; (b) Executive: The President is the head of state, the head of the government, and commander-in-chief of the armed forces. The President can veto legislative bills before they become law — subject to Congressional

1 https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html. 2 https://worldpopulationreview.com/country-rankings/spanish-speaking-countries.

Argentina

1.1.7.

3

override — and appoints the members of the Cabinet and other federal officers, who administer and enforce federal laws and policies. Despite possessing no formal legislative powers beyond signing or vetoing congressionally passed bills, the President is largely responsible for dictating the legislative agenda of their party and the foreign and domestic policy of Argentina; and (c) Judicial: The Supreme Court and lower federal courts interpret laws and overturn those that they find unconstitutional. The judiciary is independent of the executive and the legislature. The Supreme Court has five members appointed by the President, subject to Senate approval, who serve for life. Lower court judges are proposed by the Judicial Council and appointed by the President upon Senate approval. Provincial governments are organized following the same model implemented at federal level. However, in some provinces the legislature is not bicameral, but rather organized into a single chamber of provincial representatives.

1.2. The Legal System 1.2.1.

1.2.2. 1.2.3.

Argentina has a civil law system, based on Western-European legal systems. The system relies on statute law passed by the federal, provincial and municipal legislatures on their respective jurisdictions, which govern all aspects of private and public life. The main pillars of the Argentine legal system are the Constitution and the Civil and Commercial Code.3 Other federal legal codes in force cover the following areas: criminal4, mining5, maritime6, aeronautic7 and customs8. Statute law is complemented by regulatory law passed by the federal, provincial and municipal governments in their respective spheres of competence. The Constitution was enacted on 1 May 1853, and amended several times beginning in 1860. The latest amendment became effective on 24 August 1994 and refers, fundamentally, to the organic part of the Constitution.9

3 Código Civil y Comercial de la Nación (Ley 26.994) [Civil and Commercial Code of the Nation (Law 26,994)] (Argentina) 7 October 2014, Boletín Oficial 32,985, 2014, 1 (‘Civil and Commercial Code’). 4 http://servicios.infoleg.gob.ar/infolegInternet/anexos/15000-19999/16546/texact.htm. 5 http://servicios.infoleg.gob.ar/infolegInternet/anexos/40000-44999/43581/norma.htm. 6 http://servicios.infoleg.gob.ar/infolegInternet/anexos/40000-44999/43550/texact.htm. 7 http://servicios.infoleg.gob.ar/infolegInternet/anexos/20000-24999/24963/texact.htm. 8 http://servicios.infoleg.gob.ar/infolegInternet/anexos/15000-19999/16536/texact.htm. 9 https://www.congreso.gob.ar/nationalConstitution.php.

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1.2.4.

1.2.5.

Ricardo E. Barreiro-Deymonnaz

The original Argentine Civil Code was written by Argentine jurist Dalmacio Vélez Sársfield and became effective on 1 January 1871.10 Beyond the natural influence of the Spanish legal tradition, the Civil Code was also inspired by the Draft of the Brazilian Civil Code, the Napoleonic code and the Chilean Civil Code among others. Except for a significant amendment introduced in 1968, and other reforms that amended specific issues, much of the Civil Code remained untouched until 7 October 2014, when the Argentine president promulgated Law 26,994 passed by Congress on 1 October 2014, which abrogated the Civil and Commercial Codes then in force, and enacted a new, unified Civil and Commercial Code that became effective from 1 August 2015.11 Justice is administered by both federal and provincial courts. Federal courts deal only with cases of a federal nature (i.e., federal crime, and cases arising under the Constitution, federal laws or international treaties). Provincial courts are responsible for the enforcement of ordinary justice within the provincial territory, and for applying the Civil and Commercial Code, Criminal Code, Mining Code and Customs Code. The Federal Supreme Court exercises its appellate jurisdiction as per regulations and exceptions prescribed by Congress. It also exercises original and exclusive jurisdiction over all cases concerning ambassadors, public ministers and foreign consuls; cases related to admiralty and maritime jurisdiction; matters in which the Nation is a party; actions arising between two or more provinces, between one province and the inhabitants of another province, between the inhabitants of different provinces, and between one province or the inhabitants thereof against a foreign state or citizen. The Federal Supreme Court supervises and regulates lower federal courts. Lower federal courts include nine appellate courts, with three judges for each; single judge district courts, at least one for each province; and onejudge territorial courts. Provincial courts include high courts, appellate courts, courts of first instance, and minor courts of justice of the peace and of the market. Members of provincial courts are appointed by the Governor. Trial by jury is authorized by the Constitution for criminal cases,12 but its establishment was left to the discretion of Congress, so has not yet been implemented at a federal level. The provinces of Córdoba, Neuquén and Buenos Aires have recently implemented trial by jury for criminal cases within provincial jurisdiction.  

1.2.6.

1.2.7.

1.2.8.

10 http://servicios.infoleg.gob.ar/infolegInternet/anexos/105000-109999/109481/texactley340_ libroII_S3_tituloI.htm. 11 http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=235975. 12 https://www.congreso.gob.ar/constitucionParte1Cap1_ingles.php.

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1.2.9.

The tradition of codification and regulation has reduced the importance of case law, which is consigned to fill in legislative empty spaces or to interpret unclear aspects of the law. 1.2.10. Every case is decided on its own merit according to law. Judges may use case law, but they are not obligated to apply stare decisis on upper courts’ decisions, except for upper courts’ plenary judgements, which are mandatory for lower courts. Federal Supreme Court doctrine and case law has moral authority and often is applied by lower and upper courts to support their judgments, but has no mandatory effect except for the case onto which the decision was rendered. 1.2.11. Arbitration is admitted in Argentina, and regulated under the Civil and Commercial Code, the Civil and Commercial Procedural Code (‘NPC’),13 and the provincial procedural codes. 1.2.12. The Civil and Commercial Code includes a new chapter on arbitration. This chapter establishes the bases for the practice of arbitration in Argentina, including the definition of arbitration, the forms required for arbitration, the matters that are excluded from arbitration, the different types of arbitration, and the arbitrators’ duties. 1.2.13. The NPC is applicable in the City of Buenos Aires and to federal courts all over the country when the cases fall under their jurisdiction. The provincial codes — similar in many aspects to the NPC — apply to provincial courts. 1.2.14. The provisions of the NPC regulate, inter alia, the conduct of arbitration proceedings and the recognition and enforcement of foreign arbitration awards. The NPC does not distinguish between domestic and international arbitration, and includes provisions governing three basic types of arbitration: arbitration in law, amiable composition, and expert determination. 1.2.15. On 4 July 2018, the National Congress enacted the International Commercial Arbitration Law.14 This law is based on the UNCITRAL Model Law on International Commercial Arbitration,15 with minor changes. 1.2.16. Matters relevant to the construction industry may be dealt with by federal or provincial legislation and courts, depending on their nature.

13 Código Procesal Civil y Comercial de la Nación (Ley 17.454) [Civil and Commercial Procedural Code of the Nation (Law 17,454)] (Argentina) 20 September 1967, Boletín Oficial 21,308, 1967. 14 Ley de Arbitraje Comercial Internacional (Ley 27.449) [International Commercial Arbitration Law (Law 27,449)] (Argentina) 4 July 2018, Boletín Oficial 33,919, 2018, 16 (‘International Commercial Arbitration Law’). 15 UNCITRAL Model Law on International Commercial Arbitration, UN GAOR, 40th sess, Supp No 17, UN Doc A/40/17 (21 June 1985) annex I.

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Ricardo E. Barreiro-Deymonnaz

1.3. The Economy 1.3.1.

1.3.2.

1.3.3.

Benefiting from rich natural resources, a highly literate population, an export-oriented agricultural sector and a diversified industrial base, the economy of Argentina is Latin America’s third-largest16. It has a ‘very high’ rating on the Human Development Index17 and a relatively high GDP per capita, with a considerable internal market size and a growing share of the high-tech sector. A middle emerging economy and one of the world’s top developing nations, Argentina is a member of the G-20 major economies. Mauricio Macri, Argentina’s president between 2015 and 2019, was designated as the G-20 president for 2018. The G-20 annual meeting was be held in Buenos Aires in November 2018.18 The current president of Argentina is Alberto Fernández19. Historically, however, its economic performance has been very uneven, with high economic growth alternating with severe recessions, income maldistribution and, in recent decades, increasing poverty and social unrest. High inflation — a weakness of the Argentine economy for decades — has become an issue once again, with a rate of 51.5 % in 2019.20 The leading sectors of the Argentine economy by volume are: food processing, beverages and tobacco products; motor vehicles and auto parts; textiles and leather; refinery products and biodiesel; chemicals and pharmaceuticals; steel, aluminum and iron; industrial and farm machinery; home appliances and furniture; plastics and tires; glass and cement; and recording and print media. In addition, Argentina has long been one of the top five wine-producing countries in the world.21 The Province of Córdoba is Argentina’s major industrial center, hosting metalworking and motor vehicle and auto parts manufacturing. Next in importance are the Greater Buenos Aires area (food processing, metallurgy, motor vehicles and auto parts, chemicals and petrochemicals, consumer durables, textiles and printing); the Greater Rosario area (food processing, metallurgy, farm machinery, oil refining, chemicals, and tanning); the Province of Tucumán (sugar refining); and the Province of Santa Fe (food processing, dairy products, zinc and copper smelting, flour milling, chemicals and pharmaceuticals).22  

1.3.4.

1.3.5.

16 https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2016&locations=ZJ-CO-CL-MX-PE& most_recent_value_desc=true&start=2016&view=bar. 17 http://hdr.undp.org/en/countries/profiles/ARG. 18 https://g20.argentina.gob.ar/en. 19 https://www.britannica.com/biography/Alberto-Fernandez. 20 https://data.worldbank.org/indicator/NY.GDP.DEFL.KD.ZG?locations=AR. 21 http://www.oecd.org/economy/surveys/Argentina-2019-OECD-economic-survey-overview.pdf. 22 https://import-export.societegenerale.fr/en/country/argentina/market-distribution.

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Argentina

1.3.6.

Argentina ranks 85th out of 180 countries in Transparency International’s 2018 Corruption Perceptions Index.23

2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

According to the Economic Commission for Latin America and the Caribbean (‘CEPAL’), the Argentine construction industry registered the largest growth rate among construction industries in Latin America during the 2003–12 period, doubling its contribution to the country’s GDP.24 Considering the evolution of the industry’s aggregate value in terms of its proportionate contribution of GDP, Panama has the strongest construction industry of any Latin American nation, with an average annual growth of 18 % since 2003. Argentina follows Panama in second place, with an average annual growth of 12 %, largely exceeding the Latin American average of 7 %; Argentina’s performance is triple that of Brazil’s, and double that of Bolivia’s, Uruguay’s and Chile’s.25 The Argentine construction industry expanded significantly since 2002, from 3 % of the country’s GDP in 2002 to 5 % in 2015, showing a certain degree of dependence on the national economy.26 In 2013, the construction industry accounted for 17 % of overall goods producing activities, 15 % above the agricultural sector and 8 % below the manufacturing sector, making it one of the most dynamic and robust sectors of the Argentine economy. The construction industry supplied approximately 7 % of aggregate employment, with more than 380,000 jobs in 2014 and 449,276 in 2017.27 According to the country’s national statistical office, the Instituto Nacional de Estadística y Censos (‘INDEC’), the construction industry grew 12.7 % in 2017. INDEC differentiates the sector into the following categories: residential buildings; buildings for other purposes; oil and gas; road works; and other infrastructure.28  

 

2.1.3.

 

2.1.4.

 

 

 

 

 

 

2.1.5.

 

23 ‘Corruption Perceptions Index 2018’, Transparency International (Web Page, 2018) . 24 https://repositorio.cepal.org/bitstream/handle/11362/43964/141/S1800837_es.pdf. 25 Departamento de Estudios de Grupo Edisur. 26 Departamento de Estudios de Grupo Edisur. 27 https://www.ieric.org.ar/p2/informes-anuales-65. 28 https://www.indec.gob.ar/uploads/informesdeprensa/isac_01_18.pdf.

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The Industry Report prepared by the Statistics and Registration Institute of the Construction Industry (‘IERIC’) states that more than 1 million tonnes of cement was consumed in December 2017. In addition, consumption of cement grew 16.5 % from 2016 to 2017. The accumulated expansion from January to November 2017 was 12.5 %, being one of the highest rates of the decade.29  

 

2.2. Participants 2.2.1.

2.2.2.

According to IERIC, as of December 2017 there were 23,346 registered construction companies active in Argentina, 13,448 of which were organized as corporations (the rest being individual contractors or small partnerships).30 The main national and foreign players in the industry (i.e., companies with the largest or most significant private and public construction projects) are the following: (a) National companies: (i) TECHINT Ingeniería y Construcción; (ii) IECSA/SACDE — Grupo ODS; (iii) ESUCO; (iv) José Cartellone Construcciones Civiles; (v) ROVELLA CARRANZA; (vi) JCR; (vii) GRUPO ROGGIO; (viii) CHEDIACK; (ix) SUPERCEMENTO; (x) PETERSEN, THIELE & CRUZ; (xi) PANEDILE; (xii) COARCO; (xiii) CONTRERAS HERMANOS; (xiv) EQUIMAC; (xv) Grupo GANCEDO; (xvi) PIETROBONI; (xvii) CRZ Construcciones; (xviii) LUIS LOSI; (xix) GREEN Constructora; (xx) GUERECHET; (xxi) VICTOR CONTRERAS; (xxii) RIVA Construcciones;

29 https://www.ieric.org.ar/p2/informes-anuales-65. 30 https://www.ieric.org.ar/p2/informes-anuales-65.

 

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2.2.3.

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(xxiii) Homaq; and (xxiv) DECAVIAL. (b) Foreign companies: (i) Odebrecht; (ii) Skanska; (iii) Andrade Gutierrez; (iv) Camargo Correa; (v) Queiroz Galvao; (vi) Isolux-Corsan; (vii) OAS; (viii) OHL; (ix) DYCASA; (x) Constructora San José; and (xi) Ghella. There are no specific entry barriers for companies to operate in the Argentine construction industry. If a company complies with the general requirements established by law and regulation to do business in Argentina (i.e., rules governing the setting up of local corporations, labour, social security and tax laws, etc.), it will be free to act in the construction industry. Certain restrictions and special requirements may apply to companies willing to contract with governmental entities. Please see Sections 3.7 and 4.3 for further details.  

2.3. Work, Health and Safety 2.3.1.

2.3.2.

The Unión Obrera de la Construcción de la República Argentina (‘UOCRA’) is the strongest and leading labour union in the construction industry. Beyond representing construction workers and negotiating salaries and other compensation arrangements annually, UOCRA promotes and enforces very strict health and safety standards for construction workers. These standards are in line with international practices, and include the mandatory use of the following safety elements:31 (a) Safety helmets; (b) Safety glasses; (c) Safety shoes; (d) Gloves; (e) Harnesses; (f) Ear muffs; and (g) Breathing protection.

31 https://www.uocra.org/?s=biblioteca-SST&sub=legislacion-de-la-seguridad-e-higiene&lang=1.

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2.3.3.

2.3.4.

2.3.5.

Ricardo E. Barreiro-Deymonnaz

Additionally, UOCRA closely supervises the registration of all workers employed in the industry, and ensures that companies make all required social security payments and contributions, as provided under applicable regulations. Regarding health measures, UOCRA requires employers to provide health plans for all workers. A portion of the cost of the health plan is deducted from the workers’ salaries and supplemented by contributions from the employer. Life, accident and sickness insurance are mandatory in the industry and are strictly enforced by UOCRA.

2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

There are no specific environmental regulations applicable to the construction industry exclusively. Instead, construction, like all other industrial activities, is subject to and must comply with the general environmental protection framework. Section 41 of the Constitution provides the right of all inhabitants to enjoy an environment which is healthy, balanced, and suitable for human development. It sets forth the duty to correct and restore to its prior condition any damage caused to the environment (the ‘polluter pays’ principle). Section 41 provides that the federal government must enact laws imposing certain minimum environmental standards, while provincial governments must enact supplemental regulations as necessary. Federal laws do not alter local jurisdiction. In this regard, on 6 November 2002 the National Congress passed the General Environmental Act (‘GEA’),32 which sets out minimum standards and outlines a general policy for the protection of the environment and the implementation of sustainable development. The GEA establishes environmental principles that regulate the interpretation and implementation of environmental regulations. Moreover, most provinces have enacted their own environmental protection laws, which establish principles of provincial environmental policy. Provincial laws supplement the provisions of the GEA and should be in line with the minimum environmental standards established therein. For instance, the GEA of the Province of Buenos Aires (Law 11,723) seeks to protect, preserve, enhance and restore natural resources and the environment in the Province of Buenos Aires.33

32 Política Ambiental Nacional (Ley 25.675) [National Environmental Policy (Law 25,675)] (Argentina) 6 November 2002, Boletín Oficial 30,036, 2002, 2 (‘GEA’). 33 http://www.opds.gba.gov.ar/sites/default/files/Ley%20 %2011723.pdf.  

Argentina

2.4.4.

2.4.5.

2.4.6.

2.4.7.

11

The Ministry of Environment and Sustainable Development (‘MESD’) is the federal department competent to consider, inter alia, environmental issues involving more than one provincial jurisdiction, exports and imports of waste, international treaties, and pollution in federal jurisdiction sites. There are also other federal agencies with jurisdiction over the environmental aspects of certain specific matters, such as electricity and hydrocarbons. Provinces, in turn, have their own environmental ministries or secretariats, with authority to enforce the law. The enforcement of environmental law follows general administrative proceeding rules. Section 4 of the GEA establishes the principles governing the enforcement of environmental law, including the prevention and precautionary principles and the polluter-pays principle, among others. Government agencies rely on different means to enforce environmental law, such as environmental impact assessments (‘EIA’), control of hazardous activities, environmental information, prosecution, and punishment of violations. At the federal level, s 11 of the GEA provides that any work or activity that may negatively affect the environment is subject to an EIA procedure before it can be conducted. Each province in turn has established an EIA and environmental permit procedure. Environmental laws also establish permits for the operation of industries, discharge of waste waters, air emissions and hazardous waste management.34

2.5. Quality Assurance 2.5.1. 2.5.2.

There are no specific federal or provincial regulations concerning quality assurance in the construction industry. Industry players establish their own internal quality assurance processes and norms, which in most cases follow international standards and are compliant with quality assurance rules as set by the International Organization for Standarization and the Instituto Argentino de Normalización y Certificación [Argentine Institute for Normalization and Certification] (‘IRAM’)35.

2.6. Construction Contracting Dynamics 2.6.1.

Private construction projects are not subject, in general, to any specific form of contract. Although contracting dynamics vary a lot depending on the pro-

34 https://normativa.ambiente.gob.ar/. 35 http://www.iram.org.ar/.

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2.6.2.

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Ricardo E. Barreiro-Deymonnaz

ject’s circumstances, specific commercial issues and the characteristics of the parties, customarily owners produce the first contract draft when dealing with head contractors. The same would apply to head contractors vis-à-vis subcontractors, and equipment suppliers vis-à-vis purchasers. Regarding public construction projects, the government must, as a matter of law, set the contractual form that will be used for each project.36 These standards are established in the public bidding process. While in practice contractors usually qualify their offers to the amendment of the government-set contractual form, there is little room for negotiation. Multilateral credit institutions often select the form of contract to be used both in private and public projects.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

The liberty that parties have to negotiate and establish mutually acceptable terms and conditions, and the general principles that govern each type of contract, differ significantly between private contracts and public contracts. (a) Private contracts: (i) Freedom of choice: Parties are free to contract with whoever they choose, and to negotiate and agree on the terms and conditions that they deem fit for their contract, to the extent that such terms do not violate public policy principles. (ii) Freedom of form: Contracts are not subject to any specific form or formalities, except where specifically detailed in the Civil and Commercial Code. Verbal agreements and contracts perfected through tacitly accepted offer letters are valid and binding, to the extent the parties can prove their existence and terms. (iii) Pacta sunt servanda: Contractual clauses are law between the parties and parties must abide by contractual obligations. (iv) Good faith: Parties must deal with each other honestly and fairly. (v) No abuse of rights: Abusive exercise of rights is not admitted under the law. (vi) No disproportion: Contractual obligations must be reasonably proportionate.

36 http://servicios.infoleg.gob.ar/infolegInternet/anexos/35000-39999/38542/norma.htm.

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Public contracts: (i) Equality amongst bidders: Equality requires that all bidders are in the same situation, with the same opportunities and the same level of information, making their offers on the same basis. Bids must be as open as possible, to allow the participation of as many bidders as possible. (ii) Open Competition: All qualifying bidders are allowed to present their offer. (iii) Publicity: Public contracting must be transparent and open to public scrutiny. Bidders have the right to review and challenge the bids filed by other participants. (iv) Ius variandi: The government has the right to vary the scope of the contract if deemed convenient.

3.2. Legal Framework 3.2.1.

Please see Section 4.1.

3.3. Public Policy 3.3.1.

3.3.2.

3.3.3.

Public policy principles are mandatory and cannot be amended or waived by the parties. Contractual amendments or waivers are deemed null and void. Public policy principles are related to nullity, capacity to enter into contracts, things and rights that cannot be subject to contracts, statute of limitations, and due process, among other issues. The nullity doctrine distinguishes between void acts and voidable acts. Void acts are those granted or executed by persons incapable of giving informed consent; persons that would require a judge or legal representative’s permission to enter into a contract; simulated or fraudulent acts; or, in general, acts forbidden under the law. Voidable acts are those where a person acts on an accidental disability, or those entered under error, violence, fraud, or simulation. The statute of limitations generally applicable to contractual obligations is five years. This notwithstanding, the Civil and Commercial Code establishes specific statutory liabilities for contractors and designers, for construction and design defects. Articles 1251–127737 establish the liability regime for hidden defects or vicios redhibitorios (e.g., defects that make a project unfit for its  

37 http://servicios.infoleg.gob.ar/infolegInternet/anexos/235000-239999/235975/norma.htm#22.

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3.3.4.

3.3.5.

3.3.6.

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destination for structural or functional reasons, or diminish its usefulness to such an extent that, if known, the purchaser would not have acquired it, or its consideration would have been significantly lower). To trigger this liability, the owner of the project must initiate a formal claim based on hidden defects within 60 days of the date on which the owner knew or learned about the defects. If the owner fails to make the claim within such deadline, the constructor or designer’s liability is extinguished. The statute of limitations applicable to hidden defects liability is three years from the project’s final acceptance date. This liability may be covered by insurance, but cannot be avoided, waived or mitigated through contract. Civil and Commercial Code Article 1273 establishes that the constructor of a project with an inherently long life cycle is liable, to the owner or the purchaser of the project, for defects that compromise its durability or make it unfit for purpose. The constructor is only released from liability if they prove an external cause for the defect. A defect of the soil is not deemed an external cause, even if the land belongs to the principal or a third party, nor is a defect of the materials, even if they are not provided by the contractor. Civil and Commercial Code Article 1274 provides that the liability established by Article 1273 is extended to subcontractors, designers, project directors, and any other professional linked to the principal by a contract for construction work referring to the damaged work or to any of its parts. The statute of limitations applicable to this liability is 10 years from the project’s final acceptance date. This liability may be covered by insurance, but cannot be avoided, waived or mitigated through contract. Extra-contractual obligations (in general, damages caused outside the scope of a contract) are limited to a 3-year statute of limitations period.

3.4. Statute Law 3.4.1. 3.4.2.

As explained in Section 1.2, Argentina has a civil law system, which relies entirely on statute law. In addition to the specific codes and laws referenced throughout this chapter, other important laws relevant to the construction industry (and to any other business) are the following: (a) Public Works Act (Law 13,064);38 (b) Concessions Act (Law 17,520);39

38 http://servicios.infoleg.gob.ar/infolegInternet/anexos/35000-39999/38542/norma.htm. 39 http://servicios.infoleg.gob.ar/infolegInternet/anexos/15000-19999/16942/norma.htm#:~:text= ARTICULO%201 %C2 %BA.,procedimientos%20que%20fija%20esta%20ley.  

 

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Public and Private Partnership Act (Law 27,328);40 Corporations Act (Law 19,550);41 Anti-Money-Laundering Act (Law 25,246);42 Employment Contract Act (Law 20.744);43 Labor Risks Act (Law 24.557);44 and Specific acts regulating income tax, value added tax, and other federal and provincial taxes.

3.5. Implied Contract Terms 3.5.1.

3.5.2.

As more fully explained in Sections 4.1 and 5.1, parties are free to negotiate construction contracts and agree on the terms they deem fit to govern a project, provided that said terms do not violate public policy rules. The Civil and Commercial Code sets the basic rules or standards governing contracts, including construction contracts, which may or may not be taken by the parties to govern their relationship. Any aspect not specifically covered by the parties in the contract will be governed by the provisions of the Civil and Commercial Code. An example of this principle is the right that a non-defaulting party has to terminate a contract if the defaulting party does not comply with a defaulted obligation within a 15-day term. This principle is established by Articles 1087–9 of the Civil and Commercial Code. It may be waived by the parties, and the 15day term may be extended but not reduced.

3.6. Construction of Contract Terms 3.6.1.

Contractual interpretation under Argentine law generally aims to discover the common intention of the contracting parties. Three main principles apply:

40 Contratos de Participacion Publico–Privada (Ley 27.328) [Contracts of Public–Private Participation (Law 27,328)] (Argentina) 16 November 2016, Boletín Oficial 33,514, 2016, 1 (‘Public and Private Partnership Act’). 41 Sociedades Comerciales (Ley 19.550) [Commercial Companies (Law 19,550)] (Argentina) 3 April 1972, Boletín Oficial 22,409, 1972, 11. 42 Código Penal: Lavado de Activo de Origen Delictivo — Modificacion Código Penal (Ley 25.246) [Penal Code: Money Laundering of Criminal Assets — Criminal Code Modification (Law 25,246)] (Argentina) Boletín Oficial 29,395, 2000, 1. 43 Ley de Contrato de Trabajo (Ley 20.744) [Employment Contract Law (Law 20,744)] (Argentina) Boletín Oficial 23,003, 1974, 2. 44 Ley de Riesgos del Trabajo (Ley 24.557) [Labour Risks Law (Law 24,557)] (Argentina) Boletín Oficial 28,242, 1995, 1.

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1) the search for the actual will of the parties; 2) pre-eminence of good faith; and 3) the continuance of the contract. In light of the above principles, the interpreter (i.e., the judge, arbitrator, or party) must resort to subjective and objective interpretation criteria: subjective interpretation would allow consideration of the parties’ actual will, while objective interpretation would help to eliminate doubts or ambiguities in those cases where the parties’ intention is unclear. The general interpretation rules are set out in Articles 1061–6 of the Civil and Commercial Code, and may be summarized as follows: (a) Subjective interpretation rules: (i) The parties’ common intention: When words are ambiguous, the parties’ intention may be sought from their literal sense or meaning. (ii) Contextual interpretation: Ambiguous or mistaken terms must be interpreted in light of the precise or clearer terms used in other parts of the contract, giving to such terms the meaning most suitable given the context. (iii) Factual interpretation: The conduct of the parties following the execution of the contract will be the best explanation of their actual intention at the moment of entering into such contract. (b) Objective interpretation rules: (i) Literal interpretation: Words in a contract must be given their generally-used meaning. (ii) Conservative interpretation: Where clauses have two different interpretations, one of which would invalidate the clause while the other would sustain its validity, the clause must be interpreted in the latter sense.  

3.7. Private and Public Procurement 3.7.1.

3.7.2.

In general, Argentine government agencies may acquire goods and services through direct awards, grants and public tenders. A bid is often implemented when the evaluation criteria is primarily economic, while in other cases the procedure will conducted through tenders. Tenders and bids may be national or international, and foreign companies can participate in contests organized by administration. International tenders are often used for large or complex infrastructure projects. Award processes may be public or private: in accordance with the System of Public Procurement for the State, awards must be by simplified procedure when the amount involved does not exceed AR$75,000, by direct award when the amount involved does not exceed AR$1,300,000, by private bid or

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3.7.4.

3.7.5.

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tender when the amount involved does not exceed AR$6,000,000, and by public bidding when the amount involved exceeds AR$6,000,000. Projects financed by international organizations or multilateral credit agencies are governed by the rules determined by those entities, which normally require that companies from all member countries be invited to participate in the bidding process, regardless of the type of tender (national or international). This is a fairly common situation, as Argentina receives significant funding from entities such as the Inter-American Development Bank and the World Bank, among others. Tenders may be called by the national government, provincial governments, municipalities, public organizations, state-owned or controlled companies, and private companies providing public services. Tenders organized by the national government, or its agencies or companies, are regulated by Decree 1023/200145 establishing the System of Public Procurement for the State and Decree 1030/2016,46 which sets the rules for acquisition, disposal and procurement of goods and services for the national government. Tenders organized by provincial and municipal governments are governed by their specific legislation, though they may voluntarily implement national rules. In any case, it is important to note that Argentina has in place a regime that gives preference to domestic over foreign firms when awarding a tender or bid. The so-called Buy Argentine Act (Law 25,551, passed in November 200147 and regulated by Decree 1600/2002)48 requires the government agency organizing the bid to award the contract to ‘national offers’ if the prices included therein do not exceed those included in offers made by foreign entities by more than 5 % (or 7 % for small- and medium-sized companies), provided experience and technical requirements are met. The implementation of this system is mandatory in all tenders of the National Public Administration and its agencies and departments, state-owned enterprises, and private providers of public services and their subcontractors.49  

 

45 Administracion Publica Nacional: Contrataciones del Estado (Decreto 1023/2001) [National Public Administration: State Contracts (Decree 1023/2001)] (Argentina) 13 August 2001, Boletín Oficial 29,712, 2001, 1. 46 Regimen de Contrataciones de la Administracion Nacional (Decreto Reglamentario 1030/2016) [Regime of Contracting of the National Administration (Regulatory Decree 1030/2016)] (Argentina) 15 September 2016, Boletín Oficial 33,463, 2016, 2. 47 Compre Trabajo Argentino (Ley 25.551) [Buy Argentine (Law 25,551)] (Argentina) 28 November 2001, Boletín Oficial 29,806, 2001, 2 (‘Buy Argentine Act’). 48 Compre Trabajo Argentino: Ley 25.551 — Reglamentacion (Decreto Reglamentario 1600/2002) [Buy Argentine: Law 25,551 — Regulation (Decree 1600/2002)] (Argentina) 28 August 2002, Boletín Oficial 29,972, 2. 49 https://www.cambridge.org/core/journals/international-legal-materials/article/argentina-buyargentine-law/655C343CCDA546D516F78AF81683313C.

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‘National offers’, in relation to the procurement of goods, are offers that comprise goods that have been produced in Argentina and do not incorporate an imported cost exceeding 40 % of the gross production value of the product, regardless of the nationality of the manufacturer. As such, a foreign company can make a ‘national offer’. In terms of service provision, the rules are not entirely clear, but in practice they greatly limit the participation of non-resident companies. Article 8 of the Buy National Law (Law 18,875)50 states that the construction of works and the provision of services must be contracted with local companies, except in exceptional cases pre-approved by a resolution of the competent ministry, where valid reasons for international bidding and contracting are given. With regards to projects involving an international bid or tender, Decree 2,930/1970,51 which regulates the Buy National Law, provides that foreign companies and suppliers of works or services that participate in tenders organized by government entities are required to partner with a local company. The procuring entity requires the consortium so integrated to provide documentation evidencing the nature of the association, responsibilities of the parties, and their participation interests. Finally, companies wishing to participate in public or private tenders or bids organized by governmental entities are generally required to register in the System of Providers of the State (‘SIPRO’) first. Registrants must be domiciled in Argentina, so companies that are based in another country and that have no presence in Argentina cannot abide by these processes.  

3.7.7.

3.7.8.

3.7.9.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

The federal government has not passed any specific legislation regulating the construction industry. There is, however, national legislation which applies to business generally. The Civil and Commercial Code regulates private construction contracts. In general, the provisions of the Civil and Commercial Code concerning construction contracts are limited, as they fail to regulate, among other things, the different contracting methods available for the parties, or the consequences of concurrent delay.

50 Compre Nacional (Ley 18.875) [Buy National (Law 18,875)] (Argentina) 23 December 1970, Boletín Oficial 22,087, 1971, 2 (‘Buy National Law’). 51 Compre Nacional: Ley 18.875 — Regulation (Decreto 2930/1970) [Buy National: Law 18,875 — Regulation (Decree 2,930/1970)] (Argentina) 23 December 1970, Boletín Oficial 22,087, 1971, 4.

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4.1.3.

4.1.4.

4.1.5.

4.1.6.

4.1.7.

4.1.8.

4.1.9.

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The regulatory gap created by the old Civil Code’s failure to fully regulate construction contracts has been partially filled through the new Civil and Commercial Code, Federal Public Works Contracts Act (Law 13,064),52 Public and Private Partnership Act, and case law. The Federal Public Works Contracts Act regulates construction contracts where the federal government is, directly or indirectly, the owner of the project, and sets out basic standards or principles. The Public and Private Partnership Act was passed on 30 November 2016, in order to develop projects concerning infrastructure, housing, activities and services, productive investment, applied investigation, and technological innovation. Public-private partnership contracts are entered into between the government bodies which integrate the national public sector (in the role of contracting parties) and the private or public subjects (in the role of contractors). Projects must be specifically declared to be constructed under the regulation of the Public and Private Partnership Act for the application of the Act. The project must be declared to be of public interest, and may involve design activities, construction, expansion, improvement, maintenance, goods and equipment supply, operation or financing. The goal of the Act is to set a legal framework which stimulates private investment in these vital sectors. The main difference from the previous regulation is that the Public and Private Partnership Act includes all legal aspects needed to develop mega-projects. The great novelty of the Act lies in: (i) the flexibility to develop projects related to the public interest; (ii) the transparency in the structure, selection, award, and execution stages of such projects; and (iii) the use of alternative methods to deal with disputes arising from the projects. Most of the Argentine provinces have their own Acts dealings with public works contracts, which are generally substantially similar to the Federal Public Works Contracts Act and apply to construction contracts where the provincial governments are the owners of the project. Provinces were also invited to adhere to the Public and Private Partnership Act. The city of Buenos Aires, the province of Buenos Aires, and Mendoza, among others, have already adhered to this Act. In addition, construction in general is subject to the regulations set by municipal governments and city councils on urban planning and zoning (Códigos de Planeamiento Urbano y Zonificación). These regulations outline the general and particular rules for the urban configuration of a city and vary depending on the type of city and development policies. However, they usually deal with the correct use of land, plot division, the outline of streets and highways,

52 Obras Públicas (Ley 13.064) [Public Works (Law 13,064)] (Argentina) 6 October 1947, Boletín Oficial 15,900, 1947 (‘Federal Public Works Contracts Act’).

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the aesthetic town planning, the preservation of historical monuments and parks and other common spaces. 4.1.10. The construction of homes is normally subject to regulations provided by the city councils contained in the Códigos de Edificación [Building Codes]. These Codes establish the rules for building, demolition, restoration and surveillance of works for homes and other types of buildings, either private or public, of the given town or city. The appointment of a technical director is mandatory in every building work that is performed. 4.1.11. Regulations of the Planning Codes and Building Codes are normally public policy and cannot be disregarded by the parties to a construction agreement.

4.2. Codes of Practice 4.2.1. 4.2.2.

4.2.3.

There are no federal or provincial codes of practices applicable to the construction industry in Argentina. Architects, engineers and land surveyors are, however, subject to a federal Code of Ethics issued in 1984 by Executive Decree No 1099/1984, which establishes general rules that apply to such activities.53 This Code coexists with the codes of ethics of the respective provincial professional associations (where existing) in relation to the activity involved. Usually each professional association has its own code of ethics.

4.3. Licensing of Professionals and Contractors 4.3.1.

4.3.2.

4.3.3. 4.3.4.

Professionals in the construction industry (architects, engineers, land surveyors, etc.) need to be licensed by the respective professional association to be able to practice in their jurisdiction. The requirements to obtain the license depend upon the respective professional association. However, all of them request evidence of a degree obtained from a local university. Foreigners wishing to perform one of these professional activities must obtain the validation of their degrees to get a license. Employers and employees in the construction industry must be registered with the Registro Nacional de la Industria de la Construcción [National Construction Registry].

53 Agrimensura, Arquitectura e Ingenieria: Código de Ética (Decreto 1099/1984) [Surveying, Architecture and Engineering: Code of Ethics (Decree 1099/1984)] (Argentina) 6 April 1984, Boletín Oficial 25,414, 1984, 11.

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In addition, building companies and professionals wishing to perform public works must first register with the Registro Nacional de Constructores de Obras Públicas [National Registry of Public Work Builders].

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

5.1.3.

5.1.4.

5.1.5.

5.1.6.

5.1.7.

As mentioned in Section 4.1, the Civil and Commercial Code regulates (though in a somewhat incomplete manner) private construction contracts as a subtype of lease agreements (‘locación de obra’). The Federal Public Works Contracts Act and the Public and Private Partnership Act regulate construction contracts where the federal government is, directly or indirectly, the owner of the project, and sets out basic standards and principles which are much more detailed than those of the Civil and Commercial Code. Articles 958 and 1015 of the Civil and Commercial Code provide that parties are free to set contractual terms. Thus, the provisions of the Civil and Commercial Code are optional for the parties, as long as those provisions are not deemed to regulate issues of public policy (in which case they cannot be superseded by contractual arrangements). The Civil and Commercial Code applies by default for all matters not specifically addressed by the parties in the relevant contract. On the contrary, the provisions of the Federal Public Works Contracts Act (or the relevant provincial public works contracts Act, as applicable) are mandatory in all contracts involving the federal or provincial governments, and cannot be materially changed or superseded by a construction contract. As a result of the above, and considering the principles provided for by Articles 958 and 1015 of the Civil and Commercial Code, the parties to a private construction contract are free to set the terms and conditions that they deem fit for their project, many of which are often not specifically contemplated under the Civil and Commercial Code. In line with this, the provisions of the Federal Public Works Contracts Act (or the relevant provincial public works contracts Act, as applicable) are frequently used as a reference to regulate a private construction project as a result of the parties’ decision to incorporate some of its terms into the contract or, absent any specific provision by the parties, as a consequence of judicial interpretation of a private construction contract. Consequently, contracts relating to private construction projects are typically tailor-made for each project, although the parties may choose to resort to internationally accepted standard forms such as FIDIC contracts. Public construction projects, on the contrary, are usually subject to a standard form of contract set by Resolution No 22/2019 of the National Procure-

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ment Office54, that establishes the standard bidding terms applicable to public construction projects. Although these standard specifications are not binding, the government normally adapts these specifications to the type of work involved. Despite the abovementioned legislation, it is expected that most of the big public construction projects will be regulated by the Private and Public Partnership Act.

5.2. Amendment of Contracts and Bespoke Contracts 5.2.1.

5.2.2.

5.2.3.

5.2.4.

Private and public construction contracts may be amended pursuant to the individual contract’s provisions. Public contracts, however, are normally less flexible than private contracts, especially in connection with the parties’ ability to introduce significant changes to the original contract. The government is expressly authorized to change unilaterally the terms of an agreement under certain circumstances. This is based on the government’s power to adapt the terms of an agreement for the public interest, also known as ius variandi.55 Under the Federal Public Works Contracts Act, the constructor must comply with the changes introduced by the government, provided that those changes do not alter the main purpose of the agreement. The contractor must accept variations in the cost of the works if those variations do not exceed 20 % of the initially agreed costs. If the variations exceed 20 %, the parties may agree a new price for the work. The government may also enter into a new agreement with a different contractor, in which case the initial contractor has no right to claim damages.56 The government may also alter the scope of the works by reducing the works agreed or requesting additional works. If these variations entail the suspension of the works, the contractor may seek damages for the additional costs caused. On the other hand, if additional works are requested, the government must reimburse the contractor for the additional costs.57 The contractor has the right to terminate the agreement if (i) the variations in the costs of the works exceed 20 % of the costs initially agreed; (ii) the government suspends the project for more than three months; (iii) the government  

 

5.2.5.

5.2.6.

 

54 http://servicios.infoleg.gob.ar/infolegInternet/verNorma.do?id=326145. 55 http://www.saij.gob.ar/nicolas-francisco-barbier-contratos-administrativos-principios-esencialesdeben-regir-contratacion-administrativa-dacf110143-2011-09-19/123456789-0abc-defg3410-11fcanirtcod. 56 Law 13.064 – art 38 – http://servicios.infoleg.gob.ar/infolegInternet/anexos/35000-39999/38542/ norma.htm. 57 Law 13.064 – art 30 y 34.

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fails to comply with its obligation to provide materials or other elements in time; and (iv) the obligations under the agreement cannot be complied with due to acts of God or force majeure events.58 Under the Public and Private Partnership Act, a contracting party may unilaterally change a contract in regards to the execution of works by up to the 20 % of the contract value, if adequate compensation is provided to the contractor.  

6. Key Issues 6.1. Overview 6.1.1. 6.1.2.

There are certain aspects that are commonly agreed upon by the parties, both in public and private contracts. Although public construction agreements are ruled by specific legislation, many of the provisions of the Civil and Commercial Code apply to such agreements by default.

6.2. Fit for Purpose 6.2.1.

6.2.2. 6.2.3.

6.2.4.

6.2.5.

Private and public construction agreements in Argentina typically include a ‘fit for purpose’ clause that refers to the fact that the finished work must be fit for its intended use. This clause establishes that blueprints should reflect the ‘as-built’ conditions after the work has been finished (‘planos conforme a obra’). Once the works are finished, either partially or totally, the project director must provide the ‘as-built’ blueprints upon delivery of the works. The ‘asbuilt’ blueprints are not necessary if the works have been performed pursuant to the initial project schedule approved by the owner. Ideally, the ‘as-built’ verification is performed several times during construction, so that conflicts between design and construction can be resolved with minimal effect on the initial project schedule. The ‘as built’ blueprints are part of the project schedule provided by the project designer. However, the building company may be held jointly liable for errors in the project schedule if those errors could have been diligently foreseen by the building company before the building works began.

58 Law 13.064 – art 53 inc A.

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6.3. Late Completion 6.3.1.

6.3.2.

The Civil and Commercial Code, the Federal Public Works Contracts Act and the Public and Private Partnership Act establish that strict compliance with the contract’s execution term and the project’s delivery on the agreed time are two of the pillars of the contractors’ obligations. Failure to comply with the agreed terms and delivery deadlines is often penalized by imposing fines, or even with the termination of the contract due to contractor’s default on its obligations.59 The above notwithstanding, private and public construction contracts may have a different approach when dealing with contractual time and delays.

Private Construction Contracts 6.3.3. Below are some principles applicable to private construction contracts, absent any specific provisions included therein. Amendment of Construction Term; Additional Works 6.3.4. The parties may agree to change the construction term set in the contract. The term will be deemed to be tacitly extended if the owner orders additional works, unless the owner proves that the nature or characteristics of the additional works did not require an extension of time. In case of controversy, the need for a time extension and the extension itself will be established by the court.60 Supplementary Term 6.3.5. The contractor has the right to a supplementary term (i.e., a time extension) due to delays or work suspensions caused by events not attributable to the contractor, such as suspension of the works derived from force majeure events, or events attributable to the owner (e.g., where the owner delays delivery of basic engineering, materials, equipment or committed partial payments). In such cases, the term is deemed extended in proportion to the time the works were suspended, and no judicial determination is required. The owner has the right to prove that the delay does not justify the suspension of works or the extension of the term. 6.3.6. The time extension resulting from the above cases will not affect any of the contractor’s rights under the contract, including the right to a premium for early termination if such premium was agreed in the contract. Moreover, if the  

 

59 Civil and Commercial Code, the Federal Republic Works Contracts Act and the Public and Private Partnership Act. 60 http://servicios.infoleg.gob.ar/infolegInternet/anexos/235000-239999/235975/norma.htm#22.

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delay and the time extension derived from an event attributable to the owner, the contractor has the right to claim compensation for damages and to terminate the contract due to owners’ default. Insufficient Term 6.3.7. If the parties establish a contractual term that later proves insufficient for completion of the project, this sole circumstance does not invalidate the contract or give the contractor the right to demand a time extension. These two remedies will be available only if continuation of the project is prevented by an absolute and objective cause; the contractor’s subjective inability to continue the project will not be relevant and will not release the contractor of their obligations. Liability for Late Completion 6.3.8. Liability for late completion is usually limited to a sum that does not exceed the costs of construction involved in the work. Compensation must be reasonable and appropriate and must cover all of the direct damages caused to the owner. 6.3.9. Receipt of the finished works by the owner in cases of late completion implies the tacit acceptance of the works and releases the contractor from any liability arising from the late completion. Public Construction Contracts 6.3.10. The standard contract form typically used for public works projects provides that ‘the project must be totally completed in the term provided under the contract and the extensions that may have been granted, in accordance with the general works program’ and also, ‘if the project is not completed within the agreed term plus any extensions that may have been granted, for reasons not acceptable for the owner, the contractor shall be charged with a fine, and the owner shall have the right to terminate the contract if the contractor does not cure any delay after due notice’. 6.3.11. The above terms reflect the principles that govern the project execution term in public works contracts. The contractor is responsible for completing the works within the agreed term and any extension thereof. Not complying with such conditions exposes the contractor to severe sanctions, unless the contractor can prove that any delays were caused by reasons attributable to the owner or were otherwise out of the contractor’s control. 6.3.12. The general rule is that the works must start immediately upon execution of the contract. Failure to do so may expose the contractor to sanctions, which may include termination of the contract. 6.3.13. If the works do not start for reasons attributable to the owner, then the contractor must be compensated for damages, and the contractor will have the

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right to seek specific performance or request the termination of the contract. If the works do not start for reasons out of the parties’ control (e.g., force majeure), then the owner may grant a term extension. In general, the contractor will not be granted a term extension unless: (i) there is a material breach by the owner of their obligations under the contract, and such breach is strictly related to and has a direct impact on the contract term (e.g., the granting of access to the project’s field); (ii) the owner requests additional works within the scope of the contract, and such additional works reasonably require additional execution time; or (iii) the contractor proves that delays were caused by force majeure events, or causes attributable to third parties out of the contractor’s control. The Public and Private Partnership Act establishes that the contracts entered into under the Act must provide the term of the contract and the possibility of term extensions for the contractor.61 The concept of liquidated damages is not common under Argentine law; rather, contractual penalties for default, delay or non-compliance are typically set forth as fines. Neither the Civil and Commercial Code nor the Federal Public Works Contracts Act sets specific rules for the form or value of fines, so parties may set these under the contract. Under the Public and Private Partnership Act, the bid specifications must establish the sanctions to be imposed to the contractor in case of breach of the contract.62 The recovery of extended overhead costs is normally pursued as compensatory damages. Whenever the contractor or the owner is allowed to claim damages, the assessment must take into consideration any the parameters set under the contract. Absent such parameters, the compensation to be sought must be in strict proportion to the losses suffered because of a contract suspension or a time extension derived, for example, from additional works being requested within the scope of the contract. In general, the principle is that the party suffering the loss must be indemnified and put in the position they would have been in had the loss not occurred. Unless specifically excluded, certain indirect or consequential damages may be included in such compensation.  

6.3.14.

 

6.3.15.

6.3.16.

6.3.17.

6.3.18.

6.3.19.

61 http://servicios.infoleg.gob.ar/infolegInternet/anexos/265000-269999/268322/norma.htm. 62 http://servicios.infoleg.gob.ar/infolegInternet/anexos/265000-269999/268322/norma.htm.

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6.4. Force Majeure and Latent Conditions 6.4.1.

6.4.2.

6.4.3.

6.4.4.

6.4.5.

6.4.6.

6.4.7.

6.4.8.

Force majeure is regulated under the Civil and Commercial Code, and therefore applicable to all contractual relationships to limit liability for non-performance of obligations. Under Argentine law, force majeure events are unexpected conditions which could not have been reasonably foreseen or avoided.63 The terms of an agreement may be also altered by a sovereign act (‘hechos del príncipe’). A sovereign act is an extraordinary governmental decision, act or omission that affects the contractual terms initially agreed. The terms of the agreement may be temporarily or indefinitely affected by a sovereign act, and thus may lead to a temporary suspension of the works or to the termination of the agreement. In both cases, the affected party may seek damages if the sovereign act was unexpected and could not have reasonably been foreseen. The parties may limit, extend or regulate the scope of the provisions of the Civil and Commercial Code concerning force majeure in each contract to the extent they deem fit. Most private and public construction contracts contain clauses that deal with force majeure cases in detail. Force majeure events affect the terms of the agreements and may sometimes lead to its termination when the obligations become impossible to perform. In other cases, these events may only impede compliance with the terms of the agreement for a certain period of time, after which the party should resume its obligations. Soil and other latent conditions not exactly fitting into the definition of force majeure or provided under the Civil and Commercial Code, such as underground interferences or obstacles, may be added to the contractual definition of ‘force majeure’. In some cases, these latent conditions are considered to be previous risk factors that either party may assume. Judicial precedents have determined that force majeure events must directly affect the obligations of one of the parties to be able to be considered ‘force majeure’.64 For this reason, owners typically seek to narrow the application of the clause and place more risk on the head contractor. In the case of public works, sovereign acts are those extraordinary decisions, acts or omissions that directly affect the terms of an agreement and that come from a governmental authority different from the contracting governmental party. In the case of a sovereign act or a force majeure event, the Federal Public Works Contracts Act states that contractors may request reimbursement for

63 http://www.notarfor.com.ar/codigo-civil-comercial-unificado/articulo-1730.php. 64 Cámara de Apelaciones en lo Civil y Comercial de Salta, sala II • 03/10/2019 • A., R. V.; M., C. E. c. I. S.A. s/ Acciones ley de defensa del consumidor y Cámara Nacional de Apelaciones en lo Civil, sala K • 29/08/2018 • Quelas, Graciela Mercedes c. Habitat Fides SRL yotros s/ daños y perjuicios.

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any additional costs caused, or may terminate the agreement if its terms have become unenforceable and seek damages.65 6.4.9. In any case, the government must award damages to the affected party if the force majeure event did not derive from the other party’s own negligence.66 6.4.10. The Public and Private Partnership Act67 establishes that contracts entered into under the Act must provide for the consequences derived from sovereign acts and force majeure events.

6.5. Limitation of Liability 6.5.1.

6.5.2.

6.5.3.

6.5.4.

6.5.5.

6.5.6.

The Civil and Commercial Code establishes specific statutory liabilities for constructors and designers for construction or design defects. See Sections 3.3.3–3.3.5 for a discussion of the statute of limitations. As a general rule, the Civil and Commercial Code prohibits the limitation of liability in cases of willful misconduct.68 However, the parties to an agreement may freely restrict their liability in cases of negligence, since there is no prohibition in this regard. There are no other provisions under the Civil and Commercial Code providing for or restricting liability. Parties to private or public agreements usually agree to limitation of liability clauses that exclude cases of gross negligence or willful misconduct. For public works, the project designer is responsible for errors in the project schedule. The contractor will not be held liable for project schedule errors if the contractor provides warnings of such errors before the building works begin. Materials for construction can be provided by either the government or the contractor. The contractor is liable for defects of the materials if it committed to providing materials. If the government provide the construction materials, there is legal opinion69 that says that the contractor may not be held liable for defects of these materials if the contractor through reasonable diligence could have recognised the defects and warned the owner about those defects. Under the Federal Public Works Contracts Act, the contractor is also responsible for the correct execution of the works and adherence to the project sche-

65 Law 13.064 – art 39. 66 Law 13.064 – art 39. 67 Law 27.328 – art 9 inc B. 68 http://www.saij.gob.ar/rosario-echevesti-codigo-civil-comercial-nacion-diez-puntos-basicosresponsabilidad-dacf150819-2015-11-10/123456789-0abc-defg9180-51fcanirtcod. 69 http://parellada.com.ar/uploads/files/responsabilidad-profesionales-de-la-construccio–n.key. pdf.

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dule. In any case, to be released from liability the contractor must warn the owner about any defect of the project. The Federal Public Works Contracts Act does not contain provisions regarding liability for ruin or for patent or latent defects of works, and thus the Civil and Commercial Code provisions apply to these cases. As mentioned above, there is legal opinion that says that contractors are released from liability for patent defects upon delivery of the works.70

6.6. Duration of Exposure and Time Bars 6.6.1.

6.6.2.

6.6.3. 6.6.4.

Under the Civil and Commercial Code, the concept of “material ruin” is equated to that of “functional ruin” due to works that are unfit for their intended purpose and the contractor, the designer and project manager will be liable not only to the principal, but also to a third-party purchaser. The constructor is only released if it proves that the “ruin” is attributable to an external cause. Neither the soil conditions, even if the land belongs to the principal or a third party, nor the vice of the materials, even if they are not provided by the contractor, are considered external causes71. The Civil and Commercial Code further extends liability for ruin to any person or entity who sells a work or building that such person has built, if said person makes that activity its usual profession (eg. real estate developers), to any person who, even when acting as agent of the owner of the work, fulfills a role similar to that of a contractor, and according to the cause of the damage, the subcontractor, the designer, to the project manager and to any other professional linked to the principal by a construction work contract related to the damaged work or to any of its parts (partial ruin)72. The statue of limitation for total or partial ruin is of 10 years, counted as from the completed work was accepted by the principal73. If a guarantee period is agreed under a contract for the principal to verify the quality of the work or test its functionality, the reception is considered provisional and does not presume acceptance, regardless of the fact that any clause that exempts or limits the liability provided for damages derived from total or partial ruin, is considered null and void74.

70 http://parellada.com.ar/uploads/files/responsabilidad-profesionales-de-la-construccio–n.key. pdf. 71 Art. 1273 Civil and Commercial Code. 72 Art. 1272 Civil and Commercial Code. 73 Art. 1275 Civil and Commercial Code. 74 Art. 1276 Civil and Commercial Code.

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Finally, there is also a limitation period to promote the action for total or partial ruin that is one year, counted from the date the ruin occurred75.

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

7.1.4.

7.1.5.

The most frequent dispute resolution method used in construction matters is judicial action, in which the plaintiff sues the defendant in court for breach of construction contract. Judicial action is preferred above other dispute resolutions like mediation, arbitration, amiable composition, and expert arbitration. The main reason for this preference is tradition and trust. Even if judicial actions take longer and are more expensive than, for example, arbitration, parties tend to trust in courts more than any other mechanism. The jurisdiction is often stipulated in the contract. In 1995, a significant change to the judicial action was introduced. Law 24,573 established a mandatory mediation proceeding before filing a claim at court.76 However, mediation is generally used to fulfil the formal requirements to file a lawsuit rather than to resolve the dispute. Notably, mediation is not mandatory when the State is party to the dispute.77 Although not as widely used as judicial action, arbitration is slowly gaining importance in the construction industry. There are two different types of arbitration in Argentina: the institutional arbitration, where parties agree to solve their dispute under the rules of an institutional arbitral tribunal, and the adhoc arbitration, where parties establish the procedure for the appointment of the arbitrators and the procedural rules. Section 1656 of the Civil and Commercial Code provides that parties may appeal an arbitration award before judicial courts if the award is deemed to contradict Argentine public policy principles. This provision thus discouraged the use of arbitration. Nevertheless, courts of appeal have ruled against this section, stating that awards may be appealed before the judicial courts only where there were mistakes during the arbitration proceeding, or the award relates to matters not included in the arbitration.78

75 Art. 2564 Civil and Commercial Code. 76 Mediacion y Conciliacion (Ley 24.573) [Mediation and Conciliation (Law 24,573)] (Argentina) 4 October 1995, Boletín Oficial 28,258, 1995, 1. 77 http://biblioteca.asesoria.gba.gov.ar/redirect.php?id=4366. 78 Cámara Nacional de Apelaciones en lo Civil, sala H • 27/09/2017 • Laderas del Perito Moreno S.A. c/ Colegio de Escribanos CABA Tribunal Arbitraje Gral. Y Mediación s/ recurso directo a Cámara y Corte Suprema de Justicia de la Nacion • 06/11/2018 • Procuracion del Tesoro Nacional c/ (nulidad del laudo del 20-III-09) s/ recurso directo.

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7.1.6.

The General Arbitration Tribunal of the Buenos Aires Stock Exchange and the Centre for Mediation and Arbitration of the Argentine Chamber of Commerce are the most prestigious institutions administering arbitration in Argentina. The Argentine Construction Chamber has also created an arbitration tribunal especially focused on construction disputes, but so far it has seldom been used by construction companies. 7.1.7. Argentina is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (ratified with reservations related to reciprocity and commercial disputes),79 the Convention on the Settlement of Investment Disputes between States and Nationals of Other States,80 the Inter-American Convention on International Commercial Arbitration,81 the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards,82 and the Mercosur International Commercial Arbitration Agreement,83 among others. 7.1.8. The Civil and Commercial Code regulates arbitration, but its provisions are not applicable when public order is compromised and when the State (federal or local) is party to the dispute.84 Therefore, private construction contracts may freely contain an arbitration clause to settle disputes arising between the parties. 7.1.9. Nevertheless, the Public and Private Partnership Act establishes that arbitration may be used to settle disputes on public–private partnership contracts.85 7.1.10. The Public and Private Partnership Act also allows parties to choose technical panels (dispute boards) to settle disputes arising from the public–private partnership contract.86 These two alternatives show that out-of-court methods for settling disputes are being promoted in Argentina. 7.1.11. The costs of the technical panel, including its members’ fees, must be equally paid by the parties to the contract.87

79 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959). 80 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966). 81 Inter-American Convention on International Commercial Arbitration, opened for signature 30 January 1975, 1438 UNTS 245 (entered into force 16 June 1976). 82 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, opened for signature 8 May 1979, 1439 UNTS 87 (entered into force 14 June 1980). 83 Acuerdo sobre Arbitraje Comercial Internacional del Mercosur [Mercosur International Commercial Arbitration Agreement], adopted 23 July 1998 (entered into force 9 October 2002). 84 Art. 1649 Civil and Commercial Code. 85 Law 27.328 – art 25. 86 Law 27.328 – art 9 inc W. 87 Law 27.328 – art 9 inc B.

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7.1.12.

Unless the public tender documents or the public–private partnership contract provide to the contrary, all technical, interpretative, or patrimonial disputes that arise during the execution or termination of the contract must be decided by the technical panel. Filing of claims or disputes before the National Administration is not be necessary to start a dispute procedure before the technical panel.88 7.1.13. When deciding on a dispute, the technical panel will give recommendations. The recommendations will only be mandatory when the parties do not expressly reject the recommendation within the term established in the public tender documents or the public–private partnership contract.89 7.1.14. If one of the parties expressly rejects the recommendation within the term, it will be able to dispute the recommendation before a judicial or arbitration court (but only if arbitration was provided in the public tender documents or the public–private partnership contract). If not rejected within the term, the recommendation will not be disputable before judicial or arbitration courts.90 7.1.15. There are also other dispute resolution methods provided under the NPC, such as the appointment of an amiable compositeur or an expert arbitrator.91 7.1.16. The amiable compositeur is an arbitrator ex aequo et bono. The amiable compositeur is under no obligation to observe the rule of law and must deliver judgment within a three-month period. The award is not appealable, unless it is delivered after the three-month period or relates to something not relevant to the issue in dispute.92 7.1.17. Lastly, expert arbitrators only rule on facts, not law. Expert arbitrators must be specialised in the subject at issue. They must deliver judgment within a one-month period. 7.1.18. Nevertheless, amiable composition and expert arbitrations are not used very frequently. Parties prefer the typical judicial action, in which they have much more confidence. Moreover, the fees of an amiable compositeur and an expert arbitrator are expensive.

88 89 90 91 92

Law 27.328 – art 9 inc W. https://www.argentina.gob.ar/sites/default/files/guia_orientativa_contratos_estructurados.pdf. https://www.argentina.gob.ar/sites/default/files/guia_orientativa_contratos_estructurados.pdf. Civil and Commercial Code – art 1652. http://abogados-inhouse.com/editorial.php?id=132.

Andrew Stephenson

Australia 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6.

Context 34 The Country 34 The Legal System 34 The Economy 36 The Construction Industry 36 Size and Nature 36 Participants 37 Work, Health and Safety 38 Industrial Relations 39 Protection of the Environment 39 Quality Assurance 40 Construction Contracting Dynamics 40 Legal Underpinnings of Contracts 41 Freedom of Contract 41 Elements of a Valid Contract 41 Legal Framework 42 Public Policy 43 Statute Law 44 Implied Contract Terms 44 Construction of Contract Terms 45 Private and Public Procurement 46 Government Involvement 47 Legislation and Regulation 47 Codes of Practice 49 Licensing of Professionals and Contractors 50 Construction Contracts 51 Available Contracts 51 Most Commonly Used 51 Example 1 – AS 4000-1997 – General Conditions of Contract Example 2 – AS 4902-2000 – General Conditions of Contract for Design and Construct 52 Key Issues: AS4300 and PC-1 52 Overview 52 Fit for Purpose 53 Late Completion 54 Latent Conditions 56 Force Majeure 57 Limitation of Liability 58

https://doi.org/10.1515/9783110712728-002

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6.7. 6.8. 6.9. 6.10. 7.

Andrew Stephenson

Duration of Exposure 58 Time Bars 58 Cost or Price 59 Security 60 Dispute Resolution: AS4300 and PC-1

61

1. Context 1.1. The Country 1.1.1. 1.1.2.

1.1.3.

1.1.4. 1.1.5.

Australia is a federation. It comprises six states and two mainland territories. Each state was originally established as a colony of Great Britain. Each state has a constitution. However, the constitution is an instrument of the State Parliament and can be amended by that parliament.1 Each state government has unlimited powers2. The Commonwealth of Australia was established by legislation passed in Great Britain in 1900.3 That legislation implemented the Australian Constitution. The Federal Government’s powers are limited to the powers set out in the Constitution.4 Where the Federal Government has concurrent power, it can override the power of the states.5 The territories are governed by the Federal Government.6 Matters relevant to the construction industry are generally dealt with by the laws of the states.

1.2. The Legal System 1.2.1. 1.2.2.

Australia’s legal system is a common law system similar to the legal system in England and Wales. The highest court in Australia is the High Court. The High Court is created by the Australian Constitution.7 The Federal Government has also established the Federal Court.

1 See Constitution Act 1902 (NSW); Constitution Act 1934 (Tas); Constitution Act 1975 (Vic); Constitution Act 1934 (SA); Constitution Act 2001 (Qld); Constitution Act 1889 (WA). 2 Australian Constitutions 108. 3 Commonwealth of Australia Constitution Act 1900 (Imp) 63 & 64 Vict, c 12, s 9. 4 Australian Constitutions 51, 52. 5 Australian Constitutions 109. 6 Australian Constitutions 122. 7 Australian Constitutions 71.

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1.2.3.

Each state has its own court system. The highest court in each state is the Supreme Court. 1.2.4. An appeal can be made from a State Supreme Court to the High Court.8 However, this is not common. 1.2.5. There is a single Australian common law, but there are slight variations in the law of different jurisdictions within Australia. Discrepancies between jurisdictions are resolved by the High Court. 1.2.6. A number of states have established tribunals to deal with certain matters. In many states matters relevant to the construction of homes are dealt with by these tribunals. 1.2.7. Arbitration (both international and domestic) is supported in Australia. At the international level, Australian law includes the UNCITRAL Model Law on International Commercial Arbitration,9 the New York Convention,10 which provides for the international enforcement of arbitration agreements and awards, as well as the Washington Convention,11 which provides for a special system of arbitration for disputes between states and foreign investors. 1.2.8. Domestic arbitrations are governed by legislation in each of the states which have all passed legislation based on the Model Law.12 1.2.9. It is generally not permissible to use arbitration in relation to home building matters. Rather, states have established, by legislation, specific tribunals to deal with these types of disputes13. 1.2.10. All Australian states have implemented an adjudication system to resolve claims for payment in the construction industry. While the adjudication system is not a national model, the system is similar between the states and provides for determinations as to Contractors’ entitlements to payment. Such determinations of entitlement are interim only and can be challenged in the usual manner by arbitration or if there is no arbitration clause, in court. 1.2.11. Alternative dispute resolution is popular in Australia and is generally supported by the courts. Mediation is the most popular form of alternative dis-

8 Australian Constitutions 73. 9 United Nations Commission on International Trade Law: Model Law on International Commercial Arbitration, UN GAOR, 40th sess, Supp No 17, UN Doc A/40/17 (21 June 1985). 10 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959). 11 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966). 12 ‘Commercial Arbitration Acts’, Australian Centre for International Commercial Arbitration (Web Page) . 13 See for example, Victorian Civil and Administrative Tribunal Act 1998 (Vic).

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pute resolution. Most superior courts have introduced mandatory mediation as part of the pre-trial process.14

1.3. The Economy 1.3.1.

In 2018, the Australian economy was the 13th largest in the world, based on a nominal GDP (purchasing power parity) of approximately USD 1.38 trillion.15 From 1991–92 to 2017–18, the Australian economy has grown consistently, averaging 3.2 % growth per year in real terms and before the pandemic in 2020 was continuing to grow at approximately this rate.16 It is hoped that the economy will return to its pre pandemic rate of growth once a vaccine is generally available. The majority of the Australian economy is made up of the services sector, which contributes almost three quarters of total economic output.17  

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction sector is the second largest contributor to Australia’s production, generating 8.1 % of the nation’s total gross value added18 and em 

14 See for example, Civil Procedure Act 2005 (NSW) pt 4; Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 50.07. 15 ‘World Economic Outlook Database’, International Monetary Fund (Web Page) . 16 Edmund Tang, 2017–2018 GDP growth rate of 2.9 % confirms the resilience of our economy (12 September 2018). . 17 Edmund Tang, 2017–2018 GDP growth rate of 2.9 % confirms the resilience of our economy (12 September 2018). . 18 The size of the Australian economy is typically described in terms of GDP, and the structure and performance of the economy in terms of industry GVA. GDP is an estimate of the total market value of goods and services produced in Australia, in a given period, after deducting the cost of goods and services used up in the process of production (intermediate consumption), but before deducting the allowances for the consumption of fixed capital (depreciation). Industry GVA is the term used to describe the unduplicated value of goods and services produced by individual industries. GVA of the total economy usually accounts for more than 90 % of GDP (about 93 % of GDP in 2017–18). Edmund Tang, 2017– 2018 GDP growth rate of 2.9 % confirms the resilience of our economy (12 September 2018). .  

 

 

 

 

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37

ploying approximately 10 % of the Australian workforce19. The construction industry generated over AUD 350 billion in revenue in 2018 and has a projected annual growth rate of 2.5 % in the next five years.20 In 2018, employment in the Australian construction industry reached nearly 1,118,000 being employed and is projected to exceed 1,300,000 by 2023.21 The most common occupation in this industry is carpenters and joiners, at 9.5 % of the total workforce.22 Employment in this occupation is projected to grow by 5 % between 2018 and 2023. During the same period, employment for other occupations such as construction managers, and plumbers is also expected to grow by over 13 % and 11 % respectively.23  

 

2.1.2.

 

 

 

 

2.2. Participants 2.2.1.

Participants in the Australian construction industry include: (a) landowners and property developers; (b) urban planners; (c) contractors; (d) subcontractors and tradespeople; (e) architects; (f) designers; (g) civil engineers; (h) structural engineers; (i) services engineers;

19 Edmund Tang, 2017–2018 GDP growth rate of 2.9 % confirms the resilience of our economy (12 September 2018). . 20 Australian Industry and Skills Committee, ‘Construction’, National Industry Insights (Web Page, 11 September 2019) . 21 Australian Industry and Skills Committee, ‘Construction’, National Industry Insights (Web Page, 11 September 2019) ; Australian Bureau of Statistics 2017, 2016 Census – Employment, Income and Unpaid Work, TableBuilder. Findings based on use of ABS TableBuilder data. 22 Australian Industry and Skills Committee, ‘Construction’, National Industry Insights (Web Page, 11 September 2019) . 23 Australian Industry and Skills Committee, ‘Construction’, National Industry Insights (Web Page, 11 September 2019) ; ‘EQ06 – Employed persons by industry group of main job (ANZSIC), Sex, State and Territory, November 1984 onwards’, Australian Bureau of Statistics (Data Cube, 19 September 2018) .  

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Andrew Stephenson

(j) building surveyors; (k) quantity surveyors; (l) project managers; (m) financiers; and (n) end users. Increasingly, Australian state and federal governments, as well as Australian superannuation funds, are at the forefront of the construction industry. By way of example, the Federal Government is investing AUD 100 billion over 10 years from 2019 to 2020 in transport infrastructure across Australia.24 Further, as at 31 March 2018, the value of total assets under management by superannuation funds was approximately AUD 2.6 trillion.25 Australian superannuation funds invest around 5 % of their assets in infrastructure.26 Government funded infrastructure projects are commonly procured by way of Public Private Partnerships (PPPs).  

2.3. Work, Health and Safety 2.3.1.

Each Australian state and territory has legislation in place to ensure the safety of workplaces, particularly construction sites (‘WHS legislation’).27 Historically, each state and territory had different regulatory requirements in relation to work, health and safety. However, recent national reforms have been implemented to provide a consistent approach, and therefore reduce compliance costs for businesses, especially for those who operate over multiple states. The harmonization of WHS legislation has been implemented progressively by each state enacting legislation based on a Model Work Health and Safety Act (‘Model Act’). As at April 2019, Victoria and Western Australia remain the only two states that have not implemented the Model Act although Western Australia is in the process of introducing the vast majority of the Model Act.28

24 Department of Infrastructure, Regional Development and Cities, Infrastructure Investment Program (2 April 2019) Australian Government . 25 ‘5655.0 – Managed Funds, Australia, Mar 2018’, Australian Bureau of Statistics (Web Page, 7 June 2018) . 26 Damian McNair, Investing in Infrastructure: International Best Legal Practice in Project and Construction Agreements – 2017 (PricewaterhouseCoopers) i . 27 Work Health and Safety Act 2011 (ACT); Work Health and Safety Act 2011 (NSW); Work Health and Safety (National Uniform Legislation) Act 2011 (NT); Work Health and Safety Act 2011 (Qld); Occupational Health and Safety Act 2004 (Vic); Occupational Safety and Health Act 1984 (WA). 28 “The Development of model WHS Law.” Safe Work Australia (Web page 21 May 2020) .

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39

Persons in control of workplaces owe a duty of care to their employees to provide a safe working environment. Each state and territory has a regulator with broad investigatory powers to ensure compliance with WHS legislation. The consequences of failing to comply with WHS legislation can include hefty penalties or imprisonment. Depending on the severity of the breach, individuals, such as company directors, can be personally prosecuted and sentenced to jail.29

2.4. Industrial Relations 2.4.1.

2.4.2.

All states except Western Australia have referred their industrial relations power to the Commonwealth Government, and accordingly, the Fair Work Act 2009 (Cth) applies to all states except Western Australia.30 The legislation provides workplace laws that are designed to promote productivity and economic growth, as well as provide a framework for cooperative and fair workplace relations. Fair Work Building and Construction Commission (previously known as the Australian Building and Construction Commissioner) is primarily responsible for the regulation and enforcement of workplace relations laws.31

2.5. Protection of the Environment 2.5.1.

Each state and territory has legislation in place to protect the environment (‘environmental legislation’). The environmental legislation is generally enforced by a regulator in each state and territory. Persons undertaking construction work may be required to obtain a permit or licence from the relevant regulator to undertake certain work. In addition, there is also different statebased legislation in relation to water, air and noise pollution. Further, if a project is deemed to be of national environmental significance, approval may

29 For example, under s 31 of the Model Act, where a director commits a breach of duty by being reckless as to the risk to an individual of death or serious injury or illness, the penalty can be up to a fine of AUD 600,000 and/or five years’ imprisonment. For these serious offences, the prosecution must prove that the conduct was engaged in without reasonable excuse. 30 The Australian Constitution provides no direct power for the Commonwealth Parliament to enact laws relevant to employment or industrial relations. Therefore, the Fair Work Act 2009 (Cth) relies upon the states referring employment and industrial relations powers to the Commonwealth, which all states have done so except Western Australia. 31 Building and Construction Industry (Improving Productivity) Act 2016 (Cth) s 29.

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Andrew Stephenson

also be required at the Federal level under the Environment Protection and Biodiversity Conservation Act 1999 (Cth).

2.6. Quality Assurance 2.6.1.

2.6.2.

Quality assurance provisions apply in each state and territory in relation to residential construction work. Under this legislation, warranties related to the performance of work and the suitability of materials are implied into every contract of residential building work, although the precise nature of these warranties varies depending on the relevant legislation.32 Outside the context of residential building work, the Australian Consumer Law (‘the ACL’), contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth), provides for added quality control guarantees applicable to ‘consumer’ transactions. Consumer transactions are defined as a transaction either under AUD 40,000, or for goods or services that are acquired for ‘domestic household use or consumption’. Specific protections include the implication of guarantees of quality and fitness for purpose. Both the warranties applicable under relevant domestic building acts and the ACL cannot be varied or excluded by contract.33

2.7. Construction Contracting Dynamics 2.7.1.

The party that usually selects the form of contract differs depending on the circumstances. Typically, between: (a) owner and head contractor – the owner selects the contract; (b) head contractor and subcontractor – the head-contractor selects the contract although subcontractors that provide unique products may have superior bargaining power with the result that they dictate the terms of the contract; (c) equipment supplier and purchaser (the owner or the head contractor) – depending upon the number of alternative suppliers, which will determine the bargaining position of the suppliers, the equipment supplier will offer the contract;

32 Building Act 2004 (ACT); Domestic Building Contracts Act 1995 (Vic); Home Building Act 1989 (NSW); Home Building Contracts Act 1991 (WA); Building Act 1993 (NT); Queensland Building and Construction Commission Act 1991 (Qld); Building Work Contractors Act 1995 (SA); Residential Building Work Contracts and Dispute Resolution Act 2016 (Tas). 33 Competition and Consumer Act 2010 (Cth) sch 2 ss 3, 54, 55, 64.

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consultant (architect or engineer) and the owner or head contractor – the contract will be selected by either party depending on the particular commercial dynamics. A project financier will not usually select a contract. However, a project financier will often decide to review a contract and may call for modifications of the contract. (d)

2.7.2.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Australian courts generally uphold the principle of pacta sunt servanda (i.e. agreements must be kept) in respect of a valid contract. Accordingly, courts generally strive to uphold the original bargain struck by the parties.  

3.2. Elements of a Valid Contract 3.2.1.

Broadly speaking, for a valid contract to exist under Australian law there must be: (a) An offer: This means an expression of willingness to enter into a contract on certain terms. Whether an offer has been made will depend on whether it would appear, to a reasonable person, that an offer was intended. That is, an objective test is applied.34 (b) Acceptance: This means an unqualified assent to the terms of the offer. An offeree will be taken to have accepted an offer if the offeree behaves in such a way that a reasonable person would regard the conduct of the offeree as signalling to the offeror that his offer has been accepted.35 (c) Capacity to create a legally binding agreement: A contract will be void if the parties to it do not have contractual capacity. There are certain persons and classes of persons that lack the requisite capacity, including minors, intoxicated persons and those suffering from mental disorders.36 (d) Intention to create legal relations: Courts take an objective approach towards ascertaining an intention to create legal relations. The test is

34 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020) [03-001]. 35 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020) [03-030]. 36 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020) [16-010] – [16-340] (minors), [16350] – [16-450] (mentally disabled and intoxicated persons).

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what a reasonable person would take to be the intent of the parties as evidenced by their actions in the circumstances.37 (e) Consideration: A promise is generally only binding if the promise is supported by consideration. Valuable consideration may consist of some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility suffered by the other. That benefit or detriment must be conferred on the promisor, or suffered by the promisor in return for the promise.38 (f) Sufficient certainty and completeness of terms: Uncertainty will arise where the language is so obscure that it is not capable of any definite or precise meaning. However, as long as the contract is capable of some meaning, the court will uphold it and attempt to resolve any ambiguity.39 Each of these elements must be present in order for a valid contract to be formed. In addition, terms may be implied into a contract by common law or by statute. Some statutes introduce implied conditions or guarantees into contracts. Such statutes often prohibit the parties to a contract from ‘contracting out’ of a statutory implied term. For example, s 64 of the ACL provides that certain guarantees cannot be excluded by contractual terms.

3.3. Legal Framework 3.3.1.

3.3.2.

3.3.3.

The law of contracts in Australia exists predominantly within the common law. While some aspects are impacted by statute, such as the ACL, the majority of the law comes from the vast body of case law that has been developed through the state and federal court systems. Decisions from other common law countries may be persuasive, but are not binding. Due to the common law nature of contract law, judges play a very important role in determining the law and interpreting any relevant statutes. Judges and case law are also both crucial to interpreting contracts made between various parties. Judges will apply the principles laid down in prior cases to interpret the contract before them and settle any disagreements or disputes between the parties. While there is a single Australian common law, different constructions of the law can arise in different states and territories, due to the structure of the Aus-

37 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020)[08-001] – [08-020]. 38 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020)[06-001]. 39 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020)[04-001] – [04-030].

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tralian court system. Therefore, there may be different interpretations of the law in each state that have been enunciated by the respective supreme courts. Where such differences exist, these can only be resolved by a judgment of the High Court of Australia. As stated above, statute law plays a limited role in contract law within Australia. Therefore, court judgments and the common law are central in defining those aspects of the law that are not specified in legislation. The vast body of common law on the subject of contracts is what defines the majority of contract law within Australia.

3.4. Public Policy 3.4.1.

Under the common law in Australia a variety of contracts cannot be legally enforced on the grounds of public policy. Over time the position has been developed that it would be wrong to allow parties to rely on the existence of a contract to enforce their rights in certain circumstances. Examples of contracts which may be deemed to be unenforceable on grounds of public policy include: (a) contracts which are entered into with the object of committing an illegal act;40 (b) contracts which are prejudicial to the administration of justice;41 (c) contracts which seek to oust the jurisdiction of the courts;42 and (d) contracts which create a conflict between a person’s public duty and his or her private interest.43

40 Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 413 (Gibbs ACJ); Nelson v Nelson (1995) 184 CLR 538, 549 ( Deane and Gummow JJ), 594–5 (Toohey J); Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215, 218–19 (Dawson and Toohey JJ), 223 (McHugh and Gummow JJ), 244–5 (Kirby J). 41 Any contact ‘having a tendency, however slight, to interfere with the administration of justice’ is contrary to public policy: A v Hayden (1984) 156 CLR 532, 533, 537 (Mason J), 543 (Gibbs CJ), 586 (Brennan J). In this case, the High Court held that the promise by the Commonwealth not to disclose the identity of its employees in the employment contract (who were members of the Australian Secret Intelligence Service) was not enforceable because it prevented the government from revealing information that would assist in the investigation of a crime, and this interfered with the administration of justice. 42 Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643; Brooks v Burns Philp Trustee Co (1969) 121 CLR 432; South Australian Railways Commissioner v Egan (1973) 130 CLR 506; Murphy v Benson (1942) 42 SR (NSW) 66; Novamaze Pty Ltd c Cut Price Deli Pty Ltd (1995) 128 ALR 540. 43 Wilkinson v Osborne (1915) 21 CLR 89; Horne v Barber (1920) 27 CLR 494; Wood v Little (1921) 29 CLR 564; R v Boston (1923) 33 CLR 386.

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3.5. Statute Law 3.5.1.

While the foundations of contract law in Australia are found within the common law, there are various areas which have been influenced over time by statute law at both a state and federal level. This is the case in areas such as adjudication, consumer law, proportionate liability, bribery and corruption, contractors’ and subcontractors’ liens. A few of these areas of the law are discussed in more detail at Section 4.1 below.

3.6. Implied Contract Terms 3.6.1. 3.6.2.

3.6.3.

3.6.4.

In Australia, contract terms may be implied by fact and by law. Terms implied by fact are said to be based on the presumed intention of the parties (on the hypothesis that the parties would have included them if they had thought of them). For a specific term to be implied, it must satisfy the fivelimbed BP Refinery test,44 which was endorsed in Codelfa Constructions:45 (a) it is capable of clear expression; (b) it is reasonable and equitable; (c) it is necessary to give business efficacy to the contract; (d) it is so obvious that it goes without saying; and (e) it is consistent with the express terms of the contract. In respect of terms implied by law, one example is the common law duty to cooperate which is implied into every contract.46 That is, each party agrees, by implication, to do all such things as are necessary on his or her part to enable the other party to have the benefit of the contract. This may mean, for example, that a principal must give possession of a site to a contractor within a reasonable time, or if instructions, nominations, information, plans or details are required, the principal may be under an implied duty to supply them within a reasonable time. Traditionally, a general implied duty of good faith has not been recognized in Australian contract law. However, the law is unsettled and the position varies from state to state.47 The content of this duty, where it does arise, appears to be as follows:

44 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283. 45 Codelfa Constructions (1982) 149 CLR 337, 347 (Mason J). 46 Mackay v Dick (1881) 6 App Cas 251; Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 607. 47 In general, decisions at first instance and by intermediate courts of appeal (particularly the New South Wales Court of Appeal) have recognised that an obligation of good faith ‘may be implied as a matter of law as a legal incident of a commercial contract’: Vodafone Pacific Ltd v Mobile Innovations

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(a) (b) (c)

45

the duty prevents parties from exercising contractual powers ‘capriciously’ or for an ‘extraneous purpose’; is likely to include the duty to cooperate as one of its obligations; and will require parties to act reasonably in performing their contractual obligations.

3.7. Construction of Contract Terms 3.7.1.

3.7.2.

In broad terms, courts strive to give a contract a meaning consistent with the objective intent of the parties as determined by reference to the terms of the contract. Australian law takes an objective approach, meaning words are to be understood by determining what a reasonable person would understand them to mean. That said, evidence of surrounding circumstances (which may affect a reasonable person’s understanding) is admissible in the interpretation of a contract if the language is ambiguous or susceptible to multiple interpretations.48 Evidence is not admissible to prove the actual intention of either party, for the purpose of construing the contract.49 While ‘factual matrix’ evidence may be admitted, the circumstance in which it may be admitted remains unsettled.50 However, it is uncontroversial that such evidence may be admitted if it assists in resolving an ambiguity. Some decisions at the intermediate appellate court level suggest that such evidence may be admitted even where no ambiguity exists.51 The question as to the extent of circumstances in which factual matrix evidence can be admitted awaits a final determination by the High Court. Where such evidence is admissible, it is limited to factual matters which were known, or ought reasonably to be known to the parties which indicate the ob-

Ltd [2004] NSWCA 15; Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17; Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91. However, other decisions at first instance, and by the Victorian Court of Appeal, have approached the issue as one of implication of fact: Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL & Ors [2005] VSCA 228. 48 JW Carter, LexisNexis, Carter on Contract (online at 2 July 2020) [12-001]. 49 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 432, 429. 50 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 45; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 251 CLR 640. 51 County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2008] NSWCA 193, [150]; MBF Investments Pty Ltd v Nolan [2011] VSCA 114, [195] – [204]; Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 154, [22].

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ject of the contract and otherwise provide a context.52 As discussed above, it does not include evidence of actual intent.

3.8. Private and Public Procurement 3.8.1.

3.8.2.

3.8.3.

3.8.4.

The processes of public procurement have undergone extensive review over the past few years, with the Federal Government commissioning a Productivity Commission Report into Public Infrastructure in 2014.53 The Productivity Commission released the Public Infrastructure Report in May 2014. The report recommended that planning and tendering arrangements be significantly improved.54 The recommendations were targeted at both state and federal governments. Many of the recommendations suggested ways in which governments could help to reduce bid costs in the tender process, thereby encouraging an increase of PPPs.55 All Australian state and territory government agencies apply the National Public Private Partnership Policy and Guidelines (‘Guidelines’),56 formed by the Council of Australian Governments in 2008, in the procurement of PPPs. The Guidelines act as a general policy statement about the objectives and processes involved in the procurement of infrastructure projects. They do not have legislative force, and their aims are mostly stated in broad aspirational terms rather than as blanket rules. Generally, projects over AUD 50 million in value are candidates for procurement by way of a PPP. Procurement is usually achieved through an extensive tender process, involving an expression of interest phase, a proposal phase, and finally the negotiation and completion of the contract with the approved bidder. The decision of when a procurement project will be appropriate for delivery via PPP is at the discretion of the government agency, which has the ultimate say in the way in which procurement outcomes are achieved.

52 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 185 ALR 152, [11]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 45. 53 Productivity Commission, Public Infrastructure (Inquiry Report No 71, 27 May 2014). 54 See for example, Productivity Commission, Public Infrastructure (Inquiry Report No 71, 27 May 2014) 12.1, 12.2, 12.3 and 12.5. 55 See for example, Productivity Commission, Public Infrastructure (Inquiry Report No 71, 27 May 2014) 12.1, 12.2, 12.3 and 12.5. 56 Department of Infrastructure and Regional Development, National Public Private Partnership Guidelines (December 2008).

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

The Federal Government has not passed any legislation which is directed exclusively towards the contracting practices of the construction industry or participation in the construction industry. Given the limited nature of the power of the Federal Government granted by the Australian Constitution, it would be difficult for the Federal Government to pass such legislation. At a state level, all states and territories require registration of commercial builders.57 Most states and territories also require mandatory insurance, although this is often quite limited in its scope.58

Security of payment 4.1.3. Although security of payment legislation is not uniform across all Australian states, the essence of the legislation remains the same. Its aim is to protect contractors’ rights to receive payment for works by providing a legislative mechanism for the making of, and the determination by adjudication of, progress payments. The legislation contains ‘no contracting out’ provisions which prevail over any contractual clauses which seek to circumvent the legislative process. In addition, the legislation includes provisions which restrict certain contractual clauses such as ‘pay when paid’ clauses, which are prohibited.59 Residential construction 4.1.4. The construction of domestic residences is subject to significant regulation in all Australian states.60 This legislation often requires compulsory registration

57 See Building Act 1993 (Vic) pt 11; Pt 3 Home Building Act 1989 (NSW); Queensland Building and Construction Commission Act 1991 (Qld) pt 3; Building Act 1993 (NT) pt 3 div 1; Building Services (Registration) Act 2011 (WA) pt 3; Building Work Contractors Act 1995 (SA) pt 2; Occupational Licencing Act 2005 (Tas) s 22A. 58 See Building Act 1993 (Vic) pt 9; Home Building Act 1989 (NSW) pt 6; Queensland Building and Construction Commission Act 1991 (Qld) pt 5; Building Act 1993 (NT) s 25C; Building Services (Registration) Act 2011 (WA) s 18; Building Work Contractors Act 1995 (SA) pt 5 div 1. 59 See Building and Construction Industry Security of Payment Act 2009 (SA) s 12; Building and Construction Security of Payment Act 2002 (Vic) s 13; Building and Construction Industry Security of Payment Act 1999 (NSW) s 12; Construction Contracts Act 2004 (WA) s 9; Building and Construction Industry Security of Payment Act 2009 (Tas) s 16; Building and Construction Industry (Security of Payment) Act 2009 (ACT) s 14; Building Industry Fairness (Security of Payment Act 2017 (Qld) s 74. 60 Home Building Regulation 2014 (NSW); Domestic Building Contracts Act 1995 (Vic); Building Work Contractors Act 1995 (SA); Home Building Contracts Act 1991 (WA); Queensland Building and Construction Commission Act 1991 (Qld); Residential Building Work Contracts and Dispute Resolution Act 2016 (Tas); Building Regulations 1993 (NT); Building Act 2004 (ACT).

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of contractors, compulsory insurance for the benefit of home owners and prescribed requirements in relation to contracts.61 In addition, there are often statutory warranties with respect to the quality of home building which apply for the benefit of subsequent purchasers of homes.62 Australian Competition and Consumer Law 4.1.5. Australia has one national law for fair trading and consumer protection – the Competition and Consumer Act 2010 (Cth) (‘CCA’), which is enforced by the Australian Competition and Consumer Commission (‘ACCC’). The CCA imposes numerous requirements on all contracting parties related to: (a) competition (antitrust) violations;63 (b) consumer protection (through provisions related to implied guarantees, unfair consumer contracts and other behaviour directed at consumers);64 and (c) breach of other community standards, including provisions against engaging in misleading or deceptive conduct or unconscionable dealing.65 4.1.6. These provisions can also be enforced by private parties, and have been litigated extensively. Proportionate liability 4.1.7. The proportionate liability regime in Australia amends the common law concept of joint or joint and several liability. The legislation limits a concurrent wrongdoer’s liability to an amount that reflects the proportion of the damage or loss that a court considers just, having regard to the extent of the defendant’s responsibility for the damage or loss.66 Bribery and corruption 4.1.8. Under Australian law, bribery is dealt with through both State and Commonwealth criminal legislation.

61 Building Act 2004 (ACT) s 90, div 6.2A; Building Act 1993 (NT) s 54C; Queensland Building and Construction Commission Act 1991 (Qld) s 67X, sch 1B pt 2 div 1; Home Building Regulation 2014 (NSW) pts 2, 3, 6; Domestic Building Contracts Act 1995 (Vic) ss 29(b), 31(l), pt 2; Building Work Contractors Act 1995 (SA) ss 6, 34, pt 5 div 1; Home Building Contracts Act 1991 (WA) pts 2, 3A; Residential Building Work Contracts and Dispute Resolution Act 2016 (Tas) pt 5. 62 See for example s 88 Building Act 2004 (ACT); s 54B Building Act 1993 (NT); Pt 6 Residential Building Work Contracts and Dispute Resolution Act 2016 (TAS); Pt 3 Sch 1B Queensland Building and Construction Commission Act 1991 (QLD); Pt 2 Div 1 Domestic Building Contracts Act 1995 (Vic); s32 Building Work Contractors Act 1995 (SA); s11 Home Building Contracts Act 1991 (WA). 63 See Competition and Consumer Act 2010 (Cth) pt IV. 64 See Competition and Consumer Act 2010 (Cth) sch 2 (Australian Consumer Law). 65 Competition and Consumer Act 2010 (Cth) ss 20–22, 29–37. 66 See Competition and Consumer Act 2010 (Cth) Sch 2 (Australian Consumer Law) ss 87CC, 87CD.

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4.1.9.

At the Commonwealth level, bribery of a Commonwealth official is regulated under pt 7.6 of the Criminal Code Act 1995 (Cth), with separate offences related to bribery of foreign officials covered under div 70 of the Act. 4.1.10. In addition, state laws impose additional criminal liability on parties to bribery when the person involved is not a Commonwealth employee. 4.1.11. In 2015, a Royal Commission into Trade Union Governance and Corruption was completed. It had a particular focus on construction industry unions and found that ‘systemic corruption and unlawful conduct, including corrupt payments, physical and verbal violence, threats, intimidation, abuse of right of entry permits, secondary boycotts, breaches of fiduciary duty and contempt of court’ were present in the industry.67 4.1.12. The main relevant finding of the Royal Commission was its support for the return of an independent regulator for the building and construction industry that had previously existed between 2005 and 2012.68 In 2016, the Australian Building and Construction Commission was reformed. Contractors’ or subcontractors’ liens 4.1.13. In Australia, property rights in goods other than land are universally regulated under the Personal Property and Securities Act 2009 (Cth) (‘PPSA’). The PPSA provides for a system of registration of interests and the management of priority between competing interests. Under the PPSA, registered or ‘perfected’ interests in property take priority over all other claims. Importantly, the definition of a ‘security interest’ under s 12 of the PPSA is stated in broad terms as ‘an interest in personal property by a transaction that, in substance, secures payment or performance of an obligation’.69 This means that it could potentially apply to a large number of construction law securities, including performance bonds, retention monies, retention of title clauses, and other similar rights.

4.2. Codes of Practice 4.2.1.

A number of states have published Codes of Practice relevant to the construction industry. The Federal Government has also published such a code.70

67 Royal Commission into Trade Union Governance and Corruption (Final Report, December 2015) vol 5, ch 8. 68 Royal Commission into Trade Union Governance and Corruption (Final Report, December 2015) vol 5, ch 8. 69 Noting that the PPSA only applies to consensual transactions: Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd & Ors [2014] VSCA 326; Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217. 70 National Code of Practice for the Construction Industry (NCC).

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4.2.2.

The motivation for the publication of these codes was to increase the productivity of the construction industry, improve its tendering practices, improve its industrial relations practices and reduce disputes.71 The codes mandate practices relevant to publicly funded projects. They seek to change the current behaviour within the industry through the advocacy of changed practices in relation to public projects. In some instances the codes provide that a contractor seeking any government work must adhere to the relevant practices in all of the contractor’s projects, including any private projects. These Codes of Practice operate as a matter of policy and purchasing preference. They do not have legislative force. They often mandate the use of a contract from an approved list and also call for minimal amendments to be made to the contract. This control over the contracts used in public sector procurement is intended to increase efficiency, lower costs and reduce disputes by reason of the increased familiarity with the contracts.

4.2.3.

4.2.4. 4.2.5.

4.3. Licensing of Professionals and Contractors 4.3.1.

Licensing of construction professionals is undertaken at a state level, with each state having its own regulatory authority managing the registration of building professionals.72 While some minimal work can be carried out by a person other than a licensed practitioner (for example in Victoria, work not exceeding AUD 5,000 that does not involve the re-blocking, re-stumping, demolishing or removing of a home),73 the vast majority of construction work cannot be performed without the contractor being licensed, accredited or registered to do so. Performing work without a license is a criminal offence, and can result in prosecution by the relevant state authority. In Queensland, an unregistered practitioner cannot recover the contract price, although it will be able to recover the costs of doing the relevant work. To become an accredited or registered building licensee, proof of an appropriate prescribed qualification or equivalent qualification is required. In addition, applicants must meet ‘good character’ requirements, with the building

4.3.2.

71 As of 1 May 2019, all States and the Northern Territory have adopted the 2019 edition of the NCC: ‘NCC 2019 was adopted by all States and the NT on 1 May!’, Australian Building Codes Board (Web Page, 1 May 2019) . 72 See e.g. Building Professionals Act 2005 (NSW); Architects Act 1991 (Vic); Professional Engineers Act 2002 (Qld). 73 See for example, Building Regulations 2018 (Vic) Sch 3, item 3.  

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authorities in each state having an entitlement to refuse registration on the grounds that the applicant’s conduct does not meet the standards required by the profession.74

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

5.1.3.

There are a number of standard form contracts in use in Australia. Some of these are appropriate for building and construction projects generally, whereas others are more suited to specific areas such as mining or engineering. For example, the FIDIC contracts are sometimes used in the mining and resources industry and also in relation to some renewable energy projects, although the adoption of these terms is rare. The NEC Engineering Construction Contract, while being used for engineering projects, is also rarely, if ever, used. Standard form contracts are often amended, sometimes quite heavily. Completely bespoke contracts are occasionally used, particularly for larger projects.

5.2. Most Commonly Used 5.2.1.

The most commonly used standard form contracts are the suite of contracts published by Standards Australia. A number of organisations have sought to introduce additional standard forms as an alternative to those published by Standards Australia, however these alternative forms have not generally been widely adopted by the construction industry. One example of an alternative standard form which is sometimes used in construction is the PC-1 1998 contract published by the Property Council of Australia.

5.3. Example 1 – AS 4000-1997 – General Conditions of Contract 5.3.1.

AS4000-1997 is a standard form construction contract published by Standards Australia and is one of the most widely used forms of head contract for

74 See for example, ss 9-11 of the Professional Engineers Act 2002 (Qld).

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5.3.2.

5.3.3.

Andrew Stephenson

construction projects in Australia. This standard form contract is used for construction only and is for a lump sum payment. There are a number of clauses that set this standard form contract apart from other standard form contracts. For example, clause 41.2 provides that a party’s failure to comply with the notice provisions of the contract, entitles the other party to damages for a breach of contract, but does not invalidate or bar the party’s claim. This is an uncommon provision as the usual position is that the party is barred from making a claim if the notice provisions have not been complied with. However, this standard form is usually amended before use, mostly to shift the risk to either the principal or contractor. Also, given that the standard form contract is over 20 years old, it is generally amended to account for pieces of legislation that have been passed since its introduction that can affect the parties’ rights and obligations.

5.4. Example 2 – AS 4902-2000 – General Conditions of Contract for Design and Construct 5.4.1.

5.4.2.

AS4902-2000 is in the same suite as AS4000-1997 and, in fact, has a similar risk profile, drafting and formatting as the construct only standard form. This standard form is a widely used form of head contract for design and construct projects in Australia. This standard form is usually amended before use, mostly to manage the risk profile.

6. Key Issues: AS4300 and PC-1 6.1. Overview 6.1.1.

This section provides a comparative analysis between two commonly used design and construct construction standard form contracts in Australia, the Australian Standard form AS4300-1995 and the Property Council of Australia’s Project Contract PC-1 1998. Both forms are suitable for design and construct projects. The Australian Standard suite of contracts has been described as the most commonly used contract forms in the Australian construction industry today.75 As the standard forms are drafted by a committee representing

75 Ian H. Bailey and Matthew Bell, Understanding Australian Construction Contracts (Thomson Lawbook Co, 2008) xli.

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6.1.2.

6.1.3.

53

various Australian interest groups, the contracts are thought to provide a balanced risk allocation between principal and contractor. However, the contracts are similarly criticised as having ‘imprecise risk allocation and drafting due to the compromised method of negotiation and preparation involving industry interest groups with a vested interest’.76 As such, whilst the Australian Standard form construction contracts are the most commonly used, it is rare to find a project where that form is used unamended. The main point of difference between the Australian Standard suite of contracts and PC-1 is that the Property Council of Australia has prepared PC-1 purely from an owner’s perspective. The rationale for such drafting was to attract competitive tenders and performance from contractors. Its drafting is intended to pass more of the project risk to contractors. Below is a comparison of the risk allocation stipulated by the Australian Standards Contract AS4300-1995 with the Property Councils PC-1. The comparison looks at the two contracts’ treatment of design, quality, time, cost, security and the dispute resolution procedures.

6.2. Fit for Purpose 6.2.1.

6.2.2.

6.2.3.

6.2.4.

The contractor is required to use materials and standards of workmanship required by the contract and in the absence of any such requirements, new materials and proper tradesmanlike workmanship pursuant to cl 30.1 of AS4300. Whilst there is no express requirement that the materials or the works are fit for purpose under that clause, cl 4.1 of that contract requires the contractor to warrant that the works, when completed, shall be fit for their stated purpose and comply with all requirements of the contract and all legislative requirements. In contrast, PC-1 cl 9 requires a higher standard of workmanship and materials in the absence of a prescribed contractual standard. It requires that work be of, and materials will be of, the best industry standard of work and materials. What constitutes proper tradesmanlike workmanship for the purposes of the Australian Standards contract will be a question of fact and therefore the words themselves have not been the subject of judicial interpretation in Australia. However, the United States District Court provides some useful guidance. In Aquila LLC v City of Bangor 640 F Supp 2d 92 (D Me, 2009), Woodcock CJ held that tradesmanlike workmanship means the quality of work

76 Sergio Capelli, ‘The Property Council of Australia Standard Form Contract – A User’s Guide’ (1999) 66 Australian Construction Law Newsletter 16.

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6.2.6.

Andrew Stephenson

that would be done by a worker of average skill and intelligence. Similarly, in Jones v Davenport,77 the court held that tradesmanlike workmanship is defined as the way work is customarily done by other contractors in the community. In either case, the standard of work required is less than the best industry standard required by PC-1. PC-1 also requires that workmanship and materials be fit for purpose.78 Further, such materials are to be of merchantable quality, consistent with the nature and character of the works and are to comply with the requirements of the Building Code of Australia and all relevant Australian Standards to the extent those standards are not inconsistent with the requirements of the contract.79 These express additional warranties in respect of materials supplied circumvent the need for the owner to establish the elements required for an implied warranty at common law of merchantable quality and to ensure that the works when constructed are done so to the highest standard.

6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

6.3.4.

Most contracts will contain a liquidated damages clause. That is, the contractor will become liable to pay a predetermined daily or weekly amount as compensation for late completion. The amount nominated by way of liquidated damages must be reasonable and reflect the anticipated losses that might arise by reason of the lateness.80 AS4300 contains a liquidated damages clause. Clause 35 states that if a contractor fails to reach practical completion by the date set, then they will be indebted to the principal for liquidated damages at the rate stated in Annexure Part A for every day of late completion. AS4300 also allows for the contractor’s liability in respect of liquidated damages to be limited to an amount agreed to by the parties in the contract. Further, if after the contractor has paid or the principal has deducted liquidated damages, the time for practical completion is extended, the principal shall repay to the contractor any liquidated damages paid or deducted in respect of the period to and including the new date for practical completion. The PC-1 also contains a liquidated damages clause. Clause 13.7 states that the amount of liquidated damages are to be set in the contract particulars by

77 (Jan. 26, 2001), 2nd Dist. No. 18162, at 8, citing Salewsky v. Williams (Sept. 17, 1990), 5th Dist. No. CA-8131, at 4. 78 Property Council PC-1 1998 cl 9.1. 79 Property Council PC-1 1998 cl 9.1. 80 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, [86].

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6.3.5.

6.3.6.

6.3.7.

the parties and should represent a genuine pre-estimate of the damages the owner will suffer if the work is completed late. An arbitrary or plainly harsh figure should be avoided, as it may later be susceptible to attack as a penalty. In contrast to AS4300 there is no inclusion of a limit on contractor liability in the standard form of PC-1. This is consistent with the intention of PC-1 being more favourable to the owner. It is becoming increasingly common in practice for head contractors to seek to limit liquidated damages. This limit is usually a percentage of the contract sum. Such limitations are common in projects for energy and resources companies. They are also found in contracts between concessionaires and contractors in PPP projects. However, if the cap is reached, some of those contracts require the contractor to ‘up the limit’ or otherwise the failure to complete on time will be deemed to be a ‘major default’ which may lead to termination. AS4300 entitles the contractor to claim an extension of time to the date for practical completion if the contractor is or will be delayed in reaching practical completion by a relevant cause.81 It does not matter whether the contractor will be delayed in achieving practical completion by the date for practical completion stipulated in the contract. As such, in circumstances where the contractor is forecasting earlier completion than that prescribed by the contract, and it is delayed by a relevant cause, it will nevertheless be entitled to an extension of time. In contrast, PC-1 requires that any delay cause the contractor to be unable to achieve completion by the date for completion.82 Therefore, any delays experienced by the contractor which would otherwise not prevent it from achieving the date for completion would not give rise to an extension of time. The contractor must first use up its program float (i.e., in this context, the period between the planned date for completion and the contractual date for completion) for the benefit of the principal. In addition to the contractor actually being delayed or likely to be delayed in achieving completion by the date for completion, PC-1 requires the contractor provide a written claim, and to have not been given an instruction to accelerate, as prerequisites to an extension.83 Where an extension of time is granted, the contactor may be entitled to claim delay and/or disruption costs: (a) in the case of AS4300, where the delay is caused by the principal or other delay caused by any event for which payment of costs for delay or  

6.3.8.

6.3.9.

55

81 Standards Australia AS4300-1995 cl 35.5. 82 Property Council PC-1 1998 cl 10.7. 83 Property Council PC-1 1998 cl 10.6.

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(b)

disruption is provided for in the Annexure, such extra costs as are necessarily incurred by the contractor by reason of the delay;84 and in the case of PC-1, where the delay is caused by: (i) a breach of contract by the owner only, the amount stated in the contract particulars for each day by which the date for completion is extended, and that amount will be a limitation upon the owner’s liability to the contractor for any delay or disruption which the contractor encounters, arising out of, or in any way in connection with the breach by the owner;85 or (ii) a variation, in which case the right to prolongation costs is set out in cl 11, being the variation clause.

6.4. Latent Conditions 6.4.1.

6.4.2.

6.4.3.

Some contracts will contain a clause dealing with latent or unforeseen conditions, which usually gives rise to claims for unforeseen ground conditions. The clause is often limited to such conditions. Latent conditions are unexpected conditions which could not have reasonably been anticipated. The AS4300 contains a latent condition clause. It applies to physical conditions on the site and its surrounds (excluding weather). Clause 12 states that if the contractor becomes aware of a latent condition during the execution of the work, then the contractor shall give written notice to the superintendent. Where possible this should be done before the latent condition is disturbed. If required by the superintendent, the contractor shall provide a written statement specifying: (a) the latent condition encountered and in what respects it differs materially; (b) the additional work and additional resources which the contractor estimates to be necessary to deal with the latent condition; (c) the time the contractor anticipates will be required to deal with the latent condition and the expected delay in achieving practical completion; (d) the contractor’s estimate of the cost of the measures necessary to deal with the latent condition; and (e) other details reasonably required by the superintendent. Under AS4300, delay caused by the latent condition may justify an extension of time and cost if the contractor has to carry out more work, use more con-

84 Standards Australia AS4300-1995 cl 36. 85 Property Council PC-1 1998 cl 10.11.

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structional plant or incur more cost than the contractor could have reasonably anticipated at the time of tendering.86 PC-1 also contains a latent conditions clause. It applies to ground conditions only at site (other than conditions due to inclement weather) which differ materially from those which should have been anticipated by a prudent, competent and experienced contractor. Clause 7.3 allows the contractor to claim extra costs reasonably incurred after giving notice to the contract administrator, who will make a determination within 21 days. The reference to a ‘prudent, competent and experienced’ contractor places a more stringent responsibility on the contractor to anticipate latent conditions than is the case with AS4300, which simply states the threshold is that which a ‘[c]ontractor could have reasonably anticipated at the time of tendering’.87 In practice, the latent condition clause is often amended from its standard form. Owners seek to narrow the application of the clause and place more risk on the head contractor. This amendment is often accompanied by clauses which seek to protect the owner from deficiencies or inadequacies in information which the owner may have given to the head contractor. There is considerable unhappiness amongst head contractors on this issue and some resist the amendments made by the owners.

6.5. Force Majeure 6.5.1.

6.5.2.

6.5.3.

6.5.4.

The concept of force majeure is not known to Australian law. While Australian law recognizes the doctrine of frustration of a contract, this is much narrower than the concept of force majeure. Despite this, the concept of force majeure is sometimes drafted into contracts. This traditionally occurred in relation to contracts in the resources industry. Many financiers will also request the inclusion of a force majeure clause. It is becoming increasingly common for head contractors to request such clauses in contracts for building and civil engineering projects. Owners will often not resist this request in relation to civil engineering projects. Both AS4300 and PC-1 standard contracts do not contain a clause that is explicitly labelled a ‘force majeure’ clause. However, they both do contain clauses which operate to extend the time for completion in specified circumstances. Under both contracts the common law doctrine of frustration may also be relevant. The AS4300 specifically deals with the consequences of frustration in cl 45.

86 Standards Australia AS4300-1995 cl 12.3. 87 Standards Australia AS4300-1995 cl 12.3.

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6.6. Limitation of Liability 6.6.1.

6.6.2.

6.6.3. 6.6.4.

Historically contracts for building projects and civil engineering projects did not contain limitation of liability clauses. The liability of the head contractor was unlimited. This was not the case in relation to contracts for resource projects. Both the AS4300 and the PC-1 do not contain a general limitation of liability clause in their respective standard formats. However, as stated earlier in Section 6.3 Late Completion, AS4300 does provide the option for parties to impose a cap on liquidated damages in cl 35.7. PC-1 does not include such a provision. Further, neither contract excludes liability for indirect or consequential loss as part of their respective standard formats. Despite this, it is becoming increasingly common for head contractors to request the inclusion of a limitation of liability clause in all contracts. This is often accompanied with a request to exclude any liability for economic or consequential loss. Such clauses are becoming more common.

6.7. Duration of Exposure 6.7.1.

6.7.2.

The law in Australia provides a time limit for the bringing of claims in relation to a construction project. The details of these time limits vary between the various states and are quite complicated. In very general terms a claim must be brought within six years (or a longer period if the contract is in the form of a deed) from the breach of contract; however, in some jurisdictions the limitation period for defective work is 10 years from the date on which the project is completed and a statutory certificate is issued certifying completion. Some contracts will include a provision which limits the time for the bringing of claims to a shorter period than provided for in the relevant legislation. This is permissible and such contractual provisions can be effective. However, the usual defects liability period specified in the standard form contracts is unlikely to limit the time for bringing a claim for breach of contract.

6.8. Time Bars 6.8.1.

Time bar clauses operate to restrict the contractor from bringing a claim if they do not comply with the particulars and timing as set out by the contract in situations where they are required to give notice to make a claim. Clauses of this type are common.

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For example, PC-1 does contain a time bar clause in cl 16.5 in relation to the giving of notice for variations and other stipulated events. The clause operates to the effect that if the contractor fails to comply with the timing and particulars of the notice requirements, then the owner will not be liable (insofar as it is possible to exclude such liability) upon any claim by the contractor and the contractor will be absolutely barred from making any claim against the owner arising. This applies to any claim arising out of the relevant direction or fact, matter, or thing to which cl 16.1 or 16.2 applies.

6.9. Cost or Price 6.9.1.

6.9.2.

6.9.3.

88 89 90 91

Each of AS4300 and PC-1 provides that the contract sum or contract price, as the case may be, can be a lump sum, schedule of rates or a combination of both. Unless the contract otherwise provides, the cost of carrying out the work under each contract is to be borne by the contractor. In AS4300, a direction by the superintendent to increase, decrease or omit work, change the character or quality of any material or work, change the lines, levels, positions or dimensions of the work, execute additional work or demolish or remove material or work no longer required constitutes a variation which is to be valued using: (a) prescribed rates or prices; (b) if there are no prescribed rates or prices, the rates or prices in a schedule of rates to the extent it is reasonable to use them; (c) if there are no prescribed rates or a schedule of rates, reasonable rates are to be applied; or (d) in the event that none of (a) to (c) above apply, daywork rates.88 PC-1 provides that a variation is any change to the works including any addition, increase, decrease, omission, deletion, demolition or removal to or from the works.89 The contract administrator may direct variations and request details of the effect a variation is likely to have on the contract price and the date for completion.90 Unlike AS4300, the valuation mechanism in PC-1 clearly sets out the way in which a variation will be priced, including the percentages for non-time related on-site overheads and preliminaries and offsite overheads and profit to which the contractor is entitled.91 This feature of PC-1 avoids any argument between contractor and superintendent as to the value

Standards Australia AS4300-1995 cl 40. Property Council PC-1 1998 cl 1.1. Property Council PC-1 1998 cl 11.1, 11.2. Property Council PC-1 1998 cl 11.3.

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of these mark ups which are often left silent and therefore subject to excessive disputation.

6.10. Security 6.10.1. Under Australian common law, a negative covenant can be enforced by way of an injunction.92 Accordingly, where such a negative covenant is contained in the contract which limits the circumstances in which a call can be made against the security, the contractor may be entitled to an interlocutory injunction, preventing a call being made, pending the resolution of the dispute. To make a successful application for an interlocutory injunction, a contractor needs to establish that: (i) there is a serious question to be tried, (ii) damages are not an adequate remedy, and (iii) there are no discretionary matters which would preclude a grant of an injunction.93 6.10.2. AS4300 contains bilateral arrangements for the provision of security. The form of security to be provided is broad and includes cash, insurance bonds, unconditional undertakings and interest bearing deposits.94 If an unconditional undertaking is proposed, Annexure Part C contains the form of undertaking which is approved. Retention monies may also be withheld. It is very unusual for it to be agreed that the Principal provide security. 6.10.3. In pursuit of a balanced risk allocation between the parties, clause 5.6 contains a fetter on the right to call upon the security. Only once a party has become entitled to exercise a right, and has given 5 days’ notice to the other party of its intention to have recourse to the security, can it access the security. Accordingly, AS4300 contains a negative covenant which is a precondition, in most cases (ie absent fraud) for the grant of interlocutory injunction. 6.10.4. Under PC-1, security is in the form of an unconditional undertaking or retention.95 To the extent that the security held is cash security or retention, there is no requirement for those funds to be held in trust for the contractor unlike the provisions in AS4300, nor is there a requirement for the owner to pay any interest earned on the security to the contractor. 6.10.5. PC-1 does not contain an express provision setting out the circumstances under which the owner may call upon the security or limitations on the calling of the security. This is likely to arise out of a presumption that an uncondi-

92 Pearson Bridge (NSW) Pty Ltd v State Rail Authority of NSW [1982] 1 Aust Const LR 81; Reed Construction Services v Kheng Seng (Aust) (1999) BCL 158, 164–165; Ewin International LP v Ausbulk Ltd [2008] SASC, [82]–[116]. 93 Australian Broadcasting Corporation v O’Neill [2006] HCA 46, [19]. 94 Property Council PC-1 1998 cl 5.3. 95 Property Council PC-1 1998 cl 1.1.

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tional undertaking is exactly that, in the absence of a limitation clause to the contrary, it is subject to no conditions which a contractor can rely on to restrain the principal from making a call. Accordingly, absent a serious issue to be tried relating to some fraud of the principal, the contractor will not be entitled to an interlocutory injunction, even if there is a serious question to be tried as to the principal’s entitlement to the money obtained as a consequence of a call. 6.10.6. The inability to obtain an interlocutory injunction does not prevent the contractor seeking permanent relief, after a trial, for the recovery of money obtained by the principal without justification.

7. Dispute Resolution: AS4300 and PC-1 7.1.1. 7.1.2.

7.1.3.

7.1.4.

7.1.5.

7.1.6.

Both AS4300 and PC-1 contain processes for resolving disputes which ultimately lead to a determination made by an arbitrator. AS4300 contains two alternatives for its process which are selected at the commencement of the project.96 The first is a relatively fast executive negotiation followed by an arbitration in the event that the dispute cannot be resolved by the parties. The second alternative requires a determination of the dispute by the superintendent prior to the executive negotiation. The utility of this extra step is debatable, particularly for disputes in respect of the contractor’s entitlement for an extension of time or valuation of variations, where the superintendent will have already provided his or her determination. None of the dispute resolution processes in AS4300 prejudice the right of a party to seek injunctive or urgent declaratory relief in respect of a dispute under cl 47 or any matter arising under the contract. In contrast, PC-1 distinguishes between disputes which relate to a direction of the contract administrator and disputes which do not.97 The process for resolving each differs materially. In respect of disputes relating to a direction of the contract administrator, the process involves an interim binding expert determination, executive negotiation and an arbitration; those disputes not relating to a direction of the contract administrator omit the expert determination step. The rationale for separating out disputes which relate to directions from those which do not is said to arise as a result of the contract administrator acting as agent for the owner and owing no obligation to the contractor to act fairly or

96 Standards Australia AS4300-1995 cl 47.2. 97 Property Council PC-1 1998 cl 15.

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reasonably in its certification or valuation functions. However, this complicated dispute resolution procedure can take up to 91 days before the parties can refer the dispute to arbitration.

Thomas Frad

Austria 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 3. 3.1. 3.2. 3.3. 3.4. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6.

Context 64 The Country 64 The Legal System 65 The Economy 66 The Construction Industry 67 Size and Nature 67 Participants 68 Work, Health and Safety 69 Protection of the Environment 71 Quality Assurance 72 Legal Underpinnings of Contracts 72 Freedom of Contract 72 Legal Framework 73 Implied Contract Terms 74 Public Procurement 75 Government Involvement 76 Legislation and Regulation 76 ÖNORM 77 Licensing 77 Construction Contracts 78 Most Commonly Used 78 Contract Amendments and Bespoke Contracts Construction Contract Types 79 Sample Construction Contract 79 Key Issues 80 Overview 80 Delay 81 Contractual Penalty 81 Sharing Risk 82 Compensation for Damages 82 Warranty 83

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1. Context 1.1. The Country 1.1.1.

1.1.2.

Austria covers an area of 83,858 km² and consists of nine independent federal states, each with their own provincial government. Austria, officially the Republic of Austria, is a democratic republic. It is bordered by the Czech Republic and Germany to the north, Hungary and Slovakia to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the west.1 Austria’s terrain is highly mountainous given the presence of the Alps. Only 32 % of the country is below 500 m (1,640 ft), and its highest point is 3,798 m (12,461 ft). The country’s official language is German.2 Vienna is the capital of Austria as well as the country’s largest city. The Parliament of Austria is in Vienna. Austria became a federal and parliamentary democratic republic through the Federal Constitution of 1920. After the Second World War, the political system of the Second Republic with its nine states was based on the constitution of 1920 and re-enacted on 1 May 1945.3 The Austrian Federal Government consists of the Chancellor, Vice-Chancellor, and other federal ministers of the Austrian cabinet. Together with the Federal President, the Government forms the Supreme Federal authority. The Federal President is Austria’s head of state and is directly elected by popular vote. The chairman of the Federal Government is the Federal Chancellor.4 The Parliament of Austria consists of two chambers — the National Council and Federal Council. Both execute federal legislation. The composition of the National Council (183 seats) is determined every five years.5 The dominant chamber involved in creating legislation in Austria is the National Council. The Federal Council only possesses a limited right of veto. The National Council can, in almost all cases, bypass this veto by voting a second time. This is referred to as ‘vote of persistence’.6 Austria has been a member of the European Union (‘EU’) since 1995.  

1.1.3.

1.1.4.

1.1.5.

1.1.6.

1.1.7.

1 ‘Austria’, Europa.eu (Web Page, 6 February 2019) . 2 ‘About the EU’, Europa.eu (Web Page, 25 March 2019) . 3 ‘Die Geschichte von Österreich’, Geschichte Österreich (Web Page, 2019) . 4 ‘The Austrian Federal Government’, Federal Chancellery (Web Page) . 5 ‘Who is Who’, Republic of Austria Parliament (Web Page) . 6 ‘Who is Who’, Republic of Austria Parliament (Web Page) .

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1.2. The Legal System 1.2.1.

1.2.2.

The Federal State has exclusive judicial competence under the Federal Constitution Act. Therefore, it is prohibited for federal provinces to establish any courts. Austria‘s judicial system includes ordinary courts, public prosecution offices, prisons (including institutions for penal service as well as court prisons), and the Federal Cartel Prosecutor. Courts are generally State institutions which decide on civil law claims and criminal law charges, pursuant to formal procedure. The judges that manage the courts are independent, impartial, cannot be removed or transferred from office, and are only bound by the legal system.7 One of the most important articles in the Austrian Federal Constitution Act is Article 83 (2) which grants every citizen the right to trial before a judge of law.

The Court System There are three supreme courts: (a) The Constitutional Court, (b) The Administrative Supreme Court, and (c) The Supreme Court. 1.2.3. The judicial courts are organized into District Courts, Regional Courts and four higher Provincial Courts. 1.2.4. District Courts are typically first instance courts that decide civil law claims of up to €15,000. District Courts also have jurisdiction over certain branches of law irrespective of the amount in dispute, e.g. family and rent law cases. 1.2.5. For claims above €15,000, the claim will be heard in Regional Courts (where the claim type is not reserved to District Courts). In addition, Regional Courts are courts of second instance that can rule on appeals against District Court decisions. 1.2.6. Furthermore, there is a third organisational level of four higher regional courts of appeal. They are in Vienna, Graz, Linz and Innsbruck. These courts of second instance can hear all civil and criminal law cases. 1.2.7. The Supreme Court in Vienna is the highest court instance in civil and criminal law cases. The Constitutional Court, Administrative Supreme Court and Supreme Court are together referred to as the ‘Highest Court’ in Austria, meaning that no further domestic remedy is available against its decision. 1.2.8. In cases where District Courts are the court of first instance, appeals are lodged to the more senior Regional Court. An appeal panel will rule as the  

7 ‘The Judiciary’, Federal Ministry of Constitutional Affairs, Reforms, Deregulation and Justice (Web Page) .

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second instance. Whenever Regional Courts act as courts of first instance, there is the possibility of appealing against the judgement. A more senior Regional Court would decide such an appeal as a court of second instance. Where cases concern a decision on legal issues of fundamental importance, it is also possible for a further appeal to be heard in the Supreme Court. Consequently, there are three successive stages in civil law cases.8 Arbitration 1.2.9. Arbitration is a form of dispute resolution where the parties agree that the dispute will not be decided by a State court, but by a panel of arbitrators. However, arbitration clauses are rarely agreed upon between contracting parties in the construction industry. An arbitration agreement must be drawn up in written form to be valid and legally binding. 1.2.10. Compared to State court proceedings, arbitration is generally faster, more expensive, and offers a higher degree of confidentiality. The main advantage is that parties can design arbitral proceedings to a great extent (e.g. language of proceedings, seat of arbitration, applicable law and the arbitrators), which can reflect the needs of the parties involved.9 1.2.11. Austria is signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards10 and supports international arbitration.  

1.3. The Economy 1.3.1.

1.3.2.

As mentioned, Austria has been an EU Member State since 1995. The process of economic adaptation, which started in January 1994 with Austria’s participation in the European Economic Area (‘EEA’), was thus accelerated. EU membership also offered prospects for deepening the scope of integration beyond economic aspects to include trade, agricultural, regional, tax and monetary policies.11 Austria is one of the most prosperous and stable EU Member States. Its economic system is characterised by a free market economy with a strong social focus that considers the weaker members of society. Another important aspect is the system of economic and social partnership, which has traditionally

8 ‘The Courts’, Federal Ministry of Constitutional Affairs, Reforms, Deregulation and Justice (Web Page) . 9 Jens-Peter Lachmann, Handbuch für die Schiedsgerichtspraxis (De Gruyter, 2008) 2. 10 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (‘New York Convention’). 11 ‘Austria’, Europa.eu (Web Page, 6 February 2019) .

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played a strong and reconciliatory role in determining wage and price policies.12 With a gross domestic product per head of approximately €40,420 (2016), Austria is one of the most prosperous countries in the EU. Austria’s entire GDP nominally amounts to €353.3 billion.13 GDP in Austria primarily flows from the services sector. The industry sector contributes a substantial proportion and flows from sophisticated machinery, many machinery part suppliers, and a number of large and medium-sized companies which are highly specialized and global market leaders. The foremost industries are foodstuffs,high-price merchandise, mechanical engineering, steel construction, chemicals and vehicle manufacturing. Within the vehicle sector, the production of engines and transmissions is the most important segment. For instance, Austria produces about 800,000 engines per year for major car manufacturers all over the world. The country has made a name for itself in the electronic engineering field with the production of customised electronics products like microprocessors and integrated circuits e.g. chips for airbags, ABS braking systems, components for Airbus airliners and high-speed trains, etc.14  

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The Austrian construction industry is an important sector for the Austrian economy. It includes approximately 288,000 employees, working in 34,564 companies in construction services which are amongst the largest private employers in Austria. They account for approximately 4 % of Austrian GDP.15 Data from Statistik Austria indicates that Austrian construction companies had a backlog of construction orders amounting to €7.8 billion in January  

2.1.2.

12 ‘Wirtschaftslage und Prognose’, WKO (Web Page, 29 March 2019) . 13 ‘Österreichs Wirtschaft Wuchs 2017 um 2,9 %’, Statistik Austria (Web Page, 1 April 2019) . 14 Wirtschaftskammer Österreich, WKO Statistik: Wirtschaftsprofil Österreich (Report, February 2019) ; ‘Österreich. Zahlen. Daten. Fakten’, Statistik Austria (Web Page, 4 March 2019) . 15 ‘Bauwesen’, Statistik Austria (Web Page, 25  October 2017) .  

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2014, which is 10.3 % more than the year before.16 Underground construction services comprise 58.5 % of all construction orders (11.7 % more than the year before), whereas building construction makes up 40.7 % of all construction orders (3.2 % less than a year before).17 The regional distribution of construction orders in Austria is rather variable. In Salzburg, Burgenland, and Upper Austria, construction orders rose in comparison to the year before. However, construction orders declined in Vienna and Lower Austria compared to the previous year.  

 

 

 

 

2.1.3.

2.2. Participants 2.2.1.

2.2.2. 2.2.3.

2.2.4.

The number of participants in a construction project is multifaceted. In overview, the main parties typically involved in a longer construction project are the: (a) Principal; (b) General Contractor; (c) Sub-Contractors; (d) Architects; (e) Project Managers and Project Controllers; (f) Construction Supervision Authority; and (g) Consulting Engineers. Other parties may be required for their expertise in special project areas as well. The first level is the purchaser level. This level contains the project investors, future user of the building, and the other participants such as lawyers, etc. Principals can be represented by public bodies (the State) on the one hand, or legal persons under private law on the other hand. Public bodies must consider complex procurement regulations to contract with General Contractors. The second level deals with the control and management tasks of the Principal. This level could be implemented by the Principal or delegated to an external party. Where outsourced, the ‘Project Management’ task represents the Principal rather than other parties participating in planning and completion. The Project Controller only involves the Principal in important decisions. The Project Manager is responsible for implementing the quantity, quality, budget and timeframe requirements set by the Principal.

16 ‘Auftragsbestand Bau’, Wohnnet (Web Page, 7 October 2014) . 17 ‘Auftragsbestand Bau’, Wohnnet (Web Page, 7 October 2014) .

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2.2.6.

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The pillar on the left side represents the planning of the project, supported by specialist planners and consultants. The pillar on the right side represents the construction companies. Both pillars are connected through the ‘Construction Supervision’ authority. The Project Manager and Construction Supervision authority will report progress on construction works to the Principal. For larger projects, General Contractors can organise projects through an association. This association is called a syndicate (Arbeitsgemeinschaft or ‘ARGE’). The General Contractor is authorized to do all the work required either directly, or through subcontractors to ensure compliance.18

2.3. Work, Health and Safety 2.3.1.

2.3.2. 2.3.3.

2.3.4.

In Austria, there is different legislation for work, health and safety. The relevant legislation for the construction industry is: (a) Federal Act on Co-ordination of Construction Working: this federal law guarantees safety and health protection for employees at their workplace. (b) Employee Protection Act: this law addresses health and safety on construction sites. In addition, collective bargaining agreements can contain specific health and safety requirements. Pursuant to the Federal Act on Co-ordination of Construction Working, larger construction works must be reported to the competent authority and, where several contractors are working simultaneously at a site, an expert must be nominated. Moreover, a plan addressing safety, health security and dangerous work must be established. Austria has a widespread system of employee protection which incorporates European legislation. The basis of the system is the Employee Protection Act. Moreover, there are various special labour laws that apply to particular groups of employees. These laws regulate working hours and other aspects, and comprise a body of rules of ‘higher importance’, including public law to protect life, health, and moral well-being in connection with the performance of work.19

18 Thomas Mathoi, Ablauf der Planung (FH Joanneum Architektur + Bauwesen, 2008) . 19 European Commission, Work-Based Learning in Europe: Practices and Policy Pointers (Report, June 2013) ; Austrian Federal Ministry of Labour, Social Affairs and Consumer Protection, Constructions Works: Construction Work Coordination Act (Sozial Ministerium Arbeitsinspektion, March 2016) .

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For example, the following provisions relating to employees’ health and safety are of ‘higher importance’: (a) The use of dangerous machinery and other technical equipment; (b) The use of dangerous working material (e.g. poisonous, flammable materials); (c) Any other burdens resulting from the operating procedure (e.g. noise); (d) Instructions and inspections; (e) The configuration of workplaces and sanitary facilities; (f) Working conditions for pregnant women and younger people; and (g) Hours of work and rest periods. Health and safety protection at work regulates the workplace in general. It prescribes how work premises, work areas and workplaces must be constructed. The aim of these regulations is to minimise the risk of suffering an injury. In this respect, it is worth mentioning that an employer has to ensure the safety of his employees at all costs and take advantage of the latest technology to do so. Furthermore, the law regulates in detail the correct handling of work equipment and certain substances. As mentioned above, the general rule is that any equipment used must ensure as little risk as possible to employees’ health and safety, using the latest technology. State-of-the-art technology is expected in this respect and in the cases specified by ÖNORMEN (see Section 4.2 onwards). In Austria, all dangerous equipment must be tested to check that it is in good condition, installed properly, and safe to use. In the case of work substances, there are different groups of substances and their level of risk. For higher-risk category substances there may be specific regulations addressing health and safety for their use. Furthermore, employee protection law also allows an individual to be nominated as responsible for health and safety issues at work, acting as a kind of monitor. Nevertheless, at the end of the day it is the employer that is responsible for its employees’ health and safety, even where there is a nominated monitor. In summary, this responsibility implies an obligation on the employer to identify and evaluate existing risks to employees’ health and safety, and to provide employees with adequate information concerning risks and their prevention.20  

 

2.3.6.

2.3.7.

2.3.8.

2.3.9.

20 European Commission (n 208).

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2.4. Protection of the Environment 2.4.1.

Due to the importance of environmental protection, several guidelines, standards and requirements are considered in Austrian legislation. The aim of these laws is to preserve Austria’s environment for future generations. As a result, multiple measures against the pollution of air, water and the general environment must be considered. The most important instruments are discussed below.

Water Rights Act 2.4.2. The Water Rights Act dictates procedures regarding the use of water in Austria as well as the control of water pollution. Furthermore, this Act regulates preservation, protection, water management issues, maintenance, enforceable rights, and elements of criminal offences concerning bodies of water and their supervision. Emission Control Act 2.4.3. The Emission Control Act regulates control measures against air pollution and defines air quality targets. Furthermore, it governs areas that warrant high levels of protection due to their sensitivity to increased emission loads. A breach of these regulations results in criminal penalties. 2.4.4. As mentioned, these provisions aim to (i) provide long-term protection for human health, animal and plant life from harmful pollution, (ii) reduce emissions, and (iii) ensure the best possible air quality. Waste Management Act 2.4.5. The intention of the Waste Management Act is to provide transparency with regard to environmentally sound collection, storage, transport and treatment of waste. 2.4.6. This Act is of ‘higher importance’ in that waste management is a fundamental issue in construction. Environmental Impact Assessment Act 2.4.7. Projects initiated by public or private persons or associations must pass an environmental impact assessment if the project might have environmental impact. This approval procedure involves the public as well. 2.4.8. These different instruments for environmental protection can be said to be of ‘higher importance’ for the construction sector.

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2.5. Quality Assurance 2.5.1.

2.5.2.

2.5.3.

2.5.4.

2.5.5.

For the construction sector, quality assurance is matter of ‘higher importance’. The constitution of prospective buildings for future generations is inseparable from the conservation and improvement of building structures. The topic of quality is neither new, nor limited to the construction industry. Attempts to define ‘quality’ in relation to the construction industry leads to ambiguity. ‘Quality’ is subjective, being seen differently by every stakeholder involved in the construction industry and always connected to a certain point of view. In the EN ISO 9000 standard, quality is defined as the ‘degree to which a set of inherent characteristics fulfil requirements’. The ISO 9000 addresses different aspects of quality management and incorporates some of ISO’s bestknown standards. These standards provide guidance and tools to ensure that products and services consistently meet customer requirements, and that quality is consistently improved.21 If a company implements a quality policy, it must continuously supervise that quality policy for the entire construction project — like a common theme from the initial idea to the completion of the building. The quality assurance system in the construction industry relates to the entire construction process, not just specific processes, parts of products or services. The aim of these procedures is to avoid risks and their causes. Quality assurance is ultimately a forward-looking planning process that focuses on prevention, rather than a retrospective process that inefficiently removes deficiencies.22

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Freedom of contract is one of the most important principles regarding the conclusion of contracts in Austria. This principle determines that contracting parties are free to choose the terms of their contract, unless a contractual provision or covenant is unconscionable or otherwise unlawful.

21 Hans Georg Jodl, ‘Nutzen der Qualitätssicherung für die Bauwirtschaft’ in Qualität im Siedlungswasserbau 2009 (Österreichische Vereinigung für das Gas- und Wasserfach, 2009) 30. 22 Hans Georg Jodl, ‘Nutzen der Qualitätssicherung für die Bauwirtschaft’ in Qualität im Siedlungswasserbau 2009 (Österreichische Vereinigung für das Gas- und Wasserfach, 2009) 30.

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An important restriction to the principle of freedom of contract is the essentialia negotii rule, i.e. a contract must contain minimum terms to be held effective and legally binding.23 A contract is concluded by mutual consent. The offer must be accepted by the parties within the period of time determined by the offeror. The acceptance can be declared in written form, orally, and through generally accepted conduct. This conduct is action which leaves no reasonable doubt that the related parties agreed to the circumstances of the contract. Neither offer nor acceptance requires a specific form in Austrian law since § 869 of the Civil Code states that consent to a contract must be declared freely, seriously, determinedly and clearly.24 However, there are some exceptions to the freedom of form, e.g. insurance contracts and other certain agreements governed by consumer protection law must be in written form to be valid.25 Austrian mandatory law also impacts the subject matter of a contract. If a contractual clause conflicts with the mandatory law, the clause is considered void. In a business-to-business (‘B2B’) contract, the clause may only be partially invalid depending on the aim of the mandatory law.  

3.1.3.

3.1.4.

 

3.1.5.

3.2. Legal Framework 3.2.1. 3.2.2.

The legal framework of contracts is determined by the Civil Code and Uniform Commercial Code (‘UGB’). The UGB regulates all commercial transactions. The following statutes and provisions are particularly significant: (a) Civil Code § 879: a contract that violates a legal prohibition or public policy is void, e.g. immorality;26 (b) Civil Code § 914 and § 915: these provisions govern the rules of contract interpretation. They determine that contract terms are to be understood not only literally, but as well in the context of the intention of the parties and commercial practice. Where still ambiguous, unclear expressions will be interpreted to the detriment of the party who used the expression. The judge has the power to interpret and modify the contract as required;27  

23 Rudolf Welser and Brigitta Zöchling-Jud, Bürgerliches Recht (Manz, 2015) vol 2, 13. 24 Stefan Perner, Martin Spitzer and Georg E Kodek, Bürgerliches Recht (Manz, 5th ed, 2016) 39. 25 Stefan Perner, Martin Spitzer and Georg E Kodek, Bürgerliches Recht (Manz, 5th ed, 2016) 39. 26 Peter Eschig and Erika Pircher-Eschig, Das Österreichische ABGB — The Austrian Civil Code (LexisNexis, 2013) 211. 27 Peter Eschig and Erika Pircher-Eschig, Das Österreichische ABGB — The Austrian Civil Code (LexisNexis, 2013) 222.

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(c)

3.2.3.

Civil Code § 1165 et seq: these paragraphs contain rules specifically governing contracts of services;28 (d) Civil Code § 1168: if the work remains unperformed due to circumstances attributable to the Purchaser, the agreed remuneration remains due to the Contractor. However, the Contractor must set off sums saved due to the non-performance of the service;29and (e) Civil Code § 1170b: a building Contractor may demand security up to the value of one-fifth of the agreed outstanding remuneration from the Purchaser, upon conclusion of the contract. This provision is mandatory law. If the security is not provided by the Purchaser, the Contractor possesses the right to withdraw from the contract by setting a deadline for payment. The Purchaser will consequently lose its warranty claims.30 As mentioned, the Austrian legal system and its contract law is dominated by the principle of freedom of contract. This basically means that parties may deviate from the contractual regulations set out in the Civil Code. This Austrian law is called non-mandatory law (e.g. regulations concerning guarantees), because it can be replaced by terms agreed by the parties. Therefore, the nonmandatory law is the opposite to the mandatory law — which is legally binding. This non-mandatory law has two functions. First, it helps to interpret the meaning of contracts and modify incomplete contracts. Second, it can be said that this non-mandatory law acts as a kind of guideline to establish a legal contract. In Austrian law there are some exceptions from the concept of freedom of contract. For example, agreements which interfere with the rights of third parties, contradict fundamental values, or are immoral, are void. If these legal principles are respected, the contractual parties are free to decide the terms of their contract. The principle of freedom of contract particularly prevails in contracts between enterprises.31  

3.2.4.

3.2.5.

3.3. Implied Contract Terms 3.3.1.

Implied terms are those terms which are implied into a contract by law, even though they have not been discussed by the parties or expressly referred to in

28 Peter Eschig and Erika Pircher-Eschig, Das Österreichische ABGB — The Austrian Civil Code (LexisNexis, 2013) 284. 29 Peter Eschig and Erika Pircher-Eschig, Das Österreichische ABGB — The Austrian Civil Code (LexisNexis, 2013) 285. 30 Peter Eschig and Erika Pircher-Eschig, Das Österreichische ABGB — The Austrian Civil Code (LexisNexis, 2013) 285. 31 Perner, Spitzer and Kodek 39.

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the contract. These terms may be implied by statute.32 For example, where contractual parties do not expressly agree terms relating to the guaranteed time horizon, § 933 of the Civil Code will apply. This provision stipulates that the right to warranty for an immovable asset must be claimed at court within three years.

3.4. Public Procurement 3.4.1.

3.4.2.

3.4.3.

In Austria the Federal Public Procurement Law applies to public procurement and deals with the legal framework for the acquisition of goods and services by a contracting authority. The Public Procurement Law ensures equal treatment and non-discrimination between all candidates and tenderers. This principle implies an obligation of transparency, which demands sufficient publicity to ensure fair competition and impartiality of procurement procedures. Essentially, a contract announcement should be published by a contracting entity to open contract negotiations for competition. However, the Public Procurement Law also specifies circumstances in which prior publication is not required. These principles are relevant to the interpretation of the law, especially as the law must also be interpreted in the spirit of EU legislation.33 Public procurement is one of the most important core economic areas for the EU. Therefore, the EU has issued regulations to standardise and open up national markets to increase competition in relation to public procurement.34 These regulations are essential given the unique characteristics of public entities in contractual arrangements with private parties. Furthermore, these regulations ensure important legal protections for private contracting parties to ensure a fair balance of powers against a potentially overpowering public opponent.35 The aim of these regulations is to ensure equal treatment and nondiscrimination between parties, resulting in increased competition and greater efficiency.

32 Adolf Schopf and Georg Karasek, 77 Musterbriefe für die Bauwirtschaft mit einem Grundriss des Bauvertragrechtes für Praktiker (Österreichischer Wirtschaftsverlag, 2009) 205. 33 Michael Holoubek, Claudia Fuchs and Kerstin Holzinger, Vergaberecht (Verlag Österreich, 4th ed, 2014) 1. 34 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC [2014] OJ L 94/65 ; Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on Combating Late Payment in Commercial Transactions [2011]) J L 48/1 . 35 Holoubek, Fuchs and Holzinger 19.

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

The Austrian federal legislator has issued laws specifically relating to construction projects. The following important examples result from that law.

Payment Security 4.1.2. The Civil Code regulates security of payment in relation to construction contracts. The building Contractor may demand payment on security of up to one-fifth of the agreed outstanding remuneration from the Purchaser, upon conclusion of the contract. 4.1.3. This regulation essentially protects the building Contractor from instances of contract violation. Under Austrian law, the building material becomes the property of the land owner as soon as they are used. If the land owner refused to pay its debts, the Constructor would lose out on both its anticipated remuneration and the cost of building materials. Therefore, the Civil Code provides the option to demand security.36 Late Payment – Due Dates and Interests 4.1.4. Both the Civil Code and the UGB regulate due dates of payment and interest rates that apply on late payments. Especially § 1000 of the Civil Code and § 456 of the UGB are important for the construction sector as they define the rates for interests on late payment. 4.1.5. In the event of delays in the payment of monetary claims between entrepreneurs, the statutory interest rate pursuant to § 456 UGB is 9.2 percentage points above the base interest rate. Since July 1, 2018, the base interest rate is -0.62 percent. The base interest rate is based on the monetary policy instruments of the European Central Bank and is published by the Austrian National Bank.37 4.1.6. The default interest rate according to § 456 UGB only applies if the debtor is responsible for the delay. If he is not responsible for the delay, he only has to pay default interest according to § 1000 Abs 1 ABGB. This is the generally applicable default interest rate of 4 %. 4.1.7. The purpose of the considerably higher interest on arrears compared to the general interest rate is to strengthen payment behaviour in business transac 

36 Georg Karasek, ÖNORM B 2110: Allgemeine Vertragsbestimmung für Bauleistungen — Werkvertragsnorm (Manz, 2nd ed, 2009) 834. 37 ‘Interest Rates on Business Arrears’, Oesterreichische Nationalbank (Web Page, 2018) .

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tions and the resulting trust of entrepreneurial confidence in timely performance.38

4.2. ÖNORM 4.2.1. 4.2.2.

The ÖNORM is published and issued by the Austrian Standards Institute. It is a legally non-binding national norm. The ÖNORMEN are set up through different committees of the Austrian Standards Institute. These committees consist of parties that will need and use the ÖNORM in the future, including: (a) Enterprises (e.g. producers, service providers); (b) Public authorities (at national or regional level); (c) Testing, inspection or certification bodies; (d) Scientists and researchers (e.g. universities, research institutes); (e) Consumers (e.g. B2B customers, final consumers); and (f) Civil society (e.g. consumer protection or environmental protection organisations, etc.). Every party involved in establishing an ÖNORM will delegate experts to the Austrian Standards Institute committee. In these committees, parties develop the content of standards and rules through dialogue with other pressure groups. The result is a definition of the Austrian position on European and international standardisation projects.39 There are clearly defined rules and procedures which must be followed to develop standards. The Austrian Standards Institute ensures that they are respected and that standards are prepared in line with principles such as unbiased collaborative work, transparency, and consensus.40  

 

 

 

4.2.3.

4.2.4.

4.3. Licensing 4.3.1.

In Austria, a building permit is required for construction and significant remodelling. The requirements for obtaining a building permit vary in the different federal provinces according to regional planning laws. These different laws in different provinces can inevitably increase a project’s complexity.

38 Perter Jabornegg and Eveline Artmann, Kommentar zum UGB – Band 1 (Springer, 2nd ed, 2010) § 352 n 4. 39 Karasek 4. See also Austrian Standards (Web Page, 2019) . 40 ‘About Standards’, Austrian Standards (Web Page, 2019) .

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4.3.2.

4.3.3.

4.3.4. 4.3.5.

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Furthermore, commercial projects may require a separate permit. As mentioned in Section 2.4, larger construction projects are also subject to environmental impact assessments. In general, environmental impact assessments are typically the responsibility of provincial governments, whereas permits for commercial projects are the responsibility of the municipality. As would be expected, a building permit and any necessary environmental impact assessment must be obtained prior to the commencement of construction work. On the contrary, a commercial plant permit can be requested during construction. In general, a statement of completion must be sent to the authorities before a completed project can be operationalised. Lastly, there is also a licensing regime applicable to construction project participants, e.g. builders must have a business licence and architects require certification as civil engineers.  

5. Construction Contracts 5.1. Most Commonly Used ÖNORM B 2110 5.1.1. As previously mentioned in Section 4.2, the Austrian Standard Institute is a private and independent service association without public authority. 5.1.2. Generally, the most important ÖNORM concerning construction projects in Austria is ÖNORM B 2110. It is the most commonly used standard form construction contract in Austria. The ÖNORM enjoys copyright protection, such that its reproduction is not permitted in this chapter.41 FIDIC 5.1.3.

FIDIC is a standard form contract which is not used in Austria. There are some fundamental differences between FIDIC, Austrian law and the ÖNORM B 2110 in particular. While FIDIC contracts issued in Central Europe are popular in cross-border projects, this form of contract is not commonly accepted in Austria.

41 Karasek 1.

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5.2. Contract Amendments and Bespoke Contracts 5.2.1.

5.2.2.

Given the principle of freedom of contract in Austria, it is uncommon for contractual parties to execute the ÖNORM B 2110 in unmodified form. Usually, parties will adapt the clauses from the standard form contract. The ÖNORM B 2110 specifies that parties must agree about the basis of setting up a legally binding contract. Given that construction contracts normally consist of more than one contractual component, an order of priority must be defined. If there is a conflict between contractual components, the component with greater ‘higher importance’ will take priority.42

5.3. Construction Contract Types 5.3.1.

There are two different types of contract which are regularly used in the construction sector:

Unit Price Contract 5.3.2. A Unit Price Contract is a construction contract based on a bill of quantities or estimate of costs. A final payment is calculated upon conclusion of the construction works. Generally speaking, this calculation multiplies agreed rates by used quantity. The purpose of this contract is to create a close correlation between performance and compensation.43 Fixed Price Contract 5.3.3. In a Fixed Price Contract the amount of compensation is already determined. Generally, the Contractor has no ability to demand a higher rate of compensation. Where basic conditions for a construction project can be defined (e.g. timeframe, used goods, performance indicators, etc.), the conclusion of a Fixed Price Contract is normally preferred.44  

5.4. Sample Construction Contract 5.4.1.

As detailed in Section 4.2, the ÖNORM B 2110 is published by the Austrian Standards Institute.

42 Schopf and Karasek 205. 43 Schopf and Karasek 205. 44 Schopf and Karasek 199.

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5.4.2.

5.4.3.

5.4.4.

5.4.5.

5.4.6.

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ÖNORMs are not legally binding as they are not mandated by legislation and act merely as industry guidelines. The contractual parties can however agree to incorporate the ÖNORMs as a legally binding part of the contract.45 The ÖNORM B 2110 contains general contractual provisions related to construction work. Construction work is defined as manufacturing, modification, repair, disassembling/removing construction, construction works resulting from a service contract, unskilled labour, etc.46 The ÖNORM B 2110 consists of the following 12 segments: (a) Segment 1: regulations regarding application of the ÖNORM; (b) Segment 2: outlines the necessary normative documents for the ÖNORM; (c) Segment 3: terms of definition; and (d) Segment 4: appendices for other ÖNORMs. Segments 5–12 were previously consolidated into a single segment 5 which contained general contractual provisions. This segment is now divided as follows: (a) Segment 5: contract; (b) Segment 6: performance and construction execution; (c) Segment 7: performance variance and its consequences; (d) Segment 8: accounting, payment and securities; (e) Segment 9: usage rules before take-over; (f) Segment 10: take-over; (g) Segment 11: final statement; and (h) Segment 12: liability provisions. As previously stated, the ÖNORM B 2110 is protected by copyright.

6. Key Issues 6.1. Overview 6.1.1.

The ÖNORM provisions vary from Austrian statutory laws in that they favour the interests of the Principal in some aspects and favour the Contractor in other aspects. For certain contractual issues the ÖNORM seems to be more Contractor-friendly. Generally however, the ÖNORM B 2110 is balanced between the interests of the Principal and the Contractor.

45 Andreas Kropik, Der Bauvertrag und die ÖNORM B 2110: Anwendung und Umsetzung in der Praxis (Austrian Standards Plus, 2009) 75. 46 Karasek 5.

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As a result, contracting parties should carefully consider which parts of the ÖNORM or Austrian law should be considered and whether any amendments need to be made.

6.2. Delay 6.2.1.

Delay is defined as the failure to execute an agreed performance of contstruction work, or where it has not been executed in accordance with the agreement, i.e. when deadlines are not met. In cases of delay, a contractual party may terminate the contract if the delaying party is unable to fulfil the agreement within an extension of time. Alternatively, a contractual party can insist on contract performance by the delaying party (Civil Code § 918). In relation to delay, the ÖNORM B 2110 reiterates § 918 of the Civil Code. The ÖNORM B 2110 states that a cancellation in cases of delay must be provided in clear and coherent written form.47  

6.2.2.

6.2.3.

6.3. Contractual Penalty 6.3.1.

6.3.2.

6.3.3.

Contractual penalties can be agreed between contractual parties for circumstances of contract violation. Financial loss is not mandatory to elicit contractual penalties, although a default by a contracting party is. The burden of proof in proving a contract violation exists lies with the injured party. The ÖNORM B 2110 does not contain contractual penalty provisions, but does state that contracting parties can agree to such terms. Where such provisions are missing, the ÖNORM B 2110 incorporates legal regulation. Where a contract agrees an exorbitant contractual penalty, it may be deemed to be against public policy. To avoid this possibility, the ÖNORM B 2110 stipulates a maximum contract penalty of 5 % of the total contract value. However, a financial loss of more than 5 % of the total contract value can be claimed in instances of gross negligence.48  

 

47 Karasek 180. 48 Karasek 501.

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6.4. Sharing Risk 6.4.1.

6.4.2.

6.4.3.

The sharing of risk in construction contracts is regulated by § 1168 and § 1168a of the Civil Code. Pursuant to § 1168, the risk of frustrating the construction contract is initially allocated to the Contractor, unless the Principal is responsible for the contract being frustrated. The risk is transferred to the Principal upon project completion and the Principal accepts the work as complete. The risk of losses relating to the material used for construction is borne by the party that supplies it. For example, where the Principal provides the material, the Contractor is only liable for any damage to that material where caused by its errors. This clarifies one of the most important questions regarding the sharing of risk; who assumes liability for any random damage? Typically, this risk lies with the Contractor. However, the ÖNORM B 2110 acts to shift some of the risk allocated under statutory law to the Contractor, through to the Principal.49

6.5. Compensation for Damages 6.5.1.

6.5.2.

Under Austrian Law, the party that suffers loss is entitled to claim compensation for damages from the party that caused the loss (Civil Code § 1295).50 Furthermore, under statutory law, the liability of the party causing the damage is not limited. Under the ÖNORM B 2110, the amount of compensation awarded for damages relates to the total value of the order. Where the contract value is up to €250,000, the maximum possible award for damages is €12,500. Where project values amount to more than €250,000, the compensation amounts to a maximum of 5 % of the order (up to maximum payment of €750,000). The liable party must have acted unlawfully or in violation of the contract. However, in cases of gross negligence or intentional unlawful behaviour, the party must provide full compensation for the loss.51 In general, the burden of proof lies with the injured party. Although in contractual relationships, like in construction cases, it is the responsibility of the liable party to prove that it acted without fault. Under Austrian law, compensation for damages relating to a construction contract is very important, as a defect will typically also lead to claim for damages.  

6.5.3.

6.5.4.

49 Karasek 534. 50 Karasek 1028. 51 Karasek 1115.

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6.6. Warranty 6.6.1.

6.6.2.

6.6.3.

6.6.4.

6.6.5.

Under the Civil Code, a warranty is an undertaking given to the Purchaser by the Seller stating that a product is reliable, free from known defects, and that the Seller will repair or replace defective parts without charge, within a given time limit, and subject to certain conditions. Moreover, in Austria a warranty means that the Seller must ensure that agreed or typically expected characteristics of the product will be fulfilled.52 Having a closer look at the ÖNORM, its provisions address warranty issues by deeming a defect to exist where there is divergence from the final performance agreed in the construction contract. The scope of the expected final performance will be defined in the construction contract. Where it is not defined, the final contract performance must contain all characteristics normally expected in such a contract. It is essential that a deficit exists at the time of the handover to successfully claim on warranty. The warranty timeframe starts from the moment of handover and its conditions may be agreed in the construction contract. If there is no specific clause, immoveable goods have a warranty timeframe of three years, whereas moveable goods have a timeframe of two years. For warranty claims, the burden of proof lies with the Contractor for the first six months. After six months, the burden of proof shifts to the Principal. The Principal must prove that the contractual performance was not free from defects at the time of the handover.53 For defects, the Principal can insist on the repair or replacement of the defective parts within a given time limit. Therefore, the Contractor has an opportunity to repair the defects. However, under the following conditions, improvement or exchange of the defective goods or performance is not possible: (a) The Contractor rejects an improvement of the defective goods or performance; (b) Improvement of the defective goods is not possible within an adequate timeframe; (c) The improvement works would create specific inconvenience to the Principal; or (d) The Principal rejects the improvement due to serious concerns about the Contractor.54

52 Perner, Spitzer and Kodek 39. 53 Karasek 963. 54 The ‘serious concern’ must be a qualified loss of confidence in the competence of the Contractor. The mere defectiveness of the service alone is not enough. For example, safety-relevant circumstances such as a sloppy repair of the brake system of a motor vehicle which has led to a brake failure, but also faults which suggest a particular carelessness and negligence on the part of the Contractor.

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Where one of the above conditions applies and replacement or improvement is not possible,the following remedies will be applicable: (a) Reduction of price; or (b) Conversion (only possible where the defect is of ‘higher importance’).55 Austrian law differentiates between warranties and guarantees. Strictly speaking, under civil law a guarantee is a promise that a certain event will take place, or that future damages will be paid. In a typical construction contract, you will find rules regarding warranties but not regarding guarantees.

55 Kropik 379.

Benoît Kohl, Rony Vermeersch and Mitch Windsor

Belgium 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 5. 5.1. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 7. 7.1. 7.2. 7.3.

Context 86 The Country 86 The Legal System 87 The Economy 88 The Construction Industry 89 Size and Nature 89 Participants 90 Work, Health and Safety 91 Protection of the environment 91 Quality assurance 92 Construction Contracting Dynamics 92 Legal underpinnings of contracts 94 Freedom of contract 94 Legal framework 94 Public policy 95 Statute Law 95 Implied contract terms 96 Construction of contract terms 96 Private and Public procurement 97 Government Involvement 98 Legislation and Regulation 98 Licensing of professionals and contractors 99 Construction Contracts 100 Available Contracts 100 Key Issues 100 Overview 100 Fit for Purpose 101 Late Completion 101 Latent Conditions 102 Force Majeure 103 Limitation of Liability 104 Duration of Exposure 104 Time Bars 105 Dispute Resolution 105 Special Jurisdiction 105 Arbitration and ADR 105 Appealing Judicial Decisions and Arbitral Awards

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

Belgium is a constitutional and parliamentary monarchy. Becoming independent in 1830, it has been a single state for almost 150 years. However, as a founding member of the now EU, Belgium has witnessed a significant transfer of power in the past decades. Through various sets of institutional reforms (in 1970, 1980, 1988, 1993, 2001 and 2014), Belgium also went through drastic change from a unitary state into a federal state. Decision making power in Belgium is no longer exclusively held by national authorities, but shared among several national and regional authorities, which exercise their competencies independently in a number of areas. Modern day Belgium has therefore a complex and hybrid state structure. The Belgian state is headed by the monarch and consists of a federal government and a two-chamber federal parliament (the House of Representatives and the Senate). The post-war constitutional reforms have created: (a) three “communities”, reflecting the linguistic differences across the land: the Flemish Community, the French-speaking Community and the German-speaking Community; (b) three “regions”: the Flemish Region, the Brussels-Capital Region and the Walloon Region; and (c) ten “provinces”: five within the Flemish Region and five within the Walloon Region. Geographically, the Flemish Region sits in the north of the country, the Walloon Region takes up the south and the Brussels-Capital Region sits within the southern part of the Flemish Region. Linguistically, Flemish, a variant of Dutch, is spoken in the Flemish Region (or ‘Flanders’) and in Brussels, while French is spoken in the Walloon Region and Brussels. The German-speaking community is in the north-east of the Walloon Region, also bordering with the north of Luxemburg. Due to this linguistic mix the Belgian population is in general multi-lingual, with English also widely spoken, especially in professional settings. The linguistic regions are a mere division of territory and do not have their own political organisation. Parliamentary democracy in the fractured Belgian system generally results in a coalition government.

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1.2. The Legal System 1.2.1.

Belgium is a civil law system, based on the Napoleonic Code.1 Besides the Federal government, the Belgian governance system comprises three regional authorities with significant autonomy, and three language communities (cutting across the regions), with separate competencies (e.g., in education). Authority to tax and spend is thus spread across different levels of government, with complicated sharing arrangements and sometimes overlapping responsibilities. This complex political and institutional setting means that a consensus on economic issues is difficult to achieve. Fiscal policy needs to be negotiated across many different dimensions, and deeper reforms, both fiscal and structural, can be challenging to adopt. The federal government retains control over the judicial system, army, federal police, labour law, social security (unemployment, pensions, health insurance), public debt, prices, income and wage policy financial sector and financial markets (including protection of savings) and macroprudential policies (the National Bank of Belgium), nuclear energy, state-owned companies (such as Belgian Railways and the Post Office), and the federal scientific and cultural institutions. Furthermore, the federal government is responsible for the obligations of Belgium and its federalised institutions towards the EU and NATO. The powers of the three regions – the Flemish Region, the Brussels-Capital Region and the Walloon Region – have been extended in the course of the various reforms. During the Second State Reform in 1980, the Flemish and the Walloon Regions were given their parliament and government. The Brussels-Capital Region, on the other hand, was only granted its institutions following the Third State Reform in 1988-89. The regions have powers relating to the economy (including direct support, guarantees, business sites and cluster policy), employment, minor aspects of social security (such as reduction of social security contributions for targeted groups), economic migration, agriculture, water policy, housing, public works, energy, transport (except Belgian Railways), the environment, town and country planning, nature conservation, credit, FDI and foreign trade, supervision of the provinces, communes, and intercommunal utility companies. They also have powers relating to scientific research and innovation, and over the research centres and international relations in those fields. The competences of the three communities – the French, the Flemish and the German-speaking – are culture (theatre, libraries, audio-visual media, etc.), education, (pre-primary to higher and adult education) the use of languages and matters relating to the individual which concern health policy (curative  

1.2.2.

1.2.3.

1 Code civil des Français [French Civil Code] (‘Napoleonic Code’).

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1.2.4.

1.2.5.

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and preventive medicine) and assistance to individuals (protection of youth, social welfare, aid to families, immigrant assistance services, etc.). They also have powers in the field of scientific research in relation to their powers, the community scientific institutes and international relations associated with their powers. In Flanders, the community and regional institutions have been merged: there is one parliament, one government, and one administration. The court system resembles the French system from which it derived. The ordinary, first-instance, courts rank in four levels. The Criminal Court (“Tribunal de Police/Politierechtbank”) and the Civil Court (“Justice de Paix/Vredegerechten”) are the lowest levels for minor crimes and civil matters. The typical firstinstance courts are known as the “Tribunal de Première Instance/Rechtbank van Eerste Aanleg” (for both civil and criminal cases), which are called the Correctional or Juvenile Courts for criminal matters. Recently, specialised tax chambers were added to the formal organisation of the courts of first instance. Commercial Courts have lay judges alongside professional magistrates and social law cases are heard in the labour tribunal. Serious offences are heard before the Assize Court (“Cour d’assises”), the only Belgian court with a jury. The appeal level is the Court of Appeal (“Cour d’appel/Hof van Beroep”), where civil, criminal and commercial matters are dealt with. Finally, the Cassation Court (“Cour de cassation/Hof van Cassatie”) is the highest appeal level, dealing only with points of law. No new facts can be brought before this court, just as in the French system. In keeping with the linguistic diversity of Belgium, legal practice must deal with the fact that the use of either Dutch or French depends on the region where the court is established. In Brussels, both languages are used. The federal parliament issues Acts of Law (“loi/wet”), whereas the Parliaments of regions and communities issue Decrees (“decreet/decret”). The core of the civil, commercial and criminal law remains at the federal level, whereas mostly public law issues such as education, environment, and culture have become the competence of the regions and communities, roughly depending on whether it is material competences (e.g. economics and urban planning) or people-related competence (e.g. eduction and culture). Being a member of the EU also entails the requirement to implement European legislation and give regard to the rulings of the European Court of Justice.  

 

1.2.7.

1.3. The Economy 1.3.1

Brussels’ location as the head of the EU makes it a key strategic political and economic centre in the region. As well as being a founding member of the EU, Belgium was one of the first countries to adopt the Euro in 1999.

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Belgium’s gross domestic product (GDP) per capita in 2019 was USD 54,545, with a 1.4 % real GDP growth from the previous year.2 Belgium is an open economy of 11.4 million inhabitants, benefitting from strong communication infrastructure and a highly qualified workforce. Nevertheless, foreign trade is essential for Belgium, and 70.9 % of Belgian exports are directed to the EU market. The most significant trading partners for Belgium are its direct neigbours; the Netherlands, Germany and France. In 2018, the products mainly exported by Belgian companies concerned the chemical industries, vehicles and transport equipment, and machinery and industrial equipment.3 Belgium’s unemployment rate dropped in 2019 to a record low of 5.4 %4, further evidencing this strong economic recovery. Relative to other countries, Belgium also performs above or close to the OECD average across all wellbeing measurements.5  

 

1.3.3

 

2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

Belgium is home to some of Europe’s largest contractors, with specialisation in the offshore sectors. There is therefore a high level of expertise in the Belgian construction market itself, even if major projects are dominated by a few local market players. Belgium is one of the three largest exporters of construction services outside of the EU, along with Denmark and the Netherlands, further highlighting this expertise.6 Its geography also grants easy access to the major Western European economies of France and Germany. In recent years the Belgian construction sector continued its rebound after bottoming out post-recession in 2013. Key sector issues are the (un)availability of skilled labour and the high cost of local labour. Traditional cyclical trends in public spending due to political instability has been mitigated in re-

2 https://www.imf.org/en/News/Articles/2020/03/31/pr20122-belgium-imf-executive-board-conclu des-2020-article-iv-consultation. 3 Belgium’s Economy In A Nutshell, Economic Outlook of January 2020, FPS Economy, internet version – https://economie.fgov.be/en/publication/belgiums-economy-nutshell-0. 4 https://www.imf.org/en/News/Articles/2020/03/31/pr20122-belgium-imf-executive-board-conclu des-2020-article-iv-consultation. 5 OECD Better Life Initiative: Belgium, https://www.oecd.org/statistics/Better-Life-Initiative-countrynote-Belgium.pdf. 6 European Construction Sector Observatory, April 2017 – http://ec.europa.eu/docsroom/documents/ 25921.

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cent years by a period of political stability, leading to more confidence in the projects sector. The recent political agreement to extend the European Fund for Strategic Investments (also known as the Juncker Plan) until December 2020 will breathe further life into Belgian projects.7

2.2. Participants 2.2.1.

The main parties involved in construction projects in Belgium are: (a) Employer/owner/client: this party controls and conceptualises the project, and appoints the architect, engineer and the contractor; (b) Architect: the architect holds a special role in Belgium and must always be separately appointed by the employer whenever a building permit is required. The architect designs the works, applies for and procures any necessary building permits, and supervises the works on behalf of the employer. Under Belgian law, architects cannot have any contractual relationship with the contractor. Architects are usually paid a percentage of the total construction costs; (c) Consulting engineers: engineers are typically appointed as specialists in a particular field (for example, civil engineers), and are usually paid on the basis of an hourly rate; (d) Health and safety coordinator: the health and safety coordinator monitors and manages health and safety risks during the entire project. They must also be appointed separately by the employer for the design and build phase; and (e) Contractor and subcontractors: as most Belgian projects are procured on a traditional basis, contractors are responsible for execution of the works. There is a distinction between single contractors, who are each responsible and therefore liable for a part of the construction works (that is, there are several agreements between the employer and separate contractors), and general contractors, who are responsible for the execution of the entire project (and also responsible for its subcontractors).

7 https://ec.europa.eu/commission/presscorner/detail/en/IP_17_3207.

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2.3. Work, Health and Safety 2.3.1.

2.3.2.

2.3.3.

The basic legislation on health and safety in Belgium is the Well-being Act of 4 August 1996.8 This Act created a legal framework under which different royal decrees have been adopted, to implement the principles set out in the Act. As a member of the EU, the relevant health and safety at work and construction project regulations have been implemented at the national level. For example, the client must appoint a health and safety coordinator at the project preparation stage, and during the execution of the project for any construction site where more than one contractor is present. The coordinator must draw up and maintain a health and safety plan for the site. For projects for which the total cost is at least €500,000, any person who performs work on the project (for example, employees, contractors, subcontractors employees of contractors and subcontractors, etc.) must be registered through an electronic presence recording system each day before commencing work, which is referred to as ’Checkinatwork’.

2.4. Protection of the environment 2.4.1.

2.4.2.

2.4.3.

Following the Belgian state reforms, the regions of Belgium (being Flanders, the Walloon Region and the Brussels Capital Region) have become almost exclusively competent for environmental matters (including granting environmental permits and ensuring permit compliance). The federal government remains competent only for limited areas (for example, asbestos and radioactive substances). An environmental permit or environmental declaration is required when the specific activity for which the construction is built is categorised as installations, workshops, appliances or production methods, or products that are classified as hazardous, harmful or unhealthy. Belgium and the Regions have implemented EU directives on various environmental matters, including Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on Waste and Repealing Certain Directives9 and Directive 2011/92/EU of the European Parliament and of the Council of 13 December 2011 on the Assessment of the Effects of Certain

8 Loi du 4 août 1996 relative au bien-être des travailleurs lors de l’exécution de leur travail [Act of 4 August 1996 on the Wellbeing of Workers in the Performance of Their Work] (Belgium) (‘Wellbeing Act of 4 August 1996’). 9 Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on Waste and Repealing Certain Directives [2008] OJ L 312/3 .

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Public and Private Projects on the Environment10 (environmental impact assessments). Projects that are within the scope of Directive 2011/92/EU (that is, projects with a possibly significant impact on the environment) must perform an environmental impact assessment (‘EIA’) or must assess whether or not an EIA must be performed as part of the permitting process. For example, oil refineries, nuclear facilities, and rail road construction of more than 10 kilometres, all require EIAs to be performed. For some projects, a simple EIA screening is sufficient.

2.5. Quality assurance 2.5.1.

2.5.2.

Belgian construction projects are subject to an array of standards and regulations, which reflect international market practice, particularly in EU member states.11 Decennial liability is imposed as public policy to ensure that architects, consulting engineers and contractors are strictly liable for serious structural defects for a period from 10 years after acceptance of the works by the client.12 In general, as a sophisticated market for construction services, there is a clear market practice when it comes to the apportioning of risks and the contractual regulation of quality standards. For example, the implication of a contractual obligation to bring about a specific result is a contractual mechanism to ’add weight’ to a contractor’s quality obligation.

2.6. Construction Contracting Dynamics 2.6.1.

In private projects, there is no typical market-practice dictating which party will ’hold the pen’ when providing first drafts of contract documents. It may be more typical that the owner or client will provide a first draft for more complex projects. For smaller projects, general contractors may have their standard terms which they will seek to impose on a client.

10 Directive 2011/92/EU of the European Parliament and of the Council of 13 December 2011 on the Assessment of the Effects of Certain Public and Private Projects on the Environment [2012] OJ L 26/1 . 11 For example, the Regulation (EU) No 305/2011 of the European Parliament and of the Council of 9 March 2011 laying down harmonised conditions for the marketing of construction products, commonly known as the ‘Construction Products Regulation’, lays down harmonised rules for the marketing of construction products in the EU. 12 Articles 1792 and 2270 of the Belgian Civil Code.

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2.6.2.

2.6.3.

2.6.4.

2.6.5.

2.6.6.

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When public contracts for works, services or delivery of goods are concerned, a specific set of rules is applicable. The Royal Decree of 14 January 2013 provides a detailed set of the general execution rules (‘GERs’), that is, contractual terms and conditions applicable to all public contracts for works, services or delivery of goods.13 A public authority can only deviate from these rules in specific circumstances. The GERs were most recently amended by the of Royal Decree of 22 June 2017, which added (inter alia) extensive provisions relating to subcontractors and contract variations.14 Nonetheless, in the project finance context in particular, where predictability of the eventual revenue is important, the Design-Build-Finance-Maintain (‘DBFM’) model is increasingly dominant, and the GERs do not apply to this model. For public projects, the provisions of the GERs and market practice typically dictate that the public authority provides the first draft of the project documents. Belgian contracting dynamics then follows international market practice in having a structured period of contract negotiation with physical meetings, and tables of comments and mark-ups being exchanged between the parties. On financed projects the lender or financier will typically not be involved directly in contract negotiations, but will require the ability to review and comment on the main contractual documents and project structure, prior to financial close. On larger projects, due diligence reports are often produced for the benefit of key stakeholders (notably financiers).

13 Arrêté royal du 14 janvier 2013 établissant les règles générales d’exécution des marchés publics et des concessions de travaux publics [Royal Decree of 14 January 2013 Establishing the General Rules for the Execution of Public Contracts and Public Works Concessions] (Belgium) (‘Royal Decree of 14 January 2013’). 14 Arrêté royal du 22 juin 2017 modifiant l’arrêté royal du 14 janvier 2013 établissant les règles générales d’exécution des marchés publics et des concessions de travaux publics et fixant la date d’entrée en vigueur de la loi du 16 février 2017 modifiant la loi du 17 juin 2013 relative à la motivation, à l’information et aux voies de recours en matière de marchés publics et de certains marchés de travaux, de fournitures et de services [Royal Decree of 22 June 2017 Amending the Royal Decree of 14 January 2013 Establishing the General Rules for the Executition of Public Contracts and Public Works Concessions and Setting the Date of Entry into Force of the Act of 16 February 2017 Amending the Act of 17 June 2013 on the Motivation, Information and Remedies Relating to Public Procurement and Certain Works Contracts, Supplies and Services] (Belgium) (‘Royal Decree of 22 June 2017’).

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3. Legal underpinnings of contracts 3.1. Freedom of contract 3.1.1.

3.1.2.

3.1.3.

Freedom of contract constitutes a fundamental principle of Belgian contract law. This reflects the individualist and liberal vision embodied in the French and Belgian civil codes. Freedom of contract is tempered to a certain extent (when compared with the common law approach for example), by the fact that the exercise of the right to freedom of contract is limited by the theory of ‘the abuse of right’ (“abus de droit/rechtmisbruik”). Under certain circumstances, the exercise of the right to contract, to not contract or to contract only on certain conditions can become an abuse of right. An important distinction between the Belgian system and in particular common law jurisdictions is that, since its enactment in 1804, the Civil Code (Belgium) provides (in Art 1134, para 3) that a contract has to be performed in good faith. Performing in good faith implies an express duty to perform contractual relations as a reasonable person. In the application of the ‘complementary function’ of good faith, the parties may be bound by obligations which are not expressly provided for in the contract (for example, the obligation to provide information, to notify, to secure the works, etc.). In application of the ‘corrective function’ of good faith, the parties may not abuse those rights which are expressly granted in the contract.

3.2. Legal framework 3.2.1.

In Belgian legal theory, the branches of law are typically divided into the broad public law and private law categories. Public law encompasses constitutional law, administrative law, taxation law and criminal law and procedure. More relevant for this chapter, private law includes: (a) Civil law: the set of rules regulating the civil status of persons and goods, family law, inheritance law, contracts, torts, and so on. Many of these rules originate from the Napoleonic Code of 1804 (amended on numerous occasions since then15); (b) Commercial law: regulating the status of merchants and commercial activities. It is based on the Code de Commerce (‘Commercial Code’) (Belgium) and a great number of specific laws, which have progressively re-

15 The Belgian Civil Code is currently undergoing a review process, with the various new parts of the Civil Code expected to come into force from mid-2021.

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placed the 1882 Code de Commerce. It also includes the ‘economic law’, i.e., the State intervention into economic life, and is in this respect more public in nature; and (c) Social law: including social security and labour law. In Belgium, the term ‘construction contract’ is not defined in the Civil Code. A construction contract is treated as a form of service contract, which are generally subject to the rules on ‘the contract for work’ governed by the Civil Code, Article 1779 and 1787–1799, and the general law applicable to contracts, as interpreted by case law.  

3.2.2.

3.3. Public policy 3.3.1.

3.3.2.

Many of the public policy decisions which affect private commercial contracts are included separately in this chapter. The principles of good faith and the abuse of right theory permeate all contractual relations in Belgium. More specifically to construction projects, the imposition of strict decennial liability is a key public policy objective which can under no circumstances be contracted out of.16 Another important public policy decision in Belgium is to require the separation of the architect from the contractor on construction projects. Where required (usually where a building permit is necessary), architects must be appointed separately by the client and must not form a part of the contractor’s team.

3.4. Statute Law 3.4.1.

3.4.2.

Only four Articles of the Civil Code specifically deal with construction contracts: Article 1792 (decennial liability), Article 1793 (modifications and additions in the framework of lump sum contracts), and Articles 1798-1799 (subcontracting). These were introduced in the original Napoleonic Code, and since then the legislature has not remedied any shortcomings of these Articles (although Civil Code reforms are currently in progress). No new comprehensive legislation has been adopted regarding construction contracts, except for the Act of 9 July 1971, which deals with the specific issue of the promotion and construction of dwellings.17 Further, Civil Code Article 1798 was modified by the Act of 19 February 1990, which aimed to in-

16 Articles 1792 and 2270 of the Belgian Civil Code. 17 Loi du 9 juillet 1971 réglementant la construction d’habitations et la vente d’habitations à construire ou en voie de construction [Act of 9 July 1971 Regulating the Construction of Dwellings and the Sale of Dwellings to be Built or Under Construction] (Belgium) (‘Act of 9 July 1971’).

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crease the protection of subcontractors in the case of the contractor’s bankruptcy.18 In such cases, subcontractors are granted a right of direct action against the employer. Construction contracts are not limited to building projects, but also cover contracts involving the manufacture of goods and the provision of professional services (for instance contracts with architects, lawyers, accountants etc.). The term is to be given a broad interpretation: not only the realisation of material objects, but also contracts involving repair works or the maintenance of goods.

3.5. Implied contract terms 3.5.1.

3.5.2.

In the construction context, the most important term is decennial liability, which is effectively implied into all contracts. Also, consumers who are a party to a construction contract are protected against unfair terms through Economic Code Articles VI.82 to VI.87. This includes extensive protection against unfair terms, mainly for the benefit of consumers. While not specific to the construction industry, construction contracts are captured by these provisions. In relation to termination, the employer can unilaterally terminate for nonperformance by the contractor (or architect, engineer, etc.), only in cases of ‘serious’ breach. In the absence of an express clause, Article 1184 of the Civil Code provides that in a reciprocal contract such a clause is always implied if one of the two parties commits a ‘serious’ breach in not fulfilling its contractual obligations. It is assumed by case law and commentators that unilateral termination is always subject to an a posteriori review by a judge.

3.6. Construction of contract terms 3.6.1.

The most generally accepted principal, which flows from the theory of freedom of contract, is that contract terms should be construed according to the common intention of the parties.19 In this sense, the Belgian system aligns with the majority of European civil law countries.

18 Loi du 19 fevrier 1990 complétant l’article 20 de la loi hypothécaire et modifiant l’article 1798 du Code civil en vue de protéger les sous-traitants [Law of 19 February 1990 Supplementing Article 2 of the Mortgage Act and Amending Article 1798 of the Civil Code to Protect Subcontractors] (Belgium) (‘Act of 19 February 1990’). 19 Civil Code (Belgium) Art 1156.

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3.6.4.

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The requirements of good faith also manifest themselves in the construction of contract terms, as frequently the principle of reasonable interpretation is not formulated explicitly but is applied in the guise of good faith. The contra proferentem rule, which holds that where a contract term is ambiguous the term should be construed against the party who drafted it, is applicable in Belgium. To combat this, many contract drafters expressly exclude this from their contracts, and such exclusion can be upheld in principle by the courts. A final general interpretation rule is that an interpretation which renders the contract lawful or effective is to be preferred to one which would not. This rule in favour of full effect is found in Civil Code Article 1157.

3.7. Private and Public procurement 3.7.1.

3.7.2.

3.7.3.

As a competitive construction market and economy, there are few restrictions on the procurement of private works and private procurement in Belgium. This is similar to international market practice. Belgian legislation on public procurement has been updated and recently codified in the Act of 17 June 2016 Concerning Public Procurement (the new ‘Public Procurement Act’).20 This Act contains the core of the coordination and codification of all existing public procurement regulations and the transposition into Belgian law of the 2014 EU Public Procurement Directives. There are, in addition, several Royal Decrees implementing this Act. The previous Public Procurement Act of 15 June 200621 was replaced on 17 June 2016 by new legislation to implement the following European directives: (a) Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts;22 (b) Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and repealing Directive 2004/ 18/EC;23 and

20 Loi du 17 juin 2016 relative aux marchés publics [Act of 17 June 2016 Concerning Public Procurement] (Belgium). 21 Loi du 15 juin 2006 relative aux marchés publics et à certains marchés de travaux, de fournitures et de services [Act of 15 June 2006 Concerning Public Procurement and Certain Works, Supplies and Services Contracts] (Belgium) (‘Public Procurement Act of 15 June 2006’). 22 Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts [2014] OJ L 94/1 . 23 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC [2014] OJ L 94/65 .

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(c)

3.7.4.

3.7.5.

3.7.6.

Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC.24 The new Public Procurement Act only entered into force in mid 2017. Public tenders launched before 30 June 2017 are still subject to the previous Public Procurement Act of 15 June 2006. Contracting authorities must always respect the general principles relating to good administration and the fundamental principles of the treaties of the EU when they award public procurement contracts. Of these general principles, the most relevant in terms of public procurement are equal treatment and non-discrimination, free competition, transparency, legal certainty and proportionality. These principles can also be used when interpreting Belgian (and European) public procurement law and must be considered in situations where no explicit regulation exists. The suspension or withdrawal of the decisions made by contracting authorities are brought before the Council of State, except in cases where the contracting authority is not a public authority; in the sense of the legislation on the Council of State. In this case, suspension or annulment actions are brought before the civil courts. Applications for review do not have an automatic suspensive effect. The civil courts have the exclusive competence for damage claims and for the suspension and annulment of the public procurement.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

4.1.3.

As noted above, only four Articles of the Civil Code deal specifically with construction contracts. The Civil Code also regulates various general aspects of contract law. As an EU member state, Belgium has implemented EU directives on various issues which affect the construction sector, from health and safety to posted workers to environmental protection. The government does occasionally intervene specifically to recorrect detrimental behaviour in the construction sector. For example, the Directive 2011/ 7/EU of the European Parliament and of the Council of 16 February 2011 on

24 Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on Procurement by Entities Operating in the Water, Energy, Transport and Postal Services Sectors and Repealing Directive 2004/17/EC [2014] OJ L 94/243 .

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Combating Late Payment in Commercial Transactions25 was transposed through the Act of 22 November 201326, stipulating that payment terms be set at 30 days if the contract does not provide otherwise. For business-to-business (‘B2B’) transactions, the parties may agree on payment terms of up to 60 days or longer, provided that the agreement is not unfair to the creditor.

4.2. Licensing of professionals and contractors 4.2.1.

4.2.2.

4.2.3.

4.2.4.

Architects in Belgium hold a special position in the construction sector. It is a long-standing public policy objective in Belgium that architects should take care of the interests of the employer or client. Architects do not therefore have a neutral role when they supervise and monitor works; they act for the benefit of the employer or client, althought they do maintain independent legal status. According to the Act of 20 February 1939 on the Protection of the Title and Profession of Architects27, Belgian employers are under a duty to engage an architect registered at the Tableau de l’Ordre in the case of Belgian architects, or a foreign architect accredited under the laws and regulations of an EU member state, whenever they initiate building activities which require a building permit. As a consequence, the function of the architect is protected and licensed in Belgium. Moreover, the architect’s instructions do not cover only the design of building works for which a permit is required, but also the ‘control’ of the performance of such building works by the contractor(s). This makes the architects’ monopoly over the construction industry one of the widest in Europe. For public contracts, contractors must possess a ’recognition’ of their competence, depending on the contract value, and type and class of works. Recognition can be obtained from the Federal Public Service Office. Access to certain other construction professions is strictly regulated; for example health and safety coordinator, energy performance and indoor climate (‘EPB’) experts, Building Research Establishment Environmental Assessment Method (‘BREEAM’) certification, soil experts, etc.

25 Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on Combating Late Payment in Commercial Transactions [2011] OJ L 48/1 . 26 Loi du 22 novembre 2013 modifiant la loi du 2 août 2002 concernant la lutte contre le retard de paiement dans les transactions commerciales [Act of 22 November 2013 Amending the Act of 2 August 2002 on Combating Late Payment in Commercial Transactions] (Belgium) (‘Act of 22 November 2013’). 27 Loi du 20 fevrier 1939 sur la protection du titre et de la profession d’architecte [Act of 20 February 1939 on the Protection of the Title and Profession of Architects] (Belgium).

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5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

5.1.3.

5.1.4.

In Belgium, there are no specific standard forms of construction contracts. However, all construction contracts for public works are subject to specific legislative instruments. As discussed above, the Royal Decree of 14 January 2013 provides a detailed set of the general execution rules (‘GERs’), that is, contractual terms and conditions applicable to all public contracts for works, services or delivery of goods. Independent use of integrated contracts, such as engineering, procurement and construction (‘EPC’) and design-build, has also increased. For international model construction contracts, the FIDIC suite of contracts is increasingly widespread in Belgium, especially on energy projects (both on and offshore). The release of the 2017 FIDIC suite and its surrounding commentary has increased the exposure of the form to the Belgian market. The FIDIC suite of contracts is now seen to be used on all types of renewable energy projects, as well as warehousing, battery energy storage and data centre projects. Large Belgian contractors operating nationally and internationally are now very familiar with the FIDIC forms. The common law based NEC(4) suite of contracts has also received increasing attention, with NEC4, Option C (target cost) contracts being used to procure over half of the ambitious €3.5 billion Oosterweel Link project in Antwerp (the construction of a 15km dual carriageway). Although standard forms of Anglo-Saxon origin and inspiration are being used more frequently, and provide for the comfort of being recognisable to lenders and foreign investors, their application and enforcement will not be as strict, literal and rigourous as under common law, particularly with respect to notices and notice periods. Rather, they will be tempered by the legal principle of good faith proper to civil law. The Belgian construction market is still dominated by traditional procurement methods. Contracts that only involve local parties are generally tailormade or bespoke to the project. The client or contractor can offer its own general conditions as a basis for negotiations.

6. Key Issues 6.1. Overview 6.1.1.

Generally, the key issues in construction contracts and law found in Belgium are similar to those found generally in the developed world. The key differ-

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ences come as a natural result of the civil law system, based on the Napoleonic Code, when compared with the common law world. Further, EU law and regulation and public policy have a strong impact on the design and carrying out of construction works in several respects. Below are a few key issues and points to note for all parties entering into a construction contract in Belgium.

6.2. Fit for Purpose 6.2.1.

6.2.2.

Where the contractor has agreed to undertake a ‘result obligation’ (“resultaatsverbintenis” / “obligation de résultat”), the contractor is obliged to bring about a defined result. This is similar to the common law concept of the ‘fitness for purpose’ obligation, but does not go quite as far as this. In the Belgian system, the result obligation means that proof of fault is not necessary for liability in case of breach of contract by the contractor. This means that, in effect, the burden of proof is shifted from the client or claimant to the contractor’s defence. Commonly, in design and build arrangements, the contractor is charged with this result or fitness for purpose obligation. If the contractor delivers something not in accordance with the contract, then they will prima facie be in default.

6.3. Late Completion 6.3.1.

The inclusion of liquidated damages for delay (whether to final completion or intermediate, milestone dates) is common in the Belgian construction sector. Generally, the contract provides for a certain amount per day or week of delay, with a cap (often at 5-10 % of the contract sum). Market practice in Belgium is broadly aligned with international market practice vis-à-vis liquidated delay damages and the associated caps. The Cassation Court, the highest court in Belgium, has decided that reasonable liquidated damages for delay must be upheld even when the employer in fact suffers no loss as a result of the late completion. However, where the contractual amount of liquidated damages exceeds the sum of the losses that the client suffers, the Civil Code entitles the contractor to ask a judge (or arbitrator) to reduce the sum. Under Civil Code Article 1231, a judge or arbitrator is entitled to reduce the liquidated damages where, in its opinion, the amounts do not correspond to the losses foreseeable at the time the contract was made or where the client already has the benefit of a partly completed project. Also, a Belgian judge or arbitrator may find that a pure  

6.3.2.

6.3.3.

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mechanical application of liquidated damages, where the client is not suffering any damage, or only minor damage, is speculative and constitutes an ’abuse of right’ (“rechtsmisbruik”), especially where there is a concurrent delay at hand. A tribunal must uphold the contractual agreement between the parties in principle, but is entitled to soften the effects and application of such provisions.

6.4. Latent Conditions 6.4.1. 6.4.2.

6.4.3.

6.4.4.

In Belgium, one must distinguish between serious, structural defects and other defects in the works discovered after acceptance. In relation to minor latent defects (for example the swelling of window frames), according to Belgian jurisprudence, any related claim should in principle be brought before the courts within as short a period of time as possible following discovery of the defect and within a maximum of 10 years, although the limitation period with respect to minor latent defects can be contractually determined by the parties. Such a ’defects notification period’ is agreed between the parties contractually, and is typically 2–5 years (depending on the bargaining power of the parties and the nature of the project). The acceptance of the works traditionally discharges the contractor from any liabilities with respect to visible minor defects known to the principal at the point that the principal provisionally accepts the works. It is however not unusual to contractually determine that the provisional or final acceptance will also discharge the contractor from any liability with respect to minor latent defects. For serious structural defects, the decennial liability regime applies. In general, decennial liability under Belgian law, although based on Article 1792 of the Civil Code, is a contractual liability, relating to the safety and stability of ‘immoveable works’. If the safety or the stability of these immoveable works is affected or endangered by a defect, a designer or contractor can be held liable for its consequences for 10 years from acceptance of the works, even when the defect was visible at the time of completion. One cannot limit or contract out of this strict decennial liability, as it is part of Belgian public policy. There is no need to notify within a short period of time after the discovery of the defect. Decennial liability does not only apply to the stability of construction works in their entirety, but also can apply to ’parts’ of those works, or even equipment or installations within such works, if they constitute an important and inseparable part of the works. In reality, there is a fine line as to when decennial liability applies; for instance, decennial liability would apply to a central heating system or industrial pipes, but not to sanitary fittings. As such, jurisprudence is not always predictable. A major distinction, according to certain

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6.4.5.

6.4.6.

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doctrine, should be whether the ’installation’ is a constructive part of the building. Liability for minor hidden defects on the other hand constitutes an autonomous ground for (contractual) liability. Contrary to decennial liability, one can contract out of the application of liability for minor hidden defects. Under Belgian law this liability ends 10 years after acceptance of the works, but it is not uncommon to limit this period, for example, to one or two years. However, to the extent a hidden defect triggers decennial liability, an exoneration or limitation of liability for hidden defects will have no effect. In July 2018 the law on mandatory decennial liability insurance took effect. As of July, contractors, architects and other service providers are obliged by law to take out insurance covering the liability for stability to buildings intended for residential use. Since 1 July 2019, architects, land surveyors and security coordinators are also obliged to carry professional civil liability insurance with minimum limits set by law.

6.5. Force Majeure 6.5.1.

6.5.2.

As force majeure is a concept enshrined in Belgian contract law, force majeure clauses are not a necessity in Belgium. Articles 1147–1148 of the Civil Code set out the statutory regime for force majeure. Nonetheless, customised force majeure clauses are enforceable and even customary in more complex transactions (especially where a lender is involved), as the statutory provisions are rather general and not sophisticated enough for most modern construction projects. The concept of hardship, however – sometimes referred to as application of the clausula rebus sic stantibus – is not part of general Belgian contract law. Only when public contracts are concerned can a concept close to hardship be invoked. Hence, particularly in private contracts, a hardship clause could prove useful. There is a lot of variety in the market for managing situations of force majeure or hardship. The risk of force majeure is shared among parties. Parties are free, however, to contractually regulate force majeure as they deem fit. Hardship would normally be a risk borne by the party affected by it, and may be mitigated somewhat in the case of public contracts where contractors can often obtain additional time or payments in situations that would qualify as ‘hardship’.

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6.6. Limitation of Liability 6.6.1.

6.6.2.

6.6.3.

6.6.4.

Under Belgian law, limitations of liability in the construction industry are a gradually increasing phenomenon. As to basic liabilities relating to a construction contract, the liability for hidden defects and the decennial liability must be mentioned. In addition, general rules of contractual responsibility apply. In principle, liability for indirect or consequential losses, or for loss of business or profits, can validly be limited or excluded by contract (except in the case of decennial liability). Yet, there are limits to such limitations or exclusions of liability. A party can only limit its liability if this limitation or exoneration does not strip the essential contractual obligations of their substance. If a clause limiting liability implies that, as a result, a debtor has no genuine obligation to perform, the limitation is invalid. To exonerate for gross negligence, explicit wording must be inserted. In application of the principle of law referred to as ‘fraus omnia corrumpit’, pursuant to Belgian law it is not possible to avoid liability for one’s own wilful misconduct. Therefore, in principle, a clause aiming to avoid liability for wilful misconduct has no effect. Limitation of liability is only permitted for the specific situation of wilful misconduct by employees of the concerned party. Although admissible under Belgian law and a token of good practice, liability caps are not yet standard practice in all construction contracts. For instance, the GERs for public procurement contracts do not contain any limitations of liability. Liability caps do not apply to any liability which cannot be excluded at law (for fraud or wilful misconduct).

6.7. Duration of Exposure 6.7.1.

Contractual liability for hidden defects in the works ends ten years after acceptance of the works (i.e. after the transfer of risk has occurred). However, it is standard contract practice in Belgium to limit this period, for example to two years. The length of this period is up for negotiation and will depend on the nature and complexity of the project and the parties’ respective bargaining power. Under Belgian law, the transfer of risk takes place at the time of provisional acceptance (or when provisional acceptance should have taken place). Generally, a claim for breach of contract may be brought before the courts by any of the parties within 10 years of the breach or knowledge of the breach by the party in default. Extra-contractual claims are subject to a limitation period of five years from the day the claimant had knowledge of both the damage and the responsible  

6.7.2. 6.7.3.

6.7.4.

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person’s identity. However, such an action is subject to a limitation period of 20 years from the day following the occurrence of the circumstances that caused the damage. With respect to extra-contractual liability, the client can only rely on this against its contractor in the case of a criminal offence or in case of damage caused by negligence, where both (the damage and the negligence) fall outside the scope of the contract. Therefore, these extra-contractual claims are in effect limited to claims by third parties against a contractor.

6.8. Time Bars 6.8.1.

The application and enforcement of time bar clauses will not be as strict, literal and rigorous as under common law, particularly with respect to notices and notice periods. Rather, they will be tempered by the legal principle of good faith proper to civil law. The literal application of time bar clauses in Anglo-Saxon inspired contracts (for example FIDIC) in some common law jurisdictions will not be applied in Belgian law cases without an exploration of reasonableness and good faith.

7. Dispute Resolution 7.1. Special Jurisdiction 7.1.1.

7.1.2.

In Belgium there are no specific courts or tribunals dealing with project finance transactions or construction contracts. Depending on the specific circumstances, disputes may fall under the jurisdiction of the civil or commercial courts. In practice, each court will have a specialised construction chamber. Nevertheless, two administrative courts are important to note in a project finance context; the Council of State at the federal level, and the Board of Permit Appeals in the Flemish region. The latter is competent to rule on (and hear appeals against), inter alia, building permits in the Flemish region, and the former is competent to rule on administrative decisions of most public authorities.

7.2. Arbitration and ADR 7.2.1.

The use of ADR in the Belgian market is increasingly popular. Nonetheless, its market share is still limited, and disputes regarding projects or construction are usually dealt with by the courts, quite often combined with expert advice.

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7.2.3.

7.2.4.

7.2.5.

7.2.6.

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For public contracts or strictly national transactions, ADR is only applied occasionally. In a commercial context, the use of arbitration precedes mediation and any other ADR mechanisms. The governing legislation for both arbitration and mediation (internatonal and domestic) can be found in the Code Judiciare (Belgium) (‘Judicial Code’). The general rules on arbitration can be found in Part 6 of the Judicial Code, which as of 1 September 2013 was completely revised (largely based on the UNCITRAL Model Law). The rules on mediation constitute Part 7 of the Judicial Code. The importance of expert determination in construction contracts is growing, particularly for large or long-term projects that require efficient settlement of certain categories of disputes. In general, the use of expert determination is limited to technical issues. Dispute resolution or adjudication boards are still rare. In recent PPP projects however, dispute boards do appear. Typically, they act as an intermediate procedure, prior to falling back on the courts or arbitration. Most probably the foreign influence on the structures used for these PPPs and the standardisation in this field explains why such boards have started to appear. The most prominent Belgian organisation for institutional arbitration and ADR is the Belgian Centre for Arbitration and Mediation (‘CEPANI’), which provides rules on arbitration, mediation and (technical) expertise. New CEPANI arbitration rules and CEPANI mediation rules entered into force on 1 July 2020.28 The Belgian courts adopt a rather neutral approach towards arbitration, neither favouring arbitration nor showing bias against it. Tax disputes and criminal matters are excluded from arbitration. When an individual is concerned, caution is required, as use of arbitration in consumer, insurance and labour matters is restricted. Automatic domestic arbitration does not exist in Belgium. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards entered into force in Belgium in 1975.29 Upon ratification, Belgium declared that it will only apply the New York Convention to recognition and enforcement of awards made in the territory of another contracting state. If an award is contrary to public policy or the dispute was not arbitrable, enforcement will be refused. Enforcement of a foreign award will also be refused if one of the grounds for setting aside the award exists.

28 CEPANI Arbitration Rules (Belgian Centre for Arbitration and Mediation, 1 July 2020) . 29 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (‘New York Convention’).

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Belgium ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States30 in 1970 and has signed many bilateral investment treaties, providing for either ad hoc or ICSID arbitration. The first ICSID arbitration ever brought against Belgium under the ICSID Convention was dismissed in 201531, while Belgian investors have initiated several proceedings against foreign countries.

7.3. Appealing Judicial Decisions and Arbitral Awards 7.3.1.

The losing party can attempt to reopen a judgment given by default. The time limit for doing so is one month following service of the judgment on the defaulting party. Judgments on the merits can be appealed by any party if the amount of the claim reaches a certain threshold; €2,000 for a judgment of a Justice of the Peace and €2,500 for a judgment of the Court of First Instance and the Commercial Court. Here again, the time limit for an appeal is one month following service of the judgment on the appellant. No appeal is possible against an arbitral award; it can only be overturned on specific grounds.

30 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966). 31 Ping An Life Insurance Co of China Ltd v Belgium (Award) (ICSID Arbitral Tribunal, Case No ARB/12/ 29, 30 April 2015).

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Brazil 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 7.

Context 110 The Country 110 The Legal System 110 The Economy 111 The Construction Industry 113 Main Trends 113 Size and Nature 114 Participants 114 Work, Health and Safety 116 Protection of the Environment 117 Quality Assurance 119 Construction Contracting Dynamics 120 Legal Underpinnings of Contracts 121 Freedom of Contract 121 Legal Framework 121 Public Policy 122 Statute Law 123 Implied Contract Terms 123 Construction of Contract Terms 123 Private and Public Procurement 124 Government Involvement 127 Legislation and Development Permits 127 Codes of Practice 129 Licensing of Professionals and Contractors 130 Construction Contracts/Undertaking Contracts 131 Available Contracts 131 Most Commonly Used 132 Key Issues 132 Rights and Obligations of the Parties 132 Subcontractors 135 Guarantee and Defects 136 Late Completion 137 Termination of the Contract and Legal Consequences Force Majeure 139 Limitation of Liability 140 Bribery and Corruption 140 Duration of Exposure 142 Dispute Resolution 143

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

The Federative Republic of Brazil is the largest country in both South America and Latin America, and the fifth largest country in the world, with a land area of over 8.5 million km2. The Brazilian population is estimated to be over 209 million people, making it the sixth most populous country in the world.1 Brazil’s 26 states and the Federal District [Distrito Federal] are divided conventionally into five regions: North [Norte], Northeast [Nordeste], Southeast [Sudeste], South [Sul], and Centre-West [Centro-Oeste]. Each of the five major regions has a distinct ecosystem. However, administrative boundaries do not necessarily coincide with ecological boundaries. In addition to differences in physical environment, patterns of economic activity and population settlement vary widely among the regions. Brazil was the only country in South America to be colonized by Portugal, and, therefore, unlike most of its neighbours, its official language is Portuguese.

1.2. The Legal System 1.2.1. 1.2.2.

1.2.3.

Brazil is a civil law country. Its legal system, which has its origins in Roman law, was implemented by the Portuguese during the colonization period. The country is organized as a Federative Republic formed by the indissoluble union of the states and municipalities and the Federal District. Under the principles established in the Constituição Federal de 1988 [Federal Constitution of 1988] (Brazil) (“Federal Constitution”), Brazil’s 26 federate states have powers to adopt their own organic constitutions and laws. Municipalities also enjoy restricted autonomy, as their legislation must follow the dictates of the State Constitutions, and consequently those of the Federal Constitution itself. As for the Federal District, it blends functions of federate states and municipalities, and its equivalent to a constitution, named ‘Organic Law’, must also obey the terms of the Federal Constitution.

1 APEX-BRASIL (Brazilian Agency of Promotion of Investment and Exportation). Investment Guide to Brazil 2019. Available at: https://portal.apexbrasil.com.br/wp-content/uploads/2019/11/investmentguide-to-brazil-2019.pdf. Accessed on August, 2020.

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Head of State 1.2.4. The head of the executive is the President of the Republic, who is both the Chief of State and the Head of Government, and is directly elected by the citizens. Legislature 1.2.5. The legislature, being the National Congress, consists of two houses or chambers; the Chamber of Congressmen and the Federal Senate. The members of both chambers are representatives directly elected by the population. Judiciary 1.2.6. The judiciary comprises of the Federal Supreme Court, the Superior Court of Justice, the Regional Federal and State Courts, and federal and state judges. There are also specialized courts to deal with electoral, labour and military disputes. 1.2.7. Each state territory is divided into judicial districts named ‘comarcas’, which are composed of one or more municipalities. The 27 Courts of Justice have their headquarters in the capital of each state and have jurisdiction only over their state territories. 1.2.8. There are two national superior courts, which rule on both civil and criminal cases; the Superior Court of Justice, also known as ‘STJ’, which rules on offences to non-constitutional legal provisions, and the Supreme Federal Court, known as ‘STF’, the highest Brazilian court, which is in charge of deciding issues concerning offenses to the Federal Constitution.

1.3. The Economy 1.3.1.

1.3.2.

For the last decade, Brazil has been known, together with Russia, India, China and South Africa, to be part of the so-called ‘BRICs’, the group of the biggest rising economies in the world. Brazil has the third-largest manufacturing sector in the Americas, ranging from automobiles, steel and petrochemicals, to computers, aircraft, and consumer durables. With increased economic stability provided by the economical reforms in the early 1990s, Brazilian and multinational businesses have invested heavily in new equipment and technology.2

2 Ana Paula. ‘Government breaks reinsurance monopoly but discards privatization’. Folha de São Paulo. São Paulo January 15, 2007. Available at: . Accessed on August, 2020.

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Brazil has a diverse and sophisticated services industry as well. During the early 1990s, the banking sector accounted for as much as 16 % of the GDP.3 Although undergoing a major overhaul, Brazil’s financial services industry provides local businesses with a wide range of products and is attracting numerous new entrants, including US financial firms. On 8 May 2008, the São Paulo Stock Exchange (‘Bovespa’) and the São Paulo-based Brazilian Mercantile and Futures Exchange (‘BM&F’) merged, creating BM&F Bovespa, one of the largest stock exchanges in the world. Brazil’s natural resources, particularly iron ore, are highly prized by major manufacturing nations, including China. Large iron and manganese reserves are important sources of industrial raw materials and export earnings. Deposits of nickel, tin, chromite, uranium, bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals are also significantly exploited. As part of its economic sustainability, the Brazilian government is involved in various initiatives to reduce the country’s dependence on imported oil. In 2006, Brazil achieved the status of being energy independent, meaning that it could produce enough energy to sustain its own needs. For decades, hydroelectricity has been a major focal point for Brazil, which remains one of the world’s leading producers of such power. Nonetheless, the country has been endeavouring to diversify its energy matrix, with renewable energies such as wind and photovoltaic power playing a central role. Moreover, major gas-to-power power plants are also picking up momentum and have greatly increased its representativity in the national energy matrix in the next few years. Despite its recent economic and political turmoil, Brazilian growth accelerated notably in the last quarter of 2017, although it fell short of market expectations. It was led by strengthening household spending on the back of falling unemployment and low inflation, and a turnaround in fixed investment. According to available indicators, the positive economic momentum seems to have carried over into the first quarter of 2020. In January, the current account deficit narrowed year-on-year. Moreover, in February business confidence moved into optimistic territory for the first time since mid-2013, and the manufacturing PMI rose on the back of solid domestic demand and job creation.  

1.3.4.

1.3.5.

1.3.6.

1.3.7.

3 Ana Paula. ‘Government breaks reinsurance monopoly but discards privatization’. Folha de São Paulo. São Paulo January 15, 2007. Available at: . Accessed on August, 2020.

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2. The Construction Industry 2.1. Main Trends 2.1.1.

2.1.2.

2.1.3.

2.1.4.

Brazil and its construction market have been facing a very turbulent political and economic situation since the beginning of 2015. This is mainly due to the operação lava-jato [car wash investigation], by which political leaders and businesses have been investigated for tax evasion, bribery and misuse of public funds. Brazil’s major construction companies have been at the centre of these investigations and have suffered from lack of credit and opportunities. Due to the decrease in public financing for infrastructure projects, the government created the Programa de Parcerias de Investimentos [Programme of Investment Partnerships] (“PPI”) to increase the contribution of private capital to infrastructure projects in Brazil. The purpose of the PPI is to expand and strengthen the relationship between the state and the private sector through partnership contracts (including concessions, public–private partnerships, permissions or leasing of public assets, and other public–private arrangements with similar legal structures). Due to the deterioration of major construction companies involved in the car wash investigation, there has been an increase in activity of medium-sized construction companies and foreign players in the construction market, especially in the concession of highways, airports and transmission lines throughout the country. In February 2020, the National Industry Federation’s report revealed that contractors had been experiencing a 5 % increase in occupation as compared to January 2019, indicating some growth in the sector. During the first half of 2018, the government auctioned 2,562 km of transmission lines with commercial operation varying from 36–63 months. In the end of such year, the National Power Agency auctioned over 7,000 km of transmission lines, representing over $5 billion in investment. Some of the biggest infrastructure projects in Brazil over the next few years consist of the construction of four combined cycle power plants, one of which will be the largest thermal power station in Latin America. The plants will supplement hydropower during dry seasons and help to meet the increasing demand for electricity in Brazil. Additionally, the plants are scheduled to deliver power for 23–25 years, starting from 2020 and 2021, in accordance with the relevant power purchase agreements, which were awarded by the Brazilian government in 2015 and 2017.4  

2.1.5.

4 Nascimento, Luciano. ‘Public hearing will discuss the bid notice regarding 7,1 thousand km of transmission lines’. AgênciaBrasil. March 04, 2018. Available at: . Accessed on July, 2020. 5 IBGE (Brazilian Institute of Geography and Statistics). Pesquisa Anual da Indústria da Construção – PAIC, 2018 [Annual Research on the Construction Industry, 2018]. Available at: https://www.ibge. gov.br/estatisticas/economicas/industria/9018-pesquisa-anual-da-industria-da-construcao.html? =&t=destaques. Accessed on August, 2020.

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Architect/Engineer 2.3.3. The architect or engineer of the construction works can be an individual qualified to render architectural or engineering services, or an entity employing such individuals. Architects or engineers may be responsible for the preparation of the project design and, if explicitly assigned by the employer, for carrying out preliminary research and investigation. The architectural designers may be local or foreign subjects who possess the relevant licenses. 2.3.4. An architect or engineer is not necessarily responsible for supervising the execution of the project designed by them, if this was not expressly required in the contract, as per Article 610, second paragraph6 of Lei Nº 10.406, de 10 de Janeiro de 2002 (Código Civil) [Law No 10,406, of 10 January 2002] (Brazil) (“Civil Code”). Contractor 2.3.5. The contractor is a company engaged in construction works, which holds the relevant licenses to execute construction works under a contract with the employer. The contractor must be registered before the competent governmental bodies (e.g., the Regional Councils of Engineering and Agronomy/Architecture (“CREA”)) and must undersign the authorship of its works, therefore undertaking liability for them. The contractor is responsible for execution of the works in compliance with the approved design and permits, and the legal requirements concerning construction works, methods, materials and products, as well as for preparing the ‘as-built’ documentation for the works.  

Owner’s Engineer 2.3.6. The role of the owner’s engineer is becoming more and more common in project development in Brazil. The increase in the use of FIDIC standard forms, even if only for inspirational and baseline purposes, has assisted parties to better understand the role of the owner’s engineer and incorporate it into their contract practices. However, it is not common for parties to grant decision-making powers to the engineer as is seen, for example, in Section 3.5 of the FIDIC Yellow Book. 2.3.7. Moreover, the increase in foreign project finance and the consequent importation of foreign lenders’ standard practices and rules, which often require that the project or that specific contracts of the project rely on a dedicated owner’s engineer, have also contributed to the development of the role of the owner’s engineer in the construction industry in Brazil. 2.3.8. Owner’s engineers are ideally chosen and appointed at the early stages of a project’s feasibility evaluation and planning. Among other activities, an own-

6 Art. 610, § 2, do Código Civil [Art. 610, § 2, of the Civil Code] (Brazil).

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er’s engineer is usually expected to: (i) advise and assist in the procurement procedures, including tendering procedures; (ii) review contracts from technical and benchmark perspectives; (iii) monitor project development progress; (iv) monitor compliance with technical specifications; (v) assist in engineering and design review; and (vi) monitor and advise on commissioning and testing procedures.

2.4. Work, Health and Safety 2.4.1.

In Brazil, health and safety are among the main concerns in a construction contract and are regulated by the following: (a) The Federal Constitution, which establishes employees’ rights and includes, among others, the reduction of risks inherent to works through compliance with health, hygiene and safety rules; (b) The Consolidação das Leis Trabalhistas [Consolidation of Labour Laws] (Brazil) (Labour Code); (c) Administrative rulings (e.g., Portaria Nº 3.214, de 8 de Junho de 1978 [Ordinance No 3,214, of 8 June 1978] (Brazil) (“Ordinance No 3,214/ 1978 of the Ministry of Labour and Employment”); (d) Rules and standards issued by the Brazilian Standards Association; and (e) International Labour Organization conventions. Furthermore, according to Normative Resolution Nº 7 from the Ministry of Labor and Employment (Norma Regulamentadora Nº 7 do Ministério do Trabalho e Emprego), at each company, at least one staff member for each group of employees must be trained in providing first aid in case of emergencies. The Ministry of Labour and Employment enacted the Normative Resolutions through Ordinance No 3,214 of June 08, 1978 of the Ministry of Labour and Employment regarding Health and Safety norms, which established rules that must be complied with by employers and employees. The key provisions are as follows: (a) Inspeção Prévia [Prior Inspection]: A company must request an inspection by the Ministry of Labour and Employment before starting its activities7. (b) Serviços Especializados em Engenharia de Segurança e em Medicina do Trabalho [Specialised Work Safety and Medicine Services] (“SESMET”): Companies hiring more than 50 employees must have SESMET, aiming to promote the protection of health and safety in the workplace. The size  

2.4.2.

2.4.3.

7 Norma Regulamentadora Nº 2 – Inspeção Prévia [Normative Resolution No 2 – Prior Inspection] (Brazil).

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(e)

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of SESMET will vary in accordance with the risk of a company’s business (established by law) and the number of employees8. Comissão Interna de Prevenção de Acidentes [Accident Prevention Commission] (“CIPA”): Companies hiring more than 20 employees must have a CIPA, aiming to prevent occupational accidents or diseases. The size of a CIPA will vary in accordance with the number of employees9. Equipamentos de Proteção Individual [Personal Protective Equipment] (“EPI”): The employer must provide its employees with EPI, aiming to neutralise or reduce their exposure to chemical, physical, and biological agents10. Programa de Controle Médico de Saúde Ocupacional [Programme for Medical Control of Occupational Health] (“PCMSO”): The PCMSO aims to promote and maintain the health of employees, emphasising the clinical and pathological issues relevant to the relationship between health and work, from both an individual and collective perspective11. Programas de Prevenção de Riscos Ambientais [Environment Risk Prevention Programme] (“PPRA”): The PPRA aims to provide consulting services for the assessment and control of environmental risks, such as noise, heat, and chemical agents12.

2.5. Protection of the Environment 2.5.1.

Obtaining an environmental licence is mandatory for the construction, installation, enlargement, modification or operation of facilities or activities that use environmental resources or could cause any environmental damage.13 Licences are valid for a specific term and their effectiveness depends on compliance with previously established technical requirements, which may vary according to the activity and facility. Requirements relating to environmentally sensitive aspects, such as air emissions, water quality, contaminated areas

8 Norma Regulamentadora Nº 4 – Serviços Especializados em Engenharia de Segurança e em Medicina do Trabalho [Normative Resolution No 4 – SESMET] (Brazil). 9 Norma Regulamentadora Nº 5 – Comissão Interna de Prevenção de Acidentes [Normative Resolution No 5 – CIPA] (Brazil). 10 Norma Regulamentadora Nº 6 – Equipamentos de Proteção Individual [Normative Resolution No 6 – EPI] (Brazil). 11 Norma Regulamentadora Nº 7 – Programa de Controle Médico de Saúde Operacional [Normative Resolution No 7 – PCMSO] (Brazil). 12 Norma Regulamentadora Nº 9 – Programa de Prevenção de Riscos Ambientais [Normative Resolution No 9 – PPRA] (Brazil). 13 Art. 10, da Lei Nº 6.938, de 31 de Agosto de 1981 [Art. 10, Law No 6,938, of 31 August 1981] (Brazil) (‘Brazilian Environmental Policy’).

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and waste disposal, must also be observed. The technical requirements of these aspects have been outlined in federal rules, some of which are discussed below. Air 2.5.2.

Water 2.5.3.

Air is regulated by Resolução CONAMA Nº 3, de 28 de Junho de 1990 [Environmental National Council (“CONAMA”) Resolution No 3, of 28 June 1990] (Brazil). However, this is a general federal regulation and each state can establish its own specific regulation on matters such as air emission standards in construction activities.

Some of the key local laws on water are: (a) Lei Nº 9.433, de 8 de Janeiro de 1997 [Law No 9,433, of 8 January 1997] (Brazil) (‘National Policy on Water Resources’), on water quality; and (b) Resolução CONAMA Nº 357, de 17 de Março de 2005 [CONAMA Resolution No 357, of 17 March 2005] (Brazil).

Waste 2.5.4. Some of the key local laws on waste are: (a) Lei Nº 12.305, de 2 de Agosto de 2010 [Law No 12,305, of 2 August 2010] (Brazil) (‘National Policy on Solid Waste’), on general waste disposal; and (b) Resolução CONAMA Nº 307, de 5 de Julho de 2002 [CONAMA Resolution No 307, of 5 July 2002] (Brazil), on construction waste disposal. 2.5.5. Specific authorisations regarding the disposal of solid waste, release of water effluents and use of contaminated lands may also apply, regardless of the environmental permitting process. Environmental Impact Assessments 2.5.6. Activities that may cause a significant impact must provide an Environmental Impact Assessment and a Relatório de Impacto Ambiental [Environmental Impact Report] (“EIA/RIMA”) during the licensing proceeding, which must describe the potential environmental impacts of the activity and facility and propose preventive and control measures to reduce these impacts. The EIA/ RIMA is mandatory for activities that may have a severe environmental impact, such as oil and gas facilities, energy generation and transmission, and mining.14 In addition, the environmental agency responsible for the environ-

14 Resolução CONAMA Nº 1, de 23 de Janeiro de 1986 [CONAMA (Environmental National Council). Resolution No 1, of January 23, 1986] (Brazil).

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mental licensing process can require other types of environmental studies, according to the impact that the project may have. Sustainable Development 2.5.7. Sustainable development is a fundamental right in Brazil under Article 225 of the Federal Constitution15 and thousands of specific environmental rules. Some of the most important instruments created by Brazilian legislation to guarantee the achievement of sustainable development are part of the environmental permitting process16 (that is, the legal obligation to obtain specific permits before developing any potentially polluting activity) and the environmental liability regime17 (under which a polluter can be held liable to compensate or remediate a damage regardless of the existence of an actual fault, in addition to criminal and administrative sanctions that may be also applicable).

2.6. Quality Assurance 2.6.1.

The definitions of construction works and engineering works are not unified throughout Brazil, and variations may be found between different state and municipality laws and regulations. In the same sense, local construction and urbanization regulations may create different subcategories and terminologies for construction works (e.g., edification, reform, or reconstruction), which may impact licensing procedures and quality requirements. Nonetheless, most local laws and regulations will provide that construction works must be executed in compliance with: (i) the urban planning requirements; (ii) technical conditions of the design; (iii) technical conditions of the implementation of the design; and (iv) the purpose declared by the applicant. Although the content of the requirements may widely vary depending on the type of project, construction works are usually required to comply with these basic requirements for an economically reasonable working lifecycle issued by the Brazilian Standards Association (“ABNT”): (a) Mechanical and structural resistance and stability (e.g., Seção 7.1 – Estabilidade e resistência estrutural dos sistemas de vedação internos e externos da ABNT NBR 15575-4 – Parte 4 [Section 7.1 – Structural stability and resistance of internal and external sealing systems, of ABNT NBR 15575-4 – Part 4]) (Brazil);  

2.6.2.

2.6.3.

 

15 Art. 225, da Constituição Federal de 1988 [Art. 225, of the Federal Constitution] (Brazil). 16 Art 2, inciso I, da Lei Complementar Nº 140 de 8 de Dezembro de 2011 [Art. 2, item I, Complementary Law No 140, of 8 December, 2011] (Brazil). 17 Art. 225, § 3, da Constituição Federal de 1988 [Art. 255, § 3, of the Federal Constitution] (Brazil).

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Fire safety measures (e.g., Seção 8 – Segurança contra incêndio da ABNT NBR 15575-4 – Parte 4 [Section 8 – Fire Safety, of ABNT NBR 15575-4 – Part 4]; Determinação da resistência ao fogo da ABNT NBR 5628 [Fire resistance determination, of ABNT NBR 5628) (Brazil); (c) Hygiene and health conditions (e.g., Seção 15 – Saúde, higiene e qualidade do ar da ABNT NBR 15575-1 – Parte 1 [Section 15 – Health, hygiene and air quality, of ABNT NBR 15575-1 – Part 1] (Brazil); and (d) Compliance with environmental restrictions (e.g., Seção 18 – Adequação ambiental da ABNT NBR 15575-1 – Parte 1 [Section 18 – Environmental suitability, of ABNT NBR 15575-1 – Part 1] (Brazil). Furthermore, construction projects must also follow the standards and regulations issued by ABNT. For more complex and performance-demanding projects (such as power plants, vessels, sensitive or high-tech industrial facilities, and state-of-the-art real estate developments), it is common to provide in the contract that the contractor and the works must comply with the highest industry standards (national or international), in addition to the applicable laws and regulations. (b)

 

 

 

2.6.4. 2.6.5.

2.7. Construction Contracting Dynamics 2.7.1.

2.7.2.

2.7.3.

Legislation does not specifically regulate the right of a party to select the contract. The party that selects the form of contract differs depending on the circumstances. Typically, between: (a) Employer and lead contractor, the employer selects the contract; (b) General contractor and sub‐contractor, the general contractor selects the contract; (c) Equipment supplier and purchaser, the equipment supplier selects the contract; and (d) Consultant (architect or engineer) and employer or general contractor, the contract may be selected by either party depending on the commercial dynamics. Thus, although the most common practice is for the party initiating the contract to select the contract, in relatively dominated sectors of industry or at certain stages of the supply chain, it is not unusual for the contractor to provide the base contract for the negotiations, whether due to its predominant economic position or its monopoly on technical knowledge. A lender does not often select the contractor. However, it often: (i) imposes restrictions and criteria for the selection of the contractor and for the drafting of the contracts if it is involved in the business before the selection of the contractor; or (ii) requests modifications to the contract after conducting a review of its terms and conditions.

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3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

The general principle of contractual freedom is recognized by the Civil Code in Articles 421 and 42518. Articles 421–219 provide that contracting parties must always have regard for the social purpose of the contract and the principles of good faith. Per Article 104 of the Civil Code20, the principal requirements of a contract are: (a) Capable parties; (b) Legal, possible, and determined or determinable objects of the contract; and (c) A form of contract as prescribed, or not prohibited, by law. Although the Brazilian civil law and courts acknowledge the principle of pacta sunt servanda, many courts and arbitrators take into account the behaviour of the parties during the negotiation, execution and performance of the contract, in order to apply the principles of good faith and social purpose of the contract. Thus, a less literal interpretation of the contract and of the will of the parties is applied when deciding on disputes than in common law jurisdictions.

3.2. Legal Framework 3.2.1.

3.2.2.

3.2.3.

As discussed in Section 1.2, Brazil’s legal system is based on a civil law system in a manner that law is highly reliant in written law, issued by the legislative. However, there is specific statute law on contracts or construction. Brazilian private contract law, including construction contracts, is generally governed by the Civil Code, especially article 104 to 853. Important provisions regarding conflict of laws may be found in Law nº 4657 of September 04, 1942 (“Lei de Introdução ao Direito Brasileiro – “LINDB” / Decree of Introduction to Brazilian Law). According to Article 22 of the Federal Constitution, only the Federal Legislative can legislate on contract law. Hence, unlike other countries, states cannot legislate on the subject. Nonetheless, states and municipalities are entitled to regulate on matters or issues which may impact the performance of construction contracts, such as health and safety, construction requirements and real estate.

18 Arts. 421 e 425, do Código Civil [Arts. 421 and 425, of the Civil Code] (Brazil). 19 Arts. 421 e 422, do Código Civil [Arts. 421 and 422, of the Civil Code] (Brazil). 20 Art. 104, do Código Civil [Art. 104, of the Civil Code] (Brazil).

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3.3. Public Policy 3.3.1.

3.3.2.

3.3.3.

Although referenced in several legal provisions in the Brazilian legal system, such as the Civil Code, the Lei Nº 9.307, de 23 de Setembro de 1996 (Lei de Arbitragem) [Law No 9,307, of 23 September 1996] (Brazil) (“Arbitration Law”)21, and the Lei Nº 2.848, de 7 de Dezembro de 1940 (Código Penal) [Law No. 2,848, of 7 December 1940] (Brazil) (“Criminal Code”), the term ‘public policy’ is not defined or explained in any laws or legal provisions. Despite its wide application in several fields of law and business, especially when referring to project development and infrastructure projects, Brazilian scholars and case law struggles to reach a clear definition or limitation to the concept of public policy. However, in general, public policy comprises rules and principles of the national legal system that: (i) are considered essential and thus cannot be dismissed by the parties’ will; and (ii) prevent the application of foreign laws, acts and decisions that are contrary to them. For example, Articles 38 and 39 of the Arbitration Law22, when regulating the homologation of foreign arbitral decisions, provides that awards will not be recognized or enforced by Brazilian courts if: (a) The parties to the arbitration agreement were under some incapacity23; (b) The arbitration agreement was not valid under the law to which the parties have subjected it, or failing any indication thereon, under the law of the country where the award was made24; (c) Proper notice was not given to a party regarding the appointment of an arbitrator or of the arbitral proceeding itself, leading to the party being unable to properly present their case25; (d) The arbitral award was issued beyond the scope of the arbitration agreement26;

21 Lei Nº 9.307, de 23 de Setembro de 1996 alterada pela Lei Nº 13.129, de 26 de Maio de 2015 [Law No 9,307, of 23 September 1996 as amended by Law No 13,129, of 26 May 2015] (Brazil). 22 Arts. 38 e 39, da Lei de Arbitragem [Arts. 38 and 39, of the Arbitation Law] (Brazil). 23 Art. 38, inciso ), da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 38, item I, of the Arbitration Law] (Brazil). 24 Art. 38, inciso II, da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 38, item II, of the Arbitration Law] (Brazil). 25 Art. 38, inciso III, da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 38, item III, of the Arbitration Law] (Brazil). 26 Art. 38, inciso IV, da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 38, item IV, of the Arbitration Law] (Brazil).

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(f) (g)

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The arbitral award has not yet become binding on the parties or has been set aside or suspended by a court in the country where the arbitral award was issued27; The object of the dispute was not subject to arbitration under Brazilian law28; or The award violates national public order29.

3.4. Statute Law 3.4.1. 3.4.2.

As explained in Section 3.2, most provisions relevant to contract and construction law are regulated in the Civil Code. Construction contracts with public entities, including state-owned companies, are subject to special regimes as further explained in Section 3.7 below.

3.5. Implied Contract Terms 3.5.1.

3.5.2.

In the absence of regulation by the parties, articles 610 to article 626 of the Civil Code, which govern construction contracts shall apply. While most of these articles may be derogated by the parties, some of them are mandatory, such as article 618, regarding the warranty period for soundness and safety defects. Furthermore, general principles and rules of contract law shall also be applicable to construction contracts.

3.6. Construction of Contract Terms 3.6.1.

The interpretation of a contract under Brazilian Law involves important principles, such as (a) good faith; (b) social purpose of contract; and (c) pacta sunt servanda. (a) Good Faith – provided under Article 422 of Civil Code, this is a duty applicable to all contracts, demanding from the parties a fair dealing standard, during both contract formation and performance. Both the Good

27 Art. 38, inciso VI, da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 38, item VI, of the Arbitration Law] (Brazil). 28 Art. 39, inciso I, da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 39, item I, of the Arbitration Law] (Brazil). 29 Art. 39, inciso II, da Lei Nº 9.307, de 23 de Setembro de 1996 [Art. 39, item II, of the Arbitration Law] (Brazil).

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3.6.3.

3.6.4. 3.6.5.

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Faith and the Social Purpose of Contract principles seek to avoid the abuse or distortion of rights. (b) Social Purpose of Contract – provided under Article 421 of Civil Code, this principle requires parties to deal and perform their obligations in view of the final outcome intended by the contract and in a manner fruitful to society as a whole. (c) Pacta sunt servanda – according to this principle, the agreement of the parties is legally binding to them. In 2019, Law nº 13.874 of September 20, 2019, also called Lei da Liberdade Econômica (Economic Freedom Act) promoted several alterations to the wording of rules of contract interpretation in Brazil30, provided mainly by Articles 113 and 421 of the Civil Code. According to the new wording of the First Paragraph of Article 113 the Civil Code, the interpretation of the contract shall attribute to its wording the meaning that:31 (a) Is confirmed by the behaviour of the parties after the execution of the contract; (b) Correspond to the practices, customs and uses of that specific business; (c) Corresponds to good faith; (d) Is beneficial to the party that did not draft the clause, if identifiable; (e) Corresponds to the reasonable interpretation of the negotiation, in light of the economic rationale of the parties, considering the information available to them at the time of the execution of the contract. Without prejudice of the above, parties are also free to agree on the rules of interpretation of the contract, as per § 2 of Article 113 of the Civil Code. With the recent alterations promoted by the Economic Freedom Act, Article 421 of the Civil Code now provide that the courts shall respect the allocation of risks agreed by the parties and that revision of the terms of the contract by courts shall be limited and restricted to exceptional circumstances.32

3.7. Private and Public Procurement 3.7.1.

Article 37, Item XXI, of the Federal Constitution33 provides for the requirement of public bidding procedures for the procurement of construction, engineering works, services, purchases and sales by the government. The basic

30 Art. 7 da Lei de Liberdade Econômica [Art. 7 of the Economic Freedom Act]. 31 Art. 113, § 1º, I, II, III, IV e V do Código Civil [Art. 113, § 1, I, II, III, IV and V of the Civil Code]. 32 Art. 421-A, I, II e III do Código Civil [Art. 421-A, I, II e III of the Civil Code]. 33 Art. 37, inciso XXI, da Constituição Federal de 1988 [Art. 37, item XXI, of the Federal Constitution] (Brazil).

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3.7.2.

3.7.3.

3.7.4.

3.7.5.

125

regulation for public procurement can be found in Lei Nº 8.666, de 21 de Junho de 1993 (Lei de Licitações) [Law No 8,666, of 21 June 1993] (Brazil) (“Public Procurement Law”). The Public Procurement Law regulates public procurement procedures and contracts entered into by federal, state and municipal governments. In theory, the Public Procurement Law is meant to provide general rules, which would be complemented by state or municipal legislation based on local circumstances. However, the Public Procurement Law is relatively detailed, leaving little margin for the states and municipalities to further legislate on the matter. Additional rules on public procurement include: (a) Lei Nº 13.303, de 30 de Junho de 2016 [Law No 13,303, of 30 June 2016] (Brazil): This provides for the specific rules for the management, corporate governance and procurement procedures for state-owned companies, where the state has a direct or indirect controlling interest; (b) Lei Nº 9.472, de 16 de Julho de 1997 [Law No 9,472, of 16 July 1997] (Brazil): This provides for the National Communications Agency and authorises the agency to create its own public procurement rules; (c) Lei Nº 9.478, de 6 de Agosto de 1997 [Law No 9,478, of 6 August 1997] (Brazil): This established the National Oil Agency and authorises that agency to create its own public procurement rules, whilst also allowing Petrobras (a state-owned oil company) to comply with a simplified tender procedure; and (d) Lei Nº 12.598, de 21 de Março de 2012 [Law No 12,598, of 21 March 2012] (Brazil): This provides special rules for the purchase and development of defence systems. Under Article 1 of the Public Procurement Law34, state-owned companies, or companies where the state has a direct or indirect controlling interest, as well as autarchies, public foundationsand other entities of the public administration are subject to the Public Procurement Law and its provisions. For clarification, in Brazil, autarchies are public entities that enjoy (relative) administrative and financial autonomy. They are not considered companies because their purpose is not to be profitable or to perform any economic activity. For example, most regulatory agencies, such as the National Oil Agency and the Brazilian Securities and Exchange Commission (‘CVM’), are autarchies. The fundamental principles for tender procedures (publicity, transparency, objective evaluation criteria, equal treatment, competition, value-for-money

34 Art. 1, da Lei de Licitações [Art. 1, of the Public Procurement Law] (Brazil).

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pursuit, efficiency, morality and probity) are all stated in Article 37 of the Federal Constitution35 and in Article 3 of the Public Procurement Law36. 3.7.6. Article 22 of the Public Procurement Law37 provides for the three main public procurement procedures that can be followed: (a) Invitation to tender, which mandates the procuring entity to invite at least three companies to participate in the competition; (b) Price survey, a tender procedure that occurs with competitors that were previously registered with the procuring entity; and (c) Public tender, which is open to whoever wants to participate, provided the tenderer can meet all qualifying criteria prior to the beginning of the bidding procedure. 3.7.7. Lei Nº 10.520, de 17 de Julho de 2002 [Law No 10,520, of 17 July 2002] (Brazil) also provides for a reverse auction, which is commonly used for the acquisition of common goods and services where performance and quality may be objectively defined in the bid call document according to market standards. Reverse auctions may also be performed electronically. The main characteristic of this procedure is the inversion of the bidding procedure stages, where the parties present their bids prior to the analysis of their legal, economical and formal qualification documents. Then, only the qualification documents of the winner of the bid will be analysed, thereby saving the time and efforts required for the procuring entity to analyse the documentation of all bidders prior to the auction as it happens in the ordinary procedure. 3.7.8. The tendering procedure to be used depends on the estimated value of the procurement and the subject matter of the procurement. For the procedures provided for in the Public Procurement Law, the financial thresholds are provided in Article 2338. 3.7.9. For works and engineering services (from the simplest to the more complex procedures): (a) Invitation to tender: up to R$150,000; (b) Price survey: up to R$1.5 million; and (c) Public tender: more than R$1.5 million. 3.7.10. For other goods and services (from the simplest to the more complex): (a) Invitation to tender: up to R$80,000; (b) Price survey: up to R$650,000; and (c) Public tender: more than R$650,000.

35 36 37 38

Art. 37, da Constituição Federal de 1988 [Art. 37, of the Federal Constitution] (Brazil). Art. 3, da Lei de Licitações [Art. 3, of the Public Procurement Law] (Brazil). Art. 22, da Lei de Licitações [Art. 22, of the Public Procurement Law] (Brazil). Art. 23, da Lei de Licitações [Art. 23, of the Public Procurement Law] (Brazil).

Brazil

3.7.11.

3.7.12.

3.7.13.

3.7.14.

3.7.15.

127

Technical specifications must clearly express the requirements of the contracting authority with regard to the quality of all works and materials to be used, as well as other requirements strictly related to the nature and components of the project. Specific qualification criteria must be listed, as well as all specific requirements, in compliance with the provisions of the Public Procurement Law. These should be proportionate and strictly related to the nature, and the ability to perform the nature, and size of the contract. In summary, the public entity is not to create unnecessary restraints and obstacles for competitors to participate in a tender. For services of a predominantly intellectual nature, such as engineering, designing, supervision, management and technical studies, the contracting entity may opt to engage in a special tendering procedure, which allows it to take into consideration the technical quality of the proposal rather than just electing the lowest price quotation. According to Article 109 of the Public Procurement, Law nº 8.666, dated June 21, 1993 Law39, the contracting authority’s decisions are subject to appeal in the cases of: (a) Qualification or disqualification of the bidder; (b) Awarding of proposals; (c) Annulment and revocation of the bid; (d) Refusal of the application for registration, or its amendment or cancelation; (e) Termination of the contract; and (f) Application of the penalties of warning, temporary suspension, or fine. The appeal must be addressed to the superior administrative authority, which must render a decision within five business days from the receipt of the appeal, under penalty of being liable for the damages arising out of the delay in deciding on the matter.

4. Government Involvement 4.1. Legislation and Development Permits 4.1.1.

In Brazil, project licensing and permitting is relatively scattered between municipal, state and federal entities, depending on the nature, complexity and location of the project.

39 Art. 109, da Lei de Licitações [Art. 109, of the Public Procurement Law] (Brazil).

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The main licences and permits to be obtained before the commencement of construction works will depend on the nature of the project (e.g., energy, port, airport, etc) but will usually at least include: (a) Preliminary Environmental License: This is granted by the local environmental authority in the preliminary planning phase of the project or activity, and approves its location and design, attesting to the environmental feasibility and establishing the basic requirements and conditions to be met in the following phases of its implementation; (b) Installation Environmental Licences: This is granted by the local environmental authority before the beginning of the implementation of the project or activity and authorizes the installation of the project or activity in accordance with the specifications of the approved programs and projects, including environmental control measures and other key conditions; and (c) Construction Permit issued by the municipality: Generally, in order to start construction work in any city, it is necessary to obtain a construction permit for such work from the municipality administration. The rules and requirements for the application, issuance and maintenance of the construction permit may vary from city to city and are normally provided for in the respective municipality’s Code of Construction Works. When assessing a request for a construction permit, the municipality must evaluate, among other issues, the legal project, its impacts and consequences for the city, and its organization. Other licences may be required for the performance of the works (e.g., licences related to explosives, transportation, or use of hazardous materials). Upon completion of the construction, erection or installation, other licenses may be required depending on the nature of the project, but will usually at least include: (a) Environmental Operating Licence: This is issued by the local environmental authority and authorizes the operation of the project or activity, after verification of effective compliance with the previous licenses, based on inspections, pre-operational reports, environmental audit reports, monitoring data or any technical means of verification of the design and efficiency of the environmental control system and mitigation measures implemented; and (b) Occupancy Permit: This is issued by the municipality where the project is located, attesting that the facility is fit for occupation and that it has been built in accordance with the construction permit. As mentioned above, depending on the nature of the project, further authorizations, especially from regulatory agencies, may be required before the beginning and after the conclusion of the project.  

4.1.3.

4.1.4. 4.1.5.

4.1.6.

 

Brazil

4.1.7.

4.1.8.

4.1.9.

129

Under Article 21, item XX, of the Federal Constitution40, it is for the federal government to determine or provide guidelines regarding urban development, including sanitation, transportation and space distribution. However, the responsibilities of territory planning and environmental control and licensing are scattered among national, state and municipal levels, depending on the subject. Unlike other jurisdictions, in Brazil there is no possibility of tacit issuance of permits, regardless of the silence or inertia of the competent administrative body. A permit is only considered issued and an activity is only authorized after the respective administrative act is published in the official press. For this reason, licensing and delays in licensing procedures by government authorities are often a concern in negotiations on extensions of time and force majeure provisions.

4.2. Codes of Practice 4.2.1.

4.2.2.

4.2.3.

Lei Nº 5.194, de 24 de Dezembro de 1966 [Law No 5,194, of 24 December 1966] (Brazil), which regulates the professions related to engineering and agronomy, incorporates the Federal Engineering Council which is responsible for issuing regulations on engineering related professions and companies, including requirements for registration and performance of engineering related services. Alongside the Federal Engineering Council, the Regional Councils, (‘CREA’), are also in charge of the enforcing such regulation, including by promoting disciplinary hearings with engineers and companies and applying penalties and sanctions, which may include fines, suspensions or the cancellation of the company or professional’s registration in the council, leading to a prohibition to practice engineering activities in Brazil.41 Regarding the product of the engineering and construction works, the Brazilian Association of Technical Regulation (“ABNT”) issues several rules or recommended standards with regards to engineering, formatting, standardization, quality and assurance.

40 Art. 21, inciso XX, da Constituição Federal de 1988 [Art. 21, item XX, of the Federal Constitution] (Brazil). 41 Art. 71, da Lei Nº 5.194, de 24 de Dezembro de 1966 [Art. 71, of Law No 5,194, of 24 December 1966] (Brazil).

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4.3. Licensing of Professionals and Contractors 4.3.1.

4.3.2.

4.3.3.

4.3.4.

Licensing in construction works is mainly regulated by the following: (a) Lei Nº 5.194, de 24 de Dezembro de 1966 [Law No 5, 194, of 24 December 1966] (Brazil), which regulates the professions related to engineering, architecture and agronomy, and provides for the requirement of registration with CREA for professionals who handle the performance of activities such as: (i) management of natural resources; (ii) construction works, installations and access routes; and (iii) industrial or rural developments; (b) Resolução Nº 336, de 27 de Outubro de 1989 [Resolution No 336, of 27 October, 1989] (Brazil), which is issued by the Federal Council of Engineering and Agronomy and further details the procedure and requirements for the registration and clearance of individuals and legal entities for developing construction and engineering activities; (c) Resolução Nº 1.025, de 30 de Outubro de 2009 [Resolution No 1,025, of 30 October, 2009] (Brazil), which is issued by the Federal Council of Engineering and Agronomy and requires that any engineering, architecture or agronomy activity is signed by a responsible professional through a Technical Responsibility Annotation (‘ART’). The ART records the authorship of the works and assigns liability to the responsible professional(s); and (d) Lei Nº 12.378, de 31 de Dezembro de 2010 [Law No 12,378, of 31 December 2010] (Brazil), which segregated the oversight of architecture and created the Regional Councils for Architecture and Urbanism (‘CAU’). CAU has a similar structure and regulation to CREA, but is related to architects and architecture services instead of engineering, including registration requirements for companies and professionals and ART requirements. Registration and ARTs for design, supervision and testing activities in relation to construction works are subject to the same rules and standards as construction works. The request for an ART by professionals will be assessed by CREA based on the academic or educational qualifications of the professional and their capacity to handle the fields of knowledge that are deemed necessary for that specific task42. Without the applicable registrations, professionals may suffer sanctions, both of a civil and criminal nature. Furthermore, without the applicable registra-

42 Art. 3, da Resolução CREA Nº 1.025, de 30 de Outubro de 2009 [Art. 3, of CREA (Regional Councils of Engineering and Agronomy/Architecture)’s Resolution No 1,025, of 30 October 2009] (Brazil).

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Brazil

4.3.5.

4.3.6.

tion of the responsible engineers, it is not possible to obtain or maintain the necessary construction and environmental permits required for the development of the project. This may cause delays and impacts to the schedule and budget43. Engineering Councils do not authorize or grant permits to specific projects. On the contrary, they register and authorize an individual or legal entity to perform a certain scope of activities based on their technical capacity and the general description of the activities intended, and do not examine the technical feasibility of the project itself. The authorizations and permits required for the development of specific projects must be granted by the applicable municipality, environmental authorities, and other regulatory authorities, depending on the type of project44. Foreign entities may apply for registration if they are certified in Brazil and have a Brazilian-qualified responsible engineer. Foreign engineers may apply for registration in CREA and, therefore, become Brazilian-qualified, if they have their diplomas validated in Brazil45.

5. Construction Contracts/Undertaking Contracts 5.1. Available Contracts 5.1.1.

Construction contracts, or ‘undertaking contracts’ as defined by the Civil Code, are regulated by Articles 610–26 of the Civil Code46. Moreover, several other provisions of the Civil Code applicable to contracts in general (e.g., formation, termination and interpretation) may apply to such types of contracts. Most projects developed in Brazil use bespoke contracts (that is, contracts specifically drafted for a particular project) rather than standard form contracts. However, it is becoming more common to use contracts based on international standard forms, such as the FIDIC contracts and the New Engineering Contract (‘NEC’) when a foreign party is involved (such as a foreign sponsor, partner or lender). These projects, however, still represent a very small percentage of the total projects developed in Brazil.  

5.1.2.

43 Art. 6, da Lei Nº 5.194, de 24 de Dezembro de 1966 [Art. 6, of Law No 5,194, of 24 December 1966] (Brazil). 44 Art. 20, da Lei Nº 5.194, de 24 de Dezembro de 1966 [Art. 20, of Law No 5,194, of 24 December 1966] (Brazil). 45 Art. 2, b, c, da Lei Nº 5.194, de 24 de Dezembro de 1966 [Art. 2, b, c, of Law No 5,194, of 24 December 1966] (Brazil). 46 Arts. 610 – 626, do Código Civil [Arts. 610 – 626, of the Civil Code] (Brazil).

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5.2. Most Commonly Used 5.2.1.

Contractual structure depends on various aspects, but mainly risk allocation and the sophistication of the parties involved. However, the most common structures used in Brazil are the following: (a) Engineering, Procurement and Construction (“EPC”) contract: An EPC contract provides for a single point of responsibility. The employer hires a contractor to provide the design, all necessary materials, equipment, and the construction services for the project. In large projects involving construction and erection works as well as equipment supply (such as power plants and factories), the contractor can be hired to provide its services on a turn-key basis, in which case it becomes responsible for taking over the project to allow the employer to be ready to operate it on completion of the works by the contractor; (b) Engineering, procurement and construction management (‘EPCM’) contract: This type of contract reflects the arrangement known as ‘management contracting’, in which a contractor acting as an agent of the employer enters into separate contracts with different contractors who provide the materials, equipment and construction services necessary for the project; (c) Design-Bid-Build (‘DBB’) contract: An employer hires a designer to provide the basic design of the project and once the basic design is concluded, the project is submitted to a bidding process involving several contractors. The selected contractor is in charge of detailing the basic design and, once it is approved by the employer (or by the employer’s technical adviser or engineer), the contractor must perform the construction services in accordance with this detailed design; and (d) Alliance Agreement: This is a co-operative method of contracting, which still represents a very small portion of the projects developed in Brazil. The parties work together and align their commercial interests, sharing the risks and rewards arising out of the contract. It is also common to establish in the contract the goals to be achieved by the parties in exchange for a bonus and with penalties for underachievement.

6. Key Issues 6.1. Rights and Obligations of the Parties 6.1.1.

Although, as mentioned above, the Civil Code regulates the basic rights and obligations of employers and contractors in construction contracts, such rules were not originally designed to handle more complex contractual struc-

Brazil

6.1.2.

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tures, such as EPCs, construction management agreements or alliance contracts. Per Articles 421 and 425 of the Civil Code47, parties are entitled to further expand their rights and obligations by way of contract and to design new types contract, provided this is done: (i) without breaching the boundaries set by the law; and (ii) taking into consideration the principle of good faith and the social purpose of the contract.

Rights and Obligations of the Contractor 6.1.3. Pursuant to Article 611 of the Civil Code48, when materials are provided by the contractor, the contractor bears the risks and responsibilities of such materials until delivery and acceptance of the final works. If the contractor was only responsible for providing services or manpower, all risks are borne by the employer, except in the case of fault of the contractor. 6.1.4. Per Article 614 of the Civil Code49, if the works are completed in stages or milestones or are by nature determined by measurement of physical progress, the contractor also has the right to demand the measurement and the payment of the works in parts, in proportion to the portion of the works completed. Due to the existence of this Article, for most mid-sized projects it is important to contractually provide for the procedures for measurement or milestones for payments to further complement or to supersede the provisions of Article 614 of the Civil Code. 6.1.5. Additionally, Civil Code Article 614, first paragraph50 provides that any works paid are presumed to have been verified by the employer. For this reason, any advance payments or payments performed without prior verification or acceptance of works should be followed by a declaration or explanation that such payment does not imply acceptance of the works. 6.1.6. Further, Article 614, second paragraph51 provides that all works measured are presumed to be verified if the employer does not claim any defects within 30 days. 6.1.7. The contractor may terminate the works, without damages being due to the employer: (a) By the employer’s fault or by virtue of an event of force majeure; (b) When difficulties arise related to geological or hydrical causes which make the object of the contract excessively burdensome and the employer opposes any necessary price review; or

47 48 49 50 51

Arts. 421 e 425, do Código Civil [Arts. 421 and 425, of the Civil Code] (Brazil). Art. 611, do Código Civil [Art. 611, of the Civil Code] (Brazil). Art. 614, do Código Civil [Art. 614, of the Civil Code] (Brazil). Art. 614, § 1, do Código Civil [Art. 614, § 1, of the Civil Code] (Brazil). Art. 614, § 2, do Código Civil [Art. 614, § 2, of the Civil Code] (Brazil).

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(c)

If modifications required by the employer are disproportionate to the approved project, even if the employer undertakes to pay the increase of price.

Employer’s Rights and Obligations 6.1.8. The employer has the right to inspect the performance of the works. However, under Article 619 of the Civil Code52, the employer must pay for increases in the scope of work performed by the contractor without the employer’s authorization, because if the employer is constantly present and supervising the works, they could not have been unaware of these modifications or increases in scope. 6.1.9. Article 623 of the Civil Code53 provides that the employer may terminate the contract, without cause, by paying the contractor its costs and profits in relation to the services already provided, plus a reasonable indemnification, calculated in light of the profits the contractor would have made had the works been concluded. 6.1.10. Article 615 of the Civil Code54 provides for the employer’s right to reject the works if the contractor has deviated from the instructions, designs or applicable technical rules. Article 616 of the Civil Code55 complements this rule by providing the possibility for the employer to receive the works with a price reduction. Variation of Works and Price Revision 6.1.11. The price for the work to be completed is usually defined in the contract. The price may be expressed as a lump sum or, as described in Section 6.1, it may be based on the volume of work, milestones, or phases of the project concluded, and other specifications. 6.1.12. In private contracts, the employer can order variations to the works at any time prior to taking over the works. 6.1.13. Generally, construction contracts include ‘change order provisions’ under which the parties can discuss the impact of the respective variation and, in the case of material changes, negotiate a price adjustment or an extension of time. 6.1.14. If the contract does not provide for these variation provisions, the Civil Code applies and the employer is responsible for paying the additional costs arising from the requested variations. If the variations requested by the employer

52 53 54 55

Art. 619, do Código Civil [Art. 619, of the Civil Code] (Brazil). Art. 623, do Código Civil [Art. 623, of the Civil Code] (Brazil). Art. 615, do Código Civil [Art. 615, of the Civil Code] (Brazil). Art. 616, do Código Civil [Art. 616, of the Civil Code] (Brazil).

Brazil

6.1.15.

6.1.16.

6.1.17.

135

are disproportionate to the design already approved, the contractor can refuse the variations, even if the employer agrees to pay the additional costs56. Additionally, variations to reduce the scope of work are only allowed if expressly provided for in the contract or agreed between the parties. The employer may otherwise be required to indemnify the contractor for any losses and damages arising from such reduction. As discussed in Section 6.1, under Article 619 of the Civil Code57, the employer must pay for unauthorized increases in the scope of work performed by the contractor if the employer is constantly present and supervising the works and could not have been unaware of such modifications or increases of scope. With respect to public contracts, under Article 65 of the Public Procurement Law, the employer (i.e., the public entity) can unilaterally vary the works whenever it is necessary to either: (a) Modify the design or the project specifications to better achieve the technical purposes of the project58; or (b) Increase or reduce the scope of the works59. In both cases, the contractor is forced to accept the variations under the same contractual conditions, provided that the increases or reductions to the works, services or purchases do not exceed 25 % of the original price. This limit can be increased to 50 % when related to the restoration of buildings or equipment. In all cases, the economic-financial balance of the contract must be maintained and ensured.  

6.1.18.

 

 

6.2. Subcontractors 6.2.1.

The Civil Code does not rely on specific provisions or limitations regarding subcontracting. Considering that construction contracts are by law regarded to be an ‘obligation of result’ (i.e., the contractor is responsible for the final result of the works regardless of the resources used to achieve the result), the main contractor remains responsible towards the employer for the performance mand quality of subcontractors’ work. Article 72 of the Public Procurement Law60 allows the private contractor to subcontract parts of its work. It also leaves the specific criteria for such sub 

6.2.2.

56 Art. 619 e 626, III do Código Civil [Art. 619 and 626, III of the Civil Code] (Brazil). 57 Art. 619, do Código Civil [Art. 619, of the Civil Code] (Brazil). 58 Art. 65, I, a, da Lei Nº 8.666, de 21 de Junho de 1993 [Art. 65, I, a, of the Public Procurement Law] (Brazil). 59 Art. 65, I, b, da Lei Nº 8.666, de 21 de Junho de 1993 [Art. 65, I, b, of the Public Procurement Law] (Brazil). 60 Art. 72, da Lei de Licitações [Art. 71, of the Public Procurement Law] (Brazil).

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contracting to be specified under the public procurement rules. The bid documents must define to what extent or percentage subcontracting is allowed, and may also define requirements for the qualifications of subcontractors.

6.3. Guarantee and Defects 6.3.1.

6.3.2.

6.3.3.

6.3.4.

6.3.5.

6.3.6.

Brazilian law provides only basic guarantees for the works, such that contractors usually must provide additional guarantees, ‘make-good’ obligations or commitments, and additional warranty periods. This is especially so if there is a supply or installation of equipment involved. For defects which are impossible to detect, or not reasonably expected to be detectable upon delivery of the works, the Civil Code grants the employer the right to: (i) request a reduction of the purchase price; or (ii) avoid the contract and demand any amounts paid to be returned, if the works are unfit for purpose. As further discussed in Section 6.9, under Civil Code Article 44561, the purchaser loses the right to avoid the contract or reduce the price after 30 days if the good is moveable, and one year, if the good is immovable. In both cases, the limitation period begins from effective delivery. If the good was already in the purchaser’s possession, the limitation period is halved, and begins from the date of the transference of possession. When a latent or hidden defect, by its nature, could only be discovered later, the period begins from the moment at which the purchaser became aware of the defect. The limitation period is 180 days in the case of movable property, and one year for immovable property. Brazilian law deals very delicately with defects related to the soundness and safety of structures. Article 618 of the Civil Code62 provides that contractors who supplies materials for the works are strictly liable for any defects related to soundness and safety which appear within five years of the conclusion of the works. This warranty is considered a public policy, since it is designed to protect not only the employer but also the whole community exposed to the works. The respective warranty period is, therefore, not subject to reduction or waiver by the parties. On this matter, it is noteworthy that the concept of soundness and safety is not limited to the capacity of the structure to stand without collapsing. The concept is designed to encompass any defect that can be considered harmful to life, even if only to a minor degree. A textbook example would be an infil-

61 Art. 445, do Código Civil [Art. 445, of the Civil Code] (Brazil). 62 Art. 618, do Código Civil [Art. 618, of the Civil Code] (Brazil).

Brazil

6.3.7.

6.3.8.

137

tration leading to the formation of mould in the walls of the structure, which despite being unlikely to compromise the safety of the structure itself, is considered harmful to human health and is therefore included in the concept of the statutory warranty provided in Article 618. After the expiration of the period of five years, the contractor is no longer strictly liable for repairs or indemnification required due to the defect, but may still be held liable if it is proven that the defect arose out of the contractor’s fault. Hence, although the soundness and safety obligations are considered to expire after the 5-year statutory warranty period, the obligation to indemnify for damages arising out of the defect remains in the case of contractor fault. Article 205 of the Civil Code63 provides that the aggrieved party has up to ten years (the general statutory limitation period for liability claims), counted from the appearance of the defect, to seek compensation.

6.4. Late Completion 6.4.1.

6.4.2.

6.4.3.

In cases of late completion, Article 395 of the Civil Code64 provides for the general rule that the party in default is liable for any losses and damages arising out of the delay to the other party, plus interest, readjustment of prices, and attorney’s fees. Nonetheless, in order to: (i) increase liquidity and avoid the necessity of calculation of damages; and (ii) impose greater incentive for timely completion of the works by contractor, construction contracts commonly establish liquidated damages in the event the works are concluded after the agreed contractual date. Additionally, it is becoming more common to have penalties for certain interim milestones, which are required to ensure that the work is concluded on time. The Civil Code regulates the application of liquidated damages for delay, which at law are called ‘penalties’. Per Article 411 of the Civil Code65, delay penalty clauses consist in forcing the delayed party to pay a fine as compensation for late completion of an obligation. The amount nominated by way of liquidated damages must be reasonable and reflect the anticipated losses that might arise as a result of late completion. Moreover, Article 416 provides that, in cases where the contract expressly allows, the party claiming the delay may claim damages in excess of the contractual penalty, to the extent it is

63 Art. 205, do Código Civil [Art. 205, of the Civil Code] (Brazil). 64 Art. 395, do Código Civil [Art. 395, of the Civil Code] (Brazil). 65 Art. 411, do Código Civil [Art. 411, of the Civil Code] (Brazil).

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6.4.4.

6.4.5.

6.4.6.

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able to prove such damages. In the past, the Superior Court of Justice has, on occasions, granted damages in addition to the penalty clause, even without the express provision in contract required by Article 416, Sole Paragraph66. However, recently, the Superior Court of Justice67 has pacified the understanding which it does not allow the granting of damages in excess in addition to penalty clauses. Unlike in the UK, penalties and liquidated damages are not set aside if they are considered to be excessive. Instead, Article 413 of the Civil Code68 provides for the court’s authority to decrease the amount of the penalty provided for in the contract if it deems it to be excessive in light of the circumstances. The court may not, however, avoid its application in whole. In addition to administrative sanctions applicable to delays and other breaches, most public contracts rely on delay liquidated damages in cases where the private contractor delays the performance of the works. In the same manner, delay penalties for interim milestones are also becoming common in these types of contracts. The Civil Code does not specifically deal with termination due to delays in delivery of the works. However, Article 475 of the Civil Code69 allows the contractual parties to agree on termination clauses as remedy for the default of a party. Commonly, parties agree that after a certain period of delay, the employer has the right to terminate the contract, being entitled to be compensated for damages incurred as a result of the termination or to apply a termination penalty.

6.5. Termination of the Contract and Legal Consequences 6.5.1.

Pursuant to Article 623 of the Civil Code70, the employer can withdraw from the contract even when the performance of the works or services has already started, provided that the contractor is compensated for the expenses, the work done, costs incurred and profits in relation to the services already provided, plus a reasonable indemnification calculated in light of the profit the contractor would had received if the works had been concluded.

66 Art. 416, parágrafo único, do Código Civil [Art. 416, sole paragraph, of the Civil Code] (Brazil). 67 Superior Tribunal de Justiça. Tema 970. Recursos Especiais Nº 1.498.484 / 1.635.428 / 1.614.721 / 1.631.485. Ministro Luis Felipe Salomão. Data de Julgamento: 22 de Maio de 2019 [Superior Court of Justice. Theme 970. Interim Specials Appeal No 1,498,484 / 1,635,428 / 1,614,721 / 1,631,485. Justice Luis Felipe Salomão. Date of Judgment: May 22, 2019] (Brazil). 68 Art. 413, do Código Civil [Art. 413, of the Civil Code] (Brazil). 69 Art. 475, do Código Civil [Art. 475, of the Civil Code] (Brazil). 70 Art. 623, do Código Civil [Art. 623, of the Civil Code] (Brazil).

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6.5.2.

6.5.3.

6.5.4.

6.5.5.

139

Due to the broad concept of loss of profits in Article 623 of the Civil Code71, parties commonly agree on specific provisions for termination for convenience by the employer, stipulating more specific criteria for the calculation of indemnification due to the contractor, which may include a termination penalty established as a percentage of the contract price, or at least clear standards for the calculation of the contractor’s loss of profits and termination fees. Under Article 478 of the Civil Code72, if the contract becomes excessively burdensome to one of the parties due to extraordinary, unforeseeable and unavoidable circumstances, the affected party may claim the termination of the contract. In order to avoid termination, the other party may offer to modify the conditions of the contract and re-establish its economic balance. Such termination does not operate automatically, but must be declared by the competent court or arbitrator. Article 474 of the Civil Code73 provides that where there is an express termination clause, the non-breaching party may terminate the contract without the need for judicial or arbitral intervention. For this reason, it is common to establish: (i) an obligation to notify the breaching party; and (ii) a cure period for the breaching party to remedy the breach, if possible, so that the default is more liquid and easier to characterize, leaving less margin for the breaching party to challenge the termination. Construction contracts are generally not terminated upon the contractor’s death, except when the contract provides for that possibility in view of the contractor’s personal characteristics.

6.6. Force Majeure 6.6.1.

6.6.2.

71 72 73 74 75

The concept of force majeure is known and enforceable in Brazil. Under Article 393, sole paragraph of the Civil Code74, force majeure is considered as ‘the necessary event, whose effects were impossible to avoid or impair’. Also, Article 393 of the Civil Code75 establishes that the affected party is not responsible for losses resulting from force majeure events, unless such responsibility was expressly stated in the contract. Thus, under Brazilian law, force majeure is a legal exemption to performance and liability during its occurrence. The party affected by a force majeure

Art. 623, do Código Civil [Art. 623, of the Civil Code] (Brazil). Art. 478, do Código Civil [Art. 478, of the Civil Code] (Brazil). Art. 474, do Código Civil [Art. 474, of the Civil Code] (Brazil). Art. 393, parágrafo único, do Código Civil [Art. 393, sole paragrah, of the Civil Code] (Brazil). Art. 393, do Código Civil [Art. 393, of the Civil Code] (Brazil).

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6.6.3.

6.6.4.

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event is not liable for damages arising from it, provided that that: (i) the party submits enough evidence of the event; and (ii) the event was unforeseeable and beyond the party’s control, as per the requirements of Article 393, Sole Paragraph. Although, in principle, each party bears their respective expenses and costs resulting from a force majeure event, in certain cases the force majeure risks are allocated to the employer under the contract. The parties may agree upon a contractual definition of force majeure and even waive the application of the concept of force majeure established in the Civil Code in certain cases. It is common to expressly exclude from the concept of force majeure events such as: (i) changes affecting the economic balance of the contract, even if the contract becomes uneconomic; (ii) labour or materials shortage; and (iii) strikes restricted to the contractor’s employees or subcontractors.

6.7. Limitation of Liability 6.7.1.

6.7.2.

6.7.3.

Article 403 of the Civil Code76 expressly limits liability of the parties to direct damages, thereby excluding indirect damages. Nonetheless, case law and scholars’ opinions often differ, and there is difficulty in defining the concept of indirect damages and its application in concrete cases. Parties are also free to contractually limit or exclude their liability. It is usual to limit the contractor’s liability to a certain percentage of the contract price and to exclude from the parties’ liability indirect and consequential damages and loss of profits. Although there is no specific legal provision in this regard, case law and scholars’ opinion understand that any agreement that excludes the liability of the parties in case of non-performance of essential contractual obligations would be void. In the same sense, any agreement that limits or excludes the liability of the parties in case of damage caused due to fraud, gross negligence or wilful misconduct is also considered to be invalid.

6.8. Bribery and Corruption 6.8.1.

The Brazilian legal framework regarding the prohibition of corrupt business practices and bribery can be found in several different laws and decrees, as described below.

76 Art. 403, do Código Civil [Art. 403, of the Civil Code] (Brazil).

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141

Criminal Code 6.8.2. Article 333 of the Criminal Code77 imposes criminal penalties on individuals who offer or promise any unlawful advantage to a domestic or foreign public official to constrain him or her to do, omit or delay any official act. Brazilian law does not impose criminal liability on companies for corruption. 6.8.3. Article 333 of the Criminal Code78 establishes that the penalty is imprisonment for up to 12 years and a fine. Penalties may be increased by one third if, as a result of the advantage or promise, the public official delayed or omitted an official act or infringed his or her duties. Anti-Corruption Statute 6.8.4. Lei Nº 12.846, de 1 de Agosto de 2013 (Lei Anticorrupção) [Law No 12,846, of 1 August 2013] (Brazil) (“Anti-Corruption Statute”) imposes strict administrative and civil liability and sanctions on companies for acts that are harmful to the domestic or foreign government, regardless of fault or intent. Article 5 of the Anti-Corruption Statute79 provides that the following offenses are subject to the application of this law: (a) To promise, offer or give, directly or indirectly, an undue advantage to a public official, or a third person related to him or her80; (b) To finance, fund, sponsor, or in any other manner subsidise illegal acts81; (c) To use third parties, physical persons or legal entities to hide or disguise real interests or the identity of the beneficiaries of the acts82; (d) To defraud, manipulate, prevent or frustrate public biddings or contracts83; and (e) To hinder investigations or oversight by agencies, entities or public officials, including regulatory agencies, or interfere in their activities84. 6.8.5. Possible sanctions for above-listed offenses include: (a) Administrative sanctions, enforceable by means of administrative proceedings, such as: (i) Fines ranging from 0.1–20 % of gross revenues of the fiscal year before the initiation of administrative proceedings, excluding taxes; and  

77 78 79 80 81 82 83 84

Art. 333, do Código Penal [Art. 333, of the Criminal Code] (Brazil). Art. 333, do Código Penal [Art. 333, of the Criminal Code] (Brazil). Art. 5, da Lei Anticorrupção [Art. 5, of the Anti-Corruption Statute] (Brazil). Art. 5, inciso I, da Lei Anticorrupção [Art. 5, item I, of the Anti-Corruption Statute] (Brazil). Art. 5, inciso II, da Lei Anticorrupção [Art. 5, item II, of the Anti-Corruption Statute] (Brazil). Art. 5, inciso III, da Lei Anticorrupção [Art. 5, item III, of the Anti-Corruption Statute] (Brazil). Art. 5, inciso IV, da Lei Anticorrupção [Art. 5, item IV, of the Anti-Corruption Statute] (Brazil). Art. 5, inciso V, da Lei Anticorrupção [Art. 5, item V, of the Anti-Corruption Statute] (Brazil).

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(ii) Extraordinary publication of the administrative decision. Civil sanctions enforceable by the courts, such as: (i) Seizure of assets, rights, or value gained from the illegal act; (ii) Partial suspension or prohibition of activities; (iii) Compulsory dissolution of the implicated legal entity; and (iv) Prohibition against the receipt of donations, grants, subsidies or funding from public entities and public financial institutions for 1–5 years. The Public Procurement Law also deals with bribery, corruption and other practices designed to specifically defraud public contracts and their respective bidding procedures. Penalties and sanctions include the following: (a) Fines; (b) Compensatory damages; (c) Other termination or indemnification provisions, which may be provided in contractual terms and conditions; (d) Termination of the governmental contract without compensation for damages arising out of termination (if the contract is ongoing); (e) Suspension of rights to participate in public bids for up to two years; and (f) Definitive bans on entering into contracts with the government. (b)

6.8.6.

6.9. Duration of Exposure 6.9.1.

6.9.2.

With regards to exposure relating to soundness and safety of construction works, Article 618 of the Civil Code85 provides for a statutory limitation of five years counted from the date of delivery of the works. Since it relates to the safety of third parties exposed to the construction, this limitation is unanimously considered as a public policy and is not subject to reduction by agreement between the parties. Furthermore, the Civil Code also provides for time limitations for the assessment and claiming of latent defects. Under Article 44586, the purchaser loses the right to avoid the contract or a reduction in price after 30 days if the good is moveable, and after one year if the good is immovable. In both cases, the period begins from effective delivery. If it was already in the purchaser’s possession, the period is halved and is counted from the date of the transference of possession. When the defect, by its nature, could only be discovered later, the period is counted from the moment at which the purchaser became aware

85 Art. 618, do Código Civil [Art. 618, do Código Civil] (Brazil). 86 Art. 445, do Código Civil [Art. 445, do Código Civil] (Brazil).

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143

of the defect. The period is 180 days in the case of movable property, and one year for immovable property.

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

7.1.4.

7.1.5.

7.1.6.

Contracting parties may contractually provide for the forum that will examine their disputes where they cannot be resolved amicably. Either the court or arbitration tribunal may act as the competent forum, based on the contractual agreement. In construction and infrastructure disputes, if no amicable settlement is reached, disputes are usually resolved by arbitration. Unlike in the UK, Brazilian law does not provide for statutory adjudication. However, the inclusion of dispute boards in construction contracts has become more common in the past few years, which in practice creates a contractual adjudication mechanism for certain projects. In 2018, the municipality of São Paulo through Lei Nº 16.873/2018 [Law No 16,873/ 2018] (Brazil) has passed the first law allowing and regulating the use of dispute review and adjudication boards in public procurement contracts executed by the municipality. Brazilian arbitration is regulated by the Arbitration Law, which is based on the UNCITRAL Model Law) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).87 Therefore, some important principles and features may be applied in arbitration proceedings, such as due process, the right to be heard, impartiality and independence of arbitrators, kompetenz-kompetenz [competence-competence] and separability of the arbitration agreement, among many others. Any party that can enter into a contract is permitted to submit disputes to arbitration. However, the dispute must relate to rights and assets that can be freely transferred or disposed of by the parties. Domestic awards — those rendered inside Brazilian territory — are considered as final judgments and do not require any confirmation by courts for the purposes of enforcement. Foreign awards, on the other hand, are subject to recognition proceedings within the High Court of Justice, in accordance with the New York Convention. Parties may choose the arbitral institution to administer the case, the language of the proceedings, the law applicable to the dispute, and the number of arbitrators to constitute the tribunal, as well as other procedural aspects related to the arbitration.

87 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959).

Sharon Vogel, Bruce Reynolds and Helmut Johannsen

Canada 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 3. 3.1. 3.2. 3.3. 3.4. 4. 4.1. 4.2. 5. 5.1. 5.2. 5.3. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7.

Context 146 The Country 146 The Legal System 147 The Economy 149 The Construction Industry 149 Size and Nature 149 Participants 150 Work, Health and Safety 151 Protection of the Environment 152 Legal Underpinnings of Contracts 154 Freedom of Contract 154 Legal Framework 154 Implied Contract Terms 155 Public Procurement 156 Government Involvement 157 Legislation and Regulation 157 Permits and Licensing 159 Construction Contracts 161 Standard Form Contracts 161 Contract Amendments and Bespoke Contracts Construction Contract Types 162 Key Issues 164 Overview 164 Representations and Warranties 164 Unforeseen Site Conditions 165 Notice Provisions and Delay 166 Force Majeure 167 Liquidated Damages 168 Project Security 168

https://doi.org/10.1515/9783110712728-006

162

146

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

Canada is the second largest country in the world with 90 % of its population of 37.9 million people living within 160 kilometres of the southern border with the United States.1 Canada’s population has grown significantly in recent years as a result of international migration, with its growth rate the highest among all G7 countries.2 The majority of Canadians live in urban centres such as Toronto, the capital of the most populous province of Ontario, Montreal, Calgary, or Vancouver. Given its size, Canada has multiple timezones, terrains, and environments. These include the temperate climate of British Columbia, the permafrost tundra of Nunavut, Yukon and the North West Territories, the prairie flats of Manitoba and Saskatchewan, the mountain ranges of Alberta and British Columbia, the Great Lakes in Ontario and Quebec, and the coastal island climates in the east of New Brunswick, Nova Scotia, Newfoundland, and Prince Edward Island. Canada’s official languages are English and French, although Indigenous communities throughout the country maintain their own languages.3 Canada was colonized by the British and French in the 1700s, with Britain defeating France in 1759 and later defeating the American colonies in a series of conflicts that culminated in the War of 1812.4 In 1867, Canada was founded through Confederation as a British colony, achieving independence from Britain in 1931.5 Certain groups of Canada’s Indigenous peoples made treaties with the newly formed Canadian government at this time, with these treaties being the topic of much litigation and political debate.6 Canada is a constitutional monarchy under the British Crown, with the Queen’s delegate the Governor General of Canada. Canada is one federal state  

1 “By the numbers”, CBC News (12 May 2009) . 2 Canada’s Population, July 1 2019, Statistics Canada (30 September 2019) . 3 Aboriginal languages in Canada, 2011 Census of Population, Statistics Canada ; Indigenous Languages Act, SC 2019, c 23. 4 ‘Canada’s History’, Government of Canada . 5 The Statute of Westminster, 1931, Government of Canada . 6 Treaties and agreements, Crown-Indigenous Relations and Northern Affairs Canada, Government of Canada .

Canada

1.1.5.

1.1.6.

147

comprised of 10 provinces and 3 territories, all but one of which have a common law legal system; the exception is the province of Quebec, which is a civil law jurisdiction. The 1867 Canadian Constitution allocates powers between the federal and provincial levels of government. The provinces are allocated a number of important powers, the most significant of which is the power to make laws in relation to property and civil rights in the province.7 Generally speaking, this Constitutional allocation of power gives the provinces the right to legislate over any construction matters, with the exception of those within enumerated federal jurisdiction(s) such as railways, airports, and military zones. The government of Canada is elected separately; federal elections occur every four years, with provincial and territorial elections occurring in a similar timeframe but administered by the respective provinces and territories.8 Federal and provisional governments can however, call elections earlier than 4 years. Federally there are three branches of the Canadian Parliamentary system: Executive, Legislative, and Judicial. The Executive Branch consists of the Governor General, Prime Minister, and the Cabinet. The Legislative Branch consists of the Senate and House of Commons, and the Judicial Branch consists of a series of independent federal and provincial courts.9 Canada has two Chambers of Parliament, the upper house of the Senate which is appointed by the Governor General at the advice of the Prime Minister, and the lower House of Commons which consists of elected Members of Parliament. All federal legislative bills must be reviewed and passed by both Chambers before they can achieve Royal Assent and be passed into law. A similar process occurs in the provinces and territories for provincial legistlation.

1.2. The Legal System 1.2.1.

Canada has a Federal Court with trial and appellate divisions, although its jurisdiction is limited to strictly federal matters, which includes construction law issues related to federal government procurements. Parliament has exclusive authority over the procedure regarding criminal cases, but the provinces administer justice in their jurisdictions by maintaining the

7 Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, Appendix II, No 5, s 92. 8 FAQs on Elections, Elections Canada . 9 Our Country, Our Parliament, Library of Parliament, Parliament of Canada .

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Superior (general) and Small Claims court systems and regulating civil procedure.10 In accordance with the Canadian Constitution, the judiciary is independent from the Executive and Legislative branches of government. The federal government appoints judges to the Federal courts and the Superior courts of the provinces and territories and the Supreme Court of Canada. All other provincial and territorial judiciary are appointed by their respective provincial or territorial governments.

The Court System 1.2.3. The Supreme Court of Canada is the highest court in the country and hears appeals from all three levels of the courts. These include the military courts and the Court Martial Appeal Court, the provincial and territorial appellate courts, and the Federal Court of Appeal. The exception to the appellate system is the territory of Nunavut which has a single-level trial court, although it is still under the authority of the Supreme Court of Canada.11 1.2.4. Within the provincial and territorial court system, the Superior courts are the highest level of judicial administration and are divided into trial and appeal levels. Under the Superior courts are the Divisional courts and Administrative boards and tribunals. Arbitration 1.2.5. Arbitration is one of the most common private dispute resolution processes used in Canada, and is widely utilized in commercial disputes including in the construction industry. Arbitration is regulated in Canada by statute, both at the federal level and in each province and territory. Arbitration is traditionally a binding process but can be non-binding, and is generally voluntary.12 1.2.6. Arbitration is frequently used to resolve construction disputes. The courts tend not to be equipped or have the desire to hear complex commercial disputes in the construction and infrastructure industries, so mediation and arbitration have largely occupied this field. 1.2.7. Although many international arbitration institutions are regularly used in Canada, the most common are the International Chamber of Commerce, the International Centre for the Settlement of Investment Disputes, ADR Chambers, and the ADR Institute of Canada.

10 The Judicial Structure, Department of Justice, Government of Canada . 11 The Judicial Structure, Department of Justice, Government of Canada . 12 Dispute Resolution Reference Guide, Department of Justice, Government of Canada .

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In Canada, it is common for government agencies to participate in private arbitration. All arbitration proceedings, including those involving government agencies, are subject to arbitration legislation that is, as noted, enacted federally and in each province. Generally, there is separate legislation for international arbitrations and for domestic arbitrations in each jurisdiction.

1.3. The Economy 1.3.1. 1.3.2.

1.3.3.

In 2011, Canada’s construction industries accounted for 6 % of Canada’s GDP, and as of 2020 contributed $141.1 billion to the GDP of the country.13 Canada’s economy grew at an annual pace of nearly 4 % in the first part of 2017, which the International Monetary Fund noted was the fastest growth rate among G7 countries.14 Canada is a signatory of the North American Free Trade Agreement and the new Canada–United States–Mexico Agreement. Canada has also ratified numerous foreign investment promotion and protection agreements (BITs) with individual countries. Although these agreements vary, investment is generally broadly defined to include any kind of asset owned or controlled either directly or indirectly through an investor, including movable and immovable property, shares, stocks and bonds, money, goodwill, and intellectual property rights.  

 

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction industry plays a vital role in the Canadian economy, with over 1.5 million Canadians employed in its labour force.15 Canada’s construction industry is generally split between the residential sector, the industrial, commercial and institutional sector, and the heavy and civil engineering sector.

13 Statistics Canada, “Canada Year Book 2011”, Catalogue No  11-402-X pg 72 ; Construction Industry Key Indicators, BuildForce Canada . 14 K. IShi, D. Gentry, C. Hoon Lim, “Unlocking Canada’s Future Growth Through Infrastructure“, International Monetary Fund, (13  July 2017) . 15 Construction Industry Key Indicators, BuildForce Canada .

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Generally, the largest projects are in the heavy and civil engineering construction sectors, including highways and transit, as well as utility systems and energy production. These projects have been fuelled by significant investment from both the federal and provincial governments. The number of women employed in the industry is growing, being up 6.9 % from previous years, although still only consisting of 13.5 % of the overall employment figures for the country’s construction industry.16 The older workforce is not being replaced as fast as they reach retirement age, with a greater need for recruitment a recent focus for the industry, as 22 % of the labour force are expected to retire in the next decade.17 Employers in Canada in the construction industry are generally larger construction or engineering firms, with most Industrial, Commercial, and Institutional contractors stating, in the pre-Covid context, that their main concern in the next few years is the aging workforce and recruiting skilled workers.18  

 

 

2.1.4.

2.2. Participants 2.2.1.

2.2.2.

Depending on the size and nature of the project, the participants in the Canadian construction industry can vary from the two party relationship of owner and contractor in smaller residential construction, to the multi-level structure of larger industrial construction projects, which is commonly referred to as the “construction pyramid” and involves the following key players: (a) Owner; (b) Consultants (Engineers and Architects); (c) Surety; (d) General Contractor; (e) Sub-Contractors; and (f) Sub-Sub-Contractors and Suppliers. On larger infrastructure projects, general contractors and sub-contractors can be consortiums that have come together to form joint ventures while still maintaining their separate businesses. Similarly, most of the larger general and sub-contractors have their own project managers who are tasked with co-ordinating their section of the project, and larger general contractors will at times have their own engineering consultants.

16 Construction Industry Key Indicators, BuildForce Canada . 17 Construction Industry Key Indicators, BuildForce Canada . 18 2020 Contractor Survey, Ontario Construction Secretariat, pg 5 .

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Lien legislation is only at the provincial and territorial level, as Canada currently does not have federal lien legislation. Surety bonds are mandatory for many Crown projects where the government is the owner, in accordance with provincial construction legislation or policy. They are also often required by private owners. Bid bonds, performance bonds, and labour and material bonds are all frequently utilized. In the case of performance bonds, the general contractor places the bond to protect the owner’s interests, and the owner can call upon the surety to complete the project if there is a default by the contractor. Labour and material bonds are posted by the general contractor for the benefit of the subtrades, who can make claims upon failure of payment by the general contractor. Bid bonds protect the owner by ensuring that the general contractor will follow through on a qualified bid once accepted. Public Private Partnerships, often referred to as PPPs or P3s, are increasingly common in Canada as a way to finance large infrastructure projects. The Crown, whether federal or provincial, will enter into one contract with private sector members, usually a consortium, wherein certain risks are transferred from the governmental authority to the other project participants. Where government entities are involved in P3 projects as project sponsors or owners, the project is usually subject to a dense and comprehensive contractual arrangement between the public entity and the other project participants. Specialised federal and provincial government agencies promote and oversee the use of P3 projects, for example Infrastructure Ontario in Ontario and Partnerships BC in British Columbia.

2.3. Work, Health and Safety 2.3.1.

2.3.2.

Within the provinces and territories, there are several statutes and codes that apply to the employment of construction workers. These include Acts which set out employment standards and regulations, workers compensation, occupational health and safety regulations human rights codes and labour relations codes. These laws provide various rights and protections for construction workers, including regulations with regard to working conditions and remuneration, and protection against discrimination. Workers are also protected by comprehensive health and safety legislation. Employers are subject to a wide range of consequences for failing to follow employment laws, including fines, prosecution, the issuance of compliance orders and civil actions by employees.

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2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

2.4.4.

2.4.5.

Generally, environmental legislation is governed by the federal government as the Constitution sets out the enumerated grounds for which it is responsible, including oceans and inland fisheries, all Indigenous land, and the regulation of trade and commerce. However, the provinces and territories have their own legislation to regulate protection and conservation of the environment and resources for their jurisdictions outside those enumerated as federal. Examples include Ontario’s Environmental Protection Act and New Brunswick’s Clean Air Act.19 Although Canada participated in the Declaration of the United Nations Conference on the Human Environment that adopted the Stockholm Declaration of 1972, the declaration was not adopted in Canada and it is thus not legally binding. However, Canada is a signatory to other United Nations environmental initiatives, such as the United Nations Framework Convention on Climate Change, and has ratified the Paris Agreement. With respect to local laws, there are both federal and provincial requirements for certificates of approval to proceed with a project where the project presents a threat to waterways or fisheries, in the case of federal legislation, or where the lands in question are historically contaminated. With regard to historically contaminated lands, provincial legislation requires certificates of authorisation for projects on such land to proceed. At the federal level, Environment Canada is the regulatory authority that exercises jurisdiction over specific environmental areas, such as fisheries, nuclear energy, migratory birds and species at-risk. However, Canadian provinces have enacted legislation that pertains to broader environmental protection issues and that detail the duties and liabilities imposed on parties responsible for the creation of environmental impairment. Both federal and provincial legislation maintain strict enforcement regimes that provide for various types of orders and that also allow for the prosecution of environmental offenders.

Fisheries Act 2.4.6. This federal Act protects all fish and fish habitat in Canada, and legislates and protects against any harmful alteration or destruction of fish habitat. Recent 2019 changes to the Act included ensuring Indigenous people and their knowledge be taken into account when making decisions on projects and policies, and a requirement to publicly release information on project decisions

19 Environmental Protection Act, RSO 1990, c E 19; Clean Air Act, SNB 1997, c C-5.2.

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through an online registry.20 The Ministry of Fisheries and Oceans Canada is responsible for the Fisheries Act and its regulations. Canadian Environmental Protection Act, 1999 2.4.7. This overarching environmental legislation relates to pollution prevention and protection of the environment so as to ensure sustainable development. This includes the assessment and management of chemical risks as well as polymers and living organisms, programs related to air and water pollution, hazardous waste, ocean disposal and environmental emergencies.21 The federal Ministry of Environment and Climate Change and the Ministry of Health are responsible, among others, for administering the regulations of this Act. 2.4.8. Whistleblower protection is also enshrined regarding the reporting of toxic substances being released in a way that contravenes regulations, and makes it an offence to dismiss, harass, or discipline any employee who voluntarily reports a violation of the Act. Canada Water Act 2.4.9. The Canada Water Act regulates water resources in the country and provides the framework for how federal and provincial and territorial governments regulate, monitor, and implement conservation programs regarding water resource management. The provincial and territorial governments and their municipalities are responsible for drinking water treatment and distribution and waste-water treatment in urban areas, while the federal government regulates all water related programs and policies in federal waters and on Indigenous lands as well as all fishing regulations as per the Canadian Constitution. 2.4.10. The Act is administered by the federal Ministry of Environment and Climate Change, with its regulations governed by other water legislation in both federal and provincial and territorial jurisdictions.

20 “Introducing Canada’s modernized Fisheries Act”, Fisheries and Oceans Canada, Government of Canada ; Fisheries Act, RSC 1985, c F-14. 21 Understanding the Canadian Environmental Protection Act, Government of Canada ; Canadian Environmental Protection Act, 1999, SC 1999, C 33.

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3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

3.1.3.

3.1.4.

3.1.5.

Freedom of contract is an important principle in Canadian law. Generally, Canadians have the freedom to enter into contracts for the reason and at the time of their choosing, with some limitations based on restrictions found in legislation. Freedom of contract exists due to the underlying assumption of contract law that parties are rational actors who are able to identify their own best interests. The primary goal of contracts in Canada centres around allowing parties to arrange their affairs as they see fit. At its core, the purpose of the law of contracts in Canada is to protect the reasonable expectations of the parties to any contract. In Canada, in order for a contract to be considered enforceable there must be offer and acceptance, certainty of terms, consideration and the absence of vitiating factors such as mistake or misrepresentation. Mutuality goes to the root of any legally enforceable contract. Thus, a contract requires a meeting of the minds of the contracting parties on all essential matters relating to the contract – otherwise known as “consensus ad idem”. The burden of proving a consensus between the contracting parties lies upon the party seeking to prove its existence, on a balance of probabilities. While freedom of contract is an encouraged principle in Canada, it should not be seen as the entirety of contract law. Values such as fairness, the prevention of exploitation of vulnerable parties, and injustice are other meaningful principles of contract law in Canada.

3.2. Legal Framework 3.2.1.

3.2.2.

3.2.3.

The legal framework of contracts in Canada is determined by Québec civil law and Canadian common law. These two legal frameworks generally follow similar rules regarding contracts – a valid and enforceable contract represents a legal bond between the parties. The limitations to absolute contractual freedom are seen through restrictions imposed by legislation. Contracts that are contrary to a statutory law such as the Canadian Criminal Code22 are therefore null and void. The Civil Code regulations governing contracts in the province of Québec (articles 1377, 1456 of the Québec Civil Code) are derived mainly from French ci-

22 Criminal Code, R.S.C., 1985, c. C-46.

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vil law, which earlier derived from Roman law. In other provinces in Canada, the law governing contracts is based substantially on jurisprudence and on the traditional British common law. Many provinces have adopted legislation codifying the rules of certain contracts, for example, sales and consumer contracts. While Canada’s two major legal systems differ in certain aspects of contract law, the practical remedies they outline are very similar when not identical. Except for certain types of contracts, such as those relating to the purchase and sale of real property or guarantees, it is not a legal requirement in Canada that a contract be in writing. Written or oral contracts are binding once agreement has been reached on all of the essential terms of the contract. At the same time, pursuant to legislation such as Ontario’s Statute of Frauds23, Sale of Goods Act24 and similar provincial statutes, certain contracts are not enforceable unless the agreement is in writing.

3.3. Implied Contract Terms 3.3.1.

3.3.2.

3.3.3.

As a general rule, Canadian courts encourage freedom of contract and prefer not to imply contractual terms, emphasizing that their judicial role is not to rewrite agreements between parties. In limited scenarios, a court may imply certain words or obligations to “fill in the gaps” of a contract. This infrequent step is taken to articulate what the parties intended to include or ought to have included in their agreement, not to rewrite the contract. The courts have developed two principal tests for implying terms in a contract; the officious bystander test and the business efficacy test. With respect to the officious bystander test, the court will imply a term whereby it would be obvious to an officious bystander that parties intended to include it in the contract. Further, the business efficacy test arises in circumstances where the court will imply a term if it is necessary, in the business context, to give efficacy to the contract. As well, in Bhasin v Hrynew25 the Supreme Court of Canada, in a unanimous decision, recognized that good faith contractual performance is a general organizing principle of Canadian common law. This principle means, among other things, that parties to a contract have a duty to act honestly in the performance of their contractual obligations.

23 Statute of Frauds, RSO 1990, c S 19. 24 Sale of Goods Act, RSO 1990, c S 1. 25 Bhasin v Hrynew, 2014 SCC 71.

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Canadian law recognizes a general duty of honesty in contractual performance. This duty does not arise as a result of an implied contractual term. Rather, it stands as a general doctrine of contract law that imposes a minimum standard of honest contractual performance. This threshold prevents contracting parties from lying or otherwise knowingly misleading one another on matters directly related to the performance of the contract, and the parties cannot contract out of the duty of honest performance.

3.4. Public Procurement 3.4.1.

3.4.2.

The substitution of competition for negotiation is the trademark of the tendering process of procurement in Canada. In tendering law, procedural fairness and the duty of good faith are doctrines essential to the integrity of the competitive process. A “two contract” model (Contract “A” and “B”) was established by Canadian Courts in the 1980s as the framework for determining the legal rights and responsibilities of the parties in a tendering process. Upon the submission of a tender in compliance with the requirements of the tender call, a process contract (Contract “A”) or the “Bid Contract” may come into existence between the tenderer and the party calling for tenders (i.e. typically the owner) if the parties intended to enter into contractual relations upon the submission of the tender. Accordingly, individual bid contracts come into existence between the owner and each compliant tenderer. Upon the acceptance of a tender, a second contract (Contract “B”), the Construction Contract, arises. There is a duty of procedural good faith, owed by the owner to tenderers. There is an obligation of fairness imposed on an owner to treat all tenderers fairly and equally without the application of hidden preferences or conduct in the nature of bid shopping or which results in a tenderer having an unfair competitive advantage over others. Canadian Courts will not lightly substitute their own judgment for that of an owner on whether a tender ought to have been accepted, or assume bad faith in the absence of convincing evidence but will do so if there is evidence that the owner has not acted in accordance with the criteria for acceptance in the tender documents.  

3.4.3.

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

4.1.3.

4.1.4.

4.1.5.

4.1.6.

4.1.7.

As noted above, the constitutional division of powers has delegated regulation of private contractual matters to each province. Construction contracts in Canada not involving the federal government as a party are therefore regulated in large part by provincial legislation. There has been active reform in Canadian legislation to introduce both substantive and procedural changes to construction law.26 In particular, the province of Ontario has recently undergone significant amendments to its primary piece of construction legislation, the Construction Act.27 These changes came into effect in a two-phased approach on July 1, 2018 and October 1, 2019. The objective of these changes was to modernize the construction lien remedy, implement prompt payment frameworks for invoices, and provide for mandatory interim alternative dispute resolution. An important provision within the Ontario Construction Act is its mandatory conforming provision which provides that all contracts or subcontracts are deemed to be amended to be compliant with the Act. Therefore, parties cannot contract out of the Act yet are free to include additional provisions and conditions to complement the contents of the legislation. In Quebec, a number of highly publicised corruption-related scandals in the Quebec construction industry prompted the creation of the Charbonneau Commission. The Charbonneau Commission’s mandate was threefold: to inquire into corruption schemes in the awarding and management of public contracts in the construction industry, to explore the possible infiltration of organized crime; and examine possible solutions to eliminate and prevent collusion and corruption in the awarding of public contracts in Quebec.28 As a result of the Commission’s observations on the practices of the construction industry, the Quebec government enacted legislation to review the awarding and management of public contracts, prevent collusion and protect political party financing from influence.

26 Michael A Skene & Dirk Laudan “Canadian Construction Law Reform: A survey of A Survey of Recent Developments in Builders Liens, Prompt Payment, Interim Adjudication and Mandatory Construction Bonding.” 2020, J Can C Construction Law 93 at page 2. 27 Construction Act, R.S.O. 1990, c. C.30. 28 Sharon Vogel and Emira Bouhafna, “Corruption in Quebec’s construction industry: cleaning the Augean stable”, November 2019, Construction Law International.

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The most notable legislative amendment was Quebec’s Bill 108, which aimed to reinforce the oversight of public contracts and increase the level of transparency in the process for tendering and awarding of public contracts.

Lien Legislation 4.1.9. A unique element in Canadian construction law is the use of the lien remedy, which is not commonly used in other common law juridictions in conjunction with payment and adjudication legislation. 4.1.10. Liens create a charge on land that constitutes a security interest in favour of the person who supplies services or materials toward the improvement of a premises. Lien legislation also imposes a holdback requirement on owner payments to a contractor and makes all money received by a contractor or subcontractor a trust fund. A lien arises at the moment work is commenced or materials are supplied. 4.1.11. In Ontario, lien legislation has been amended to clarify the construction lien and holdback rules. 4.1.12. As well, contractors and subtractors must now adhere to the mandatory bookkeeping rules that have been implemented. These documenting protocols serve as a protective tool for subcontractors in the event of bankruptcy. 4.1.13. New holdback payment rules now include mandatory release provisions once the appropriate conditions are satisfied. Sections 26 and 27 of the Construction Act require that the holdback is to be paid once all the possible liens against the holdback have expired, are satisfied or discharged against the premise.29 Prompt Payment 4.1.14. The amended construction legislation in Ontario now offers better protection for contractors and subcontractors through the introduction of a prompt payment mechanism. Legislated prompt payment is intended to ensure that contractors and subcontractors are paid on time. 4.1.15. Contractors are required to provide owners a proper invoice for the project. Delivery of the proper invoice triggers the start of the period leading up to the payment deadline and allows parties to implement a set payment schedule.30 4.1.16. The legislation also requires owners and contractors to agree to a fixed deadline for submitting an invoice. Time frames for payment of contractors and subcontractors once a proper invoice has been delivered have also been set at 28 days and 7 days respectively.

29 The Construction Act, S 26 and 27. 30 The Construction Act, s. 6.1.

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4.1.17. The prompt payment mechanism system also provides for mandatory interest on the late payments. Interest begins on the date the amount is due.31 4.1.18. The federal government has recently also introduced a prompt payment system. Other provinces are undergoing similar reviews to analyse whether amendments to their legislation should be made. Adjudication 4.1.19. Another notable change in construction legislation is the introduction, in some provinces, of a mandatory adjudication process. Introducing interim adjudication as a mandatory procedural step aims to facilitate efficient dispute resolution throughout the course of the project. 4.1.20. Parties are required to select an adjudicator within a short timeframe. If the parties cannot agree on the fees, terms or selection of an adjudicator, one will be appointed by the Authorized Nominating Authortity. The Authorized Nominating Authority is created by the legislation to act as a self-funded body that operates independent of government.32 4.1.21. Adjudication is particularly important as the effect of the adjudicator’s determination is temporarily binding on parties. Adjudicators may resolve a variety of defined disputes including payment under the contract, the valuation of services or materials provided under the contract, and the non-payment of statutory holdback.33

4.2. Permits and Licensing Licensing of Contractors 4.2.1. Permit and licensing regulations for contractors and residential builders are regulated provincially. 4.2.2. All designers and contractors, including foreign contractors and designers, must comply with local employment legislation and with any applicable regulatory licensing requirements in the provinces or territories where they intend to practise. 4.2.3. Generally speaking, most provinces do not require all contractors to be licensed except for the province of Quebec. This is due in part to the province’s

31 Ministry of the Attorney General . 32 Ministry of the Attorney General, “ADR Chambers named as Authorized Nominating Authority by Ministry of Attorney General”, Toronto, July 18, 2019. . 33 The Construction Act, s. 13.5.

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civil law scheme. Contractors working in Quebec must be licensed by the Régie du bâtiment du Québec, which is a provincial government entity. Only contractors with a valid license listed in the License holder’s repertory are permitted to carry out any construction work in the province. In British Columbia, residential builders must be licensed. In Ontario, residential builders must be registered with Tarion Warranty Company. Tarion Warranty Company is a non-profit private corporation responsible for the regulation and licensing of contractors such as home builders and vendors. Electrical contractors, plumbing contractors, contractors working on pressure vessels and other specialty contractors are generally required to be licensed in each province in which they work.

Licensing of Professionals 4.2.5. Licensing procedures in Canada require that professionals such as architects, design engineers and building engineers are licensed by the appropriate licensing body of the province. 4.2.6. A foreign architect or engineer cannot practise without a licence from the applicable provincial or territorial body. 4.2.7. Information on the licensing requirements for foreign architects and engineers is made available by the Canadian Architectural Certification Board and Engineers Canada. 4.2.8. The Canadian Architectural Certification Board is the sole organization recognized by the architectural profession in Canada to accredit and certify foreign trained architects. The Architects association in each province govern and restrict how certified architects can actually practice in that province. 4.2.9. Engineers Canada is the body responsible for regulating the practice of Engineering in Canada. Engineering regulators in each province are the constitutent associations of Engineers Canada. All engineers practicing in Canada must be licensed by the applicable provincial or territorial regulatory body. For example, Engineers and Geoscientists British Columbia is the regulatory body that provides the professional membership and licensing designations required for engineers practicing in British Columbia. 4.2.10. Penalties for practising without the necessary licence include fines, imprisonment, injunctions and prohibitions against collecting fees for unlicensed services. Plans and specifications prepared by foreign architects or engineers must be reviewed, stamped and signed by architects or engineers duly licensed in the province or territory in which the project is located.

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5. Construction Contracts 5.1. Standard Form Contracts 5.1.1. 5.1.2.

Standard contract forms are widely used in Canada on a variety of construction projects. Some examples of standard contract forms commonly used in the industry are CCDC, RAIC, and PPP contracts.

Canadian Construction Documents Committee (CCDC) Contracts 5.1.3. The Canadian Construction Document Committee (CCDC) Contract Forms are a suite of standard form contracts which are widely used for construction projects in Canada. The Stipulated Price Contract is the most common standard form CCDC contract used. The CCDC also has a series of subcontract forms that are regularly employed. 5.1.4. The most commonly used form for the retainer of a prime consultant that is an architect is the Royal Architectural Institute Contract Form, RAIC 6. Where an engineer is the prime consultant, the contracting forms of the Association of Consulting Engineers of Canada are adopted, most notably form ACEC 2. Public-Private Partnership (PPP) 5.1.5. Public-private partnership contracts (PPP) are frequently used on major Canadian infrastructure projects. 5.1.6. A public-private partnership contract is a specific regime in which improvements are made to Crown or government-owned land by a special purpose entity through a private finance initiative. 5.1.7. Where government entities are involved as project sponsors or owners, the project is usually subject to a comprehensive contractual arrangement between the public entity and the other project participants. The agreement between the authority (owner) and the concessionaire (Contractor) is known as a project agreement. 5.1.8. The obligations of the owner and contractor are governed through the application of the project agreement. 5.1.9. For most public–private partnership projects, the provincial government has developed a detailed standard format, particularly for infrastructure projects. The form is is then amended for each project to meet individual conditions and requirements. 5.1.10. Specialised federal and provincial government agencies promote and oversee the use of P3 projects; for example, Infrastructure Ontario in Ontario and Partnerships BC in British Columbia.

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International Standard Form Contracts 5.1.11. The Fédération Internationale des Ingénieurs Conseils (FIDIC) contracts are the pre-eminent standard forms in the international construction market. Although FIDIC contracts are commonly used in many countries, such contracts are not frequently used in Canada.

5.2. Contract Amendments and Bespoke Contracts 5.2.1.

5.2.2. 5.2.3.

Although many construction contracts are standard form contracts, the principle of freedom of contract permits parties to amend and adapt contractual provisions as required, using supplemental conditions. Bespoke contracts are often used to tailor a contract for a particular project. Although freedom of contract permits parties to amend their contract, it is important to note in Ontario that this principle is always subject to the provisions of the Construction Act, which specifically limits the ability of parties to contract out of key provisions.

5.3. Construction Contract Types 5.3.1.

The main types of payment construction contracts used in Canada are unit price, fixed price, and cost plus. Design, bid and build or design and build agreements are commonly used project delivery methods. Target price contracts and Guaranteed Maximum Price contracts also occur much less frequently.

Unit Price Contract 5.3.2. A unit price contract is an agreement in which each work unit has a specific price and the total contract price is variable. The amount, nature, and cost of each of the units are fundamental components of the unit price contract. To calculate the total contract price, units supplied are multiplied by their respective prices and added together.34 5.3.3. The benefit of using a unit price contract is that it allows contracting parties to renegotiate or adjust the cost of each work unit in the event that site conditions are different than anticipated at the time of the original agreement. For example, if actual quantities needed in the project exceed the quantities esti-

34 Heintzman, West and Goldsmith, Canadian Building Contracts, S-16-E: Alternative Financial Procurement Arrangements.

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mated in the initial agreement, the parties have an opportunity to re-evaluate the cost structure if the variation(s) exceed a fixed range (typically +/- 15 %).  

Fixed Price and Cost Plus Contracts 5.3.4. Under a fixed price contract, the parties agree to a pre-determined payment amount. Courts will use a number of factors in determining whether a contract is a fixed, cost plus or unit price contract. The fixed price, however, is subject to adjustment for variations or change orders authorised under the contract. 5.3.5. Under a cost plus contract, the contractor is reimbursed for its costs incurred and paid a variable or fixed fee on top of those costs. The total price may be subject to a target price or guaranteed maximum price, although these rarely work as anticipated by an owner to help reduce the final price. Project Risk Allocation 5.3.6. Design, bid and build and design and build are the primary types of delivery methods used in Canada that determine the allocation of risk among contracting parties. 5.3.7. A Design, Bid and Build contract is a contractual agreement where the owner retains their own design professional such as an architect or engineer. The contract is then put out for competitive tender. Upon closing of the tender, the owner then selects the contractor with the lowest compliant bid. 5.3.8. The selected contractor is obligated to build the project according to the plans and specifications. In this pyramidic contract structure, the owner has separate, distinct contracts with the designer and with the contractor. A standard contract such as a CCDC form, which may include supplemental conditions, is typically used. 5.3.9. Under a design and build contract, the owner retains one entity as the designer and builder. The designer builder (the contractor) agrees to assume a portion of the risks which are normally assumed by the owner. The contractor therefore accepts both the design and construction risks as a single point of responsibility.35 5.3.10. In addition to the above contract delivery models, Integrated Project Delivery models are increasingly employed, in a variety of sectors. The Alliance Contract model is also being used in and considered for various Canadian construction projects.

35 Heintzman, West and Goldsmith, Canadian Building Contracts, Appendix 2A: Design Responsibility.

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6. Key Issues 6.1. Overview 6.1.1.

In Canada there are a number of issues which commonly arise with respect to construction projects, including those related to representations and warranties, unforeseen site conditions, notice provisions and delays, relief events and Force Majeure, liquidated damages, and project security.

6.2. Representations and Warranties 6.2.1.

6.2.2.

6.2.3.

6.2.4.

Many Canadian construction contracts include “no representation” or “whole agreement” provisions to avoid liability for any misrepresentations made by either party to each other before the contract is entered into. However, Canadian courts have not always held these to be effective, in particular in circumstances where the misrepresentation by one party induced the other to enter into the contract or perform in some way and the party relied on this representation to its detriment. For example, in Golden Hill Ventures Ltd v Kemess Mines Inc.36 (“Golden Hill”), a British Columbia Supreme Court case and leading Canadian case in respect of representations in the construction context, the Court found that regardless of the contract stating that oral representations would not constitute misrepresentations, the contractor relied on and was induced into the contract by oral representations made by the owner that it would act in a manner consistent with an implied duty of good faith. As such, when the contractor suffered damages as a result of its reliance on the owner’s representation, the contractor was entitled to additional compensation.37 Further, the Court held that oral representations will prevail over written contractual terms if they conflict, and the oral promise was relied on to induce a party to enter into the contract.38 Canadian construction contracts commonly include provisions such as the following: (a) The Contractor represents and warrants that it has fully examined the contract and certifies that it is familiar with all of the terms and conditions of the contract.

36 Golden Hill Ventures Ltd v Kemess Mines Inc, 2002 BCSC 1460 (“Golden Hill”). 37 Golden Hill at paras 618, 690. 38 Golden Hill at para 247.

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(b)

6.2.5.

The Contractor represents and warrants that it has diligently investigated and inspected the project site and is familiar with the site conditions. (c) The Contractor confirms that it has investigated and is informed as to the status and conditions affecting the work and that no express or implied warranties or representations with respect to same have been made by the Owner, or any of its representatives. As articulated in the landmark Supreme Court of Canada decision of BG Checo International Ltd v British Columbia Hydro and Power Authority39, owners who negligently or fraudulently misrepresent the state of the worksite in a way that induces the contractor to enter into the contract are liable for damages in both tort and breach of contract. The Court found that if the reliance on the representation caused expenses to be incurred that were reasonably foreseeable, these expenses may be claimed as damages for misrepresentation. In addition, as a result of the breach of contract that occurred when the representations were made in the tender documents, the contractor was to be put in the position it would have been in had the representations not been made.

6.3. Unforeseen Site Conditions 6.3.1.

6.3.2.

6.3.3.

Claims regarding the presence of unknown or unforeseen site conditions are often raised by the contractor, which commonly include soil and water related issues. These disputes commonly involve assertions that site conditions were not disclosed to the contractor prior to the execution of the contract or more serious assertions including the owner’s misrepresentation of the site conditions. Since unforeseen site conditions experienced by a contractor, if proven, can lead to significant additional costs being borne by the owner, the contractual language is vitally important to determine the allocation of risk. An owner can attempt to reduce its risk and transfer some of this risk onto the contractor by disclosing all information in their possession or control with respect to the site conditions, and, in addition, include contractual language which provides that the contractor is responsible for any site conditions which differ from the tender information and documents. If the owner has knowledge of site conditions which it does not disclose, it is likely to be subject to claims from the contractor regardless of the contractual language.40

39 BG Checo International Ltd v British Columbia Hydro and Power Authority, [1993] 1 SCR 12 (“BG Checo”). 40 Opron Construction Co Ltd v Alberta, (1994) 151 AR 241 (QB).

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Contractors, on the other hand, will rely on the material provided by the owner during the bid process so as to minimize their costs, and qualify their bid to make clear that it is based on the representations given by the owner and may change if the site conditions differ once work begins. Qualifying the bid, however, may make the bid non-compliant and thus not capable of acceptance. Construction contracts commonly provide that the contractor has a duty to investigate the site: therefore if the contractor is provided the opportunity to investigate the site but fails to conduct its due diligence in accordance with good industry practice, the contractor is likely to be barred from advancing a claim based on unforeseen site conditions. However, as set out in Golden Hill, if the contractor is not able to complete its own site investigation prior to submitting its bid because there is insufficient time to do so or if access to the site is not provided by the owner, a contractor may be able to rely on the representations made by the owner as to the site conditions.

6.4. Notice Provisions and Delay 6.4.1.

6.4.2.

6.4.3.

Canadian construction contracts often include notice provisions which provide time or formal requirements for one party to claim a delay or cost against the other. These provisions normally provide that if notice of delay is not given within the prescribed time, the claim is barred. Generally, the courts have upheld such notice provisions as valid and binding. In one of Canada’s landmark decisions on notice, the Supreme Court of Canada in Corpex (1977) v Canada41 held that contractor was required to strictly adhere to the notice provisions within the contract in order to successfully advance a claim.42 The Court stated that this benefits both the contractor and owner, as the contractor is guaranteed payment for its claim if it is in compliance with the notice provision, and the owner is protected from claims outside of what the parties agreed upon. In a leading case from Ontario, the Court in Technicore Underground Inc v Toronto (City)43 held that regardless of the content of the delay claim, if there was a notice period as a condition precedent to submitting a delay claim and the claim was not made within the contractual time frame, the claim would be dismissed regardless of whether the contract explicitly provides that such a claim will fail.

41 Corpex (1977) Inc v Canada, [1982] 2 SCR 643. 42 Corpex (1977) Inc v Canada, [1982] 2 SCR 643. 43 Technicore Underground Inc v Toronto (City), 2011 ONSC 7205.

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However, where the parties act in such a manner as to show they are not abiding by the notice provisions, the provision may become void. This was the case in the Ontario Court of Appeal decision of Colautti Construction Ltd v Ottawa (City)44 where the owner accepted delay claims from the contractor that were advanced outside of the stipulated notice period. As a result of the owner’s action, the owner was estopped from relying on the notice provision to bar a separate delay claim.45 Courts have continued to rely on this principle for the voiding or varying of notice provisions based upon the conduct of the parties. Further, a claim for delay must be an actual claim made within the contractual time frame stipulated, and not merely an expression of the intention to do so.46

6.5. Force Majeure 6.5.1.

6.5.2.

6.5.3.

Force Majeure provisions are included in construction contracts to excuse a party’s performance under the contract to the extent its failure to perform is due to certain extreme circumstances outside the party’s control, but have not reached the level of satisfying the common law doctrine of frustration. These provisions typically operate to absolve the non-performing party of liability for its failure to meet contractual obligations as a result of the circumstance beyond the control of the parties, but its precise effect will depend on the language of the provision. The party seeking to rely on the Force Majeure provision to relieve it from liability bears the burden of providing sufficient evidence to establish that the Force Majeure is the actual cause of the party’s inability to perform its contractual obligations. It must also give notice of Force Majeure within any time limits for such notice specified in the contract. Generally, the party relying on the Force Majeure provision must show that the event has made the performance of their obligations impossible, and that the specified event and its consequences were beyond what was reasonablly foreseeable by the parties at the time of contract formation. A party cannot rely on its own actions or inactions that consequently led to a certain outcome as an event of Force Majeure as the circumstance must be unforeseeable and outside the control of the parties.

44 Colautti Construction Ltd v Ottawa (City), (1984), 46 OR (2d) 236. 45 Colautti Construction Ltd v Ottawa (City), (1984), 46 OR (2d) 236. 46 Ledore Investments Ltd (Ross Steel Fabricators & Contractors) v Ellis-Don Construction Ltd, 2017 ONCA 518.

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Every Force Majeure provision should be considered and interpreted separately and in the light of the contract as a whole. For example, in the case of the COVID-19 pandemic, an assertion that COVID-19 qualifies as a Force Majeure event depends on the precise language of the Force Majeure provision. If the Force Majeure provision includes specific reference to issues such as “disease”, “illness”, “epidemics”, “pandemics”, or “quarantine” this could encompass COVID-19. Other definitions refer to “government order”, “government action”, “public health emergency” and “national emergency”, which may also apply to certain COVID-19 related matters.

6.6. Liquidated Damages 6.6.1.

6.6.2.

6.6.3.

6.6.4.

Parties to a commercial contract may find it beneficial to predict the financial consequences of a potential breach of contract and agree on a set formula of compensation to be paid to the innocent party on the event of a breach. These provisions are referred to as “liquidated damages” provisions. Liquidated damages provisions are common in Canadian construction contracts as they serve as a useful risk allocation mechanism. The purpose of liquidated damages is to be a genuine pre-estimate of damages. Parties to a construction contract typically include a liquidated damages provision in contracts where it may be challenging to determine the actual value of services to be performed or estimate the damages that a non-breaching party may suffer if a term is breached. They may also be included as a form of limitation of liability where the damages flowing from a breach may be excessive and all out of proportion to the contract value. Canadian courts are willing to enforce these provisions if they represent a good faith attempt to pre-estimate losses. Liquidated damages provisions are commercially beneficial as they allow parties to avoid the uncertainties of litigation while promoting the timely performance of obligations. However, if the compensation to be paid is disproportionate to a party’s actual losses, the courts may deem such provisions unenforceable.

6.7. Project Security 6.7.1.

6.7.2.

The various instruments used in Canadian construction projects to protect against the risk of insolvency and default include surety bonds (described below), default insurance, letters of credit, and parent company guarantees. Surety bonds are not insurance, but rather serve as a guarantee that should the contractor fail to complete the project (i.e. a performance bond), or fail to pay its subcontractors (i.e. a labour and material bond), the owner will be  

 

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6.7.3.

6.7.4.

6.7.5.

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compensated and the subcontractors will be paid. Bid bonds secure the direct interests of the owner by constituting a promise from the surety to the owner that if the successful bidder fails to enter into a contract with the owner, the surety will pay a penalty to the owner. Default insurance is designed to protect a general contractor from the costs of default by its subcontractors and suppliers by transferring the risk of subcontractor default from the general contractor to the insurer. The insurer is not obligated to complete the work or replace the subcontractor and does not guarantee that the contractor will complete the work or pay its subcontractors. Unlike performance and labour and material bonds, default insurance does not provide protection to owners for project completion. Given the risks to the owner and the benefits to the contractor with default insurance, combining payment security methods is often encouraged. Letters of credit are often used as an alternative or supplement to surety bonds in respect of construction contracts in Canada to secure the performance of a contractor’s obligations to the owner. Letters of credit are instruments created at the request of the contractor, obligating an issuer (such as a bank) to pay money to a beneficiary (the owner) upon presentation of documents that are in strict compliance with the terms of the letter of credit. A parent company guarantee is a form of performance security in which a parent or holding company guarantees performance of its subsidiary. Here, the parent company will undertake to complete the project if its subsidiary is unable to do so, however this can provide minimal benefit, particularly in circumstances where the insolvency of a contractor also involves the insolvency of the parent company.

Oscar Aitken and Javiera Muñoz

Chile 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 4. 4.1. 4.2. 4.3. 4.4. 5. 5.1. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 7.

Context 172 The Country 172 The Legal System 172 The Economy 173 The Construction Industry 173 Size and Nature 173 Participants 174 Work, Health and Safety 174 Environmental Protection and Construction Permits 176 Quality Assurance 177 Construction Contracting Dynamics 177 Legal Underpinnings of Contracts 178 Freedom of Contract and Public Policy 178 Legal Framework 179 Implied Contract Terms 180 Construction of Contract Terms 180 Private and Public Procurement 181 Good Faith as a Principle of Contract Law 183 Government Involvement 184 Legislation and Regulation 184 Licensing of Professionals and Contractors 185 Public Procurement 185 Public Works Concession Contracts 186 Construction Contracts 187 Available Contracts 187 Key Issues 187 Fit for Purpose 187 Late Completion and Delay 188 Latent Conditions 189 Force Majeure 190 Limitation of Liability 190 Time Bars 191 Warranty Periods and Decennial Liability 191 Payment Procedures and Transfers of Property 192 Dispute Resolution 192

https://doi.org/10.1515/9783110712728-007

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1. Context 1.1. The Country 1.1.1.

1.1.2. 1.1.3.

1.1.4.

Chile is located in the southwest of the sub-continent of South America. It borders Perú to the north, Bolivia to the northeast, Argentina to the east, the Pacific Ocean to the west and the South Pole in the far south. The length from north to south Chile is approximately 4300 kilometers. Chilean territory also includes the Pacific islands of Juan Fernández and Desventuradas, and Oceania islands of Salas y Gómez and Easter Island. Chile has a varied geography consisting of mountains, valleys, deserts, forests and thousands of kilometres of coastline. Chile is a democratic republic with an open and stable economic model, favorable for foreign investment. It remained for decades one of the most competitive economies in the region according the Global Competitiveness Index of 2019. It is notable for its strong institutional framework, the strength and transparency of its public institutions, infrastructure and for having one of the most efficient and sophisticated financial markets in Latin America. Chile is the only South American member of the Organization for Economic Co-operation and Development (‘OECD’), having joined in 2010.

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

1.2.4.

Chile has a presidential democracy. The head of government is the President, while laws are enacted by a bi-cameral congress. Laws are enforced by the judiciary, which is led by the Chilean Supreme Court. The country’s powers are separated by a traditional Western system of checks and balances. Chile’s legal system follows the civil law tradition. It is influenced by Roman civil law and the legal principles developed during the French Revolution. Chilean law-making is also influenced by the statutes of the United States of America and the European Union on certain matters. The Chilean Constitution is the primary and most pertinent source of law. The Constitution establishes the fundamental rules and principles for the functioning of the Chilean state, such as the division of powers and administrative legality that seeks to limit government power by enforcing the rule of law. The Constitution also guarantees basic rights to the citizens. In the view of the authors, several of these rights are fundamental to the development of the construction industry, such as property rights, the protection of free enterprise, the right to work and the right to non-discrimination. The main source of Chilean private and contract law is the Chilean Civil Code. Faithful to the European civil law tradition (French and Spanish mainly), the

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Civil Code expressly recognises, inter alia, the autonomy of will and freedom of contract, the principle of pacta sunt servanda and the principle of good faith.

1.3. The Economy 1.3.1.

Chile has an open and market-oriented economy characterised by a high level of foreign trade. Its reputation for strong financial institutions and sound fiscal policy has given it the strongest sovereign bond rating in South America. In 2018 Chile was the number 42 economy in the world in terms of GPD, the number 43 in total exports and 45 in total imports according the Economic Complexity Index. Copper is Chile’s top export with the 49.1 % of total exports1. Chile has signed a vast array of Free Trade Agreements, 29 international agreements and double taxation treaties with 65 markets, including treaties with the EU, Mercosur, China, India, South Korea and Mexico, and has special low or zero trade tariffs with 88 % of global GDP2. Chile’s GDP fell from a high of 6.1 % in 2011 to 1.6 % in 2016 due to declining copper prices, which negatively affected private investment and exports. During 2018, under a new administration, GDP increased to 4 %.3 Most administrations have followed a countercyclical fiscal policy that allows the financing of fiscal stimulus packages in times of economic downturn, by accumulating surpluses in sovereign wealth funds during periods of high copper prices and allowing deficit spending during periods of low copper prices and growth.  

1.3.2.

 

1.3.3.

 

 

 

1.3.4.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction industry represented 6.5 % of GDP in 2018. Investment in the real estate sector increased by around 4 % in 2018. In 2018, the investment in housing was around 9.6 thousand million US dollars, a small increase from the 9.2 thousand million US dollars in 2017. In recent years, the real estate sector has kept a modest growth due to the decrease in expenditure in public housing and a modest growth in expenditure in private housing.4  

 

1 DIRECON, Annuaty of Chilean Exportations (2018). 2 Under-Secretariat for Internacional Economic Relations, available in: https://www.subrei.gob.cl/ modulo-de-acuerdos-comerciales/. 3 ECLAC, Preliminary Overview of the Economies of Latin America and the Caribbean (2018). 4 Chilean Construction Chamber, Macroeconomics and Construction Report (April 2018).

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2.1.2.

The investment in infrastructure in 2018 was 17.9 thousand million US dollars, which represents a drop from the 18.5 thousand million dollars invested in 2016. 2018 has shown a reversal in this trend which is consistent with the arrival of new projects in mining and energy sectors designed to even out the decrease in public spending.5

2.2. Participants 2.2.1.

2.2.2.

The Chilean construction sector is generally divided into (i) housing (with or without public subsidies); (ii) non-residential building activities; and (iii) public and private activities for infrastructure projects in different productive sectors. A study of the Ministry of Economics in 2017 determined that 53 % of the surveyed companies in the construction sector were individuals and 45.6 % of the companies were family businesses. Notably, only 10.3 % were considered large companies.6 Chilean law is flexible with regards to construction contracting and procurement routes in the private sector. Therefore, relevant actors in a construction project such as owners, contractors, subcontractors, contract administrators, independent engineers, consultants, suppliers, financial institutions and insurance companies have similar functions to those typically found in most other jurisdictions. The Chilean government plays an active role in the construction industry, acting as an owner in public works projects and public works concessions. This role is further detailed in Section 4. The main public entities in charge of public construction projects are the Chilean Ministry of Public Works and the Ministry of Housing and Urban Development.  

 

 

2.2.3.

2.2.4.

2.3. Work, Health and Safety 2.3.1.

Construction is the third activity requiring the most extensive use of labour in Chile, only after the public sector and commerce.7 Most construction workers have little to no qualifications which makes them very vulnerable to shifts in the demands of employment.

5 Chilean Construction Chamber, Macroeconomics and Construction Report (April 2018). 6 MINISTRY OF ECONOMICS, “Informe de resultados: Empresas en Chile” in Encuesta Longitudinal de Empresas (August 2017) available in http://www.economia.gob.cl/wp-content/uploads/2017/09/Bolet %C3 %ADn-empresas-en-Chile-ELE4.pdf. 7 World Bank, Worldwide Governance Indicators (2018).  

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2.3.2.

In 2018, the construction sector consolidated its economic recovery process, leaving behind the recessive period during which the sectoral investment suffered for the last 4 years. This is partly explained by the change in the political government that increased business confidence across the region and the increase in smaller investment projects. In 2019, the annual growth for construction investment was projected from 2.4 % to 6.4 %.8 In terms of health and safety, Act N° 16.744 on Mandatory Work Accidents and Occupational Diseases provides for a mandatory statutory social insurance covering every worker against work-related accidents and occupational diseases. This coverage is financed by employer contributions and administered by special nonprofit entities. In the construction context, the Chilean Construction Chamber (‘CCHC’) created the ‘Mutual de Seguridad de la Cámara Chilena de la Construcción’, a non-profit entity that manages the work accidents and occupational diseases statutory insurance, providing health and safety support to their affiliated employers and employees. This Mutual also owns and runs hospitals and other medical facilities aimed at providing medical assistance and treatment to workers that have suffered work-related accidents or occupational diseases covered by the insurance.9 If an employer is not affiliated with a particular entity administering the insurance (locally named ‘Mutuales’), its employees must resort to the Institute of Occupational Safety (‘ISL’), a public entity in charge of administering the insurance where no specific entity has been selected by a particular employer. Coverage of this statutory social insurance is set out by law and basically includes payment of medical expenses and medical treatment in general, as well as medical-leave subsidies during work absence arising out of work-related accidents or occupational diseases and disability. It does not include coverage of employers’ civil liability.10 Such liability, which may be significant, needs to be covered by commercial employers’ liability insurance offered by insurance companies. All employers have a statutory obligation to take all measures necessary to protect the health and safety of their employees. According to Chilean health and labour laws, which includes, among others, Supreme Decree 54 of the Ministry of Labour and Social Welfare ans Law No. 16.744 on Mandatory Work Accidents and Occupational Diseases, this includes, inter alia, the duty to have in place: health and safety regulations (Reglamento Interno); Health and Safety Committees (Comités Paritarios); a Risk Prevention Department  

2.3.3.

2.3.4.

2.3.5.

2.3.6.

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8 Chilean Chamber of Construction, Macroeconomics and Construction Report (May 2019). 9 Art 4ª Law N° 16.744. 10 Title V; and article 69, Law N° 16,744.

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2.3.8. 2.3.9.

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when employing 100 or more employees; the obligation to inform the employees about the risks their particular job entails; and the measures that should be observed to prevent them, including the provision of adequate safety gear at no cost to the employee.11 In addition, the owner of a construction site has direct liability concerning the health and work safety of the employees of all contractors and subcontractors working on its work site or premises. This obligation includes the duty to have in place an on-site integrated risk prevention system, on-site health and safety committees as well as a Special Regulation on Health and Safety for contractors.12 Specific regulations on health and environmental conditions at the workplace are set out generally in Supreme Decree 594 of the Ministry of Health. Special industries like mining are subject to more specific regulations concerning safety, such as the Mining Safety Regulation (Supreme Decree 72 of the Mining Ministry), the Safety Security Regulations of Electric Facilities (Decree 109 of the Ministry of Energy) and the Security Regulation for the Production, Transport and Supply of Liquid Fuels (Decree 160 of the Ministry of Economy).

2.4. Environmental Protection and Construction Permits 2.4.1.

2.4.2.

Chilean law requires projects with certain characteristics to be submitted to a reviewing process by the System of Environmental Impact Assessment (‘SEA’). Most large projects, such as the construction of ports, airports, mining facilities and power plants over 3 MW, aqueducts, dams and residential large developments require the environmental approval of the SEA through the Environment Impact Assessment (‘EIA’). Once the SEA approves the development of the project, it issues a master environmental permit. The project developer must still obtain all other administrative permits from the respective government agencies (such as sector-specific permits), which cannot be denied on the basis of environmental reasons.13 Construction projects destined to house people (such as residences, office buildings or shops) located in urban areas require a building permit issued by the local municipality. The construction permit should not be denied if the project complies with zoning regulations and construction quality standards according the General Urbanism and Construction Act. Interpretations of such

11 Law N° 16.744, Art 66; D.S. 40, Article 21; D.S. 594, Art 53. 12 Law N° 16.744 Art 66 Bis. 13 Law N° 19.300 and D.S. 95/2001.

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zoning regulations and construction quality standards by the developer and the authority may present challenges.14

2.5. Quality Assurance 2.5.1.

2.5.2.

Construction projects that require a building permit in accordance with Section 2.4 must comply with the minimum quality standards established by law. The legal minimum quality standards for the construction industry are published and periodically updated by the National Institute of Standardization (‘INN’), which is a technical organisation in matters of quality infrastructure. In the view of the authors, the Chilean standards are considered to be a minimum and are usually drafted to require the works to achieve a certain function, rather than establish formulas, methodologies or construction processes. Construction projects that do not require a construction permit can utilise the construction standards that the parties deem fit, except for some specific standards issued by the INN that are mandatory by law.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

14 15 16 17

Chilean law does not establish any limitations to the contracting dynamics or procurement routes that private entities may adopt in the development of construction projects. However, each industry prefers certain procurement routes. For example, in our experience, the development of large mining facilities traditionally has been made on an EPCM15 basis, with the majority of the trade subcontracts being developed on an EPC16, lump-sum basis and some contracts based on unit prices (earth movement) and on a BOOT17 basis (desalinization plants). Hydroelectric energy projects usually split their scope into contracts for the civil works and the procurement of the electromechanical equipment, following forms similar to the FIDIC Red and Yellow Books. Photovoltaic energy projects normally use bespoke turnkey EPC contracts. Public contracts differ from their private counterparts in this respect — the construction of public works is made on the basis of a traditional procurement route, and contracts are almost always procured on a lump sum basis. Public works concession contracts are procured under a Build-Operate-Trans-

Law DFL 458; Art 116. EPCM – Engineering, Procurement, Construction and Management. EPC – Engineering, Procurement and Construction. BOOT – Build, Own, Operate and Transfer.

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fer (‘BOT’) system, and pricing mechanisms vary, depending on the type of infrastructure being procured.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract and Public Policy 3.1.1.

3.1.2.

3.1.3.

3.1.4.

Chilean contract law recognises the principle of freedom of contract as a natural consequence of the constitutional right of freedom of economic enterprise. Under Chilean law, the parties to a private contract are free to enter into the agreements that they choose and agree to the terms that they deem fit, and those contracts will be enforceable. In private construction contracts in Chile, it is customary that sophisticated parties spend a significant amount of time negotiating the terms of each transaction. In public construction contracts, the principle of freedom of contract loses strength in the negotiation of contract terms, especially in public works concession contracts where the bidders only have the liberty to participate or not in the bidding process. All of the terms of the construction contract are provided in advance by the public authority, and while the bidders are allowed to make suggestions to amend certain terms in the questions and answer procedures established by law, the public authority is not required to accept or consider such requests or proposals. Following the civil law tradition, under Chilean contract law, the principle of freedom of contract in construction contracts is limited by public policy. Matters of public policy are deemed to be those that do not allow individuals to ignore the rules that govern them or replace them with other rules or provisions. Some matters that are considered public policy that are commonly relevant in construction contracts in Chile are (i) the advance waiver of future gross negligence or wilful misconduct (Article 1,465 of the Chilean Civil Code); (ii) the adequate service of process during litigation (Article 19 Nº 3 of the Political Constitution of the Republic of Chile); (iii) the application of foreign laws in respect of assets located in Chile, in particular as to the provisions on transfer of title, creation of encumbrances, attachments or liens and legal possession of property (Article 16 of the Chilean Civil Code); (iv) the fraudulent evasion of Chilean law; and (v) the extension of the duration of limitation periods. The concept of public policy will be further analysed with regards to the enforcement of foreign awards in Chile.

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3.2. Legal Framework 3.2.1.

3.2.2.

3.2.3.

Chilean private construction contract law is mainly contained in the Chilean Civil Code. The Chilean Civil Code regulates contract law by establishing various levels of rules that vary in specificity. The first level contains general legal principles such as Article 1,546 with the application of good faith and the rejection of unjust enrichment, as well as rules for statutory interpretation in Article 19 et seq. The second level contains provisions that govern the law of obligations and general contract law, dealing with issues related to contract formation, interpretation and remedies. This second level provisions can be found in the fourth book of the Chilean Civil Code “of the obligations in general and contracts”. A third level contains rules that deal with specific types of contracts, such as sale agreements (Article 1,793), loans (Article 2,196) and construction contracts (Article 1,996). While this is generally the case, its importance in the regulation of construction contracts is more nuanced in Chile’s case. Constitutionalisation and the consequent development of public law as an independent legal category have displaced the Civil Code from the centre of the Chilean legal system, confining it to private law. The majority of public construction contracts are not primarily governed by the Civil Code, but by the Public Works Regulation (Decree No. 75 of the Ministry of Public Works of year 2004), or the Public Works Concession Act (Decree No. 900 of the Ministry of Public Works of year 1996), which are mainly inspired by public law principles. Decodification has also contributed to the Civil Code’s loss of relevance as a single source of legislation for construction contracts. New legal and social issues regarding construction contracts have been dealt with in new statutes such as the General Urbanism and Construction Act (Decree with Force of Law No. 458 of the Ministry of Housing and Urban Development of year 1976), and the Consumer Protection Act (Law No. 19,496 of year 1997). Public construction contracts are governed by the Chilean Public Works Contract Regulation, an administrative decree issued by the secretary of state in charge of developing the country’s infrastructure. It contains rules governing the bidding process of public works and detailed terms that provide the majority of the legal provisions that govern public construction contracts, while the majority of the commercial and technical requirements of public work contracts are established in the bidding conditions. Public-private partnerships (‘PPPs’) for the development of infrastructure are procured on a BOT basis and are mainly governed by the Public Works Concessions Act and its complementary administrative regulation. This Act has been key in the country’s success with PPPs, providing the basis for transparent bidding processes and competitive contract renegotiation mechanisms, as well as strong investor protection.

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3.3. Implied Contract Terms 3.3.1.

The Chilean Civil Code contains the following main implied terms that specifically apply to construction contracts, to the extent that the parties do not change them: (a) If the parties do not agree on the contract price, a judge may designate an expert to determine an equitable amount; (b) The owner has a right to terminate for convenience, which requires them to pay the contractor for the cost of the work performed and the profit that it would have obtained had the works been completed; (c) The risk of loss of works and materials in progress is borne by the contractor until the acceptance of the works by the owner; (d) The risk of unforeseen site conditions is borne by the contractor, unless they could not have been detected in the exercise of due diligence; (e) A five-year warranty period applies from the time of the owner’s acceptance to protect them in the event that defects in the works cause it to perish or threaten its ruin; (f) Force majeure will give the contractor time relief but not cost relief; (g) In a construction contract where the contractor provides the materials, it is deemed a contract of sale. Whereas, if the materials are supplied by the owner, the contract is deemed a lease of services; (h) When the contract is deemed a sale, obligations in respect of latent defects under the sale contract become applicable; and (i) The obligation to build work is deemed an indivisible obligation, meaning that if more than one contractor is involved, each of them will be deemed liable to complete the whole of the work, and not just a proportion.

3.4. Construction of Contract Terms 3.4.1.

3.4.2.

The main principle of construction of contract terms under Chilean law is to respect the intent of the parties to the extent that they are clearly known. Normally, the express terms of the contract should reflect the parties’ intent, but if the terms of the contract are unclear, Chilean law requires the courts to seek, through various statutory interpretation rules, the real intention of the parties which shall then prevail over the literal meaning of the words used in the contract. Some of the main rules contained in the Chilean Civil Code for the interpretation of contracts are the following: (a) The intent of the parties is clearly known: article 1560. When the intent of the parties is clearly known, it should be accorded more weight than the literal meaning of the words;

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(b)

3.4.3.

The meaning of provisions ought to be given effect: article 1562. Where a provision is capable of a meaning that can be given effect, this shall be preferred to a meaning that is incapable of any application; (c) The nature of the contract: article 1563. The interpretation that best conforms to the nature of the contract shall be preferred where the parties have expressed no will to the contrary; (d) Implied terms: article 1563. Terms of customary use are implied into the contract even where they are not expressly included; (e) Consistency amongst provisions and the contract as a whole: article 1564(1). Provisions in a contract shall be construed with reference to other provisions in the same contract such that each is given the meaning that best suits the contract as a whole; (f) Conduct of the parties: article 1564(3). Provisions in a contract shall be construed by the practical implementation that the parties have given to such provisions, either by both parties or by one of them with the approval of the other; (g) Examples shall not be construed as exhaustive: article 1565. If a contract provides one or more examples or considerations to define an obligation, these examples or considerations shall not be construed to be an exhaustive statement of the obligation in question; and (h) Contra preferentem rule as a last resort: article 1566. If none of the prior rules can be applied, ambiguous provisions shall be construed in favour of the debtor. However, an ambiguous provision that has been included or dictated by one party, either the debtor or creditor, it shall be construed against that party, provided that the ambiguity originates from the failure of that party to provide a clear interpretation. Because Chilean law places great importance on the subjective intention of the parties for the purposes of contract interpretation, the prior negotiations between the parties and documents produced and exchanged therein can be used to evidence such an intention.18

3.5. Private and Public Procurement 3.5.1.

As a member of the civil law tradition, Chilean law establishes a fundamental distinction between public and private law. Private law aims to regulate the relationships between private parties and contains key principles such as freedom of contract, pacta sunt servanda and the protection of property rights. Con-

18 LOPEZ SANTA MARÍA, Jorge, Sistema de Interpretación de los Contratos (First Edition, Ediciones Universitarias de Valparaíso, 1971). 62–63.

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struction contracts with purely private parties are governed fundamentally by private law (i.e. the Civil Code). Public law is aimed at regulating the state structure, its powers, authority and limits as well as its relationship with the private parties. Public law contains key principles such as the rule of law, separation of powers and the subsidiarity principle (in respect of economic activity). Construction contracts involving an owner who is a public entity fall within this category and are subject fundamentally to administrative law. Both public and private law have developed their own body of legislation with particular legal principles, generating differences between the two categories that are important to distinguish if a construction contract falls within one or the other. A first difference lies in the relationship between contracts and statutory provisions. Private law principles such as the autonomy of will and freedom of contract allow express contractual terms to override statutory provisions, which act as implied terms. Only exceptional statutory provisions contain mandatory rules that parties cannot contract out of. Public law principles such as administrative legality seek to limit government power by enforcing the rule of law. Public contracts can only be entered into by public authorities if allowed to do so by legislation, and such agreements cannot contain terms that contradict public law statutory provisions. As a consequence, public construction contracts in Chile are much more rigid in their structure and content than their private counterparts, and can sometimes be seen as contracts by adhesion, incentivising bidders to reflect in their tender price any disconformities with the contract terms, typically in respect of onerous risk transfer provisions. A second difference can be found in each category’s approach to contracting parity. Private law’s principle of party equality assumes that all parties to a contract have the same bargaining power. The Chilean Civil Code reflects this by establishing the general principle of pacta sunt servanda in Article 1545, which prohibits unilateral amendments to the contract (to the extent the parties have not expressly agreed on this possibility under the contract). This ethos is upheld in the specific default rules applicable to construction contracts, which generally provide fairly balanced solutions to issues such as variations and completion. Public law has a different approach, tilting bargaining power in favour of the public entity. Since the Chilean government is constitutionally required to act in the benefit of the Chilean people, public law provides it with broad powers to unilaterally amend and terminate administrative contracts, if required to do so in the country’s national interest. The counterpart to this prerogative is found in the administrative principle of economic equilibrium of contract (Article 19 of the Public Works Concessions Act), under which the private contractor must be adequately compensated for the negative impacts produced by the exercise of administrative discretion.  

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A third difference relates to transparency requirements and bureaucracy in contract formation. Chilean private contract law establishes very few statutory provisions governing tender processes and tend to cover basic aspects such as the effects of presenting a tender. Considering the acts enacted for public procurement, public law is much more focused on the procedural aspects of tender processes, and its statutes are much more detailed and structured than its private law counterparts on this aspect, since it needs to establish a series of controls in order to determine that public funds are used transparently and efficiently to acquire the best possible product. Despite these differences, the separation between construction contracts of both legal categories is not absolute. Private contracts are not affected by the statutory provisions that govern public works, but many aspects of a construction project that are extensively regulated by contractual provisions, such as planning and building permits, fall within the legal boundaries of public law. At the same time, public construction contracts depend on private law to provide many general principles of the law of obligations that are not covered in public law legislation, such as those that govern force majeure and remedies.

3.6. Good Faith as a Principle of Contract Law 3.6.1.

3.6.2.

3.6.3.

Like most civil law jurisdictions, the principle of good faith is a fundamental principle of Chilean contract law that often operates in the context of the formation and interpretation of construction contracts. Under the principle of good faith, the parties are required to conduct themselves and perform their contractual obligations in a consistent, honest and fair manner. The first example of how the principle of good faith applies in construction contracts is that it serves as the legal background for legal doctrines that do not have an express statutory recognition. Under Chilean law, principles such as estoppel, unjust enrichment, abuse of rights and the application of the hardship theory all stem from the principle of good faith.19 A second application of good faith in construction contracts can be seen during the negotiation phase, where the negotiating parties are required to conduct themselves in a manner that is consistent with this principle. The principle of good faith underpins various duties such as (i) the owner’s duty to provide material information; (ii) the contractor’s duty to request all material information and warn about any material defects in the bidding documents;

19 SCHOPF OLEA, Adrián, “Good Faith as Legal Norm” in Revista Chilena de Derecho Privado (Nº 31, december 2018). 109–153.

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(iii) the equal treatment of bidders; and (iv) the avoidance of the abrupt termination of negotiations without cause. However, the principle of good faith does not require the parties to enter into a contract or to accept particular contract terms or conditions. The third context in which the principle of good faith applies in construction is the execution of the agreed obligations. Article 1546 of the Chilean Civil Code requires that parties perform their contractual obligations in good faith, and therefore, they must perform not only what is expressly stated in the contract but also any other relevant duties that derive from the agreed obligations. In construction contracts, several duties have been created or further developed in accordance with the principle of good faith. These include (i) the owner’s duty to avoid interferences with the contractor’s works; (ii) the duty of on-site collaboration; (iii) the contractor’s duty to inform the owner of errors in its design or requirements; (iv) the negotiation of change orders and additional works when unforeseen events occur; (v) the application of time bar provisions; and (vi) the application of unilateral termination clauses. The principle of good faith cannot be used to create new obligations entirely. The test to determine if a party is bound by an additional duty stems precisely from the nature of the obligation, either expressly provided for in the contract or existing under a statutory provision.20 Good faith cannot override express contract terms, as abiding by the principle of pacta sunt servanda is also a key obligation under the general duty of good faith.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

The following list contains the public works related Acts and engineering and construction related Acts: (a) Decree No. 75 of 2004 of the Ministry of Public Works, the Public Works Regulation; (b) Decree No. 900 of 1996 of the Ministry of Public Works, the Public Works Concessions Act; (c) Decree No. 956 of 1997 of the Ministry of Public Works approving the regulations on public works concessions and amendments; (d) Decree No. 127 of 1977 of the Ministry of Housing and Urban Development approving the regulations of the national registry of contractors and its amendments;

20 Civil Code; Art 1.546.

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Law No. 19886 on administrative contracts for supply and services of 2003 and its amendments; Decree No. 250 of 2004 of the Ministry of Finance approving the regulations of the public procurement law and its amendments; Decree with Force of Law No. 458 of 1975 of the Ministry of Housing and Urban Development, the General Urbanism and Construction Act; Decree No. 47 of 1992 of the Ministry of Housing and Urban Development; and Decree Law No. 1939 of 1977 on rules for the acquisition, administration and disposal of State property by the Ministry of National Assets and its amendments.

4.2. Licensing of Professionals and Contractors 4.2.1.

4.2.2.

4.2.3.

Chile does not have a general classification of the qualifications of construction companies. Under the Public Works Regulation, to be eligible to participate in the bidding process and to be awarded a contract for the execution of a public work, a contractor must be registered in the General Registry of Contractors. According to the regulations of the Act, such regulations apply to contracts for the execution of works entered into by the State and by companies and institutions that have a relation with the Chilean State through the Ministry of Public Works. State-owned companies are free to impose similar requirements or to request the contractor to register in their own registries for the purposes of bidding in a tender process. Similarly, a private entity seeking bids for a project may choose to request the bidders to comply with the same qualifications applicable to the General Registry of Contractors. For projects subject to the General Urbanism and Construction Act competent professionals, meaning licensed architects and engineers under Chilean Law, must design and execute the project. International professionals must validate their qualifications (i.e. professional degrees) with the competent entities prior to performing their professional services in Chile.  

4.3. Public Procurement 4.3.1. 4.3.2.

The development of public infrastructure in Chile is for the most part undertaken by the Ministry of Public Works. Contracts regarding public works are formed as a result of a two-phase competitive bidding process. The government first qualifies the technical aspects of all bids on pass-fail basis without knowing their economic value and then

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proceeds to award the contract to the bidder who is technically qualified and has submitted the most economically advantageous tender.21 Public works contracts can originate from private proposals or directly from the government’s recommendations.22 Once a proposal is accepted, it is subjected to an open bidding process in which no bilateral negotiations are allowed, operating as a two-phase mechanism. An award of a public works or concession contract can be challenged if any aspect of the bidding process, from the publication of the bid conditions to the adjudication of the award, contravenes Chilean public law. Based on Article 24 of Law No. 19886, any person who proves an interest in the matter can submit a challenge but must do so within 10 business days of having knowledge of the contravention. If the award is deemed to be illegal, it must be declared void, and a new bid must take place. Most public procurement contracts follow a traditional procurement route, and the contract price is normally structured as a lump sum.

4.4. Public Works Concession Contracts 4.4.1.

4.4.2.

4.4.3.

Public-private partnerships for the development of infrastructure are procured on a BOT basis and are mainly governed by the Public Works Concessions Act and its complementary administrative regulations. This Act has been key in the country’s success with PPPs, providing the basis for transparent bidding processes and competitive contract renegotiation mechanisms, as well as robust investor protections. As mentioned above, for public works contracts, concessions can originate through private proposals or directly from the government’s recommendation and have a similar process, where once a proposal is accepted it is subject to an open bid in which no bilateral negotiations are allowed, operating with a similar two-phased mechanism than the one used in public works. A key difference is that, in projects that have been privately proposed, the proposing bidder is given a marginal advantage. Article 9 of the Public Works Concessions Act also requires the successful bidder to create a privately held corporation that will become the counterparty to the government in the public concession, acting as a special-purpose vehicle for the transaction. Concession contracts for the development of public works normally operate on a two-phase basis, beginning with the construction phase which must be achieved within a certain period, and after that the operational phase of the

21 Article 84 of the Public Works Regulation. 22 Article 84 of the Public Works Regulation.

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contract commences. During this second phase, the developer must utilise the infrastructure built by the contractor to provide the public service that is required.23 The payment structures of public works concession contracts vary according to the type of infrastructure that is being developed. The most common payment structure that is utilised for public toll road projects is named ‘total revenue of the concession’. Under this mechanism, the bidder offers an amount of money which will constitute the maximum amount of revenue that it will be able to obtain from the concession. The concession agreement will terminate once the developer obtains the maximum offered amount or the term of the concession contract has elapsed, depending on what occurs first. Once the public concession has been terminated, the built infrastructure will be transferred to the Chilean state to be awarded once again in concession.24

5. Construction Contracts 5.1. Available Contracts 5.1.1.

It is uncommon for construction projects in Chile to utilise a standard form contract such as FIDIC or NEC. The majority of construction contracts are completely bespoke.

6. Key Issues 6.1. Fit for Purpose 6.1.1.

6.1.2.

As pacta sunt servanda is the main principle of contract law, in respect of fitness for purpose obligations or warranties, the agreement of the parties is the first key aspect to consider. The Chilean Civil Code does not include the concept of a fit for purpose warranty or any implied warranties in general. Chilean Courts have ruled that, in construction contracts, the contractor undertakes an obligation to deliver construction works exempt of defects or flaws that prevent the use of the construction for its purpose.25 This is consid-

23 Articles 49 and 54 of the regulation of the Public Works Concessions Act. 24 Article 25 of the Public Works Concessions Act. 25 Supreme Court, court ruling of April 28th, 2017, No. 47579-2016; Santiago Court of Appeals, court ruling of January 1st, 2014, No. 4958-2012; Valparaíso Court of Appeals, court ruling of April 30th, 2014, No. 1742-2013.

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ered to be somewhat equivalent to a fitness for purpose obligation. As previously mentioned, the parties can choose to amend these implied terms. Fitness for purpose obligations can be deemed to arise out of construction contracts by applying, by express legal reference, the provisions of the sales contract. According to Section 1996 of the Chilean Civil Code, if the builder supplies the materials, the construction contract is deemed a ‘sale’ subject to the approval of the owner, but if the materials are supplied by the owner, the construction contract is deemed a ‘lease’ of services. When the construction contract is deemed a sale, latent defects provisions apply. If those defects existed at the time of the sale, rendering the thing unfit for its natural use, the buyer (or owner) would be entitled to terminate the contract or demand a price reduction. Even when the contract is deemed a lease, some legal scholars have also considered that the contract imposes an obligation to deliver the works in accordance with the requirements of the contract and the lex artis.26 Therefore, if the works do not comply with such requirements, the contractor is considered to be in breach of contract. Interestingly, the burden of proof of the skill and care rests on the party who ought to have exercised it (usually the contractor). This is particularly burdensome in the construction industry, because if a building or other construction work fails, it is often very difficult to demonstrate that such failure is not caused by a failure to meet the required standard of care.

6.2. Late Completion and Delay 6.2.1.

6.2.2.

In the absence of express terms and by applying the general rules of the Chilean Civil Code on liability, if the contractor is late in the completion of the works for a reason other than force majeure or a breach by the owner, the owner is entitled to terminate the contract. This is a rather harsh remedy, and thus most parties usually agree on ad-hoc terms including one that allows termination for late completion only when a longstop date or liquidated damages cap has been reached without the works being finished. Liquidated damages or penalties (which are expressly permitted) are normally established on a daily or weekly basis, both for completion and also for

26 BRANTT, María Graciela and MEJÍAS. Claudia, “El derecho supletorio del contrato de servicios en el código civil chileno. Insuficiencia de las reglas del mandato y del arrendamiento” in Revista de Derecho de la Pontificia Universidad Católica de Valparaíso (XLVI, 1st semester of 2016). 71-103; and Barros Bourie, Enrique “Los contratos de servicio ante la doctrina general del contrato: La virtualidad analógica de las reglas del mandato”, in Fabián Elorriaga de Bonis (coord), Estudios de Derecho Civil (VII, 2011, Legal Publishing Chile). 325–340.

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intermediate critical milestones. Liquidated damages or penalties will be enforceable except where, in the opinion of a judge, they are considered enormous. In that case, the judge may lower them to a reasonable amount. Nevertheless, this power of the judge is rarely exercised.27 Chilean law does not recognise a principle similar to the ‘time at large’ concept which exists in some common law jurisdictions. However, in the absence of express contractual provisions entitling the contractor to time and cost relief, if the owner engages in a material breach that causes a delay in or interference with the completion of the project, the contractor could terminate for the owner’s breach.28 In most cases however, the contractor will be entitled to an extension of time and compensation for additional costs (if any), and there should be no impact on the enforcement of liquidated damages in the case of delays attributable to the contractor. As in common law jurisdictions, an express contractual provision providing for the contractor’s rights in the event of the owner’s breach or interference with the completion of the project is thus fundamental.

6.3. Latent Conditions 6.3.1.

6.3.2. 6.3.3.

6.3.4.

There is an implied term under Chilean law, based on Article 2003 of the Chilean Civil Code, that the risk of latent site conditions, including soil and subsurface conditions, will be borne by the owner, unless the contractor should have been able to foresee their occurrence by exercising the level of skill and care that is required under the contract. The contractor has a duty to promptly inform the owner of the occurrence of any such unforeseen conditions.29 If the parties disagree on the foreseeability of any latent conditions, they can refer their dispute to a court to determine whether or not the contractor should have foreseen the conditions. It is a common market practice for parties to clarify or rearrange the allocation of the risk of latent conditions, particularly in projects where this is a more critical risk, such as a project for tunnelling works.

27 Article 1544 Civil Code. 28 Articles 1489 Civil Code. 29 Art 2003 #2 Civil Code.

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6.4. Force Majeure 6.4.1.

6.4.2.

6.4.3.

Section 45 of the Chilean Civil Code includes a rather strict definition of force majeure — an unforeseen event that is impossible to control. This definition has sometimes been construed in absolute terms, which differs from international market practice where the test is more often based on the reasonableness of such foreseeability and controllability in light of the required skill and care. Chilean law only provides relief to the contractor on the basis of time, not cost. Some industries have adopted market practices that entitle the contractor to cost relief in case of certain extraordinary circumstances, such as soil contamination or archaeological findings that were not considered in the project’s environmental impact assessment. In private construction contracts, parties can agree to include force majeure provisions that specifically provide for force majeure circumstances and any relevant remedies.

6.5. Limitation of Liability 6.5.1.

6.5.2.

6.5.3.

Under Chilean law, damages seek to reinstate the contracting party to the position that it was in prior to the breach of contract or, depending on the action filed, to the position that the non-breaching party should have been in had the contract not been breached. The extent of damages is covered by two basic rules included in Article 1558 of the Chilean Civil Code. First, a foreseeability rule. Under this rule, except when the breach was caused by gross negligence or wilful misconduct, only damages that were foreseeable at the time of entering the contract are compensable. If the breach was caused by wilful misconduct or gross negligence, non-foreseeable damages are also compensable. The second rule provides that only direct damages are compensable, including actual damage (daño emergente) and loss of profit. Loss of profit can therefore be considered as a type of direct damage depending on the actual circumstances of the proximate causation. Therefore, loss of profit is not indirect damage per se. The concept of ‘consequential damages’ is not recognised by Chilean law. This concept is similar to the common law concept of indirect damages, but only in some respects. An accepted market practice relating to exclusions of liability in contract is to exclude loss of profit, unforeseeable damages and other specific damages which usually fall under the common law concept of consequential damage. It is also a common market practice for the parties to establish a cap on the contractor’s aggregate liability under the contract. The amount is a purely commercial issue, and the amount of the cap varies greatly between indus-

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tries and the contracts’ scope of works. Liability caps normally exclude the contractor’s obligation to complete the works. Exclusions and limitations of liability normally carve out (i) gross negligence or wilful misconduct; (ii) third-party indemnities including labour claims; (iii) breaches of intellectual property law; and (iv) insurance payments under contracts that require insurance.

6.6. Time Bars 6.6.1.

6.6.2.

6.6.3.

Under Chilean law, the sole failure to provide a notification or comply with a certain requirement within the term established under the contract will only allow the other party to claim damages caused by the breach but will not bar the exercise of a right. For a claim or right to be time barred, the time bar provision must be drafted in clear and express terms. The right to exercise a time bar provision can be deemed to be impliedly waived by its beneficiary. However, most owners include in their construction contract non-waiver provisions to avoid this. Some arbitrators have refused to apply time bars on the basis of the principles of good faith and abuse of rights when (i) the term is too short to allow for its actual compliance; (ii) the parties have consistently opted not to apply the time bar provisions during the performance of the contract (even in the presence of non-waiver provisions); and (ii) the owner has knowledge of the event requiring the notice.

6.7. Warranty Periods and Decennial Liability 6.7.1.

6.7.2.

6.7.3.

The Chilean Civil Code establishes a five-year warranty period for works that covers severe structural damage and applies to lump sum contracts for the construction of a building (construed in a broad manner). Buildings that require a construction permit have different warranty periods set out in the General Urbanism and Construction Act. These warranty periods vary depending on whether the defects concern the finishing elements, construction elements or structural elements of the building. A warranty period can extend up to 10 years and cannot be reduced by contractual provisions. It is a common market practice in Chile to include contractual warranty periods within which the contractor must correct any defects. The extension of this period is a commercial issue, but normally varies from one to two years.

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6.8. Payment Procedures and Transfers of Property 6.8.1.

6.8.2.

Under Law No. 19,983 of 2004, the contents of an invoice cannot be rejected after a period of eight days from the day of its issuance. Given this short review period, most construction contracts require the contractor to first issue a request for payment which must be approved by the owner prior to the issuance of the actual invoice. The invoice is issued only after approval of the request for payment and the stipulated amount. Any owner’s rights to retention, including the withholding of payments, must occur at the request for payment stage. An invoice that is not rejected in a timely manner is deemed to have been approved and obtains a value independent of the contract, and can be sold in the market or to third parties who can then collect it as an ‘executory title’. At such a time, no defences are available from the original contract. Pursuant to Article 1996 of the Chilean Civil Code, the owner of the project becomes the owner of the works once it has accepted the works, which normally occurs with the issuance of the provisional acceptance certificate. Most construction contracts establish that the owner will become the owner of the works once the materials and equipment have been paid or arrive at the site, to advance value-added tax recovery procedures established under Chilean tax law. These contractual provisions state that the contractor will remain liable for the risk of the works until provisional acceptance has been achieved.

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

Given the complex and technical nature of construction disputes and the absence of a specialised court similar to the English Technology and Construction Court, most construction contracts contain arbitration provisions as their main dispute resolution mechanism. In our experience, the vast majority of the arbitration provisions are governed by the rules of the Santiago Arbitration and Mediation Centre of the Santiago Chamber of Commerce, followed at a distance by ICC arbitration for very large contracts. The main centre for arbitration procedures is the Santiago Arbitration and Mediation Centre, which has a list of renowned lawyers as arbitrators and has its own rules of procedure and facilities where the proceedings can take place. In public procurement, dispute resolution is usually done by ordinary courts, except in the case of concessions of public works which has a special procedure under the Public Works Concessions Act. Article 36 of the Public Works Concessions Act provides for the resolution of technical or economic matters between the concessionaire and the State, a dispute board called the Technical Panel, comprising of lawyers and engineers, which issues a technical

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non-binding recommendation. If the parties do not agree with the Technical Panel’s recommendation, they can request the Appeal Court or the Arbitration Commission to review the matter. For legal issues of interpretation or the execution of the concession agreement, pursuant to Article 36 bis of the Public Works Concessions Act, the parties can make claims before the Appeal Court or the Arbitration Commission (formed by three arbitrators). Unlike England, Australia and Singapore, Chile does not have statutory adjudication procedures. However, some contracts establish technical disputes to be resolved by expert determination. Disputes boards are available but seldom used. The Santiago Arbitration and Mediation Centre has its own specific dispute board rules.30

30 http://www.camsantiago.cl/Dispute_Board-reglamento.html.

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China 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8.

Context 196 The Country 196 The Legal System 197 The Economy 198 The Construction Industry 199 Size and Nature 199 Participants 200 Work, Health and Safety 200 Protection of the Environment 201 Quality Assurance 201 Construction Contracting Dynamics 202 Legal Underpinnings of Contracts 202 Legal (Statutory) Framework of the Law of Contract Freedom of Contract 203 Public Policy 205 Implied Contract Terms 206 Construction of Contract Terms 209 Damages 211 Public Procurement 213 Government Involvement 213 Legislation and Regulation 213 Codes of Practice 213 Licensing 214 Construction Contracts 215 Available Contracts 215 Most Commonly Used 216 Example: The Standard Bidding Documentation for Construction Projects (2007) 216 Key Issues 218 Overview 218 General Obligations 218 Unforeseen Physical Conditions 219 Validity of Contracts 219 Payments 221 Delay in Completion 223 Right to Terminate 224 Force Majeure 225

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Risk Exposure Period 226 Time Bars 227 Dispute Resolution 228

1. Context 1.1. The Country 1.1.1.

1.1.2.

The People’s Republic of China (‘PRC’) is located in the eastern part of the Asian continent, on the western Pacific rim. It is a vast land, covering 9.6 million square kilometres (slightly smaller than Europe in its entirety). Additional offshore territory, including territorial waters, special economic areas and the continental shelf, totals over 3 million square kilometres, bringing China’s overall territory to almost 13 million square kilometres. China stretches from its westernmost point on the Pamir Plateau to the confluence of the Heilongjiang and Wusuli Rivers, 5200 kilometres to the east. With over 1.4 billion citizens (approximately one sixth of the world’s total population), China is the largest country in the world by population. China is a unified nation consisting of many different ethnic groups. 56 different ethnic groups make up the Chinese national family. As the ethnic majority, the Han people account for more than 90 % of China’s population. According to the Constitution of the People’s Republic of China, the country operates as a unitary state rather than a federal system based on a three-tier administrative system: (a) The country is divided into provinces, autonomous regions and municipalities directly under the Central Government; (b) Provinces and autonomous regions are divided into autonomous prefectures, counties, autonomous counties and cities; and (c) Counties, autonomous counties and cities are divided into townships, ethnic minority townships and towns. China has 23 provinces (including Taiwan), five autonomous regions, four municipalities directly under the Central Government and two special administrative regions. The special administrative regions are formed based on the ‘One Country, Two Systems’ principle whereby Hong Kong and Macao, though part of the sovereignty of China, practices economic and regulatory systems different from Mainland China. For the purposes of this Chapter, the law of Hong Kong and Macao are not considered.  

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1.2. The Legal System 1.2.1.

The Constitution Law of China establishes the National People’s Congress (‘NPC’) as the highest organ of state power. The NPC and the local peoples’ congresses at various levels are constituted through elections with a term of five years. The administrative, supervisory, judicial and procuratorate organs of the state are created by the peoples’ congresses, to which they are responsible and by which they are overseen. Elected by the NPC, the President is recognised as the head of the state and represents the state in conducting national affairs.

Legislative Power 1.2.2. The NPC and its Standing Committee exercise the legislative power as defined in the Constitution. The NPC enacts and amends basic laws pertaining to criminal offences, civil affairs, state organs and other matters. The Standing Committee enacts and amends all laws except for basic laws that should be enacted by the NPC according to the Constitution. When the NPC is not in session, its Standing Committee may partially supplement and revise laws enacted by the NPC, provided that the changes do not contravene the laws’ basic principles. 1.2.3. The State Council formulates administrative regulations in accordance with the Constitution and other laws. In line with the specific conditions and actual needs of their administrative regions, and on the condition that they do not violate the Constitution or other state laws and administrative regulations, the peoples’ congresses of provinces, autonomous regions and municipalities directly under the Central Government (and their standing committees) may enact local statutes. Executive Power 1.2.4. The State Council, which is the central government of the state, is the highest executive branch of China. The State Council shall be responsible to the NPC and shall report to it. The premier, nominated by the President and elected by the NPC, directs the State Council and is accountable for the work of the State Council to the NPC. Ministries or commissions of the State Council are responsible for the work of their respective departments. The ministries and commissions may issue orders, directives and regulations within the jurisdiction of their respective departments. 1.2.5. The State Council directs the local administration at various levels throughout the country. It also formulates the detailed division of functions and powers between the central government and the organs of state administration of provinces, autonomous regions and municipalities.

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Judicial Power 1.2.6. The Supreme People’s Court is the highest judicial organ of the state. It reports its work to the NPC and its Standing Committee. It is also the highest supervising organ over the trial practices of local people’s courts and special people’s courts at various levels. The Supreme People’s Court is made up of a president, vice presidents, presiding judges, vice presiding judges and judges elected by the NPC and its Standing Committee. 1.2.7. China’s people’s court system consists of courts at four levels, namely the base level courts (district courts), intermediate courts, higher courts and the Supreme People’s Court. For each level, the specific trial tribunals, such as criminal, civil, economic, administrative, maritime and railway transportation tribunals, are set up within the courts according to actual needs. Although there are judges who specialise in construction law in some of the courts, there are no specialist construction courts. Construction disputes are treated and heard like other civil claims in civil tribunals. 1.2.8. Litigants may appeal to a court of higher level within the time limit prescribed by law if they are not satisfied with the verdict rendered by courts at various levels after a trial of the case has been conducted within the court’s jurisdiction. The court at the next higher level reviews the appeal and renders the verdict after the second hearing, which constitutes a non-appealable final decision (such decision will be legally enforced but may be subject to a rehearing proceeding if it can be successfully invoked on specific grounds). A decision by a higher court is binding on lower courts. The decisions of the Supreme Court, as the final court of appeal, are binding on all other courts. 1.2.9. As a civil law jurisdiction, the law is derived from the Constitution, codes, statutes and regulations in China. Administrative rules, circulates, guidelines and rulings also form an important part of the regulatory regime, especially in construction law and other heavily regulated areas. 1.2.10. Although it is not constitutionally a primary source of law, Judicial Interpretations and Exemplary Cases announced by the Supreme People’s Court and the Supreme People’s Procuratorate (the judicial supervisory organ) are authoritative quasi-primary sources in adjudication and are strictly followed by all levels of courts during the trial process. However, due to the non-application of the principle of stare decisis in China, published cases are merely persuasive sources and the rule of precedents generally does not apply.

1.3. The Economy 1.3.1.

Since the country’s reform and opening up in 1978, China has been developing its own market-based economy. In 2009, China became the world’s lar-

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gest exporter of goods and the second largest importer of goods.1 In 2013, China became the world’s largest trader in goods.2 China has now become the world’s second largest economy, the largest manufacturer, the second largest consumer of commodities, the second largest recipient of foreign direct investment (‘FDI’) and the largest holder of foreign exchange reserves.3 China is the biggest contributor to world economic growth and an important participant in the world’s manufacturing and construction industry. According to a report released by the McKinsey Global Institute (‘MGI’), the aggregate index of the world’s exposure to China’s economy gradually rose from 0.4 to 1.2 between 2000 and 2017, with China accounting for 35 % of global manufacturing output.4  

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction industry is an important contributor to China’s economy. In 2019, statistics showed that the industry alone contributed to RMB24,845 billion of China’s GDP. During the last decade,5 the industry has grown by more than 4 % annually, which has mainly been driven by investment in real estate and an increase in fixed asset investment. Residential construction has been the largest market in the Chinese construction industry in the recent years, accounting for approximately half of its total value.6 The industry has increased at a compounded average growth rate of 8.6 % during 2015–2019.7 In the years to come, non-residential infrastructure is also expected to grow considerably. The aging population in China is creating demand for the construction of healthcare facilities and new hospitals. The rise  

2.1.2.

 

1 See State Council Information Office of the People’s Republic of China, China and the World in the New Era (White Paper, September 2019) 4 (‘State Council Information Office’). 2 See State Council Information Office of the People’s Republic of China, China and the World in the New Era (White Paper, September 2019). 3 See State Council Information Office of the People’s Republic of China, China and the World in the New Era White Paper, September 2019). 4 McKinsey Global Institute, China and the World: Inside the Dynamics of a Changing Relationship (Report, July 2019). 5 ‘Annual GDP Statistics’, National Bureau of Statistics of China (Online) . 6 Research & Markets, China Construction Industry Databook Series – Market Size & Forecast by Value and Volume, Opportunities in Top 10 Cities, and Risk Assessment (Report, January 2020). 7 Research & Markets, China Construction Industry Databook Series – Market Size & Forecast by Value and Volume, Opportunities in Top 10 Cities, and Risk Assessment (Report, January 2020).

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of the innovation, digitalisation and technology-based economy have also seen a surge in Internet Data Centre constructions and other neo-infrastructure related construction projects.

2.2. Participants 2.2.1.

2.2.2.

2.2.3.

Governments at all levels play a significant role in the construction sector in China due to its involvement in a great many infrastructure related projects. State-owned enterprises are commonly seen in sizable projects, either as major procurers of construction projects in the market or being involved to deliver large-scale construction projects. Since the Belt and Road Initiative was proposed, larger players in the construction industry in China have entered foreign markets at a growing pace. They have reached countries in Asia, Europe, Africa and the Americas, and have been actively participating in the overseas market. Great progress has been made in the construction of key interregional and intercontinental infrastructure facilities such as the China-Laos Railway, the China-Thailand Railway, the Hungary-Serbia Railway and the Jakarta-Bandung High-Speed Railway.8 The participation of Chinese contractors in the construction market of Belt and Road countries are expected to remain strong in the coming years. In spite of these particularities, the participants in a traditional constructionrelated contract are the same as in other major markets. Two main participants in a construction project are the employer and the contractor engaged by the employer to carry out building or construction work. Subcontractors, supervisory entities (who have a similar role to engineers in other widely used standard forms), architects, project management advisors, quantity surveyors, other professional consultants, sureties and insurers are usually engaged in projects as well.

2.3. Work, Health and Safety 2.3.1.

The Law on Work Safety and administrative regulations promulgated by the State Council, such as Regulations on Administration of Construction Safety, Regulations on Safe Work Permits, specifically provide that all parties to construction and engineering projects shall observe the provisions of the laws and regulations on work safety, ensure construction safety and assume responsibility in terms of construction safety according to law.

8 State Council Information Office (n 1) 24.

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In addition, any employment involved in a construction and engineering project shall comply with the Labour Law, a law formulated in accordance with the Constitution with a view to safeguarding laborers’ lawful rights and interests.

2.4. Protection of the Environment 2.4.1.

2.4.2.

The Ministry of Ecology and Environment of PRC is the main body that enforces anti-pollution laws, which include the Environmental Protection Law, the Law on Environmental Protection Tax, the Law on the Prevention and Control of Atmospheric Pollution, the Law on Prevention and Control of Water Pollution Law on Environmental Impact Assessment Control and the Law on Promotion of Cleaner Production. Other important administrative regulations regarding environmental issues include the Regulations on Environmental Protection Management for Construction Projects. These laws manifest that compliance with environmental laws and regulations are vital to every stage of a construction and engineering project, from the commencement of works and construction management to inspection, tests on completion and taking over. These laws and regulations encourage operators not to pollute and provide a framework for offenders to be punished. Penalties generally include fines, suspension of projects and provisions for jail terms.

2.5. Quality Assurance 2.5.1.

2.5.2.

The Construction Law is the primary legislation governing the construction industry in China. It sets out the general rules for quality assurance and mandates that all construction activities have to guarantee the quality and safety of the project. Compliance with the state’s safety standards for all construction activities, which includes survey, design, construction and other activities, are mandatory.9 Further, on a voluntary basis, entities engaged in construction may submit their quality certification applications to the quality certification institutions approved by the Product Quality Control authorities under the State Council for a Quality Certificate. In practice, it is common for the employer to request that entities engaged in construction projects be certified.

9 Articles 3 of the Construction Law regulates this matter. Article 3 provides: Construction activities shall ensure the quality and safety of construction projects and conform to the national safety standards for construction projects.

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Also, warranty of quality is mandatory under the Construction Law. If the works have quality problems and the contractor refuses to repair them, the employer may, as a substitute to performance, retain a third party to carry out the repair and require the contractor to bear the costs incurred.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

2.6.3.

Traditional contracting models commonly seen in the overseas market prevail in China as well. The employer will contract with a general contractor to construct the works in accordance with a specified design. A tender process used to be mandatory for most construction projects. After a recent reform, public invitation of tenders is no longer required by law for projects with limited public nature, but the tender process is still widely used by employers. In China, the traditional design-bid-build (‘DBB’) method is commonly used in general commercial construction, and general contracting methods, which includes Engineering, Procurement and Construction (‘EPC’) and design-build (‘DB’), are more popular for energy and petrochemical projects. Yet, considering the government’s strong advocacy of general contracting, it is believed that before long general contracting methods will have extensive application in China’s construction market, especially in state-funded projects. It is worth noting that, in China, the current regulations require the employer to engage a supervisor or supervisory entity in major projects to serve as a certifier and take on responsibilities similar to those undertaken by an engineer (or architect) under a foreign construction contract. A construction supervisor shall carry out supervision impartially, fairly and independently in accordance with the relevant laws, regulations and construction supervision standards. In practice, most employers tend to appoint a supervisor to take charge of safety and quality matters as prescribed by the supervisor’s mandatory statutory duty, while retaining ultimate control over the price and construction period.

3. Legal Underpinnings of Contracts 3.1. Legal (Statutory) Framework of the Law of Contract 3.1.1.

The general framework of the law of contract in China encompasses: (1) General provisions of the Civil Code of China (originally the General Provisions of Civil Law); (2) General provisions of the law of obligations under the Civil Code; and (3) General rules of contracts under the Civil Code (originally the Contract Law of China). The Civil Code also includes particular rules of con-

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struction contracts (and particular rules of contracts of works) as typical contracts.

3.2. Freedom of Contract 3.2.1.

The principle of voluntariness is a fundamental principle for civil activities under Chinese law. In contract law, it is more often referred to as ‘party autonomy’ or ‘freedom of contract’. The voluntariness principle is set out in Article 5 of the Civil Code: [W]hen conducting civil activities, civil subjects shall adhere to the principle of voluntariness and establish, revise and terminate civil legal relations of their own true will.10

3.2.2.

Most rules in civil law are default rules, which means parties may change the rules by agreement between themselves as needed according to their own interests. In other words, normally the law does not interfere with civil subjects’ freedom of contract. However, freedom of contract is conditioned on the prerequisite that its exercise will not violate the laws and administrative regulations promulgated by the State Council or the principle of public order and good morals, otherwise there is a risk that the contract so established will be deemed invalid and void. The relevant provision in the Civil Code, namely Article 153, states that: A civil act violating the mandatory provisions of any law or administrative regulation promulgated by the State Council shall be void, unless the provisions do not result in the nullity of the act. A civil act contrary to the public order and good morals shall be void.11

3.2.3.

Generally speaking, whether a provision is of a mandatory nature depends on the hierarchy of the legislation or regulation, legislative intent and the regulatory effect of the provision. Also, the scope of such a provision shall not be expanded without a reasonable cause. In terms of construction contracts, according to the Construction Law, the Tendering Law and other pertinent laws and regulations, if a civil subject violates mandatory construction qualification requirements, illegally assigns or subcontracts a construction contract, conducts collusive bidding or is involved in other similar situations of an illegal nature, the civil subject will not be allowed to rely on the defence of freedom of contract, and the relevant contract will be invalid and void in part or in whole.12

10 Civil Code of China (China) 13th National People’s Congress of China, 28 May 2020, art 5 (‘Civil Code’). 11 Civil Code art 153. 12 Interpretation of the Supreme People’s Court on Issues relating to Application of Laws for Trial of Construction Contract Disputes (China) Supreme People’s Court, No 14, 2004 (‘Interpretation No 14’). Rele-

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Moreover, some obligations that the Construction Law sets forth regarding the quality of a construction project, their safety responsibilities and warranties will stand even if the parties stipulate otherwise.13 When an agreement is made against the voluntariness principle, the parties’ free will is usually undermined. As a result, the effectiveness of contracts can often be tenuous under Chinese law. There are three situations where a party is not considered to have expressed its free will in an agreement: (1) The party expresses its will under the influence of fraud; (2) the party expresses its will under the influence of coercion; or (3) the party’s vulnerability is taken advantage of by the other party and the contract hence entered into is apparently unfair to the first party. The party whose will has been undermined has the right to apply to a court or an arbitration tribunal for rescission of the contract in accordance with law.14

vantly, Articles 1 and 4 of the Interpretation No 14 regulate this matter. Article 1 provides: Where a construction project contract is under any of the following circumstances, it shall be determined invalid in accordance with Item 5. of Article 52 of the Contract Law: (1). The contractor has not obtained the qualification as a construction enterprise or undertakes in excess of its qualification grade; (2). An unqualified actual constructor works in the name of a qualified construction enterprise; and (3). The construction project requires public bidding, but no bid is invited or the winning bid is invalid. Article 4 provides: Where a contractor unlawfully transfers the contracting of a construction project or illegally transfers the subcontracting of such project, or an unqualified actual constructor concludes a construction project contract with others in the name of a qualified construction enterprise, such act shall be invalid. 13 Relevantly, Articles 55, 74 and 71 of the Construction Law regulate this matter. Articles 55 states that: For a construction project under general contract, the general contracting unit shall be responsible for the project quality. In the case of the general contracting unit subcontracting out the construction project to other units, the former shall bear joint responsibility with the subcontracting units of the quality of the subcontracted projects. The subcontracting units shall subject themselves to the quality control of the general contracting unit. Articles 74 states that: Any building construction enterprise that does shoddy work and uses inferior materials in construction, uses substandard building materials, building structural pieces and parts and equipment, or has any other acts of construction not in accordance with the project design drawings or construction technical standards shall be ordered to make a rectification and imposed a fine; where the circumstances are serious, it shall be ordered to suspend operations for consolidation and lower its human quality grade or its human quality certificate shall be revoked; the unit that has caused non-compliance with the prescribed quality standards of the quality of a construction project shall be responsible for its reconstruction and repair and the compensation of the losses caused therefrom; where a crime has been constituted, criminal liability shall be investigated according to law. Articles 71 states that: Any building construction enterprise that fails to take measures to eliminate the hidden causes of safety accidents in construction in violation of the provisions of this Law shall be ordered to make a rectification and may be imposed a fine; where the circumstances are serious, it shall be ordered to suspend operations for consolidation and lower its human quality grade or its human quality certificate shall be revoked; where a crime has been constituted, criminal liability shall be investigated according to law. 14 Relevantly, Articles 148, 149, 150 and 151 of the Civil Code (n 10) regulate this matter. Article 148 provides: ‘Where a party performs a civil act against its true will as a result of fraud by the other

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In the process of performance, the doctrine of freedom of contract faces restrictions imposed by law for the purpose of balancing the interests of and ensuring fairness between civil subjects. For example, Article 533 of the Civil Code provides for the doctrine of frustration, which dictates that after a contract has been concluded, if the basic conditions of the contract have undergone a significant change unforeseeable by the parties at the time the contract was concluded, which cannot be classified as a commercial risk, and it is clearly unfair for the party adversely affected by the change to continue to perform the contract, the party may renegotiate with the other party to reach a resolution.15 If negotiations fail to produce a resolution within a reasonable period of time, the parties may request that a people’s court or an arbitration tribunal intervenes to modify or terminate the contract. The people’s court or arbitration tribunal shall, according to the actualities of the case, amend or terminate the contract under the principle of fairness.

3.3. Public Policy 3.3.1.

Under Chinese law, public policy mainly refers to public order and good morals. Article 8 of the Civil Code stipulates that when conducting civil activities, civil subjects must not violate laws or the public order and good morals.16 Paragraph 2 of Article 153 further states that a civil act contrary to the public order and good morals shall be void.17 Public order refers to basic order in politics, economics, culture and other areas of a society, which reflects a fundamental principle and value closely related to the overall wellbeing of the state and the society. Good morals are customs developed from mainstream opinions on morality, representing the moral standard generally recognised and observed by the members of a society. Good morals are a product of time and are region-specific; they will change as the moral understandings of the

party/parties, the defrauded party shall have the right to request a people’s court or an arbitration tribunal to revoke the act.’ Article 149 provides: ‘Where a party performs a civil act against its true will as a result of fraud by a third party, and if the other party knows or should have known the fraud, the defrauded party shall have the right to request a people’s court or an arbitration tribunal to revoke the act.’ Article 150 states that: ‘Where a party performs a civil act against its true will as a result of coercion by the other party or a third party, the coerced party shall have the right to request a people’s court or an arbitration tribunal to revoke the act.’ Article 151 sets out that: ‘Where a civil act is evidently unfair because it is formed as a result of one party taking advantage of the other party’s distress or lack of judgment, among others, the aggrieved party shall have the right to request a people’s court or an arbitration tribunal to revoke the act’. 15 Civil Code art 533. 16 Civil Code art 8. 17 Civil Code art 153 [2].

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members of the society change. Public order stresses values held at national and societal levels, whereas good morals reflect the moral rules prevalent among the people. The two elements support and complement each other. The doctrine of public order and good morals is a beneficial supplement to the statutes and serves as a catch-all provision in China. It is believed that the law is unable to foresee all acts possibly detrimental to social and public interests or the moral order and cannot provide detailed prohibitive regulations on them given the vast variety of civil activities. Thus, the doctrine of good morals can fill in the gaps and impose necessary restrictions on parties’ autonomy, so that individual interests and public or social interests can be balanced.

3.4. Implied Contract Terms 3.4.1.

3.4.2.

Although there is no specific section in the Civil Code that specifically regulates ‘implied contract terms’, ‘manifestation of intent by implication’ is an established principle in China. As provided by Article 140 of the Civil Code, a party may manifest its intention either explicitly or by implication.18 Silence shall only be deemed as such a manifestation of intention when it is so specifically stipulated by the law or agreed by the parties, or when it conforms to the business practices between the parties. ‘Implied contract terms’ and ‘manifestation of intent by implication’ are two different concepts. The former refers to provisions implied without being expressly stated in a contract, while the latter indicates the way that intent is communicated. The two concepts are also inter-connected; for example, if both parties to a contract express their acceptance of a term by implication, the term will be considered to be an implied term, a typical example being implied-in-fact contracts.19

18 Civil Code art 140. 19 On this matter, Article 490 of the Civil Code (n 10) provides that: ‘Where the parties conclude a contract in written form, the contract is established when both parties have signed it, affixed their seals or fingerprints thereon. If, before both parties sign the contract or affix their seals or fingerprints on it, a party performs its principle obligation, and the other party accepts the performance, the contract is established when the other party accepts the performance. Where a contract is to be concluded in written form as provided for by law and administrative regulations promulgated by the State Council or as agreed by the parties, if the parties fail to conclude the contract in written form, but one party performs its principal obligation and the other party accepts it, then the contract is deemed established when the other party accepts the performance.’ That is to say, implied-in-fact contracts are recognised by law where the obligations performed by one party and accepted by the other will be considered implied terms.

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It is worth noting that in the construction industry, many standard form contracts published by authorities in China have terms stipulating that the employer will be deemed to have given its consent if it fails to act within the agreed time (often called ‘implied consent’ in practice) — parties are deemed to have accepted silence as a way of manifesting agreement. However, practically speaking, for the party who will be deemed to give consent in silence, accepting such a term can be risky. Therefore, when concluding a contract, parties need to give adequate attention and careful consideration as to whether to set out a provision to contradict implied terms or even preclude their application. Implied contract terms can be created by law, common practice or fact in China. Further: (a) Terms implied into a contract by law are common. Relevant provisions in Part III (Contracts) of the Civil Code may become implied terms in a contract if the contract does not preclude the application of such provisions or the preclusion in the contract is not clear. (b) For example, if a construction contract provides for the payment of a deposit but omits the stipulation on the return of the deposit, it can be said that the laws regulating the same matter will be implied into the contract.20 (c) Another example goes to the termination of contracts. If a construction contract fails to set out a party’s right to terminate the contract or the consequence of exercising such rights, the party may invoke the right of termination as afforded by law.21

20 Article 587 of the Civil Code (n 10) sets out: ‘[I]f the debtor performs its obligations, the deposit shall be used to offset the debt or be refunded. If the party paying the deposit fails to perform its obligations or its performance of obligations does not conform to the agreement between it and its creditor, rendering the purpose of the contract unfulfillable, then the party is not entitled to a refund of the deposit; if the party receiving the deposit fails to perform its obligations or its performance of obligations does not conform to the agreement between it and its debtor, rendering the purpose of the contract unfulfillable, a refund equal to twice the amount of the deposit shall be made’. 21 The legal grounds for this are stipulated in Article 563 of the Civil Code (n 10): ‘The parties to a contract may terminate the contract under any of the following circumstances: (1) It is impossible to achieve the purpose of the contract due to force majeure; (2) Any party expressly states or indicates through its conduct prior to the expiration of the performance period, that it will not perform its principal obligations; (3) Any party delays in performing its principal obligations and fails to perform the same within a reasonable period after being urged to do so; (4) Any party delays the performance of its obligations, or commits other violations of the contract, rendering the purpose of the contract unfulfillable; or (5) Other circumstances stipulated by the law arise. For indefinite-term contracts about continuous obligations, any party may terminate the contract at any time, provided that it shall give reasonable prior notice to the other parties.’ Paragraphs 1 and 2 of Article 566 additionally provide: ‘After the termination of a contract, if the contract or any part thereof has yet been performed, the contract or the part not performed shall no longer be performed; if the contract or any part thereof has been performed, the parties to the contract may request that the original state be restored or take other remedies

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(d)

(e)

(f)

(g)

(h)

The same applies to collateral obligations.22 Besides the main obligations provided in the contract, parties to a contract are also obliged to perform subordinate obligations required by the doctrine of good faith (including assisting and notifying one another, ensuring confidentiality and preventing the expansion of losses), even though they are not expressly within the ambit of the contract. Therefore, if the parties do not explicitly incorporate such obligations into the text of the contract, such subordinate obligations would constitute implied terms. Moreover, the Civil Code sets forth rules governing 19 types of particular contracts, specified in Subpart II (Typical Contracts) of Part III (Contracts), which includes ‘construction contracts’. Those rules, in relation to their respective types of contract, will also become implied terms if a certain contract contains neither agreement contrary to the regulations nor clear agreement on the relevant matter. Turning customs into implied terms requires greater prudence in practice in China. In this context, the term ‘common practice’ is also known as business practice, which refers to the acts widely adopted in the economic activities in a region or industry which over time have developed into publicly and generally acknowledged rules followed by the participants in such economic activities. Customs serve as a ground for contract interpretation (see Section 3.5 below). The rights and obligations of each party to a contract may be defined by reference to the rules of common practice. Furthermore, when provisions in a contract are not sufficiently clear, and the parties to the contract base their transactional behaviours on business practices, such business practices will also form implied contract terms between the parties. An example is the issuance of invoices. If a contract does not provide for the obligation to issue an invoice or the requirements for the invoice, but a party to the contract still issues invoices according to the statutory tax rates and business practices, then the identity of the issuer, identity of the recipient, date of issuance, tax rate and other relevant matters will all be deemed as implied contract terms. A typical example of an implied contract term created by fact can be found in implied-in-fact contracts, as mentioned above. In such con-

in accordance with the state of such performance and the nature of the contract, and have the right to claim compensation for any losses they thus sustained. Where a contract is terminated due to breach of contract, the party entitled to the right to terminate may request the breaching party to bear the liability for the breach of contract, unless it is otherwise agreed by the parties’. 22 Paragraph 2 of Article 509 of the Civil Code (n 10) sets out: ‘The parties shall, under the principle of good faith, perform such obligations as notifying, giving assistance and keeping confidentiality according to the nature and purpose of the contract as well as the business practices’.

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tracts, the obligations that parties perform (and accept) are implied contract terms.

3.5. Construction of Contract Terms 3.5.1.

Paragraph 1 of Article 142 of the Civil Code states that: [A] manifestation of intent that has a counterparty or counterparties shall be construed according to the literal meaning of the words used in combination of relevant terms, the nature and purpose of relevant action, common practices, and the principle of good faith.23

3.5.2.

Accordingly, the construction of contract terms shall follow these basic principles in China: (a) The ‘literal approach to interpretation’ interprets the contract terms according to their wording. In order to protect parties’ reliance interests, to construe contract terms is to interpret ‘a manifestation of intent that has a counterparty or counterparties’. Thus, the terms should not be interpreted freely without regard to their wording. The wording of a contract is jointly determined by the intent of both parties so that a standard of a reasonable person’s ordinary understanding is often adopted. What a ‘reasonable person’ refers to depends on the context. In common civil activities, a ‘reasonable person’ means a ‘reasonable person’ from the general public, whereas in a special transaction, a ‘reasonable person’ means a member of the industry which such a transaction concerns. For example, a construction contract should be interpreted according to the understanding of professionals in the construction sector. (b) If it is difficult or unreasonable to interpret a term according to a reasonable person’s ordinary understanding, the meaning of the term should be determined after taking into consideration other relevant terms, the nature and purpose of the behaviour common practice and the doctrine of good faith. According to prevailing understandings in practice, ‘relevant terms’ means to construe a term on the basis of its context and its relevance to pertaining terms. When considering the ‘nature and purpose of the behaviour’, the purpose for which the contractual party manifests an intent regarding the term is to be taken into account. That is, the purpose that the contractual party intends to achieve by using the term and the intention that the term refers to should be considered. If a party is in dispute with its counterparty over the wording of a term,

23 Civil Code (n 10) art 142 [1].

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and the wording conflicts with the purpose clearly expressed by the party, then the wording may be construed based on the expressed purpose. To consider ‘common practice’, emphasis is usually put on the habits and business practices of a party. In conducting such an interpretation, the party in question shall provide evidence of the existence and details of such practice. If the party fails to cite common practice as evidence, the court may take the initiative to base its construction of the relevant contract terms on such practice.24 (c) The principle (or doctrine) of good faith may sometimes be invoked in interpreting contractual terms. This requires the judge to exercise good faith in understanding and ascertaining the meaning of a contract term, balancing the interests of all parties and reasonably determining what a party really means when expressing its intent. It is noteworthy however, that despite its vital importance, the doctrine of good faith is a rather abstract concept. In order to ensure judicial credibility and prevent abuse of judicial power, the principle of good faith is almost always relied on as a last resort. The construction of standard form contract terms is another concern under Chinese law. ‘Standard form contract terms’ refer to provisions prescribed by a party in advance for the convenience of repeated use, which are not negotiated with the counterparty or counterparties when the relevant contract is concluded. Standard form contract terms are created to streamline the contract drafting process in some industries,25 where the same transaction processes occur frequently and repeatedly. Because standard form contracts tend to put product or service providers in an advantageous position, giving them a chance to set out terms unfavourable to the counterparties, specific rules of interpretation apply to such contracts in China. According to Article 498 of the Civil Code, a standard form contract term should be interpreted according to how an ordinary person would understand it.26 In the event that a term has two or more interpretations, the interpretation favouring the counterparty over the party providing such a term shall prevail. In case of any inconsistency between a standard form contract term and a non-standard term, the non-standard term shall prevail.

24 As stated in Article 10 of the Civil Code (n 10): ‘[A] civil dispute should be handled according to law; any matter not covered by law may be resolved according to common practices, subject to the doctrine of public order and good morals’. 25 Such industries are often monopolistic in China, including public utilities (water, electricity, gas and heating), telecommunications, insurance, rail, road and air transport and maritime transport. 26 Civil Code (n 10) art 498.

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Notably, if a construction contract is entered into by virtue of a tender, contract terms in the tender documents are generally formulated by the owner according to the competent authority’s templates. The Tendering Law provides that the party inviting tenders and the tender winner shall enter into a contract in compliance with the tender documents.27 In practice, Chinese courts normally hold that tender documents are not standard terms for the purposes of interpretation on the basis that these terms are for specific projects rather than repeated and general application. Moreover, Q&A sessions during tender processes already provide opportunities for the tenderers to raise questions. Therefore, the principle of ‘favouring the counterparty’ normally does not apply to construction contracts formed on the basis of tendering.

3.6. Damages 3.6.1.

3.6.2.

In the event of breach of contract, the breaching party shall be liable for its breach, which obliges them to continue to perform the contract, provide remedies and compensate for the losses. In China, the principle of full compensation is recognised by the Civil Code. The compensation should encompass both direct damage (the actual loss of property) and indirect damage (the loss of expected interests).28 In general, the determination of indirect damage should follow two principles: (1) objectiveness, i.e. the interests that the non-breaching party could have gained had the breach not occurred should be certain; and (2) foreseeability, which is applied by law to prevent the arbitrary expansion of the scope of the compensation. Three factors are normally considered under the principle of foreseeability. First, foreseeability should be determined from the breaching party’s perspective, rather than the non-breaching party’s. Second, foreseeability refers to foreseeability at the time of entering into the contract, not when the breach occurred. Third, the damage is limited to damage foreseeable when entering into the contract, and any damage unforeseeable at such a time should not be included in the compensation.  

27 Article 46 of the Tendering Law regulates this matter. Article 46 provides: The bid inviter and the bid winner shall, within 30 days beginning from the date the notification is sent out, sign a written contract on the basis of bid invitation documents and the bid documents of the winner. 28 Article 584 of the Civil Code (n 10) states that ‘if one party fails to perform its contractual obligations or its performance fails to comply with the contract, causing damage to the counterparty, the breaching party shall compensate the counterparty for its loss, including the loss of interests that could have been gained had the performance been completed; however, the compensation should not surpass the loss that is or should be foreseeable by the breaching party when entering the contract’.

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In practice, parties normally provide for liquidated damages in a contract to reduce the difficulty of proving the amount of losses. However, if the liquidated damages are lower or exceedingly higher than the value of actual losses, Chinese law confers on the parties the right to request an increase or decrease in the damages.29 The sum of losses caused by a breach (including the loss of interests that could have been gained had the performance been completed), the context of performance, the degree of fault of the respective parties, the expected interests and other factors are usually considered when deciding whether the liquidated damages are exceedingly high. The courts generally assign the burden of proof to the breaching party claiming that the liquidated damages are too high. In most construction contracts in China, the parties will set a cap on the damages. A typical type of damages that is capped is damages for late performance. When a contract sets out a cap on the damages arising from a certain breach, it is firstly generally assumed that the maximum amount of liquidated damages for the loss has been agreed upon. Therefore, the parties waive the right to seek a higher amount of damages that exceed the cap. Secondly, one may argue that any compensation that exceeds the cap is not foreseeable on the basis that the cap delineates the scope of damages that was or should have been foreseeable to the breaching party when entering into the contract. The types of contracts and the content and construction of provisions in specific contracts may also affect the interpretation of a cap on damages. In practice, for disputes arising from standard form contracts (such as a presale contract for a commercial residential building), the courts may decide how to construe, and whether to apply, the damages cap on the basis of a number of factors, including the legal status of each party, whether one party has negotiation advantage over the other, principles for interpreting standard form contract terms, the doctrine of good faith and the burden of proof for damages. The courts may consequently approve a claim for damages higher than the cap.

29 As stated in Article 585 of the Civil Code (n 10): ‘[The] parties may provide that if a party breaches the contract, it should pay certain amount of damages to the other party, or they may provide for the calculation method of the damages arising from such a breach. If the damages agreed are lower than the loss, a people’s court or an arbitral tribunal may award an increase in the amount of the damages at the parties’ request; If the damages agreed are significantly higher than the loss, a people’s court or an arbitral tribunal may award a decrease in the amount of the damages as requested by the parties’.

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3.7. Public Procurement 3.7.1.

3.7.2.

3.7.3.

Generally speaking, public procurement contracts are subject to the rules of contract mentioned above and shall conform to the principles of transparency, fair competition, impartiality and good faith. The Government Procurement Law and the Tendering Law outline the scope of and limitations on activities to be categorised as government or public procurement in China. The Rules on Projects Subject to Tendering and the Regulations on the Scope of Infrastructure and Public Utility Projects Subject to Tendering further delineate the scope of mandatory tendering. Although public procurement may be conducted in various ways, such as competitive negotiation, private invitation of tenders, single-source procurement and requests for quotations, public invitation of tenders are the mandatory method for most public procurement of construction projects.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

As previously noted, the industry is heavily regulated and governments at all levels play a significant role in construction projects in China. Key statutory obligations imposed by regulations relevant to construction and engineering are set out in the Construction Law, the Law on the Administration of the Urban Real Estate, the Law on Urban and Rural Planning, the Tendering Law and other sources of law. Among them, the Construction Law stipulates various requirements relating to construction permits, qualifications, contracting modes, engineering supervision, safety construction management and quality management throughout construction and engineering projects. Construction contracts must comply with and reflect the mandatory standards formulated by the authorities.

4.2. Codes of Practice 4.2.1.

All persons and entities engaging in activities of construction, expansion, alteration, reconstruction projects, supervision and management of the quality of construction projects must abide by the Construction Law and the Regulations on the Quality Management of Construction Projects. In addition, construction activities are required to meet mandatory standards and codes issued by relevant authorities, which delineate aspects including fire safety,

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structural safety, durability, energy conservation, environmental protection, civil air defence and others. Among all standards and codes, only some standards or parts of the standards are declared as mandatory, while others merely provide practical guidelines for the works. For example, during tests on completion, where quality inspection authorities are legally required to be involved, standards and codes such as the Unified Standard for Construction Quality Inspection of Buildings (GB50300-2013) are strictly enforced by the authorities.

4.3. Licensing 4.3.1.

4.3.2.

According to the Law on Urban and Rural Planning, prior to the commencement of development, the developing entity must apply for a permit for a planned construction project to the department in charge of urban and rural planning. Upon the completion of a project, the authority will examine and inspect whether a construction project is in compliance with the conditions for planning. If a construction project has not been inspected by, or the examination proves that it does not comply with the conditions for planning, the employer cannot arrange for its own acceptance of the works upon completion.30 Aside from planning, some of the permits and licenses that are commonly required are listed as follows: (a) Before the commencement of the work: Construction land use permit, permit for a planned construction project and construction permit;

30 Relevantly, Articles 37, 38 and 45 of the Law on Urban and Rural Planning regulate this matter. Articles 37 provides: If the right to use of State-owned land is extended through allocation for a construction project located within the area covered by the plan of a city or town, the developing unit shall, after the project is approved or verified and recorded by the relevant department, apply to the department in charge of urban and rural planning under the city or county people’s government for a permit for planned use of land for construction, and the said department shall, according to the detailed control plan, check and verify the location and area of the said land and the scope of area within which construction is permitted, before issuing the said permit. Articles 38 provides: For a construction project for which the right to use State-owned land is obtained through transfer, the development unit shall apply to the department in charge of urban and rural planning under the people’s government of the city or county concerned for a permit for planned use of land for construction, after it receives the approval, verification and record-filing documents for the construction project and concludes the contract on transfer of the said right. Articles 45 provides: The department in charge of urban and rural planning under the people’s government at or above the county level shall, according to the regulations of the State Council, check whether a construction project is in compliance with the conditions for planning. If a construction project is not checked, or checking proves that it does not comply with the conditions for planning, the developing unit may not arrange for acceptance check upon completion of the project.

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(b) (c)

4.3.3.

4.3.4.

During the work: No special licences required; and After completion: EIA acceptance, registration of acceptance and inspection. Penalties for non-compliance with the required permits and licenses generally include a fine, suspension of construction, ordered restoration and refusal on acceptance and inspection registration. It is noteworthy that the requirements for obtaining the listed permits may vary in different provinces according to local regulations. Changes related to the construction licensing regime are expected since the Chinese government is pushing forward with the reform of construction project review processes and construction industry qualification management, while streamlining administration, delegating more power to lower-level governments and reducing licensing approval procedures. Also, contractors in construction projects are required to have a construction enterprise qualification. A construction contract signed by a contractor without such a qualification or in excess of the permitted scope of the qualification will be invalid. Moreover, there are licensing or qualification requirements for practitioners and professionals commonly engaged in construction projects, such as architects, specialised contractors, quantity surveyors and others. Practitioners and professionals are required to be duly licensed in order to carry out their work in a construction project.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

In China, at present, there are national standard construction contracts formulated by state ministries and commissions as well as local standard construction contracts formulated by local governments. The former generally apply to construction projects nationwide, and the latter are typically limited to local projects. National standard construction contracts primarily include: (a) The Surveying Contract (GF-2016-0203), the Engineering Contract (GF2015-0209/0210), the Construction Contract (GF-2017-0201), the General EPC Contract (GF-2011-0216), the Supervision Contract (GF-2012-0202) and the Cost Consulting Contract (GF-2015-0212) issued by the Ministry of Housing and Urban-Rural Development (‘MOHURD’) and the State Administration for Industry and Commerce of the People’s Republic of China (currently known as the State Administration for Market Regulation); and (b) The Standard Bidding Documentation for Construction Projects (2007), the Concise Construction Contract (2012) and the Engineering and Con-

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struction Contract (2012) issued by nine ministries and commissions, including the National Development and Reform Commission (‘NDRC’). Additionally, some industry authorities have issued standard documents applicable to their industries for various construction activities. Some owners also use FIDIC and other internationally recognised contract templates.

5.2. Most Commonly Used 5.2.1.

According to the Regulations on Implementation of the Tender Law, projects that are required by law to invite bids must use the above forms for their bidding documents.31 For example, the Standard Bidding Documentation for Construction Projects (2007) applies to projects above a certain threshold size whose engineering and construction are undertaken by different contractors.

5.3. Example: The Standard Bidding Documentation for Construction Projects (2007) The main provisions and layout of the document in question are as follows: (a) The Employer’s Obligations: This clause specifies the obligations that the employer must fulfill under the contract. (b) The Supervisor: This clause specifies the supervisor’s obligations. The supervisory system is a distinctive feature of Chinese construction works. Supervisors’ duties are similar to those of the engineers under FIDIC contracts in that their powers are also authorised by the employer, and that they should also act within the scope of the authorisation. (c) The Contractor: This clause specifies the obligations that the contractor must fulfill under the contract. (d) Materials and Equipment: This clause specifies that the materials and equipment transported to the site should be dedicated to the construction works, and that the use of unqualified materials and equipment is prohibited.

31 Articles 15.3 of the Regulations on Implementation of the Tender Law regulates this matter. Articles 15.3 provides: The prequalification documents and bid invitation documents shall be prepared in accordance with the standard texts prepared by the development and reform authority of the State Council together with other administrative supervision authorities.

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Measurements and Setting Out: This clause specifies that the contractor should be responsible for measurements and setting out, and that the employer should be responsible for the authenticity, accuracy and completeness of points, lines, levels of reference and paperwork provided by the employer, and should be liable for any cost, delay and profit loss caused by the redoing of setting out due to errors in such reference items and materials provided by the employer. (f) Program: This clause specifies the procedure for drafting, submitting and revising the time program. (g) Commencement and Completion of Works: This clause specifies the methods for determining the date of commencement and completion as well as measures that deal with delays caused by the employer or the contractor. This clause also provides that the contractor may extend the construction period of the works if any delays arise due to extreme weather. (h) Suspension of Work: This clause specifies the parties’ responsibilities at the time of the suspension of the works, the resumption of the works and the measures for handling a suspension that lasts more than 56 days. (i) Quality of the Works: This clause mainly specifies quality requirements, quality management, inspection measures and the process for the removal of unqualified works. (j) Variations: This clause mainly specifies the scope and content of variations (neither the employer nor any third party shall carry out any cancelled works), the variation procedure, variation valuation principles, the purchase methods and valuation of materials, engineering equipment and specialised works, the provisional sums of which are included in the contract price. (k) Price Adjustment: This clause mainly specifies the adjustment methods for changes in cost and in legislation. (l) Measurements and Payments: This clause mainly specifies engineering measurement methods, payment methods and the settlement of progress payments and performance bonds. (m) Completion Inspection: This clause mainly specifies the process of acceptance and handover of the works upon completion. If the works require inspection and accep-

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(n)

(o)

(p)

(q)

(r)

tance by any national regulatory authorities, the completion inspection shall be part of the authorities’ inspection. Defect Liability and Warranty: This clause specifies the contractor’s defect liability and warranty obligations, as well as their respective periods. Force Majeure: This clause mainly specifies the circumstances that constitute force majeure, the notification obligation when force majeure occurs, the obligation to mitigate and the handling of the consequences caused by force majeure events. Default: This clause specifies circumstances where the employer or the contractor will be considered in breach of contract, the default liability and the consequences of termination of the contract due to a breach by either party. Claims: This clause mainly specifies the processes for filing and handling a claim as well as relevant time limitations for claims. The supervisor shall determine through negotiation or on its own whether to instruct additional payments and/or an extension of time. Dispute Resolution: This clause specifies the methods for resolving disputes that the parties may choose from, including dispute mediation arbitration and litigation.

6. Key Issues 6.1. Overview 6.1.1.

This section will explain the parties’ general obligations, the general treatment of unforeseen physical conditions, the validity of contracts, the relationship between contracts and bidding documents, payments, delays, the right to terminate a construction contract, force majeure, the risk exposure period, time-bar clauses and other related issues.

6.2. General Obligations 6.2.1.

Chinese standard construction contracts are generally designed to favour the interests of the contractor, and this favour may even go beyond the general guidelines for internationally recognised contract templates, such as FIDIC. The variation clause of the Construction Contract (GF-2017-0201) issued by the MOHURD, for example, increases the uncertainty of contract prices in

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both procedural and substantial aspects, thereby entailing greater risks for the employer. According to this clause: (a) The contractor may, for any reason, raise objections to any variation after being notified thereof; and (b) If any variation results in more than 15 % difference between the completed quantity and the quantity specified in the contract, the parties should renegotiate or revalue the contract price. In practice, the employer will make significant changes to those standard terms. When drafting a construction contract, the employer must pay attention to those unusual clauses and compare them against the circumstances of its own project.  

6.2.2.

6.3. Unforeseen Physical Conditions 6.3.1.

According to the standard contracts issued by the MOHURD and the nine ministries and commissions, risks caused by unforeseen physical conditions can be regarded as variations, and the employer shall bear the adverse consequences of any unforeseen physical conditions. This is mainly because the information provided by the employer was inaccurate and incomplete, such that it was difficult for the contractor to foresee any latent conditions it may encounter during construction. In practice, the key to liability determination lies in whether the contractor has fulfilled its obligation to inspect the bidding documents and conduct the on-site inspection as an experienced contractor should have, and whether the contractor has taken reasonable measures to minimise losses after a unforeseeable physical condition materialises. If the contractor can prove its fulfillment of these obligations, such risks can be considered to be caused by unforeseen physical conditions, and the contractor will not be held liable and therefore may claim reasonable compensation from the employer.

6.4. Validity of Contracts The Effects of Invalidity 6.4.1. In China, construction contracts are deemed invalid if they firstly fail to meet qualification requirements if:32 (a) The contractor fails to obtain construction qualifications or undertakes a project for which the contractor is underqualified; or

32 Interpretation No 14(n12).

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(b)

6.4.2.

6.4.3.

6.4.4.

The actual constructor of a project is unqualified but undertakes the project in the name of other qualified entities. Alternatively, a construction contract may be invalid for a failure to comply with procedures if: (a) The construction project that is required to invite bids does not do so or the winning bid is invalid;33 or (b) The employer fails to obtain permits for construction planning or fails to pass other planning approval formalities.34 If works based on an invalid contract pass the inspection and acceptance for completion, the contractor may still request the employer’s payment of the contract price under the contract35. In the event that the works of an invalid contract fails to pass the inspection and acceptance for completion, if the works passes inspection and acceptance after rectification, the employer may require the contractor to bear the rectification costs. If the works still fail to pass after rectification, the court will not support the contractor’s request for payment of the contract price.36 After a contract becomes invalid, in principle, the non-breaching party may no longer claim liquidated damages under the contract but may claim actual losses as recourse. However, considering the complexity of construction contract disputes, it is very difficult for parties to prove their actual losses, which further obstructs access to remedies. Accordingly, the Interpretation of the Supreme People’s Court on Issues Relating relating to Application of Laws for Trial of Construction Contract Disputes (II) (‘Interpretation No 20’) provides that the non-breaching party may request that the court determine the losses against the quality standard, construction period, payment schedules and other relevant factors as agreed in the contract. The court will make a ruling on a case-by-case basis.37

Contracts and Tender Documents 6.4.5. As previously mentioned, tendering is widely used in the construction field and is one of the most important ways to form a contract. However, in practice, because Chinese law does not provide for a clear definition regarding when a construction contract is formed during the tendering process, there are still controversies on this issue. According to mainstream opinion, calling

33 Interpretation No 14(n12art 1. 34 Interpretation of the Supreme People’s Court on Issues relating to Application of Laws for Trial of Construction Contract Disputes (II) (China) Supreme People’s Court, No 20, 2018, art 2 (‘Interpretation No 20’). 35 Interpretation No 14 (n 12) art 2. 36 Interpretation No 14 (n 12) art 3. 37 Interpretation No 20 (n 34) art 3.

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for bids is substantially an invitation to offer, while tendering an offer and issuing the winning notice to a bidder is a commitment. Moreover, according to the Interpretation No 20, if a construction contract is inconsistent with its corresponding tendering documents and winning notice with regard to construction scope, period, quality and prices, the latter documents shall prevail when settling the accounts of the works. In the past, when tendering documents have been inconsistent with the executed contract, most courts have held that the contract prevails.38 Yet, the Interpretation No 20 has significantly increased the importance of tendering documents and their role in lawsuits as a part of the contract.39 Therefore, it is advisable for both the employer and the contractor to be more careful in dealing with tendering documents and heeding their legal effects.

6.5. Payments 6.5.1.

In China, the special regulations and arrangements relating to payments are as follows:

Salary Payments and Guarantees for Rural Migrant Workers 6.5.2. The Chinese government has always attached great importance to issues relating to rural migrant workers’ salaries. The Regulations for Guaranteeing the Wage Payment for Rural Migrant Workers, implemented on 1 May 2020, provides for a series of measures to tackle the problem of delayed payment of migrant workers’ salaries, which is the first set of measures on the issue rolled out by an administrative regulation promulgated by the State Council. These measures have had a significant impact on both employers and contractors in the construction industry, particularly in the following ways: (a) The general contractor should open an account dedicated to the salary payment of rural migrant workers in construction projects. (b) The employer should provide a payment guarantee. If it fails to do so, the employer will be ordered to rectify this within a limited time, suspend work or pay a fine. If this failure causes a delay in the salary payment to rural migrant workers, the employer’s new construction projects will be

38 See（2016）Ji 0602 Min Chu No. 999. 39 Article 1 of the Interpretation No 20 regulates the matter. Article 1 provides: The people’s court shall uphold either party’s request for defining rights and obligations according to the contract awarded in the case of any discrepancy between the construction project contract otherwise made and entered into by the bid inviter and the bid winner and the contract awarded in respect of the scope of work, construction period, project quality, project price or any other substantial content.

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(c)

restricted, and the delay in salary payment will be recorded and published in the national credit system. The employer should pay construction prices on time as agreed under the contract and promptly pay labour costs in full to the dedicated account for rural migrant workers’ salaries. The payment period for labour costs should be no more than one month.40

Construction with Funds Advanced by Contractors 6.5.3. Government-funded construction projects cannot be undertaken with funds advanced by contractors,41 but this restriction does not apply to other types of projects. For projects funded by contractors in advance, if the parties to the construction contract specify in the contract the amount to be advanced by the contractor and the interest thereon, the contractor may request that the amount advanced and the interest be returned according to the contract. If the parties fail to provide for the principal in the contract, the principal will be regarded as being entitled to payment in arrears. However, if the parties fail to provide for the interest in the contract, the contractor’s request for the payment of interest will not be supported.42 Before the formulation of the Interpretation of the Supreme People’s Court on Issues relating to Application of Laws for Trial of Construction Contract Disputes (‘Interpretation No 14’), such funding by contractors to a construction project was often considered to be unlawful borrowing between companies and thus was deemed invalid for its violation of national financial laws and regulations. As a result, the interest accrued on the amount advanced by contractors will be confiscated, or in some cases, even the amount advanced by the principal. The Interpretation No 14 legalised such funding and provides protection for the payment of in40 Article 24 and 55.1 of the Regulations for Guaranteeing the Wage Payment for Rural Migrant Workers regulate the matter. Article 24 provides: The construction unit and the general contractor shall, when entering into a written project construction contract in accordance with the law, stipulate the measurement period of the project funds, the settlement method for the progress of the project funds and the allocation period of the labour costs, and stipulate the labour costs according to the requirements of guaranteeing the wages of migrant workers to be paid in full and on time. The payment period of labour cost shall not exceed 1 month. Article 55.1 provides: In case of any of the following circumstances, the administrative department of human resources and social security and the competent engineering construction Department of relevant industries shall order it to correct within a time limit; if it fails to make corrections within the time limit, it shall be ordered to stop the project and impose a fine of not less than 50000 yuan but not more than 100000 yuan; if the circumstances are serious, the construction unit shall be punished by restricting the undertaking of new projects, lowering the qualification level, and revoking the qualification certificate, etc…(1) The general contractor fails to open or use a special account for the wages of migrant workers in accordance with the provisions... 41 Government Investment Regulations (China) art 22 and Regulations for Guaranteeing the Wage Payment for Rural Migrant Workers (China) art 23. 42 Interpretation No 14 (n 12) art 6.

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terest to the extent that it is permitted, and further establishes a set of rules specifically for this funding, which differs from those applicable to unlawful borrowing between companies or ordinary construction payments in arrears. Priority of Payment for Construction Prices 6.5.4. In order to protect contractors’ right to payment, Chinese contract law provides that, if the employer fails to pay the construction prices owed to the contractor after being requested to do so, the contractor shall have priority of payment regarding the construction prices, which may be realised by, subject to negotiations with the employer, converting the completed construction works into a sum and using it to offset the amount owed or requesting the court to put the construction works up for auction, unless the construction works are of a nature not suitable for such conversion or auction. The contractors’ priority of payment is conferred by law, which means that it will prevail over any conflicting mortgages created by agreement held by other creditors. 6.5.5. Priority of payment shall be exercised by contractors who have executed relevant construction contracts with the employer.43 The contractor is entitled to priority as long as the construction quality passes inspection, without regard to whether the construction has been completed.44 The term for exercising the priority is six months from the date that the employer was obliged to pay the construction price.45 Priority of payment covers all expenses involved in the construction, including not only the wages of construction personnel and material costs paid by the contractor for the construction, but also the cost to use construction equipment and machinery, government charges, overheads, taxes and profits, save for interest, compensation and damages.

6.6. Delay in Completion 6.6.1.

Delay analysis is a new and emerging field in China. Different from the assessment of construction costs or quality, determining liability for delay is difficult and involves complicated methods and inconsistent standards among different tribunals. In the absence of adequate institutions to conduct reliable delay analyses in China, Chinese courts have tended to adopt straightforward approaches in determining delay liability. For example, a court may rule that neither party should hold the other party accountable for a delay on the grounds that both parties are liable for the delay. At the moment, Chinese arbi-

43 Interpretation No 20 (n 34) art 17. 44 Interpretation No 20 (n 34) arts 19–20. 45 Interpretation No 20 (n 34) art 22.

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tral tribunals, such as the Beijing Arbitration Commission (‘BAC’) and the China International Economic and Trade Arbitration Commission (‘CIETAC’), have begun to hire professional appraisal agencies to assess and allocate delay liability using internationally recognised methods, such as time impact analysis. If a delay is caused by the employer, the contractor may claim damages for work stoppage and suspension. However, Chinese law does not clarify what damages the court should award, and thus damages are often the subject of disputes in practice. In China, the direct costs of works (especially those relating to personnel, equipment, machinery and materials inputs, including rises in prices of materials or equipment) and field office overhead costs (including salary, clerical work and utility costs for the site management), incurred during work stoppage or suspension, typically fall into the purview of damages caused by work stoppage or suspension. The court is likely to support claims for such damages so long as the contractor can prove relevant actual costs. Conversely, the court is unlikely to support claims for damages resulting from head office overhead costs, losses in profit, financing costs and other costs, due to factors such as the uncertainty of acquirable interest, the causal relationship between loss and delay and the contractor’s burden of proof. If a delay is caused by the contractor, and the contract does not expressly provide for damages for delay in completion, the damages which the employer can claim may include an increase in project management fees arising directly from such delay, liquidated damages payable to third parties and losses of expected gains.

6.7. Right to Terminate 6.7.1.

Under Chinese law, prolonged non-compliance or a fundamental breach of contract will render a contract unperformable. Article 563 of the Civil Code provides that if either party to a contract breaches the contract, the non-breaching party may terminate the contract under any of the following circumstances: (1) it becomes impossible to achieve the purpose of the contract due to force majeure events; (2) any party expressly states, or indicates through its conduct, that it will not pay its principal debts prior to the expiration of the contract; (3) any party delaying in paying its principal debts fails to pay the same within a reasonable period after being demanded to do so; (4) any party delays in paying its debts or commits other breaches of contract, rendering it impossible to achieve the purpose of the contract; or (5) other circumstances stipulated by law.46

46 Civil Code (n 10) art 563.

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In addition to the above general provisions, as for construction contracts, the law also expressly states that the employer will have the statutory right to terminate a contract if: (1) the quality of the completed works is substandard, and the contractor refuses to rectify it; and (2) the contractor has illegally assigned a contract or subcontract in a construction project.47 Moreover, while some views and prior judgments treat construction contracts as a special kind of contract for works and services and endorse the idea that the employer of a construction contract may terminate the contract at any time prior to the contractor completing its work,48 some other Chinese courts explicitly oppose this idea. The contractor may terminate a contract if the employer fails to perform any of the following contractual obligations, rendering the contractor unable to carry out the works thereunder, and the employer fails to correct the same within a reasonable period after being demanded by the contractor to do so: (1) making a payment for any work done as agreed thereunder; (2) providing main building materials, building structural components and other components, and equipment that conform to the compulsory standards; or (3) assisting the contractor as provided under the contract.49

6.8. Force Majeure 6.8.1.

Force majeure constitutes a type of a statutory exemption clause in China. Force majeure refers to events or circumstances that are unpredictable, unavoidable and insurmountable, including natural disasters such as earth-

47 Civil Code art 806: Where a contractor assigns the contract or illegally subcontracts the works, the employer may terminate the contract. See also Interpretation No 14 (n 12) art 8 provides: Under any of the following circumstances, a request of the employer for termination of the construction contract shall be granted: (1) The contractor explicitly states or indicates by its conduct that it will not perform the main obligations of the contract; (2) The contractor fails to complete the works within the agreed time limit and a reasonable time period set out in a notice issued by the employer demanding it to complete the works; (3) The completed works is substandard, and the contractor refuses to rectify the works; or (4) The contractor assigns the contract or subcontract a construction project illegally. 48 Civil Code (n 10) art 787: The client may terminate a contract at any time before the contractor completes its work, and the client shall compensate the contractor for any losses suffered by the contractor as a result of such termination. 49 Civil Code art 806: Where any of the main building materials, structural components and auxiliary components or equipment provided by the employer fail to conform to the compulsory standards or the employer fails to perform its obligation to assist the contractor, rendering the contractor unable to carry out construction, and further fails to perform such obligations within a reasonable time period after being demanded, the contractor may terminate the contract.

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quakes, typhoons and tsunamis, as well as social unrest such as wars, strikes and riots, wherein:50 (a) ‘Unpredictable’ means that the parties are unable to foresee the occurrence of the event based on their common sense; (b) ‘Unavoidable’ means that the parties are unable to avoid the occurrence of the events despite their best efforts; and (c) ‘Insurmountable’ means that the parties are unable to overcome the effects of an event despite their best efforts, and such a situation prevents the parties from fulfilling their obligations under the contract. In practice, Chinese courts are very strict in applying force majeure. They usually consider whether there is a direct causal relationship between the force majeure event and the parties’ non-performance and maintain the principle that contractual provisions should be the norm and take precedence over exemptions on the grounds of force majeure. Additionally, while encouraging business activities, Chinese courts are strict about the conditions for contract termination in order to prevent the breaching party from injuring the counterparty’s interests by abusing force majeure.

6.9. Risk Exposure Period Defect Liability Period and Warranty Period 6.9.1. The defect liability period under Chinese law refers to the period upon the expiration of which the quality assurance deposit should be returned. The period is typically one year and should be no more than two years. Such a period shall be decided in a construction contract by mutual agreement of the parties. The Administrative Measures of Quality Assurance Deposits for Construction Projects requires that the amount of such deposits shall not exceed 3 % of the contractual amount. 6.9.2. In China, construction contracts are required to include warranties. Under normal conditions of use, the statutory minimum warranty periods for different works are as follows: (a) For infrastructure, foundation and structural framed, the reasonable service life is as specified in the design documents;  

50 Civil Code art 590: Where any party is unable to perform the contract due to a force majeure event, that party shall be partially or wholly exempted from liability in light of the impact of the event, except as otherwise provided by law. Where a party is unable to perform the contract due to force majeure, the party shall issue a notice to the other party in a timely manner to mitigate any losses that the other party may so suffer, and shall provide proof of the force majeure event within a reasonable time. If the force majeure event occurs after any party has delayed its performance, that party shall not be exempted from liability for breach of contract on the grounds of the force majeure event.

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Five years for roof waterproofing, toilets with anti-leakage requirements and rooms and external walls with waterproof requirements; For heating or cooling systems, two heating seasons or cooling seasons; Two years for electrical conduits, water supply and drainage pipes, and equipment installation and decoration; Five years for residential insulation; and The warranty periods of other works may be freely agreed on by the employer and the contractor.

Statute of Limitations 6.9.3. The general statute of limitations provided for in the Civil Code is three years, and different limitation periods may apply under special circumstances.51 However, in general, if more than 20 years have passed since an alleged infringement has occurred, irrespective of whether the claimant knew about the infringement, Chinese courts will not uphold any claims regarding such an infringement. 6.9.4. Although the parties to a contract are not allowed to extend or shorten the limitation periods by mutual agreement, the periods can be suspended or interrupted in the following cases: (a) Suspension: Within the last six months of the statute of limitations period, if a party is unable to file any claim due to a force majeure event or other obstacles, the limitation period shall be suspended and shall expire six months after the date when the reason for the suspension is eliminated; and (b) Interruption: The limitation period will be interrupted if a legal proceeding is commenced or if a party makes a demand or agrees to perform its obligations. The limitation period shall commence anew from the date of interruption.

6.10. Time Bars 6.10.1. In China, it is very common for parties to insert a time bar clause in a construction contract to specify conditions for claims by the contractor.

51 Civil Code (n10) Article 188: The limitation of action regarding applications to a people’s court for the protection of civil rights shall be three years. Where there are other provisions in the law, such provisions shall apply. A limitation of action shall run from the date on which an obligee knows or should have known that his or her rights have been infringed and who the obligor is. Where there are other provisions in the law, such provisions shall apply. However, the people’s court shall not protect his or her rights if 20 years have passed since the infringement. Under special circumstances, the people’s court may decide to extend the limitation of action upon an application filed by the obligee.

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6.10.2. The Interpretation No. 20 clarified, for the first time, the validity of time bar clauses and their adjudication rules. According to Article 6.2 of the Interpretation No. 20,52 the basic rules of adjudicating a time bar clause regarding an extension of time for completion are as follows: (a) First, in principle, Chinese courts shall respect the parties’ free will and uphold time bar clauses. In other words, if the period agreed on by the parties expires, the contractor is not allowed to extend the time for completion and may lose the right to request a price increase in relation to such a time extension; and (b) Second, there are two exceptions to the rules: (1) The employer may agree to extend the time for completion after the specified period has passed. In practice, in addition to supplemental agreements, the employer may also approve such an extension by means such as meeting minutes, correspondence and formal letters; and (2) the contractor may raise a reasonable defence. It is to be noted, a ‘reasonable defence’ is an onerous burden of proof on the part of the contractor. It may not be a simple calculation of losses caused by a delay. Instead, the contractor may need a chain of evidence to prove the actual causes of the delay, including any events that caused the time for completion to be extended and resulted in any delays in the critical path, as well as any legitimate reasons for the contractor to not make a timely claim. Therefore, it is very difficult for the contractor to challenge the time bar clause using a reasonable defence.

7. Dispute Resolution 7.1.1.

7.1.2.

In China, the typical dispute resolution mechanisms for construction disputes are litigation and arbitration. There are no restrictions on the ability of the parties to a construction contract to have their disputes resolved by arbitration. With the development of arbitration in recent years, a growing number of construction disputes have been referred to arbitration. The most commonly selected forums by parties to construction contracts in China include the China International Economic and Trade Arbitration Commission, the Beijing Arbitration Commission (Beijing International Arbitration Centre), the Shanghai International Economic and Trade Arbitration Commis-

52 Interpretation No 20 (n 34) art 6.2: Where the parties agree that the construction period shall be deemed not extended if the contractor failed to apply for extension of construction period within the agreed period, the matter shall be dealt with pursuant to the agreement, except where the employer consents to extend construction period after the agreed period expires or where the contractor makes a reasonable defence.

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sion (Shanghai International Arbitration Centre) and the South China International Economic and Trade Arbitration Commission (Shenzhen Court of International Arbitration). The selection of forums in Hong Kong or Singapore are commonly seen in foreign-related construction projects. Arbitration law in China does not impose restrictions on parties in selecting nominating bodies, arbitration rules and the language of arbitration. Parties are free to agree to refer their disputes to mediation or adjudication. However, these alternative dispute resolution (‘ADR’) methods are neither exclusive nor recognised as the final means of dispute resolution in China. Parties refusing to accept or enforce an adjudication award are still open to refer the same dispute subsequently to litigation or arbitration after it has been referred to ADR. The adoption of ADR is still rare in Chinese construction projects – only a few foreign-related cases have resorted to dispute adjudication boards or expert evaluation. Although some government promulgated model contracts have incorporated the concept of a ‘dispute review team, ‘expert review board’ and ‘dispute avoidance board’, and a few arbitration committees are trying to establish and introduce similar mechanisms, these ADR methods are still in their infancy and are rarely used in construction disputes.

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Czech Republic 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 7.

Context 232 The Country 232 The Legal System 232 The Economy 233 The Construction Industry 233 Size and Nature 233 Participants 234 Work, Health and Safety 234 Protection of the Environment 235 Quality Assurance 236 Construction Contracting Dynamics 236 Legal Underpinnings of Contracts 236 Freedom of Contract 236 Legal Framework 237 Public Policy 237 Statute Law 238 Implied Contract Terms 238 Construction of Contract Terms 238 Private and Public Procurement 239 Government Involvement 240 Legislation and Regulation 240 Codes of Practice 240 Licensing of Professionals and Contractors Construction Contracts 241 Available Contracts 241 Key Issues 242 Overview 242 Definition of the Work 242 Fit for Purpose 244 Late Completion 244 Latent Conditions 245 Force Majeure 246 Limitation of Liability 246 Duration of Exposure 247 Time Bars 248 Dispute Resolution 248

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

The Czech Republic (also known as ‘Czechia’) is a landlocked country with an area of 78,867 km2. It is situated in the heart of Europe, sharing borders with Germany (810 km), Poland (762 km), Austria (466 km) and Slovakia (252 km). The population is 10.6 million people.1 The Czech Republic emerged as an independent state by dissolution of Czechoslovakia on 31 December 1992. It is a sovereign, unitary, democratic state under the rule of law. Although a unitary state, the Czech Republic is divided into 13 regions and the capital city of Prague, which is also considered a region. However, the regions have no legislative powers and their government powers are limited to the administration of their own matters, such as the education system, roads and hospitals. Since 1 May 2004, the Czech Republic has been an EU Member State. Membership in the EU limits the government and legislative powers of the Czech Republic to the levels devolved in the EU founding documents to the EU and its bodies.

1.2. The Legal System 1.2.1. 1.2.2.

1.2.3. 1.2.4.

1.2.5. 1.2.6. 1.2.7.

The Czech legal system is a civil law system with its historic roots in the German-Austrian legal system. The court system consists of the Supreme Court and the Supreme Administrative Court (for administrative and election matters) as the highest courts, two High Courts in Prague and Olomouc, seven regional courts (the regional court for Prague is called City Court) and 86 district courts. The judicial body responsible for the protection of constitutionalism is the Constitutional Court of the Czech Republic. Depending on the character of the dispute, claims are filed with a district or a regional court. Appeals are to territorially competent regional courts or the High Court. Final appeals are to be logged with the Supreme Court. Construction proceedings are usually commenced at the district court level. Both domestic and international disputes can be decided in arbitration. On 1 January 2014, the new Civil Code (‘NCC’),2 along with a package of other laws, came into force. This was a substantial change to the Czech private law.

1 Czech Statistical Office (Web Page, 8 May 2019) . 2 Nový občanský zákoník [New Civil Code] (Czech Republic) (‘NCC’).

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The NCC replaced the Civil Code from 1964,3 which was a law adopted during Communism and amended many times after the fall of Communism. The old Civil Code primarily regulated relations between individuals. Business transactions were regulated by the Commercial Code,4 which was adopted in 1991 to adjust business relations to the new political and economic system after the fall of the Communism. The NCC is a modern law corresponding to legal relations in the 21st century. The downside is that the existing literature and court decisions are of little use because the NCC is based on the discontinuity with both codes. The legal system is now in a state of transformation.

1.3. The Economy In 2017 the Czech Republic’s economy was the 43rd largest in the world. It had a GDP of CZK 5,045.2 billion (approximately USD216 billion).5 The economy is based mainly on industry, in particular automotive and services. Its largest trade partner is Germany, which accounts for approximately one third of all exports and imports. For this reason, economic development in the Czech Republic follows development in Germany.6 The 2008 financial crisis hit the economy hard. After a slight recovery in 2010, the economy declined until the beginning of 2014. From 2014 the Czech Republic again started to grow strongly, the growth being pushed in particular by recovering industry.7

1.3.1. 1.3.2.

1.3.3.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The value of the construction industry in the Czech Republic was CZK695 billion (approximately USD29 billion) in 2016. The construction industry had been growing strongly until 2008, mainly due to private investment. The fi-

3 Občanský zákoník [Civil Code] (Czech Republic) (‘old Civil Code’). 4 Obchodni zákoník [Commercial Code] (Czech Republic) (‘Commercial Code’). 5 Czech Statistical Office, Czech Republic in Figures — 2018 (Report, 12 December 2018) . 6 See, e.g., ‘Závislost Česka na Exportu Aut a Německu? Statistici Zdvihají Varovný Prst’, EuroZprávy. cz (online, 23 May 2018) . 7 See, e.g., ‘HDP 2019, Vývoj HDP v ČR — 5 Let’, Kurzy.cz (Web Page, 15 February 2019) .  

 

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nancial crisis in 2008 meant a substantial decline for the industry. Private investments stopped almost immediately and public investments were interrupted due to the debt brake. Since 2014, private and public investments have helped the construction industry to recover, such that demand for construction work is exceeding construction capacity in the Czech Republic.8 The construction industry can usefully be broken up as follows: (a) Residential buildings, e.g. houses and flats, (b) Industrial construction, e.g. factories and logistic parks, and (c) Infrastructure construction, e.g. roads and railways.  

 

 

2.2. Participants 2.2.1.

The Association of Building Entrepreneurs of the Czech Republic has 850 members that represent approximately 75 % of the construction industry of the Czech Republic. The members consist of construction firms, manufacturers of building materials and products for construction, designing and engineering organisations, business organisations, guilds, smaller professional unions, and associations. Its task is to represent the construction industry in matters against the Government, trade unions and other professional associations.9  

2.3. Work, Health and Safety 2.3.1.

2.3.2.

There is a complex system providing for health and safety at work. Every employer must implement measures to ensure that employees and other individuals do not suffer risks to their health or life. The system is based on three pillars — legislation; search and evaluation of risks at work; and categorisation of works. The legislation corresponds to the requirements of the EU legislation, in particular, Council Directive 89/391/ EEC.10 It comprises more than 80 legal regulations and hundreds of technical rules. The most important are: (a) Zákoník práce [Labour Code] (Czech Republic); (b) Zákon č. 309/2006 Sb., o zajištění dalších podmínek bezpečnosti a ochrany zdraví při práci [Act No 309/2006 on Securing Other Conditions for Health and Safety at Work] (Czech Republic); and

8 ‘Stavební Sektor Brzdí Hlavně Nedostatek Pracovníků’, Stavební Fórum (online, 13 March 2018) . 9 Svaz Podnikatelů ve Stavebnictví v ČR (Web Page, 2019) . 10 Council Directive 89/391/EEC of 12 June 1989 on the Introduction of Measures to Encourage Improvements in the Safety and Health of Workers at Work [1989] OJ L 183/1.

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Zákon č. 258/2000 Sb., o ochraně veřejného zdraví [Act No 258/2000 on Protection of Public Health] (Czech Republic). Employers must prevent any risks to which employees might be exposed at work. Liability for the fulfilment of the employer’s obligations rests with employees in managerial positions at all levels. Enforcement of the obligations set by the legislation is secured by a number of sanctions, ranging from fines to criminal prosecution of both employers and responsible employees.11 The principal authority for implementing and overseeing health and safety at work is the State Labour Inspection Office,12 but there are many other government bodies involved in keeping the system running — from the Ministry of Labour and Social Affairs to the National Institute of Public Health. Thus, any construction firm wishing to build in the Czech Republic must ensure that it has a health and safety at work system in place that complies with public requirements. Non-compliance is treated with a very rigid approach from the Czech authorities. (c)

2.3.3.

2.3.4.

2.3.5.

2.4. Protection of the Environment 2.4.1.

2.4.2.

The construction industry, along with other branches of the economy, is required to follow all rules adopted in the Czech Republic for the protection of the environment. There is an extensive set of legal regulations regarding environmental protection.13 The main responsible authority for protection of the environment, and for the preparation and implementation of environmental legislation, is the Ministry of Environment of the Czech Republic. Besides having to observe the obligations set by the legislation, some construction projects of a specific size or nature are required to undergo an environmental impact assessment (‘EIA’). If the EIA shows negative impacts of the project on the environment, the construction will not be granted the necessary permits unless the project is adjusted so that the EIA results comply with the legislative requirements.14

11 See, e.g., Zákon č. 251/2005 Sb., o inspekci práce [Act No 251/2005 on Labour Inspection] (Czech Republic) ss 17, 30. 12 ‘English Documents’, Státní Úřad Inspekce Práce (Web Page, 2019) . 13 Please see documents in Czech https://www.mzp.cz/cz/legislativa. 14 Zákon č. 100/2001 Sb., o posuzování vlivů na životní prostředí [Act No 100/2001 on Assessment of Impacts on the Environment] (Czech Republic) (‘EIA Act’).  

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2.5. Quality Assurance 2.5.1.

2.5.2.

Quality assurance of construction in the Czech Republic is ensured by prescribed planning and building procedures, in which the compliance of the intended construction with legal and technical requirements is assessed by authorities. The fundamental regulation is the Building Act.15 The Building Act and its implementing regulations set the requirements which every construction project of any size must fulfill. The Building Act also outlines which permits, licenses, statements, declarations and other documents must be procured before the final building permit is issued. After the construction is finished and before the constructed object can be put in use, a use permit must be issued by the building authority. A use permit is not issued without proof from the owner that the construction meets all requirements set by the building permit. This is primarily done by the submission of statements and declarations of public authorities (e.g., fire department, health department, etc), and private entities (in particticular, suppliers of electricity, gas, fire detection and fire alarm systems), confirming the compliance of the construction with applicable legal and technical regulations.16  

2.6. Construction Contracting Dynamics 2.6.1.

The party which submits the draft of contract is usually the one with a better position. Typically, the party that is paying provides the contract drafts. On the other hand, if the other party has a strong negotiating position, e.g., special know-how or a dominant market position, it can insist on its contract draft. Therefore, there is no general rule to determine construction contract dynamics.  

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Contracting parties enjoy freedom of contract. This principle is declared in NCC s 1725, which stipulates that the parties are free to conclude a contract and determine its content, within the limits of the law.

15 Zákon č. 183/2006 Sb., o územním plánování a stavebním řádu (stavební zákon) [Act No 183/2006 on Land Planning and Building Code] (Czech Republic) (‘Building Act’). 16 Building Act ss 121–2.

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3.1.2. 3.1.3.

3.1.4.

3.1.5.

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The limits of the legal order are contained in the law in force and emphasised by the principles of public policy. The NCC has mandatory provisions that the parties cannot avoid by their agreement, such as the limitation of liability for damages caused intentionally or by gross negligence, and payment terms longer than 60 days. However, there are few mandatory rules concerning construction contracts.17 Generally, parties can determine the law applicable between them through the contract. If there is any gap in their agreement, the statutory law will imply the terms in the contract. Courts tend to honour the agreement between the parties and uphold the principle of pacta sunt servanda, meaning “agreements must be kept”. Only in cases of invalid contracts, violation of mandatory rules, or public policy principles will courts free the parties from their contractual obligations.

3.2. Legal Framework 3.2.1.

3.2.2.

Due to the adoption of the NCC, and consequent adoption or amendment of other laws, the legal framework has substantially changed since the beginning of 2014. For this reason, there is uncertainty about how the law is to be applied and whether courts will uphold the existing case law. Although courts do not create law in the Czech Republic and their decisions are binding only upon the parties to the dispute,18 decisions of higher courts are followed by lawyers as a guideline for the interpretation of statutory law. Thus, court decisions play a substantial role.

3.3. Public Policy 3.3.1.

Czech law applies a narrow sense of public policy. Public policy is seen as principles of behaviour in public and ‘good manners’. Good manners serve as a correction for cases in which a person deals in compliance with the law, i.e. does not breach the stipulated law, but in a way that society is not willing to enforce. This may be because the actions contravene generally accepted and observed principles on which society is based (e.g. ethical, cultural, etc.).19  

 

17 See, e.g., NCC ss 1963, 2898. 18 One exception is the Constitutional Court, whose decisions are generally binding and can be considered as precedent: Ústavní Soud (Web Page, 2015) . 19 Jiří Švestka et al, Občanský Zákoník: Komentář (Wolters Kluwer, 2014) vol 1, 1313–14.  

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It is up to the court to decide whether public policy should invalidate an act otherwise in compliance with the law. This determination of public policy invalidating an act depends on the facts of the particular case.

3.4. Statute Law 3.4.1.

3.4.2.

Czech law consists overwhelmingly of statute law. The exceptions are the decisions of the Constitutional Court and applicable EU legislation. There are many relevant statutes from different fields of law that are important for construction contracts, but the most important are the NCC and the Building Act. As the NCC is the basis of private law in the Czech Republic, it contains all relevant contractual provisions concerning construction contracts, be it the regulation of the construction contract itself, or issues such as late payment regulations, consumer law and other important aspects.

3.5. Implied Contract Terms 3.5.1.

3.5.2.

3.5.3.

Czech law works on the presumption that the parties to a contract settle the contract terms which they consider appropriate between them. If anything is omitted, whether intentionally or by mistake, the law will fill in the gaps. The NCC contains the complete regulation of contract law, including construction contracts, so that the parties need only agree to the work to be done and the price for the work. Therefore, any contract term not stipulated will be supplemented by the law. Those ‘contract’ terms are then implied. The parties are free to agree on any aspect of their contractual relationship, thus setting the law aside, except for the mandatory rules, and terms contrary to the public policy.20 However, it is common that the parties do not try to settle everything, leaving the unstipulated terms to be implied by law. One exception to this practice is investors from common law countries, who demand the use of extensive contracts, as is the norm in their home countries.

3.6. Construction of Contract Terms 3.6.1.

Construction of contract terms is especially relevant when parties get into a dispute. The law contains some guidance on how to interpret the contract

20 NCC s 1(2).

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3.6.3.

3.6.4.

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terms.21 Ultimately, it is the court or the arbitration tribunal which decides the meaning that the contract term should be given. First, the contract terms are construed according to their content. Second, the intent of the acting party is considered, if the intent was or could have been known to the other party. If the intent cannot be ascertained, the contract term is given the meaning which would be given to it by a third party in a similar situation. The practice established between the parties while performing the the contract and the prior contractual negotiation are also used for the construction.22 If there is still ambiguity about the contract term and, in particular, if more than one meaning can be given to the contract term, then the contract term should be interpreted in disfavour of the party which drafted the term (contra proferentem).23 It is necessary to consider the regular meaning of the contract term common in the particular branch of business. These common usages in the particular field are thus used for the construction of the contract as a whole, and any ambiguous contract terms in particular.24

3.7. Private and Public Procurement 3.7.1.

3.7.2.

Contrary to public procurement, private procurement is not expressly regulated. The limits are given only by the law, which provides for mandatory rules and public policy. Public procurement is subject to strict regulation. The rules are very detailed. As a general rule, anything paid for by more than 50 % with public funds must comply with the Act on Public Procurement.25 Depending on the amount of the procurement, the Act on Public Procurement defines the procedure that must be applied. Any public procurement, irrelevant of its size or character, must follow the principles of transparency, equal treatment and prohibition of non-discrimination.26  

21 NCC ss 555–8. 22 NCC s 556(2). 23 NCCs 557. 24 NCCs 558. 25 Zákon č. 137/2006 Sb., o veřejných zakázkách [Act No 137/2006 on Public Tenders] (Czech Republic) (‘Act on Public Procurement’). 26 Zákon č. 137/2006 Sb., o veřejných zakázkách [Act No 137/2006 on Public Tenders] (Czech Republic) (‘Act on Public Procurement’). s 6.

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

There is no special legislation concerning the construction industry. Apart from the requirements for licences for persons active in the construction industry,27 and for planning and building procedures,28 all legislation applies to business generally.

4.2. Codes of Practice 4.2.1. 4.2.2.

There are no governmental codes of practice relevant to the construction industry. The Government regulates the construction industry by issuing regulations which set the standards to be observed. There is thus no tradition for codes of practice.

4.3. Licensing of Professionals and Contractors 4.3.1. 4.3.2.

4.3.3.

4.3.4.

Any professional wishing to participate in construction in the Czech Republic, including architects, engineers, and contractors, needs to have a licence. Architects must be admitted to the Czech Chamber of Architects (‘CCA’).29 The CCA is a self-administered professional association responsible for the professional, practical and ethical performance of the architectural profession in the Czech Republic. The CCA issues licences and exercises disciplinary powers over architects, urban planners, and designers of environmentally stable landuse systems. Engineers must be admitted to the Czech Chamber of Authorised Engineers and Technicians in Construction Business (‘CKAIT’).30 Like the CCA, the CKAIT is responsible for certifying and exercising disciplinary powers over engineers and technicians in construction. Contractors must have a trade licence issued by the Trade Licence Office. The necessary licence for construction of buildings is called an ‘execution of buildings, their alteration and removal’ licence. The trade licence is only is-

27 See Section 4.3. 28 See, e.g., Section 2.5. 29 See Česká Komora Architektů (Web Page, 2019) . 30 See Česká Komora Autorizovaných Inženýrů a Techniků Činných ve Výstavbě (Web Page, 7 May 2019) .  

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sued to those who employ persons qualified by law to participate in construction. There are also other trade licences for special crafts within construction, such as masonry and plumbing. The requirements and procedure for issuance of trade licences are stipulated in the Trade Licence Act.31 If the construction is carried out in special fields such as mines, specialised licences from the respective authorities are required. Contractors must fulfill different obligations to get the necessary licence, but must always employ a person qualified in the particular field.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

5.1.3.

Although there are several standard contracts that could be used in the Czech Republic, the use of such contracts is uncommon except for the public sector striving for more standardisation. The most used, or at least most known, standard contracts are: (a) General Terms and Conditions for Construction and Construction Documentation Elaborated for SIA Czech Republic — Construction Council by Czech Society for Construction Law: these terms and conditions were endorsed by the Ministry of Industry and Commerce. They are recommended but not mandatory. (b) General Terms and Conditions for Erection of Buildings: these terms and conditions were issued in 2007 by SIA in collaboration with the Economic Chamber of the Czech Republic and Ministry of Industry and Commerce.32 They replace the above terms and conditions. However, both (a) and (b) follow the old Commercial Code. (c) FIDIC: the FIDIC forms of contract are becoming standard for the used in the public sector, in particular in infrastructure projects. Owners, public and private alike, tend to use their own contract drafts. If any of the standard forms are used, they are amended significantly. Therefore, there is no tradition of using standard forms in the construction industry. Until the NCC becomes settled and contract clauses become standardised, this practice is unlikely to change.

31 Zákon č. 455/1991 Sb., o živnostenském podnikání (živnostenský zákon) [Act No 455/1991 on Trade Licencing] (Czech Republic) (‘Trade Licence Act’). 32 SIA ČR — Rada Výstavby [SIA Czech Republic — Construction Council] is an association of NGOs and chambers of professions active in the construction industry with the objective to cooperate with public authorities and coordinate their activities: SIA ČR – Rada Výstavby (Web Page, 2015) .

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6. Key Issues 6.1. Overview 6.1.1.

6.1.2. 6.1.3.

6.1.4.

6.1.5.

6.1.6.

6.1.7.

Contracts for construction work are regulated in the NCC.33 The NCC contains basic rules which can be sufficient for small projects (such as individual home building) but complex construction projects require more detailed contracts. Courts uphold the arrangements of the parties if they do not contravene the mandatory law or public policy. Therefore, it is important to sufficiently define the rights and obligations of the parties in a construction contract. There are several key issues which need to be addressed to avoid any unpleasant surprises during construction. Above all, the limits, cost/price and quality of the work to be performed must be defined. The definition of the work is complemented also by the description of the purpose for which the work is to be used. Time is of the essence for the owner. The prevention of late completion should be covered in the contract because the law offers only general remedies such as damages. Contractors are interested in the way with which latent conditions will be dealt if discovered after the commencement of the work. The same applies to force majeure events. In case of latent conditions of the place where the construction is carried out and force majeure events the contractor might be prevented in the work execution and needs to have clear view about how to proceed. Also of interest to a contractor is the extent to which the contractor will be liable for failure to perform the contract. Of concern is the time by which the other party must be notified of a claim, and when these claims are time-barred. Another important question is how and where the disputes might be settled. While all these questions should have their answers in the law, courts sometimes arrive at surprising results if there are no explicit provisions in the contract. It is thus advisable for the parties to settle those matters explicitly in the contract.

6.2. Definition of the Work 6.2.1.

There is no dispute that it is the owner that defines the work to be performed. The party who pays decides what is to be done. But because of the complexity of construction work, disputes often arise about the scope, price and quality of the work.

33 NCC ss 2586–630.

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6.2.2.

6.2.3.

Where an owner seeks to have the work constructed completely, a turnkey clause is often used to ensure that the contractor is liable for delivering all the works and materials necessary for completion of the work. Courts do not take the turnkey clause as self-defining (there is no definition in law and no accepted definition in legal theory) and look into the contract for what it really means. If no further definition is found, the work is considered to be defined by the list of works in the contract. Thus, one of the main points of discussion between the owner and the contractor is what is to be delivered to complete the work. One key point might be the purpose for which the work is to be used.34 Another is the scope of the work. The owner tends to define the work negatively, i.e. the contractor is liable for everything except for performances reserved in the contract for the owner/other contractors. In contrast, contractors try to define the work positively, i.e., to list all deliveries directly in the contract. As the owner has a stronger bargaining position, they usually prevail. Contractors must be careful to exclude any works or materials not accounted for in the bid. The cost of the work is another issue. The contractor must ensure that the bid covers what is needed for the construction. However, contractors rely on documents and information provided by the owner. Owners insist that contractors confirm that they are fully acquainted with the conditions under which the work is to be done. Then the parties often negotiate how to treat latent conditions.35 Finally, the quality of the construction is to be addressed. While owners want the best quality of construction, contractors keep their eyes on the budget. Unless there is an agreement to the contrary, the law requires the performance to be of average quality.36 Owners thus request that the quality of the work be defined by the construction project and construction design and comply with Czech State Norms (regulations), which are non-binding but can be made binding by the agreement of the parties. These norms are issued by the Czech Office for Standards, Metrology and Testing, a State agency. Although non-binding, they are highly regarded in the construction industry and are often referred to in construction projects and construction contracts. Performance of construction in violation of those norms, if included in the contract, might lead to liability for work defects, even if the work functions properly, because the work was not executed according to the specifications in the contract as defined, inter alia, also by those norms.  

 

6.2.4.

6.2.5.

243

34 See the discussion in Section 6.3. 35 See Section 6.5. 36 NCC s 1915.

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Therefore, a clear definition of the work is of utmost importance for the delivery of work. It may prevent later disputes over the scope of work and, in consequence, the work price.

6.3. Fit for Purpose 6.3.1.

6.3.2.

6.3.3.

6.3.4.

Although it is possible to include a ‘fit for purpose’ clause in a construction contract, the clause is usually not included without the purpose being clearly defined. The reason for this is that the applicable law stipulates that the work to be constructed must be fit for the purpose stated in the contract,37 and if no such purpose is stated, then the purpose for which the work is usually used is presumed. Thus, it is in a contractor’s interests to sufficiently define the purpose for which the work is to be used. A contractor will otherwise have to deal with the uncertainty of a potentially broader scope of the purpose for which the work might be used. As the law sets the basis for determining the purpose the work should be used for, the parties are usually not stuck in discussion concerning whether to define the purpose. It is the owner who sets the requirements for the work. The contractor has an interest in asking the owner for the definition of the purpose and not leaving it to the statutory “fit for purpose” definition. It is common that the extent of the work is defined generally, see Section 6.2.2. Narrowing the purpose for which the work is to be used is one of the means for the contractor to clarify what is to be delivered. The law presumes the expertise of the contractor. The contractor bears the liability for an owner’s inexpert instructions if the contractor does not warn the owner of the adverse effects of their instructions. Thus, if a ‘fit for purpose’ clause is included in the contract, then the purpose is also defined and it is typically not a substantial issue in contract negotiations.

6.4. Late Completion 6.4.1.

Late completion, including late completion of important milestones during construction, is subject to sanctions in most contracts. The sanctions do not serve to compensate the owner for damages but primarily motivate the contractor to finish the work or the milestone on time.

37 NCC s 2065(1).

Czech Republic

6.4.2.

6.4.3. 6.4.4.

6.4.5.

6.4.6.

245

Sanctions take the form of a contractual penalty. The parties must either agree to a fixed amount or the way in which the contractual penalty will be calculated.38 The law does not define acceptable amounts for contractual penalties, but the court may decrease an inappropriately high contractual penalty. The court will consider the value and importance of the secured obligation, and the amount of actual damages.39 The contractual penalty must be paid even if no damage has arisen. Thus, its nature is truly punitive. However, the contractual penalty can also serve as liquidated damages. The law stipulates that the entitled party cannot claim damages from the violation of an obligation secured by a contractual penalty. This is not a mandatory provision, so can be changed by the agreement of the parties.40 And in practice, most contracts contain a clause providing for compensatory damages in addition to the payment of the contractual penalty, or at least in the event that damages exceed the contractual penalty. Thus, a contractor who is late in completion or meeting a milestone usually faces the danger of paying a contractual penalty and damages if the owner decides to demand the contactor to pay both of them. However, the contractual penalty is commonly set to be an amount satisfactory to the owner, typically between 0.03–0.1 % of the cost of work for each day of delay, and damages are not requested if the contractual penalty is paid. Limitation of the contractual penalty is normally only sought if damages are to be paid in addition to, or in an amount exceeding, the contractual penalty. It is then usual to agree to limit the total amount of the contractual penalties paid under the contract to 10–20 % of the work price. There are usually extensive discussions about contractual penalties in contract negotiations. While it is common to include penalties, negotiations concern the quantum of contractual penalties and whether damages additional to contractual penalties can be sought.  

6.4.7.

 

6.4.8.

6.5. Latent Conditions 6.5.1.

If a contractor discovers latent conditions during their performance of work in the place of construction and these latent conditions do not allow the work to be performed in the agreed manner, the contractor must notify the owner

38 NCC s 2048. 39 NCC s 2051. 40 NCC s 2050.

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without undue delay and propose changes to the work.41 If the parties do not agree on a contract amendment in adequate time, either party can withdraw from the contract. The contractor is then entitled to payment for the partial performance of the work up to the time when latent conditions should have been discovered by the contractor if exercising due care.42 Thus, the law puts the risk of latent conditions with the owner. The owner may protect their interests by inserting contractual terms in which the contractor represents that they are fully acquainted with all conditions of the work, the place where the work should be carried out, and all other conditions relating to work performance. In most cases, contractors accept such clauses if they are given time to do independent research before the conclusion of the contract. Further, the contractor’s expertise is presumed. The contractor must be able to anticipate conditions which were not disclosed but are common in constructing the work in the place of construction.

6.6. Force Majeure 6.6.1.

6.6.2.

The concept of force majeure is recognised in Czech law. It is accepted that the obligations of the parties under the contract are suspended for the duration of the force majeure.43 The parties concentrate on defining cases of force majeure such as strike, bad weather, war, etc., and on the impacts of a force majeure events on the work execution. Much stress is put on what the parties should do in case of a force majeure event — notification to the other party, securing the construction site, etc. and what happens if the force majeure event lasts more than the defined time period. Usually either party is entitled to withdraw from the contract, with the contractor to be paid the proportionate part of the work price for the work already performed.

6.7. Limitation of Liability 6.7.1.

Until recently, the law did not allow a limitation of liability for damages. Although contractors often sought to limit their liability through clauses in construction contracts, courts disregarded such clauses.

41 NCC s 2627(1). 42 NCC s 2627(2). 43 NCC s 2913(2).

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6.7.2.

6.7.3.

247

The old Civil Code stipulated that nobody could waive his or her rights in advance. The exclusion or limitation of damages was considered such a waiver of rights. Due to pressure from the business sector, the Commercial Code was amended in 2011 to allow waiver or limitation of the right to damages, even before any damage could arise, unless the damage was caused by a wilful act.44 This provision applied only to business transactions. The NCC adopted a similar concept from the Commercial Code and extended it to all relationships except those where a weaker party waives or limits its right to damages.45 This exception applies not only in cases of wilful acts, but also in cases of gross negligence. Contractors thus try to include limitation clauses in construction contracts, while owners resist the inclusion of such clauses. It is however increasingly common that some kind of limitation, usually set at the amount of the total work price, is included. This is partly because of pressure from insurance companies offering construction insurance, which are not willing to provide insurance without the total amount of liability being agreed in the contract.

6.8. Duration of Exposure 6.8.1.

6.8.2.

6.8.3. 6.8.4.

44 45 46 47 48 49

The contractor is to be notified of claims regarding defects of the work without undue delay: after the defects were or could be discovered by the owner if exercising sufficient care, but not later than five years after the work was accepted by the owner.46 This applies only to ‘latent’ defects; evident defects should be notified to the contractor by the owner already as the owner accepts the work after the work completion. The five-year period can be shortened by an implementing legal regulation, but none have yet been issued. An agreement of the parties to shorten the five-year period will be disregarded by courts if the owner is a weaker party, usually a consumer.47 Claims brought to courts in violation of the notification period are not enforceable. They do not extinguish but the court will not honour them.48 If a breach of warranty is claimed, notification of the claim must occur without undue delay and within the warranty period.49

Commercial Code s 386(1). NCC s 2898. NCC s 2629. NCC s 2629(2). NCC s 2629(1). NCC ss 2619(1), 2117.

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If the claim notified within the period for bringing the claim (the five-year period: see Section 6.8.2) or the warranty period (see above Section 6.8.4) is rectified but reappears after the period has expired, the court treats the defect as continuing and will allow the claim to proceed. The time for the enforcement of a claim in court starts to run from the time when the other party was notified of the claim or should have been notified.50

6.9. Time Bars 6.9.1.

6.9.2.

Claims are time-barred if the action to enforce the claim is not initiated in court within the period of time set by law.51 There are two limitation periods: (a) A subjective period of three years, which starts running on the day when the entitled party learns about its right to enforce the claim. (b) An objective period of 10 years, which starts running on the day when the claim accrues irrespective of whether the entitled party has knowledge of the right to claim. This general rule can be shortened or extended by the agreement of the parties from one year to 15 years. However, this does not apply where one party is weaker and the change is to its detriment. It also does not apply if the claim results from a wilful act, or involves harm to the freedom, life or health of a person.52

7. Dispute Resolution 7.1.1.

7.1.2.

The resolution of disputes concerning construction is quite conservative in the Czech Republic. Disputes are rarely resolved by means outside court proceedings or arbitration. Arbitration is preferred because of the expertise of arbitrators and the speed of the proceedings. There is in fact no specialised court for construction disputes in the Czech Republic. In better cases, construction disputes are tried by judges sitting over business disputes, but in worse cases the judges might be generalist, trying all disputes without distinction as to whether it is business, family, property or other law. Outcomes might be unpredictable, which is undesirable in construction disputes. Therefore, arbitration offers expertise not found in the judiciary system.

50 NCC s 2629. 51 NCC s 629. 52 NCC s 630.

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The main arbitration court chosen by the parties in the Czech Republic is the Arbitration Court attached to the Economic Chamber of the Czech Republic and the Agricultural Chamber of the Czech Republic.53 For international disputes (e.g. if the owner is from abroad), other arbitration courts might be chosen, in particular, the ICC International Court of Arbitration, although the Czech Arbitration Court is the primary choice.  

53 Arbitration Court (Web Page, 2019) .

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Ecuador 1. 1.1. 1.2. 1.3. 1.4. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 4. 5. 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 7.

Context 252 The Country 252 Governance 252 The Legal System 253 The Economy 255 The Construction Industry 256 Size and Nature 256 Participants 256 Work, Health and Safety 257 Protection of the Environment 257 Quality Assurance 258 Construction Contracting Dynamics 258 Legal Underpinnings of Contracts 258 Overview of Legal Framework 258 Statute Law 259 National Construction Contract Law 261 Government Involvement 265 Reference Contract – CCS Project 265 Contract Background and Award 265 Main Features of the Contract 265 Design 266 Changes 266 Penalties 268 Dispute Resolution 269 Key Issues 270 Overview 270 Fit for Purpose 270 Late Completion 271 Latent Conditions 271 Force Majeure 271 Limitation of Liability 271 Duration of Exposure 271 Time Bars 271 Penalties 272 Dispute Resolution 272

https://doi.org/10.1515/9783110712728-010

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

Continental Ecuador covers an area of 276,000 square kilometers, plus some 6,700 km2 in the Galapagos archipelago. The political regime is unified, although a considerable ethnic diversity exists, a reality which is recognized in the Constitution. The country has land borders with Colombia to the north and Peru to the south. The Galapagos Islands constitute a separate administrative region. Geographically, the terrain is dominated by the Andes mountain range, which runs through the country in south-north direction, plus a coastal region extending over 2,200 Km, and an amazonic region bordering Peru. The Chimborazo volcano is the highest point in the country and also registers as the highest geographic location on Earth, relative to its centre. The official language is Spanish, with various indigenous languages also recognized in the Constitution.

1.2. Governance 1.2.1.

1.2.2.

1.2.3.

1.2.4.

The national capital is Quito, where the National Assembly, the Executive branch of government and major ministries, the High Court and Constitutional Court are all located. The executive branch is headed by the President, who designates ministers for the various government departments. The operation of the political system is determined by the current Constitution, written in 2008, which is the 20th of its kind since the war of independence in early nineteenth century. The Constitutional Court rules on matters involving interpretation of the Constitution, and its resolutions are final and binding. The National Assembly is composed of 137 elected members in a single chamber, subject to a 4-year re-election cycle. The monitoring of the performance of public officials is carried out by the State Auditor General, the Justice Department and various citizens’ groups. Ecuador is a constituent member of the Comunidad Andina de Naciones, has completed a trade agreement with the EU, is a party to several double taxation agreements with leading nations and is currently negotiating membership of the Asia-Pacific Agreement.

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1.3. The Legal System The Constitution 1.3.1. Since it became a separate nation state in 1830 after the dissolution of the Gran Colombia (a federation of Venezuela, Colombia and Ecuador), Ecuador has adopted 20 constitutions, with an average life of 9 years for each new text, the most recent one dating from 2008. 1.3.2. The Ecuadorean legal system is built around the 2008 Constitution, which provides a wide range of rights and guarantees to the citizens. It also reflects the important state role in the economic and cultural life of the nation, which was a feature of the political philosophy popular at that time. The legal framework is derived from the French civil code, and the provisions relating to personal and contractual obligations have not been updated. 1.3.3. In line with this orientation, we can analyse two fundamental aspects of the Constitution: (a) Nature as the holder of individual rights; and (b) The State as an important economic actor. Nature as the holder of individual rights 1.3.4. Article 10 of the Constitution provides that Nature has certain rights as defined therein.1 This provision has significant consequences in respect of the legal obligations of all parties to a construction contract for managing environmental impact and relations with the local community. 1.3.5. Article 71 continues the theme, referring to Pacha Mama, quichua (indigenous language) for Mother Nature, stipulating that the source of life in nature must be protected and allowed to regenerate through the natural process of evolution.2 The same Article provides that any citizen has the right to protect Nature against any threat to its cyclical progression.3 The State as an important economic actor 1.3.6. This is discussed in respect of three areas: (a) Equitable distribution of benefits from natural resource development; (b) Strategic development sectors; and (c) State control of the economy.

1 2008 Constitution of Ecuador art 10 (‘Constitution’). 2 Constitution art 71. 3 Constitution art 71.

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Equitable distribution of benefits from natural resource development 1.3.7. The attempts to apply this idealistic objective through the tax system over the recent past have resulted in various negative impacts on the climate for foreign investment. With the recent change of government, there has been a shift in policy directed towards encouraging foreign investment, including efforts to restore the bilateral investment treaties which had been deactivated by the previous government. A new law has been promulgated which aims to promote investment and productivity. Strategic development sectors 1.3.8. The Constitution establishes certain strategic sectors of which the state has priority in the administration and management of the development. These include energy, telecommunications, transport and non-renewable natural resources, including water resources. 1.3.9. This means that infrastructure development in these areas is controlled by state enterprises. Article 316 of the Constitution does permit participation by private investors, provided that the State retains majority control.4 Again, there have been some moves to soften this position by the current government. State control of the economy 1.3.10. State control is exercised through systems established under the Constitution, which are in fact an integration of constitutional principles and rules, public policy and management systems. Judicial Structure 1.3.11. Decisions handed down by the provincial courts can be appealed before the National Court. There are various tribunals which treat matters in dispute in the areas of public administration, taxation, criminal and civil law, commercial, labor and family matters. 1.3.12. The government agencies concerned in each area have authority to issue regulations covering the application of the legislation passed by the Assembly and approved by the Executive branch. They are also responsible for administering the regulations, monitoring performance, and applying appropriate sanctions where non-compliance is observed. 1.3.13. The performance of Judges, Provincial and National Courts, government institutions and individuals can be called into review before the Constitutional Court, in matters related to property loss and prevailing rights and obligations.

4 Constitution art 316.

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Alternative Dispute Resolution and Arbitration 1.3.14. Alternative resolution of disputes through mediation are conducted at some 60 private centres operating across the country. The public administration also provides mediation services as an adjunct to the judicial system. Construction contracts in the public and private sector generally include a provision for resolution of disputes by arbitration, and recently some have also included provision for dispute boards. 1.3.15. There are 12 Arbitration centres available to parties in dispute, the most active of which is the Arbitration and Mediation Centre of the Quito Chamber of Commerce, followed by the equivalent centre in Guayaquil and that supported by the US/Ecuador Chamber of Commerce in Quito. There exists a general respect for the findings of the arbitration tribunals, and the percentage of decisions which have been declared null and void is less than one percent. 1.3.16. Ecuador is a party to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. In accordance with the national Production Regulations, it is obligatory to apply international arbitration for resolution of disputes related to foreign investment. This includes application of the UNCITRAL or ICC regulations, or the rules of the Inter-American Convention on international commercial arbitration, as may be agreed with the claimant. 1.3.17. Ecuador has experienced 29 international arbitrations related to investments, with some having a relatively high profile. Two recent cases involved multinational petroleum companies, Occidental and Chevron (Texaco). In both cases, the arbitral tribunal ruled in favor of the company. 1.3.18. There have been some cases where Ecuador has received condemnation in international human rights tribunals for breaches of human rights of the indigenous communities, particularly related to mining and petroleum development concessions granted to foreign investors.

1.4. The Economy 1.4.1.

1.4.2.

The Ecuadorean economy is heavily oriented towards state ownership in the principal areas of activity, promulgated under the terms of the 2008 constitution, which introduced the concept of prioritized investment in strategic sectors such as transport and communications, energy, renewable resources, biodiversity and water resources. State-owned enterprises have been created to operate in the service sector as well. The result of all this is that private investors face some regulatory hurdles for entry into most sectors of the economy. The economy is highly dependent on petroleum, the principal export product, with the result that as the international market price varies, the country experiences a boom-and-bust cycle, which affects negatively the socioeconomic status of the population, and causes periodic political crises. There has

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been an effort to promote development of the mining sector as an alternative to oil as a source of revenue, but this is still in a very early phase. The GDP in 2019 was USD 107 billion which was distributed through the major sectors as shown in the following table: Table 1: GDP in 2019

1.4.4.

Sector

%GDP

Agriculture

6.12 %  

Oil and Mining

16.58 %

Light Industry

9.24 %

Construction

8.57 %

 

 

 

Services

41.57 %

Finance

11.55 %

Other

6.37 %

 

 

 

The national debt is in 2020, 46 % of GDP.  

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction industry sector constitutes around 9 % of the GDP in Ecuador, equivalent to 9 billion USD, the major part of which is concentrated in public works infrastructure.  

2.2. Participants 2.2.1.

As a result of the legal and constitutional framework existing in Ecuador, the role of the government in economic activity is quite predominant, particularly in the construction sector. The private construction sector is dedicated mainly to building construction, including the usual mix of offices, commercial centres and housing units.

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2.3. Work, Health and Safety 2.3.1.

In general, the labour force is regulated by the Employment Regulations. These regulations cover various facets of the relationship, including wages, working hours and vacation time. A labour contract when signed becomes permanent, but may be subject to termination by the employer under certain conditions after three years’ service, including a payout of 1 months’ salary for each year of service. The Social Security law provides for 21 % retention to cover sick leave, injury and retirement payments. However, in the construction sector, the regulations have been modified, to permit an individual work contract which has provisions allowing an employee to be dismissed at the conclusion of the contract, without any obligation for long service payment. Trade union labour agreements are not very common in the private sector however, in the public sector, the labour unions are quite strong and have imposed conditions which are sometimes extended to cover employees who are not members of the union.  

2.3.2.

2.3.3.

2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

2.4.4.

Nature is recognized in the Constitution as having a special status with its own rights. Water is recognized specifically in the Constitution as a gift of nature that must be protected and preserved. Environmental legislation specifies that each construction site must protect those rights with the appropriate preventative and remedial measures. In the case of non-compliance, the contractor and associated supervisory staff can be held liable for any resulting damages. These measures are implemented by the responsible government agency. Two important features of the existing law are the absence of any time limitation on the process and the fact that the onus of proof remains on the defendant to establish the absence of any adverse environmental impact. There are two levels of responsibility established in Article 396 of the Constitution, depending on the associated facts. In the first case, if the cause of the impact is clearly shown to rest with the developer, then he or she must adopt procedures to mitigate future impacts. In the second case, where there is no certainty as to the cause/effect relationship, then only alleviating measures are required. In both cases, the contractor must assume financial responsibility for his or her actions and indemnify the affected people. In addition, the law provides for economic sanctions to be applied to the operator in certain cases. There is also an obligation to consult with the local community with respect to possible future environmental impacts, under the terms of Article 398 of

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the Constitution. If objections are raised by the local community, the Government must make the final decision on whether the project goes ahead. This conforms to the Indigenous and Tribal Peoples Convention, which requires such consultations to be undertaken. Finally, there is a general requirement under Article 14 to manage and control environmental contamination, restore areas subject to degradation, and promote sustainable development of natural resources, all in the public interest.

2.5. Quality Assurance 2.4.6.

Construction contracts generally incorporate provisions for monitoring by a Owner-appointed supervisor, who is designated Fiscalizacion, and is responsible to the Owner for quality control of the materials and methodology applied by the Contractor.

2.6. Construction Contracting Dynamics 2.6.1.

With the state as the principal contracting body, there has been established a law governing state procurement, designated Ley Organica de Sistema Nacional de Compras Publicas (LOSNCP) or National System for Public Procurement, which governs the obligations and responsibilities of state enterprises in procurement and contracting for public works. Details of the application of this law and its associated regulations are provided under Section 3.3.

3. Legal Underpinnings of Contracts 3.1. Overview of Legal Framework 3.1.1.

3.1.2.

As an introduction to the status of the construction industry and the associated legal framework in Ecuador, the writer has used as a general reference the World Bank report on Doing Business. This leads into a general review of the legal and constitutional framework surrounding the industry, a summary of regulations governing contracts awarded by government enterprises, and an outline of the applicable conditions of contract for a recently completed international infrastructure project. The following statistics from the World Bank report provide a general picture of the industry status in Ecuador: (a) Its overall status and relative ease of doing business was positioned 123 out of the 190 studied economies; and

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(b)

3.1.3.

The time required to start a business averaged at 48.5 days, with a cost of USD 6000. The judicial process in Ecuador provides for up to four levels of appeal, ending with the Constitutional Court of Ecuador as the final court of appeal. Although the ultimate authority of the judicial process is enshrined in the Constitution, in practice, public administration officials have considerable latitude in interpretation, which can sometimes frustrate the administrative approval process.

3.2. Statute Law 3.2.1.

Due to the fact that there has been such a large number of Constitutions in Ecuador’s history, there are bodies of law that date from the 19th century, such as the Civil Code, or from the early 20th century, such as the Labor Code. Further, there is the Company Law and the Construction Codes from the midtwentieth century, which are updated periodically. The Regulations covering public contracting were issued in the last 10 years, and are discussed in more detail in Section 3.6.

The Company Law 3.2.2. The legal regime governing commercial and industrial activity in Ecuador consists of two bodies of law — the Company Law and the Civil Code. 3.2.3. The Company Law governs the form in which the private sector is organised, including the level of responsibility of the shareholders in a company. The Civil Code governs associations of legal entities with a profit motive, such as joint ventures. 3.2.4. If a foreign company plans to carry out regular business activities in Ecuador, it must establish residence. Then, a legal representative who will be responsible for any contractual commitments and legal obligations, including actions against the company, must be named. Where the company is to engage in activities such as exploitation of natural resources or public works contracts, it must be ‘domiciled’ under a procedure which registers it in the national public register. 3.2.5. The regulatory system requires that the competent national authority be kept informed of the final beneficiary of the share value, and if any shares are held in national companies, a legal representative must be nominated to respond to legal actions. Construction Codes 3.2.6. The municipalities have a series of construction codes that regulate construction in the private sector, including requirements for disposal of waste and water pollution control.

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Financing 3.2.7. According to World Bank statistics, Ecuador has an index of 1 out of 12 for credibility in guaranteeing the rights of lenders. This is a low figure compared to an index of 5.4 in Latin America and 6.1 in the OECD. For this reason, private developers have resorted to the use of trust funds to finance building construction, with loans provided by private banking institutions or state pension funds. The setup and management of trusts is regulated by the law relating to stock market operations under Article 109. 3.2.8. Public works are generally financed through multilateral lending institutions or bilateral agreements with state enterprises, which are normally regulated by a corresponding investment treaty where it exists. Bilateral Investment Treaties 3.2.9. Bilateral Investment Treaties (‘BIT’) are agreements between sovereign countries to protect and control cross-border investments. These arrangements are established between countries to protect investors from arbitrary changes in the legal and constitutional regime of the beneficiary country. The previous Ecuadorian government abandoned the BITs that were in force, based on a ruling by the Constitutional Court. However, the present government has initiated a process of restoring these agreements with its principal trading partners. 3.2.10. At present, Ecuador has a regulation covering investment agreements titled ‘Production Code’, which adopts the same categories as the previous BITs, including: (a) Most-favored national policy; (b) Full protection and security; (c) Fair and just treatment; and (d) Prohibition on the confiscation of goods. Trade Agreements 3.2.11. Ecuador does not have a trade agreement with the USA, as do some of its neighbors, but has completed an agreement on trade with the EU. This is not actually a full free trade agreement, but it can be described as providing for each party’s access to commercial operations within the other’s territory. This access is classified in terms of the particular discipline concerned in each case. Within this classification, rules are established to govern land ownership, communal property, environment, strategic sector investment and cultural patrimony. 3.2.12. With respect to specific disciplines, there are no restrictions on cross-border construction services, except the requirement to comply with local rules. This means that European construction companies can operate freely within Ecuador.

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Public-Private Partnerships 3.2.13. The concept of Public-Private-Partnerships was introduced in legislation recently enacted, which also covers foreign investment. The law establishes the Intra-Ministry Committee as a control body for PPPs, with the objective of promoting PPPs and approving the associated projects. In practice, a private company seeking to develop a PPP must submit its proposal to the Committee, which will then open the bidding to third parties. Still lacking from the existing regime in Ecuador is any provision for dispute resolution by Dispute Boards. Corruption 3.2.14. Cases of corruption involving foreign companies such as Odebrecht and Petrobras are in the public domain and are presently the subject of judicial proceedings in Ecuador. However in general terms, existing anticorruption measures are lacking in their enforcement. In projects partially financed by the multi-lateral banks, the enforcement measures are more effective because the availability of funds depends on compliance with the rules. 3.2.15. The other most effective anticorruption measures in the current environment depend mainly on the intervention of foreign companies based in the USA. This is because they are obliged to operate under the rules of their home country. In the case of the USA, the applicable legislation is the Foreign Corrupt Practices Act of 1977.5

3.3. National Construction Contract Law General Provisions 3.3.1. The law governing the award and administration of construction contracts in Ecuador is titled the ‘Organic Law of the National System for Public Procurement’ (‘LOSNCP’), promulgated in 2008. Construction contracts promoted or managed by any government authority are required to comply with this law, unless a special exemption is obtained. 3.3.2. The law and its regulations consider two principal categories of construction contracts: (a) Unit price contracts; and (b) Fixed lump sum contracts. 3.3.3. The application of the LOSNCP to unit price contracts is covered in some detail, whereas the fixed sum contract is only briefly described as a secondary option.

5 Foreign Corrupt Practices Act of 1977, 15 USC.

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3.3.4. 3.3.5.

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The contracting process is managed by the National Public Contracting Service (‘SERCOP’), which registers the details of each tender/award on its website. The Regulations do not provide a complete contract document for use in the bidding process; however, they do require certain features to be incorporated into the document. These include the following general categories which apply to all forms of contracts, followed by the main chapter headings of both the Law and the Regulations related specifically to construction contracts. Detailed Provisions Title I – Generalities Article 2 (Regulations) – National Participation Article 3 (Law and Regulations) – International Agreements Title IV – Contracts I. Fitness to Contract II. Requirements and Format III. Guarantees IV. Subcontract Limit V. Administration/Management VI. Acceptance and Payment VII. Price Adjustment VIII. Contract Amendments/Addenda IX. Contract Termination X. Registry XI. Obligations of the Parties Title V – Claims and Disputes I. Claims II. Dispute Resolution

3.3.6.

The detailed application of the Law is elaborated upon in the associated Regulations. The following summary of the main points of interest to the international construction community has been extracted from both the Law and the Regulations.

Title I – Generalities 3.3.7. In the following Articles, the general principles and objectives governing contracts supported by international financing are set out. 3.3.8. Article 2 of the Regulations provides that, for contracts open to international tenderers, provision must be made for participation by local (Ecuadorian) suppliers and subcontractors at a level to be specified in the tender documents, generally in the range of 15–20 %. Contractual sanctions will normally be applied if targets are not met. There is also a requirement to promote technology transfer where applicable.  

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Article 3 of the Law states that the related contractual provisions must comply with the requirements of the associated financing agreement or treaty. Notwithstanding this, where particular provisions are not covered in the treaty obligations, then the national Law shall apply. The Regulations provide further detail on the Law’s application to projects where procurement is sourced both internationally and locally, including a requirement to verify that a particular item designated to be sourced overseas is not available locally.

Title IV – Contracts 3.3.10. This subdivision relates specifically to construction contracts, and contains the following Sections, for which a brief summary of contents is provided: 3.3.11. Fitness to Contract This Section covers certain requirements which are generally related to control of corruption by public officials. 3.3.12. Requirements and Format This Section includes the general requirements relating to the registration and formalisation of contracts. As a specific requirement, the construction schedule must be approved by the relevant authority as a contract document and must incorporate intermediate target completion dates. There is also a requirement to include clauses covering penalties to be applied by the contract administrator, in case of late completion of the targets determined in the contract schedule. 3.3.13. Guarantees The Regulations require the usual array of contract guarantees, including: (a) Performance guarantee set at 5 % of final contract value; (b) Advance payment guarantee; and (c) Manufacturer’s guarantee. 3.3.14. Subcontract limit The Law requires that subcontracts be limited to 30 % of the total contract value. 3.3.15. Administration and Management There is a requirement for an administrator (the Owner’s representative) and a supervising engineer to both be officially designated by the Owner with appropriate powers and responsibilities. 3.3.16. Acceptance and Payment For works contracts, there is a requirement for both provisional and final acceptance certification. Handover of partially completed sections of the works is also permitted under certain circumstances. Final payment valuation is required to be certified at the time of final acceptance of the works. 3.3.17. Price Adjustment (a) Price adjustment is provided for in unit price contracts, in accordance with an agreed formula, generally only applicable to local costs. An ex 

 

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ception applies to equipment of foreign supply which is paid in foreign currency, where price adjustment in accordance with indices of the country of origin is permitted, subject to prior agreement between the parties. The indices for national price adjustment are taken from the monthly publications of the National Institute of Statistics and Census (‘INEC’). (b) There is a provision under the Regulations which determines the date on which the relevant index will be selected. It states that the original approved schedule date must be applied, except where there is a delay caused by the Owner which has been recognised in an approved revised schedule, where the revised date will be applied. Contract Modifications There is a limit of 15 % for additional works under change orders or supplementary contracts, with an overall limit, including quantity variations under unit price contracts, set at 35 %, subject to prior authorisation from the government audit office. These provisions do not apply to fixed price lump sum contracts, where no price variations are allowed. Termination The Owner can terminate the contract where it can be demonstrated that the contractor has not complied with the terms of the contract or has abandoned the works. The process of termination cannot be suspended, despite any legal action undertaken by the contractor. There is also provision for termination by mutual agreement between the parties under certain defined circumstances, including force majeure. Registry A registry is kept of all awarded contracts by SERCOP, including any prior noncompliance by a contractor, which is available for inspection by the parties. Obligations of the Owner and Consultant This Section lists various obligations of the Owner’s staff, which are oriented mainly towards the control and prevention of corruption. There are also provisions for penalties to be imposed against consultants where tender design documents are subject to major changes resulting in cost increases during construction.  

 

3.3.19.

3.3.20.

3.3.21.

Title V – Claims and Disputes 3.3.22. Claims This Section has reference to the tendering and award process only. Claims or disputes related to the contract award are required to be presented in the first instance to SERCOP, but then may be followed up with the relevant contracting authority. 3.3.23. Dispute Resolution The parties may resort to Alternative Dispute Resolution (ADR) through mediation or arbitration to resolve disputes that arise during construction, pro-

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vided that such provisions are included in the contract. Arbitration is generally managed through the local Chamber of Commerce for construction, under rules established by the Chamber, based on the relevant mediation and arbitration law. If dispute resolution is not reached through ADR, the next phase is the judicial process through the applicable local court system, that is, the Tribunal for Administrative Disputes.

4. Government Involvement There is no discussion on this topic for this country.

5. Reference Contract – CCS Project 5.1. Contract Background and Award 5.1.1.

5.1.2.

The Coca-Codo Sinclair Project (‘CCS Project’) was promoted as part of the Ecuadorian Government’s program for the development of alternative energy sources, mainly consisting of hydroelectric power generation. The feasibility study which forms the basis of the project layout was originally produced in 1992 and had been filed for a lack of financing. An update of the study was prepared in 2008, which formed part of the bidding documents. Because the project was designated as high priority, a special exemption from the LOSNCP Law was obtained via executive order. Bids were requested by a dependency of the state energy authority (constituted at the time as a private company) in EPC format, with a condition that the proponent should include in his or her offer a proposal for financing to cover 85 % of the contract price. After the completion of the bidding process, a contract was awarded in October 2009 to the Chinese state enterprise, Sinohydro Corporation, whose offer included financing through the EximBank of China. The Notice to Proceed was issued in July 2010, after the completion of the financial agreement between the Finance Ministry and EximBank. Provisional Acceptance of the completed project was achieved in December 2016.  

5.1.3.

5.2. Main Features of the Contract 5.2.1.

The principal characteristics of the reference contract are as follows: (a) EPC (Engineering, Procurement, Construction) Contract; (b) Bespoke format, generically related to FIDIC Silver Book; (c) Installed Generation Capacity – 1500 MW;

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(d) (e)

Lump Sum Contract Price – $2,000 million (approximately, at award); and Original Construction Schedule – 5.5 years through to Provisional Acceptance.

5.3. Design 5.3.1.

5.3.2.

5.3.3.

Under the EPC format, the Contractor is responsible for the design of the project. The design process for the CCS Project involved the following steps: (a) Conceptual design based on preliminary review of the feasibility report — due to schedule limitations which did not permit detailed studies at that stage, the contractor adopted the main recommendations of the report; (b) Basic design, which defines the final location, layout and dimensions of the principal structures and involves optimisation of the feasibility study to achieve the most efficient and cost-effective layout within the performance parameters defined in the Employer’s requirements; and (c) Detailed design, the end product of which was the drawings required to proceed with construction. The most important design phase from a contractual standpoint is the basic design. In the EPC contract format, the benefits of optimisation logically fall to the contractor, because they have taken the risk of committing to a lump sum price which could only be varied under certain defined circumstances. However, the contract incorporated a requirement for approval of each phase of the design process by the Owner or his or her nominated construction supervisor. Certain disputes arose as a result of differences between the parties related to the acceptance by the Owner of optimised design solutions, which modified the project feasibility layout. It should be noted that there can be a tendency for the supervisory engineer to reject legitimate design optimisation, because the benefits do not fall directly to the Owner. However, the benefit to the Owner was already reflected in the original contract price, which was based on the precondition that design optimisation, or value engineering, would be permitted.

5.4. Changes 5.4.1.

The CCS Project’s contract incorporated provisions for compensation (time and/or money) to the contractor for changes occurring after the award in the following major areas: (a) Change of law;

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Unforeseen geological conditions; Changes instructed by the Owner; and Force majeure (limited to time only, except for war and associated events).

Change of Law 5.4.2. The definition of change of law is quite broad and includes any decision of a government authority which modifies the existing applicable law or governing regulation in Ecuador. A time bar of 28 days in duration is imposed for notification of a change. Changes of law in other jurisdictions are not recognised. Unforeseen Geological Conditions 5.4.3. The contract defines unforeseen conditions in the underground works in an annex, with the following qualifications which must be met: (a) Contractor had no prior knowledge of the condition; (b) An experienced contractor could not have foreseen such a condition; (c) The condition negatively impacted the critical path; and (d) A time bar of 7 days from the date of discovery of the condition to notification. 5.4.4. Compensation is limited to extensions of time (‘EOT’) only, excluding cost impact. 5.4.5. To ensure that the pricing of the tender for an EPC contract is not excessive, and to avoid potential disputes, it is a generally accepted principle that there should be incorporated into the contract a reasonable risk sharing arrangement covering underground works. This will then allow the settlement of the impact of adverse geological conditions within the contractual framework. A clear definition of the risks and the proposed sharing arrangements is extremely important, and requires engineering geology input from both sides during the contract negotiations. 5.4.6. The CCS Project contained a significant component of underground works, including a 25 km headrace tunnel and an underground powerhouse. When the risk sharing terms were negotiated, the emphasis was placed on the headrace tunnel, where the major risks of adverse geology were expected to occur. During the project execution, several adverse geological events occurred in the headrace tunnel. The contractor was able to successfully bring these cases forward to the Dispute Board (‘DB’), for which time extensions were granted in accordance with the procedure in the contract. 5.4.7. Another adverse geological event which occurred in a vertical penstock shaft was not admitted by the DB because the risk sharing annex specifically only dealt with the headrace tunnel, but not with the remaining underground works. The contractor’s understanding of the contract terms was that all events of extremely adverse geology were covered, even though a specific reference to

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the structure concerned may not have been included in the risk sharing annex. The Owner argued that, since the specific details of impact assessment included in the annex applied only to the headrace tunnel, all other areas of the project were excluded from consideration for time extensions due to adverse geology. The DB accepted the Owner’s argument. It is therefore important for parties to ensure that the contract terms related to adverse geology contain a detailed definition of the base geological conditions in all underground structures, for which the Contractor assumes risk, which if exceeded would create an entitlement to claim.

Changes Instructed by the Owner 5.4.9. Changes instructed by the Owner follow the standard FIDIC procedure, requiring a change order request from the contractor which must demonstrate that the instruction represents a change in the scope of the contract. This in turn creates an entitlement to due compensation. A time bar of three working days is applicable to this entitlement, which has proved extremely difficult to comply with in practice. Force Majeure 5.4.10. An event of force majeure is defined as that which prevents either party from complying with its contractual obligations, provided that: (a) The affected party could not control, foresee, prevent or avoid such circumstances; and (b) There is no evidence of malpractice or negligence on the part of subcontractors, suppliers or employees. 5.4.11. Events excluded from consideration include: (a) Strikes originating from the contractor’s employees; and (b) Matters arising out of requirements to obtain environmental or other permits.

5.5. Penalties 5.5.1.

5.5.2.

The contract required the contractor to issue a construction schedule which is subject to approval by the Owner. Three target completion dates were established, from which the contractor built a detailed schedule covering engineering, procurement, construction and commissioning. There is provision for EOT to be granted under the conditions described under Section 5.4. This includes a provision for EOT where specified time limits for interim payments are not met, a feature which was applied several times during the course of the contract, and proved to be an important restraint against delayed payments.

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The contract incorporates a provision for indemnity payments to the Owner in case the completion targets specified in the contract schedule are not met by the Contractor. The term ‘penalty’ is applied to these payments without the restriction that would apply under the common law regime, where this would be replaced by the term ‘liquidated damages’, although the contract terms refer to these payments as an indemnity for losses incurred by the Owner. In the civil law regime which governs in Ecuador, the term ‘penalty’ is not proscribed. An overall limit of 10 % of the contract price is specified as the maximum cumulative sum of penalties to be applied.  

5.6. Dispute Resolution 5.6.1.

Dispute resolution is provided for under a two-step procedure: (a) Dispute Boards (‘DBs’) under ICC rules; and (b) International arbitration under ICC rules.

Dispute Boards 5.6.2. The contractual procedures for the establishment and operation of DBs resulted in a modified version of a standing DB. The choice between ad-hoc and standing DBs has been discussed at length in various forums, with opinion heavily favouring standing DBs because of their dispute avoidance potential. In the CCS Project, the parties agreed on a hybrid version which required the establishment of a DB when the first dispute which could not be resolved by negotiation arose. Once established, two years after Notice to Commence, the DB remained in place as a standing DB, conducting regular site visits and hearing disputes as they arose during the construction period. 5.6.3. The DB operated under the rules of the International Chamber of Commerce (‘ICC’), as a Combined DB, which provided for the issue of recommendations and/or binding decisions at the request of either party. The ICC rules generally proved very satisfactory in application, including a provision for the chair of the board to be named by the ICC when the parties’ nominees could not reach an agreement on the selection of the chair. 5.6.4. A total of 25 disputes arose during the course of construction, with the majority having been resolved by a binding decision issued by the DB. This procedure was favoured by both parties against the alternative option of a nonbinding recommendation, because of the administrative restrictions on public officials against negotiated settlements. 5.6.5. Records compiled by the Dispute Resolution Board Foundation (‘DRBF’) have shown that the cost of a standing DB is on average around 0.2 % of project costs. In the CCS Project, the proportion of the project cost was estimated as  

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less than 0.15 %, a relatively minimal cost, especially when considering the potential arbitration costs. The DB procedure for resolving disputes has not been formally recognised in Ecuadorian lawhowever, a draft proposal for its incorporation is under preparation by the DRBF.  

5.6.6.

Arbitration 5.6.7. The CCS Project’s contract terms provided for the final forum for the resolution of disputes to be international arbitration under the rules of the ICC, with Santiago, Chile designated as the seat of arbitration. The parties were obliged to register their rejection of the decision of the DB within a specified period and thus reserve their rights, in order to leave open the option of arbitration. In the absence of this reservation, the decision of the DB becomes final and binding. In the case of non-compliance by the defendant with a decision which has become final and binding, this can be carried to arbitration solely on the grounds of non-compliance. 5.6.8. The contract provides that any court of competent jurisdiction can be invoked to enforce the arbitral tribunal’s ruling which, however, is not subject to appeal before any court or tribunal, with the exception of it potentially being declared void in accordance with the prevailing law of the seat of arbitration. To date, no dispute under the contract has been carried forward to arbitration, although the parties have generally reserved their rights in this regard.

6. Key Issues 6.1. Overview 6.1.1.

The CCS project is a good example of the issues that international contractors must confront when operating in a developing country, where the construction industry environment has been built under a set of rules designed for local management of infrastructure development.

6.2. Fit for Purpose 6.2.1.

The application of the criterion designated ‘fitness for purpose’ should be mandatory for construction contracts; principally in order to control and prevent undue rigidity in the acceptance of executed works.

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6.3. Late Completion 6.3.1.

The CCS contract provided for significant penalties for failure to meet intermediate and final target dates, which proved to be a valuable incentive for achieving completion within the extended targets.

6.4. Latent Conditions 6.4.1.

The provisions in the CCS contract for evaluating latent conditions had the virtue of providing a quantitative test for determining how much EOT was due under specific changed ground or geology. One issue that needs management is to ensure that the definition of changed conditions covers the full range of works required under the contract.

6.5. Force Majeure 6.5.1.

The contract provisions imposed a time bar for notification of a Force Majeure event, which proved to be a decisive factor in determining the validity of a claim submitted by the Owner.

6.6. Limitation of Liability 6.6.1.

The contractor’s liability is limited to 50 % of the contract price.  

6.7. Duration of Exposure 6.7.1.

There is no limitation on the duration of exposure of the contractor to liability under the contract.

6.8. Time Bars 6.8.1.

Time bars were provided in all rhe key areas, including notifications under the following clauses (a) Late payment of progress payments; (b) Change Orders, including change of law; and (c) Force Majeure.

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6.9. Penalties 6.9.1.

Penalties were provided as follows: (a) Late completion of two intermediate targets and one final target; and (b) Maximum total penalty limited to 10 % of contract price.  

7. Dispute Resolution 7.1.1.

Dispute resolution under the contract has been covered under Section 4.6, including the appointment of a Dispute Board under the ruels of the ICC. To date, no disputes have been carried forward to arbitration.

Tony Marshall, Mark Crossley, Richard Bailey and Keith Kirkwood

England and Wales 1. 1.1. 1.2. 1.3. 1.4. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 4. 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 6.2. 6.3. 6.4.

Context 274 The Country 274 The Legal System 275 The Economy 276 Brexit 276 The Construction Industry 277 Size and Nature 277 Participants 278 Work, Health and Safety 281 Protection of the Environment 282 Quality Assurance 287 Construction Contracting Dynamics 288 Legal Underpinnings of Contracts 289 Freedom of Contract 289 Legal Framework 289 Public Policy 289 Statute Law 290 Construction of Express and Implied Contract Terms 295 Private and Public Procurement 297 Government Involvement 299 Legislation and Regulation 299 The Construction Act, and Government Guidance on Prompt Payment and Adjudication 300 Insurance 302 Government Guidelines 303 Licensing of Professionals and Contractors 303 Codes of Practice 308 Construction Contracts 308 Available Contracts 308 Most Commonly Used 311 DB16 311 NEC3 Engineering and Construction Contract (April 2013 Revision) 311 Key Issues 315 Overview 315 Fitness for Purpose 315 Late Completion 316 Latent Conditions 318

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6.5. 6.6. 6.7. 6.8. 7. 7.2. 7.3. 7.4. 7.5.

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Force Majeure 319 Limitation of Liability 319 Duration of Exposure 321 Time Bars 323 Dispute Resolution 323 Alternative Dispute Resolution (‘ADR’) Adjudication 325 Litigation 325 Arbitration 328

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (the ‘UK’) or, simply, Britain, consists of four countries: England, Wales, Scotland and Northern Ireland, located on the island of Great Britain (England, Wales and Scotland) and the north-eastern part of the island of Ireland (Northern Ireland). The UK is a unitary state under a constitutional monarchy with a parliamentary system (meaning that there is a cabinet system of government, with a prime minister as head of the cabinet and leader of the country). The UK has an uncodified constitution which consists mostly of a collection of disparate written sources of law, including statutes (primary legislation); statutory instruments and regulations (secondary legislation made under powers granted in primary legislation); judge-made case law; international treaties; and constitutional conventions. The UK Parliament can perform constitutional reform simply by passing Acts of Parliament, and therefore has the political power to change or abolish almost any written or unwritten element of the constitution, although it cannot pass laws that permanently bind future parliamentary sessions. Wales, Scotland, and Northern Ireland have devolved administrations. Guernsey, Jersey and the Isle of Man are British Crown dependencies, where the UK government is responsible for defence and international representation. The UK also has fourteen British Overseas Territories, formerly known as British dependent territories, which are remnants of the British Empire (Akrotiri and Dhekelia; Anguilla; Bermuda; British Antarctic Territory; British Indian Ocean Territory; British Virgin Islands; Cayman Islands; Falkland Islands; Gibraltar; Montserrat; Pitcairn, Henderson, Ducie and Oeno Islands; Saint Helena, Ascension and Tristan da Cunha; South Georgia and the South Sandwich Islands; and Turks and Caicos Islands).

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The UK does not have a single legal system, as Article 19 of the 1706 Treaty of Union between England and Scotland provided for the continuation of Scotland’s separate legal system.1 Today, the UK has three distinct systems of law: English law, Northern Ireland law, and Scots law. English law, which applies in England and Wales, and Northern Ireland law are common law systems. This chapter is concerned with the English law and legal system. While the whole of this chapter applies to construction projects carried out in England and Wales by local and overseas entities under contracts governed by English law, only some of the sections will be relevant to contracts which are governed by English law, but which relate to construction projects being carried out in jurisdictions outside England and Wales. In such cases, specific legal advice in relation to any overriding local laws and the industry in those jurisdictions, the applicability of English law statutes in other territories, conflicts of law issues, and governing law and jurisdiction clauses in the contract itself will all need to be considered.

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

English law is a common law system. This means that, subject to statute, the law is developed by judges in courts, applying statute and principles from previous cases to the facts before them to produce explanatory judgments of the relevant legal principles, which are reported and binding as precedents for future similar cases. The three devolved administrations each have varying powers to enact legislation that has characteristics of primary legislation. In one sense, all legislation of a devolved legislature is secondary, since its authority rests on the enabling powers conferred by an Act of Parliament. However, Acts of the Scottish Parliament and the Northern Ireland Assembly, and originally Measures and now Acts of the National Assembly for Wales, are clearly intended to be treated as primary legislation for many purposes. As well as being enacted by documents called Bills and being described as ‘Acts’ once made, they receive Royal Assent in the same way as Acts of Parliament. Since England and Wales form a single jurisdiction, a proposition that legislation extend to Wales only is meaningless. However, occasional instances of this proposition are sometimes found in secondary legislation as the result of careless or ignorant drafting.

1 Article XIX .

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The question of whether Wales is emerging as a separate jurisdiction as a result of devolution is attracting a certain amount of attention but is fuelled more by academic and political considerations than by practical legal ones.

1.3. The Economy 1.3.1.

The UK is a developed country. As of March 2020, it has the world’s sixth-largest economy2 by nominal gross domestic product3 and ninth-largest by purchasing power parity.4 It was the world’s first industrialised country. The UK has considerable economic, cultural, military, scientific, and political influence internationally. It is a recognised nuclear weapons state and its military expenditure ranks from fourth to eighth (depending on the source and year) in the world.5 The UK has been a permanent member of the United Nations Security Council since its first session in 1946. It was a member of the European Union (‘EU’) and its predecessor, the European Economic Community, from 1973 to 2020. It is also a member of the Commonwealth of Nations, the Council of Europe, the G7, the G8, the G20, NATO, the Organisation for Economic Co-operation and Development, and the World Trade Organization.

1.4. Brexit 1.4.1.

The UK left the European Union at 11 pm GMT on 31 January 2020, and entered a transition period until 1 January 20216 and, at least initially, most EU or EU-derived law, for example environmental regulations, continues to apply in the UK. However, despite the conclusion of a partial free trade agreement between the UK and the EU in late 2020, the effects of Brexit are likely to be felt by the construction industry in many areas over the short and long term; for example, in relation to the free movement and employment of construction workers, the free movement of goods for use in construction projects, and public procurement.

2 Investopedia . 3 Focus Economics . 4 Statista . 5 Statista . 6 Gov.uk .

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2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

2.1.3. 2.1.4.

The UK construction industry is engaged in the whole range of projects commonly encountered in an advanced, industrialised, service-based economy. These projects are built and financed in a number of ways. The industry does not use terminology consistently. The term ‘construction’ may be used generically and subdivided into building (the provision of structures in the residential and commercial sectors, such as homes and offices, and hospitals, schools, prisons, and other social infrastructure) and engineering (the provision of economic infrastructure, such as roads, airports, ports, railways, bridges, power stations, oil installations, dams and heavy industrial plants such as petrochemical and chemical process works). This split is reflected by the major construction companies that use different subsidiaries, or different divisions, in the two sectors. A further important distinction, in both sectors, is between design and construction. This different use of ‘construction’ illustrates the difficulties of terminology. Here, construction is used to mean the process of using labour and materials on the site to create a building or structure. It is contrasted with design, which is the office-based process of identifying in drawings and specifications the building or structures to be created. To add further confusion, in the engineering sector (especially in the oil, gas, and power industries), design is often referred to as engineering. Housing, energy (including nuclear new build), and high-profile infrastructure projects are currently the most active areas. In 2017, the gross value added (‘GVA’) of the UK construction industry was £112.2bn,7 being 7 % of the UK’s total GVA.8 There were 2.184 million jobs in the UK construction industry in 2017, amounting to 10 % of total UK employment.9 The construction industry experienced a downturn between roughly late 2008 and 2011, but has since rebounded, especially in the housing sector. The global COVID-19 pandemic has so far not created a significant downturn in the construction sector, but the type and location of future developments is likely to be affected by changes created during, or accelerated by, the pandemic, such as the decrease in international travel, and shifts in working, commuting and on 

 

7 Statista . 8 Government Construction Strategy . 9 Construction 2025 .  

 

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line shopping patterns. Recent successful domestic projects include the 2012 London Olympic Games and Heathrow Airport Terminal 5. The construction of Crossrail, a multi-billion pound east-west rapid underground railway across London, complementing the existing underground and rail networks, is due to open in the next 18 months.10 A new ‘super sewer’, the Thames Tideway project, is currently being built underneath London. HS2, a new high-speed rail link between London and the north of England, separate from the existing West Coast mainline, is currently under construction. Although it enjoys cross-party support, there is significant public opposition. The same applies to the building of a third runway at London’s Heathrow Airport. Discussions to improve transport and other economic infrastructure in the north of England, often referred to as the Northern Powerhouse, as well as in other regions long underfunded by successive governments and needing to ‘level up’, are underway between central and local government. Recent high-profile disputes include those connected with urban tram systems, Wembley Stadium and offshore wind farms. The Grenfell Tower tragedy in June 2017 exposed many failings in relationships and the approval process in the construction supply chain, and in the regulation of health and safety in relation to tall buildings, particularly in respect of cladding. The Grenfell Tower Inquiry is likely to recommend wideranging changes. Associated reform of the laws regarding fire safety in tall buildings is already underway.

2.2. Participants 2.2.1.

The main parties involved in a typical construction or engineering project are: (a) The employer (also known as the client, the developer, or the owner), for whose benefit the works are carried out. This could be, for example, a property developer or public authority; (b) The contractor, usually called the main contractor, appointed by the employer to construct the works. More than one contractor may be appointed, each for separate works packages. Depending on its covenant strength, the contractor may be asked to provide a parent or ultimate holding company guarantee. This contractor will in turn enter a range of subcontracts for discrete items of the works. The many divisions within the supply side of the industry lead those involved to seek to contract on the basis of their own discrete input. This produces a proliferation of contracts, even on a small-scale project;

10 Crossrail .

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The professional team, consultants or designers, engaged under appointments or consultancy agreements, usually consisting of an architect; a civil, consulting or structural engineer; a mechanical and electrical or building services’ engineer (for elements such as heating, lighting, and air-conditioning); a cost consultant or quantity surveyor; and, increasingly, a project manager. A distinctive feature of construction contracts from England and Wales (or contracts based on these forms and which are used on projects worldwide) is the inclusion of the role of a third-party certifier to assess and certify payment. To the extent that a project manager exercises this role as part of its services, it must be carried out independently and fairly; and (d) The funder, who provides finance for the project to the employer. A further bank may be involved as a provider of security in the form of a performance bond (usually described as conditional or ‘on-default’ on domestic projects, and ‘on-demand’ on international projects) for the benefit of the contractor, or, much more usually, the employer. As a building or structure is a hybrid product and not produced in a factorycontrolled environment but assembled on-site, a range of operations (such as design, manufacture, procurement, delivery, installation, management, labour, supervision and testing) and components (such as structural steel and concrete and sophisticated electrical and mechanical equipment) are involved. In an age of specialisation, when main contractors no longer carry large workforces or sizeable quantities of plant, numerous companies undertake discrete elements of the overall task. The result is that, although an employer may contract with one contractor to construct a building or structure, this main contractor will provide no more than a team to manage the work on-site and invariably will subcontract the works packages and the requirements for labour and plant to subcontractors. In turn, there will be further subcontracts and supply agreements down a many-tiered chain. There is increasing consolidation and change amongst many of the UK’s large contractor and consultant organisations, only a minority of which are operating at acceptable margins. These merged entities will be asked to carry out both design and construction roles on the same project, which will inevitably lead to tensions and conflicts of interest within these organisations and require training of the existing workforce to reflect changes in how projects are procured. In the largest local and international projects, two or more contractors may form a joint venture (‘JV’). A JV is not considered a legal entity under English law, and so will be formed either contractually or as a corporate JV (structured as a partnership, a company limited by shares, or a limited liability partnership). The members’ liability and responsibility will depend on the commercial arrangements between them and the legal form chosen. (c)

2.2.2.

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Various forms of procurement are used for major projects in England and Wales, depending on the nature of the works and the risk profile each party is willing to accept. The most common methods of procurement are: (a) Traditional procurement: Responsibility for the design and construction of the project are kept distinct. The traditional approach is for an employer to have one or more contracts with consultants for design, and a separate building or engineering contract with a contractor for construction to the required design. The traditional approach can lead to problems, both for the employer and the main contractor, in determining liability in the event of a late or defective project; (b) Design and build: The employer appoints the contractor to complete an initial outline design (prepared by the employer’s design consultants, whose appointments are novated to the contractor, usually at the time the employer enters into the design and build contract with the contractor), and to construct the works to meet this design, contained in a document known as the employer’s requirements. The contractor may appoint specialist designers to carry out the design, but it alone will be liable to the employer for the design (as well as for construction, as would traditionally be expected). From the employer’s perspective, this approach gives a single point for payment and responsibility, and price certainty. However, this requires a rather slim set of employer’s requirements, which reduces the employer’s control and may deliver a building of lower quality; and (c) Package contracting: This includes construction management (where a consultant, known as a construction manager, sources and arranges works or trade contractors for the employer to contract with directly) and the less frequently encountered management contracting (where a management contractor enters into separate works contracts but does not take responsibility for delivering the whole project). In both instances, the employer typically appoints and retains the services of the design team. The other common structure in the UK construction industry, used across key sectors such as education, healthcare, transport infrastructure, justice, waste management, recycling, social care, housing, and leisure, is where a special purpose vehicle (‘SPV’) is set up as part of a public-private partnership (‘PPP’). The public body owner enters into a contract with the SPV to purchase services (for example, the financing, design, construction, and often maintenance of a hospital or prison) on a long-term basis. The SPV (which effectively is the employer in this scenario) engages a main contractor (who, because of the contractual tier above the SPV, may be referred to as the subcontractor). As with the procurement forms mentioned above, this entity will then engage separate subcontractors for the construction, operation, and maintenance of the facility.

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Until the 2008 global financial crisis, the private finance initiative (‘PFI’) model was the most common form of PPP used in the UK. There was no specific legislation governing PFI projects, but the UK government oversaw the PPP/PFI framework by providing the key policy, guidance, and advice, and producing standardised contract documentation. An example of standardised contract documentation is SoPC4 (Standardisation of PFI Contracts, version 4), which set out what each PFI contract must include, as well as some compulsory drafting. From 2011 (when recovery was beginning after the 2008 global financial crisis) and especially after the collapse of the leading construction company and major PFI partner, Carillion, in January 2018, there have been extensive discussions on reforming the PFI model to make the process quicker, cheaper, better value for money for taxpayers, and more flexible. The UK government has announced a new regime called PF2 and published a revised draft version of the standard contract, although a lack of projects in the pipeline means that it has not been widely adopted. In October 2018, the government announced that it would no longer use PF2 for new government projects11 and its publication was withdrawn in November 2018.12 However, even with the apparent death of PFI, bespoke forms of SoPC4 continue to be used on PPP projects in the knowledge that the drafting is tried and tested.

2.3. Work, Health and Safety 2.3.1.

2.3.2.

2.3.3.

The Health and Safety at Work etc Act 1974 (UK) (the ‘HSWA’) provides the legislative framework for all health and safety law, under which sit several hundred health and safety-related regulations with which employers must comply. Some regulations are being revoked due to the current UK government’s policy of reducing what it perceives to be unnecessary bureaucracy. The HSWA sets out general duties that place obligations on employers towards both their employees and all those who are affected by their activities, including the general public. The general duties under HSWA set out an obligation for duty holders to identify risk and reduce that risk to a level as low as reasonably practicable. Duty holders must comply with this obligation at all times. Failure to comply with the HSWA or health and safety regulations is a criminal offence.13 The Health and Safety Executive (‘HSE’) usually brings prose-

11 Gov.uk . 12 Gov.uk . 13 Section 33 .

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cutions, which may result in a significant fine.14 Individuals, including company directors, also have specific obligations, and contravention of these may result in fines, disqualification, and in the most serious cases, imprisonment. Additionally, an organisation whose gross negligence leads to death may face criminal prosecution for corporate manslaughter. This will lead to a significant fine. Criminal liability under health and safety law is separate from any civil liability. Construction-related regulations include those relating to hazard identification, risk assessment, training, supervision, working at height, lifting operations and equipment, manual handling, the provision and use of protective clothing and equipment, including plant and machinery, and reporting injuries and near misses. The main specific set of construction regulations relating to health and safety on construction and engineering projects carried out in the UK are the Construction (Design and Management) Regulations 2015 (UK)15 (‘CDM 2015’). These apply to all construction projects and focus on their planning and management. Under CDM 2015, the client must appoint a principal designer (Regulation 5) (to co-ordinate health and safety during design and to produce a health and safety file at the end of the project) and a principal contractor (Regulation 5) (to plan, manage (including co-ordinating other contractors), and to monitor construction work so that health and safety risks are reduced to as low a level as reasonably practicable (Part 3)). A written construction phase safety plan is also required (Regulation 12).

2.4. Protection of the Environment 2.4.1.

14 15 16 17

By way of example, the European Union introduced the European Union Emission Trading System (EU ETS) in 2005 in order to help member states (which include the UK) reach their greenhouse gas emissions reduction targets.16 The scheme operates by allowing each member state to set an overall limit on the total emissions permitted from all installations covered by the scheme. Accordingly, if the installations on a particular construction project are caught by the scheme, requisite permits must be obtained, reports must be issued, and a fee must be paid if additional allowances are required.17

HSE Enforcement Policy on Prosecution. . Europa . .

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The UK is also a signatory to the Declaration of the United Nations Conference on the Human Environment (‘Stockholm Declaration’).18 The following list, though not exclusive, identifies key UK environmental legislation affecting the construction industry: (a) The Control of Pollution Act 1974 (UK),19 which contains a system to regulate noise from construction and engineering projects. A local government authority can serve a notice controlling the way in which the works are to be carried out (under section 60) and the contractor can apply for prior consent (under section 61); (b) The Environmental Protection Act 1990 (UK),20 Environment Act 1995 (UK),21 and Environment Protection and Biodiversity Conservation Act 1999 (UK), which aim to prevent pollution to air, land, and water and regulate, among other things, the disposal of waste and contaminated land. For example, they provide that dust, fumes, odours, noise emissions, and light pollution (among others) may be classified as statutory nuisances;22 (c) The Water Industry Act 1991 (UK),23 which provides that discharging water to any foul water sewer may only be undertaken with consent from the local sewerage provider;24 (d) The Clean Air Act 1993 (UK),25 which aims to protect the environment from harmful gases and other airborne pollutants, and prohibits the emission of dark smoke from industrial or trade premises. Breach of this Act is a criminal offence;26, 27 (e) The Control of Pollution (Oil Storage) (England) Regulations 2001 (UK),28 which applies to the storage of 200 litres or more of oil on site.29 The regulations also contain requirements aimed at minimising the risk of pollution of controlled waters;

18 Declaration of the United Nations Conference on the Human Environment, UN Doc A/Conf.48/14/ Rev.1 (16 June 1972). 19 . 20 . 21 . 22 Section 79 . 23 . 24 Section 118 . 25 . 26 . 27 Section 50 and section 55 . 28 . 29 Section 2(c) .

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(f)

(g) (h)

(i)

30 31 32 33 34 35 36 37 38 39 40

The Producer Responsibility Obligations (Packaging Waste) Regulations 2007 (UK),30 which set out requirements for companies who are defined as ‘obligated packaging producers that handle 50 or more tonnes of packaging in the previous calendar year and have a turnover of £2 million or above based on the last financial year’s accounts, to recover and recycle packaging waste’.31 The Hazardous Waste (England and Wales) Regulations 2005 (UK),32 which require waste producers to register with the Environment Agency any premises producing more than 200 kg of hazardous waste in any 12-month period;33 The Climate Change Act 2008 (UK),34 which aims to improve carbon management and help with the transition towards a low-carbon economy; The Environmental Permitting (England and Wales) Regulations 2010 (UK),35 which regulates commercial and industrial activities (such as the disposal of waste and discharges to air and watercourses) by requiring facilities covered by the Regulations to obtain a permit. For example, it is a criminal offence for a person to cause or knowingly permit a water discharge activity or groundwater activity without an environmental permit.36 A water discharge activity includes discharging waste matter or noxious or polluting matter into inland freshwaters or coastal waters. If the discharge is made into a watercourse that supports fish, then the discharge may also constitute an offence under the Salmon and Freshwater Fisheries Act 1975 (UK);37 The Waste (England and Wales) Regulations 2011 (UK),38 which implements revisions to Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on Waste and Repealing Certain Directives (the ‘Waste Framework Directive’)39 in England and Wales. The revised Waste Framework Directive requires that a waste hierarchy is strictly respected. Under the hierarchy, the preferred option is to minimise waste accumulation, followed by the preparation of waste for reuse, recycling, and other recovery methods, with disposal as a last resort; and40

. Gov.uk . . Section 30 . . . Section 12 . . . [2008] OJ L 312/3. Europa .

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The Control of Asbestos Regulations 2012 (UK),41 which impose obligations to determine whether asbestos is present on a construction project and to manage any asbestos that is or is likely to be present. The common law can also be used to ensure that the construction industry protects the environment: for example, the torts of nuisance and negligence, and the rule in Rylands v Fletcher42 (which states that a party is liable if damage occurs where it has kept something on its land which amounts to ‘non-natural use’ of the land and which was likely to cause damage if it escaped). However, the application of this rule is now rare after case law has gradually restricted its use. Contractors and developers should also note that, depending on the nature, size or location of the project, an ‘environmental impact assessment’ (‘EIA’) may be required prior to the grant of planning permission. This is required under the Town and Country Planning (Environmental Impact Assessment) Regulations 2011 (UK),43 to identify and evaluate the risks of environmental degradation associated with large infrastructure projects that potentially have significant environmental impacts. They apply particularly to the proposed construction of roads, power stations, railway lines, and to waste, energy, and industrial installations. In addition, the Building Regulations 2010 (UK)44 set out energy efficiency requirements in buildings. Approved Documents L1A, L1B, L2A and L2B provide technical guidance on complying with these regulations.45 As for sustainable design, the standard (and assessment most commonly referred to in construction documentation) is established by the Building Research Establishment Environmental Assessment Methodology (‘BREEAM’). This method awards points to buildings according to their environmental impact in ten categories (energy, site management, health and wellbeing, water consumption, transport, construction materials, waste, air and water pollution, land use and ecology).46 A building with a low environmental impact scores highly in the BREEAM rating scale, which ranges from ‘pass’ to ‘outstanding’. Certain construction projects are required to achieve a specified BREEAM rating before they are granted planning permission.47 For example, (j)

2.4.3.

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2.4.5.

2.4.6.

41 . 42 (1868) LR 3 HL 330. 43 . 44 . 45 HM Government, Approved Document L1A: Conservation of Fuel and Power (2013 ed, 2014); HM Government, Approved Document L1B: Conservation of Fuel and Power (2010 ed, April 2018); HM Government, Approved Document L2A: Conservation of Fuel and Power (2013 ed, 2014); HM Government, Approved Document L2B: Conservation of Fuel and Power (2010 ed, March 2015). 46 BREEAM . 47 BREEAM .

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all government-funded construction projects in the health sector are required by the Department of Health to achieve an ‘excellent’ rating,48 and the Welsh government requires that all new non-domestic buildings over 1,000 square metres achieve a ‘very good’ rating. BREEAM standards are not statutory obligations with which a development must comply, but the scheme is considered best practice in relation to sustainable design. If a party wants these environmental standards to be met, the obligations must be contractually created. The UK government is committed to reducing Kyoto-agreement greenhouse gas emissions by 80 % compared to 1990 levels by 2050 (Climate Change Act 2008 (UK) (the ‘Climate Change Act’)).49 The Climate Change Act provides the government with powers to take measures to ensure that this target is achieved. In 2008, the government and the construction industry published a joint Strategy for Sustainable Construction setting out how the construction industry can play its part in meeting the target.50 Directive 2002/91/EC of the European Parliament and of the Council of 16 December 2002 on the Energy Performance of Buildings,51 recast as Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the Energy Performance of Buildings (the ‘EPBD’),52 seeks to promote the improvement of the energy performance in buildings within the EU. The central requirements of the EPBD are that member states implement a methodology for the calculation of the energy performance of buildings and that regulations are made to set a minimum energy performance target for new buildings, and for existing large buildings when they are refurbished.53 In addition, the EPBD requires that Energy Performance Certificates are made available when buildings are constructed, sold or rented out, and that boilers and air-conditioning units are inspected.54  

2.4.8.

48 BREEAM . 49 National Atmospheric Emissions Inventory . 50 Sustainability Exchange . 51 [2003] OJ L 1/65. 52 [2010] OJ L 153/13. 53 Europa . 54 Europa .

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In the UK, Part 6 of the Building Regulations 2010 (UK)55 was amended to accommodate the requirements of the EPBD.56 In practice, The Government’s Standard Assessment Procedure for Energy Rating of Dwellings (‘SAP’) is the methodology used to assess the energy performance of buildings in accordance with the EPBD’s specifications.57 SAP enables several factors to be assessed, including heating installations and hot water supply, air-conditioning installation, ventilation, lighting installation, and passive solar systems, and solar protection of buildings.

2.5. Quality Assurance 2.5.1.

2.5.2.

2.5.3. 2.5.4.

In general, a contractor will be liable to the employer for its own negligence when carrying out the main building contract, as well as all acts, errors, and omissions arising from the work of its subcontractors. The exception to this in previous years was in situations where an employer nominated a particular specialist subcontractor, thereby retaining certain liabilities for the defaults of the subcontractor. However, this is now rarely used, and standard forms have been amended so that they no longer include nomination provisions. A contractor may rely on an express indemnity provided in the subcontract for acts, errors, and omissions caused by the subcontractor. However, the contractor should note that if it partly caused the loss, it may not be able to recover these losses from the subcontractor. Additionally, should the contractor wish to recover any liquidated damages that it has had to pay as a result of the subcontractor’s performance, it must have notified the subcontractor of the liabilities in the main contract. If it did not do so, the contractor may be unable to recover these monies. A contracting party cannot indemnify itself against death or personal injury claims that have been caused by its negligence. The new RIBA Plan of Work (the ‘new Plan’) was launched on 21 May 2013 and a revised version was issued on 28 February 2020.58 It was the first major update since its inception in 1963. It was updated to reflect the current working practices and methods of the construction industry. The new Plan continues to provide a framework for the organisation and management of build-

55 . 56 . 57 Department of Energy & Climate Change (UK), The Government’s Standard Assessment Procedure for Energy Rating of Dwellings: SAP 2012 (2012 ed, Version 9.92, June 2014). 58 RIBA Plan of Work 2013 .

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ing projects and is the definitive model for building design and construction processes in the UK. The traditional 11 stages, defined by the letters A-L, have been replaced with eight stages, defined by the numbers 0-7, and eight task bars. Users of the new Plan should note that it is merely guidance, just as it had been in its previous forms. It is not mandatory and simply sets out current best practices in terms of briefing, design, construction, maintenance, and operation, thereby minimising ambiguities at the outset, which otherwise may lead to costly disputes. As such, the new Plan encourages the preparation of legally binding documents, though obligations only arise if they are expressly incorporated into contracts.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

2.6.3.

The party that usually selects the form of contract differs depending on the circumstances. Typically, between: (a) the employer and the main contractor, the employer selects the contract; (b) the main contractor and subcontractors, the main contractor selects the contract; (c) the supplier and the purchaser (usually the employer or the main contractor), the equipment supplier selects the contract; and (d) the consultant and the employer or main contractor, the contract will be selected by either party depending on the commercial dynamics. A project financier will not often select a contract but will often state at the outset (usually in a finance agreement) that it must cover certain issues or ask to review a contract and call for amendments to the contract to be made. The dynamics and allocation of risk in construction contract negotiations are likely to change over the next few decades as parties adopt Building Information Modelling (‘BIM’) into the design and construction process. Essentially, BIM is a collaborative process that requires parties to contribute information about the project into a central database or online platform, such that there will be a single repository of information to cover the entire lifecycle of a building or project. This information is not limited to design but also includes prices of individual elements, and documents regarding the long-term management and maintenance of the completed project. The intention is to spot problems, such as design clashes, earlier in the construction process, and to reduce management costs, claims and disputes. BIM is seen by many as a game-changer for the construction industry globally. However, this is just the theory, as keeping the database updated requires significant investments of time, people and cost. It is uncertain whether building owners will be willing to incur such costs. At the design stage, parties have still not worked out who

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will take responsibility for changes made in the communal design platform which lead to clashes (and therefore disputes) where such clashes were not spotted at the time the information was entered into the platform. How the insurance industry and contract drafters will reflect this new type of risk has still not been settled by the market. Artificial intelligence is likely to have an increasingly important role in construction projects and complement BIM in the management of buildings across their entire life cycle, for example by providing technology that enables buildings to be ‘smart’. However, this technology is in its early stages and it is not clear which parties in the industry will be prepared to invest financial and human resources in such technology for the entire life of a building.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Apart from a small number of understandable exceptions, such as the regulation of insurance, employment, and consumer contracts, as well as of exclusion and liability limitation clauses in certain commercial contracts, and statutorily implied requirements such as fitness for purpose, the right to adjudicate and a regime for regular and prompt payment (explained below), parties to construction and engineering contracts governed by English law are largely at liberty to contract on the terms that they wish, free from constraints imposed by case or statute law, as is the case for most English law-governed commercial contracts.

3.2. Legal Framework 3.2.1.

The bedrock of construction law is the common law, especially as developed in contract and tort cases. English law allows contracting parties the freedom to include in their construction contract any terms, provided they are not in conflict with statute law or public policy.

3.3. Public Policy 3.3.1.

Certain contracts are void for reasons of public policy. These reasons can be classified into the following groups. Those that: (a) are illegal by common law or legislation; (b) are injurious to good government domestically or in foreign affairs;

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(c) interfere with the proper workings of justice; (d) are injurious to marriage and morality; and (e) are economically against the public interest. Illegality is distinguished between illegality of formation and illegality of performance. Where a contract cannot be performed in accordance with its terms, because it will involve the commission of an illegal act, the courts will not enforce it. A claimant cannot sue on a contract if the contract is legal as formed, but the performance of the contract necessarily, and to the knowledge of the claimant, involves or has as its object the commission by one or both parties of an act known to be legally objectionable. However, where the contract does not necessarily involve the commission of a legally objectionable act, and the legally objectionable intention or purpose of one party is unknown to the other, the latter is not precluded from enforcing the contract.

3.4. Statute Law 3.4.1.

There are several statutes not specifically designed for the construction industry, but which affect the drafting of construction contracts.

Sale of Goods Act 1979 (UK) (the ‘SGA’)59 3.4.2. As construction projects involve the use of goods and materials to fulfil contractual obligations, this statute is important because it implies terms into construction contracts regarding title, correspondence with description, quality, and fitness for purpose. Where a seller (such as a contractor) sells goods in the course of business, and a buyer (such as an employer), expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract will be reasonably fit for that purpose.60 This implied term can be excluded in circumstances provided for in the statute which regulates the use of exclusion and limitation clauses61 (see below). Note that the SGA does not imply a term that a completed project itself will be fit for purpose.

59 . 60 Section 14 . 61 Section 55 .

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Supply of Goods and Services Act 1982 (UK) (the ‘SGSA’)62 3.4.3. This statute applies to contracts for work and materials and contracts for services. It implies into contracts terms for work and materials equivalent to those in the SGA with respect to any goods in which the property has been transferred under the contract. This applies to materials that are used by a contractor and incorporated into the completed property, from which the employer will benefit. For services, the SGSA implies terms regarding care and skill,63 time of performance,64 and consideration.65 Late Payment of Commercial Debts (Interest) Act 1998 (UK)66 3.4.4. This statute provides for interest to be paid by a purchaser on the late payment of a debt in a commercial contract for the supply of goods or services.67 It therefore applies to employers on the late payment of a debt to a contractor under a construction contract. The current statutory interest rate is 8 % per annum above the official Bank of England base rate,68 but parties often replace this with a lower rate of around 3 %. The statute requires that any contractual rate chosen by the parties must constitute a substantial remedy for late payment.69 If there is no significant connection between the contract and the UK, the statute has no effect on a contract governed by English law.70 The statute will apply to a contract with a non-UK choice of law, if, but for the choice of law, the applicable law would have been English law (or the law of another part of the UK).71  

 

Contracts (Rights of Third Parties) Act 1999 (UK)72 3.4.5. This statute enables a third party, who is given a benefit in a contract by the contracting parties, to enforce the benefit directly against the relevant contracting party.73 Previously, only the other contracting party could enforce the benefit on behalf of the third party, if it could be enforced at all. The third party can be identified by name, as a member of a class, or by description, and need not

62 . 63 Section 13 . 64 Section 14 . 65 Section 15 . 66 . 67 . 68 Gov.uk . 69 Section 8 . 70 Section 12 . 71 Section 12 . 72 . 73 Section 1(1) .

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be in existence at the time the contract is entered into.74 The construction industry uses this statute to allow funders and future purchasers and tenants of a development to benefit from the construction and design obligations in contracts between developers and contractors or designers. It removes the need for lengthy and costly negotiation of, and circulation for the signing of, collateral warranties, which have historically been the way that third parties have taken the benefit of obligations in construction contracts (in light of the doctrine of the privity of contract, and the difficulties third parties have, as a result of how case law has developed, of recovering damages for pure economic loss in the tort of negligence under English law). Apart from granting a limited class of third parties the right to enforce certain obligations, most construction contracts expressly exclude the application of this statute. Statutes preventing bribery and corruption 3.4.6. Prior to the Bribery Act 2010 (UK),75 which came into force on 1 July 2011, bribery of a public official was a common law and statutory offence, and several statutes dealt with the offence of bribery. These have now been repealed by the Bribery Act 2010 (UK), to modernise and simplify the law on bribery. However, the Bribery Act 2010 (UK) is not retrospective, and therefore any offences committed prior to 1 July 2011 will be dealt with under the old law. 3.4.7. The Bribery Act 2010 (UK) creates the four new criminal offences of paying a bribe,76 receiving a bribe,77 bribery of a foreign official,78 and the corporate offence of failing to prevent bribery.79 Facilitation payments (such as those encouraging a public official to perform their duty in a more time-efficient manner) are made illegal.80 If convicted, the penalties for breaches of the Bribery Act 2010 (UK) include unlimited fines and custodial sentences of up to ten years.81 3.4.8. With regard to the construction industry, the corporate offence of failing to prevent bribery is likely to be of most interest, as construction firms can be strictly liable for any employees, agents, or other third-party representatives who give bribes to obtain or retain business for the firm. However, if a construction company or organisation is proactive and prepared, it can advance

74 Section 1(3) . 75 . 76 Section 1 . 77 Section 2 . 78 Section 6 . 79 Section 7 . 80 Serious Fraud Office . 81 Section 11 .

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3.4.9.

3.4.10.

3.4.11. 3.4.12.

3.4.13.

3.4.14.

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a defence to most prosecutions on the basis that it had ‘adequate procedures’ in place. If a company can demonstrate that it not only has proper procedures in place but also that compliance with these procedures is properly monitored, it would be difficult to fall foul of the legislation. The UK Ministry of Justice has published guidance on these procedures.82 In summary, a company or organisation needs to consider the six key principles of risk assessment: proportionate procedures, communication, due diligence, monitoring and review, and top-level commitment. Where a contractor has illegally obtained an award of a contract through bribery, the contract can be set aside by the court. By accepting or offering a bribe while acting as an agent of the company, a director of a company is likely to be in breach of their fiduciary duty, and the contract may, therefore, be capable of rescission.83 Further, where a party knowingly enters into an illegal contract, it may not be able to enforce it, based on the principle that no cause of action may be founded on an illegal act.84 Some standard form contracts incorporate express terms that enable the employer to terminate the contract for bribery. There are no laws that restrict the ability of contractors or design professionals to work for public agencies because of their financial support for political candidates or parties. However, one must be mindful of the Bribery Act 2010 (UK). For example, it is an offence to provide hospitality or gifts to another person that gives an advantage to that other person and where the provider of the hospitality or gifts knows or believes that the acceptance of the advantage would itself constitute the improper performance of a relevant function or activity.85 In addition, concealing defects, making dishonest claims for payment or levying liquidated damages and dishonestly withholding payment, or obtaining services without any intention or means of paying the service providers would all be criminal offences caught by the Fraud Act 2006 (UK).86 If convicted, the penalties for breaches of the Fraud Act 2006 (UK) are a fine or a custodial sentence of up to ten years.87 The Proceeds of Crime Act 2002 (UK)88 sets out a regime of anti-money laundering offences covering an individual who conceals, disguises, converts, or

Gov.uk . Section 14 . Ex turpi causa non oritur actio. Section 1 . Section 11 . Section 1(3) . .

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transfers criminal property (that is, the proceeds of any crime).89 It also covers individuals who remove criminal property, enter or become concerned in an arrangement that they know or suspect facilitates money laundering, or acquire, use, or possess criminal property. 3.4.15. These offences carry prison terms of up to 14 years and unlimited fines.90 There are additional offences that relate to the failure to report a suspicion of money laundering. Further, there is the offence of tipping off the money launderer once suspicion is raised. These offences also come with terms of imprisonment and fines.91 3.4.16. The effect of this regime is that construction firms must be very careful to understand and be comfortable with the source of any funds passed to them. In particular, they must be alert when large sums of cash are received and when payments arrive from unidentified parties or bank accounts in unrelated countries. 3.4.17. Competition law also applies to the construction sector, particularly in relation to tendering activities and the procurement of projects by public or quasi-public bodies under relevant EU procurement laws. Recently, recourse to competition law has been necessary in relation to cover pricing. Cover pricing is where a company invited to tender does not wish to win a contract but does not want the client to think that it would not be interested in future work. Therefore, the company contacts another company that is tendering for the same contract to request a price that will ensure that it does not win the work but that is not grossly inflated. The Office of Fair Trading fined 103 construction companies a total of £129.5 million in 2009 for their involvement in cover pricing, under competition law.92 However, these fines were reduced by around 90 % on appeal in 2011. In general, companies involved in anti-competitive behaviour can face a fine of up to 10 % of annual turnover.93 Moreover, the Enterprise Act 2002 (UK)94 has criminalised participation in cartel activities such as price-fixing and bid-rigging. Individuals found guilty of an offence can face a term of up to five years in prison, as well as an unlimited fine.95  

 

89 Section 327 . 90 Section 334 . 91 Section 340 . 92 Moneywise . 93 Europa . 94 . 95 Section 188 .  

 

 

 

 

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3.4.18. Investigations have also been conducted in recent years in the UK into contracting firms who maintained ‘blacklists’ of persons they would not employ due to their trade union activities.

3.5. Construction of Express and Implied Contract Terms 3.5.1. 3.5.2. 3.5.3.

3.5.4.

3.5.5.

3.5.6. 3.5.7.

3.5.8.

3.5.9.

A construction contract will contain a mixture of express and implied terms. Express terms are classified as conditions, warranties, or intermediate terms, depending on their relative importance. A condition is an essential stipulation of the contract which goes to the very substance of the contract or is so essential to its nature that its non-performance may be considered by the other party as a substantial failure to perform the contract at all. Breach of a condition will entitle the innocent party, if it so chooses, to treat itself as discharged from further performance of the contract, and also claim damages. An example of a condition may relate to the subject matter of goods in a contract for the sale of goods. A warranty is used in the sense of a contractual undertaking or promise and is reserved for the less important terms of the contract, or those which are collateral to the main purpose of the contract. Warranties will be specific to the agreement but in many commercial agreements, they will consist of a series of standard clauses connected with the transaction. Examples may include the capacity and status of the parties, pending litigation, encumbrances on property, intellectual property rights, details of employees, accounts, subsisting contracts, and environmental matters. Breach of a warranty does not allow the innocent party to treat the contract as discharged, but the innocent party can claim damages for breach. Parties to a contract may use the term ‘condition’ or ‘warranty’ to describe a contractual term. This is an indication of their intentions but is not conclusive. Of far more relevance are the parties’ intentions, as inferred from the subject matter of the contract or the surrounding circumstances. When words such as ‘of the essence’ are applied to a contractual term, especially a term relating to time, this will generally mean that the term is a condition. Intermediate terms combine the nature of a condition and a warranty and were introduced by the courts to prevent the innocent party being able to refuse further performance of the contract in the event where it had suffered no, or only trifling, damage or loss. A term will be classified as intermediate if it is capable of being broken either in a manner that is trivial and capable of remedy by an award of damages or in a way that is so fundamental as to undermine the whole contract. Breach of an intermediate term will only entitle the innocent party to treat the contract

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as discharged if: (a) the party in default has, through the breach, renounced its obligations under the contract or rendered them impossible to perform in some essential respect; or (b) it substantially deprives the innocent party of the whole of the benefit of the contract. If this is not the case, the remedy will be for damages only. Contracts are read as a whole; words and phrases are read in their immediate and contractual context. Recently, the courts have displayed a firm commitment to give words their ordinary, plain, or natural meaning, and to be less swayed by arguments that a term is ambiguous or that a term should be interpreted purposively in accordance with business common sense, particularly where the parties are sophisticated and where legal advisers were present during contract negotiations.96 Therefore, the starting point when interpreting express terms in a contract is to look at the text of the contract and then answer the question: ‘What is the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract?’. This is an objective test and does not require ambiguity to exist before it can be used. Older rules, such as construing any ambiguity against the person seeking to rely on the term, now play much less of a role in the interpretation of contracts, and the role of precedent in this area is limited. Prior negotiations and declarations of subjective intent are not admissible (although they would be for a rectification claim), but background information can be included if it can be proved by evidence that it was mentioned in negotiations. There is now extensive case law on how to interpret certain phrases such as ‘reasonable endeavours’, although the English courts are reluctant to apply hard and fast rules and prefer to decide on a case by case basis to reflect the commercial intent of the parties.97 Implied terms are terms that have not been expressly stated by the parties. The implication of a term is a matter of law for the court and is usually said to depend upon the intention of the parties as collected from the words of the agreement and the surrounding circumstances.98 They may be implied into a contract by custom, by the presumed intention of the parties, or by statute (for example, some of the statutes discussed in Section 3.4 above). If there is nothing to the contrary in the express terms of the contract, a contract may be deemed to incorporate a general usage or custom of a particular

96 Wood v Capita [2017] UKSC 24; Arnold v Britton [2015] UKSC 36. 97 See for example Jet2.com Limited v Blackpool Airport Limited [2011] EWHC 1529 (Comm). 98 Wood v Capita [2017] UKSC 24; Marks & Spencer v BNP Paribas [2015] UKSC 72.

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trade or market or locality in which the contract is made. The usage must be notorious, certain, reasonable and not contrary to law. It must be more than a mere trade practice. 3.5.15. Recent case law indicates that where sophisticated parties of equal bargaining power with access to legal advisers have drafted contracts, the courts will be less likely to find gaps in contracts that need to be filled by implying terms.

3.6. Private and Public Procurement 3.6.1. 3.6.2.

3.6.3.

3.6.4.

Private projects are usually tendered on a competitive basis. The Public Contracts Regulations 2015 (UK)99 (and, during a transition period, the Public Contracts Regulations 2006 (UK))100 set out the rules for public procurement of contracts for works, services and supplies, implementing the Public Contracts Directive (2014/14/EU) under which contracts are required to be awarded fairly and without discrimination on the grounds of nationality, and all potential bidders are treated equally. They continue to apply, for the most part, for an initial time following the end of the Brexit transition period and cover the tender and award of public contracts, which are widely defined.101 Strict rules apply to framework agreements. For example, they must not generally exceed a term of four years, and the terms of any framework must be determined at the outset.102 The Regulations may also apply if an existing contract is renewed or extended on different terms or there are material changes to an existing contract. Certain smaller contracts are largely excluded from the procurement regime and only limited rules apply. However, any contract that may interest providers from a different member state will have to comply with principles in the EU treaties. Therefore, procurement processes must be transparent. As a minimum, this will mean that contract opportunities will need to be advertised. All procurements will also need to comply with government requirements to obtain value for money. If the Regulations apply, the contract must be advertised at EU level, usually by publishing a notice (known as an OJEU or contract notice) in the Official Journal of the European Union (OJEU) in a standard form. The contracting

99 . 100 . 101 Europa paragraph 1 . 102 Europa paragraph 62 .

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authority must follow one of six award procedures, known as the open procedure, the restricted procedure, the competitive dialogue procedure, the competitive procedure with negotiation, the innovation partnership procedure and the negotiated procedure. Minimum time limits apply to the various phases of each procedure. The open procedure provides for a one-stage procurement, while the other procedures have a short-listing (selection) stage prior to tenders being submitted. Contracting authorities must apply certain selection criteria to choose suppliers to tender, apply certain award criteria to assess tenders and disclose details of these criteria to the tenderers. Procurement for most PPP projects in the UK follows the competitive dialogue method. Bidders who successfully pass the pre-qualification stage are then invited to provide their outline solutions. From the outline solutions, the authority creates a shortlist of usually three or four bidders, who are invited to produce detailed solutions, and then selects the bidders to provide final tenders. After being selected and appointed, the successful bidder and authority can only clarify, specify, and fine-tune the bid. Substantial changes are not allowed and changes must not distort competition or cause discrimination. After a contracting authority has made its decision to award a contract, it must send out a notice (known as an Alcatel letter) to everyone involved in the tender process. The contracting authority must then allow a standstill period between the notice being sent out and the contract being entered into. Suppliers of goods and services have the right to take action in the English High Court against public bodies if contracts are not advertised or awarded on an open and fair basis. If proceedings are brought, the court can take interim measures to suspend an award procedure. If the court is satisfied that there has been a breach of the Regulations, it can either order a decision to be set aside or award damages for the loss of opportunity. In addition, the Government Procurement Agreement (‘GPA’) of the World Trade Organisation103 gives non-EU suppliers based in GPA signatory countries the right to compete on equal terms for many public contracts awarded within the EU.

103 .

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

4.1.3.

The UK government has passed the Housing Grants, Construction and Regeneration Act 1996 (UK)104 as amended by the Local Democracy, Economic Development and Construction Act 2009 (UK)105 (the ‘Construction Act’), containing compulsory statutory adjudication and payment rules, to ensure the timely flow of money to the UK construction supply chain. Other than the Construction Act, the government does not interfere with the freedom of parties to enter into a construction contract in the terms they choose. However, building, health, and safety regulations set out in Section 2; compulsory insurance legislation set out in Section 4.3; and the statutes listed in Section 3.4 affect the drafting and performance of contracts for construction works. More widely, recent changes to UK planning law, and the introduction of a specialist court to handle challenges to major infrastructure schemes, should promote development and reduce delay and costs to developers having to respond to spurious legal challenges by interest groups. Companies involved in UK construction projects, depending on the nature of the project and how it is structured, must also be aware of any international or national taxes or schemes that affect their specific sector or project. These include corporation tax (if the company is UK tax-resident or trading through a UK permanent establishment), value added tax, stamp duty land tax, and withholding tax. Careful analysis should be carried out to ensure that any reliefs (such as capital allowances or deductions for funding costs), as well as input VAT recovery, are maximised. On major UK and international projects, split onshore/offshore contracts may be used to reduce local income or corporation tax liabilities. Offshore contractors, such as contractors supplying offshore equipment or design services, may be taxed in the country where they are based, although VAT may still be chargeable in the UK. Onshore contractors dealing with the UK construction itself will remain subject to UK tax. The Construction Industry Scheme (‘CIS’) applies to contractors and subcontractors in the construction industry. It governs registration and compliance, including whether payments to subcontractors are to be made subject to deduction for income tax. Other special tax regimes and incentives may need to be considered, such as in relation to regeneration and oil and gas exploration and production.

104 . 105 .

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The UK also has one of the largest networks of double taxation treaties, which covers over 100 countries, and has signed several tax information exchange agreements. There are no laws that restrict the removal of profits and investments from England and Wales. However, those in control of the business should be aware that there are certain situations in which they could be personally liable for wrongly removing profits from the country, particularly when insolvency is looming. Overseas contractors and designers will need to register with HM Revenue & Customs. Tax issues are complex and appropriate independent advice should be sought.

4.2. The Construction Act, and Government Guidance on Prompt Payment and Adjudication 4.2.1.

4.2.2.

The Construction Act requires contracts for construction operations being carried out in the UK to contain prescribed payment terms and to provide a right for a party to the construction contract to refer a dispute to adjudication at any time. ‘Contracts for construction operations’ do not have to be in writing and are intricately defined to include most commercial building and engineering contracts and subcontracts, although there are particular industry exceptions. A further statutory instrument excludes some contracts (for example, PFI concession agreements and development agreements which include a land transfer) from the Construction Act’s scope. If construction contracts do not meet the Construction Act’s requirements, there is subordinate legislation (called the Scheme for Construction Contracts (England and Wales) Regulations 1998 (UK)) 106 which implies compliant provisions into the contract.107 The mandatory minimum requirements in respect of payment require payment to be in stages, except for minor works. There must be an adequate mechanism to establish the amounts due, the time they fall due, and the final date for their payment. The payer must give notice within five days after the due date of the amount to be paid. If this notice is not issued, the payee must serve a default payment notice (although this will usually be its initial application for payment). If a party wishes to withhold payment, it must serve a pay less notice no later than a prescribed number of days before the final date for payment. Pay-when-paid provisions (that is, providing that payments by party A to party B are conditional on party A receiving payment from a third

106 . 107 Part 2 .

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4.2.4.

4.2.5.

4.2.6.

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party) and pay-when-certified provisions are invalidated (except upon insolvency) and an unpaid contractor has the right to suspend any of its work on seven days’ notice. These are the principal means by which a contractor secures the right to payment, particularly as there is no concept of a mechanic’s, contractor’s or subcontractor’s lien under English law. The Construction Act recognises the PPP/PFI concept and the characteristics of its structure, in that the top-tier contract entered into between the public sector authority and the private sector SPV is excluded from all of the payment and adjudication requirements. In addition, powers available under the Construction Act have been used to exclude first-tier PFI contracts between the SPV and its subcontractors from the prohibition on pay-when-certified provisions.108 An English government agency cannot assert sovereign immunity as a defence to a contractor’s claim for payment. Equally, if the contract falls within section 3 of the State Immunity Act 1978 (UK),109 a foreign state cannot claim immunity in relation to the commercial transaction unless the parties have agreed otherwise agreed in writing. With this statutory framework in mind, the contract sets out the express terms on which the contractor will be paid. Common payment methods include a lump sum, measurement (where work is measured and paid for in accordance with a formula in the contract), prime cost (based on the cost of the labour and materials), and cost-plus or target-cost (where prime cost, plus an added profit percentage, is payable). Contractors, subcontractors, and consultants are typically paid monthly. For consultants, often a lump sum fee is agreed with a monthly draw-down schedule, against which the consultants issue invoices. Alternatively, in some situations, consultants may agree to be paid when certain project milestones are reached. Late-payment legislation now encourages prompt payment in commercial contracts, generally by specifying periods of 30, 60, 90, or 120 days (depending on the type of contract) after which interest will accrue. However, this is rarely a problem in construction contracts, given the system of monthly stage payments. Recently, the government and industry have also published various non-binding guidance notes encouraging prompt payment to reduce the risk of supply chain cash-flow problems,110 including a prompt payment code.111 There are government proposals aimed at making a contractor’s strong prompt payment record a condition for qualifying as a tenderer on government pro-

108 . 109 . 110 Gov.uk . 111 Prompt Payment Code .

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jects. Some government and other projects may require the use of a project bank account (‘PBA’). A single bank account is set up in joint names or in the name of the contractor and the building contract includes a mechanism for calculating the sum that the employer must pay into the PBA in time for payments to be released to the supply chain in accordance with the contractor’s fee breakdown. Statutory adjudication under the Construction Act is a method of resolving construction disputes of all complexities and values that is significantly shorter than litigation or arbitration. Following receipt of a party’s claim (known as its ‘referral’), the other (responding) party usually has between seven and 14 days only to submit its response. The adjudicator will decide the dispute within 28 days of receiving the referral unless the parties agree to an extension. An adjudicator’s decision is binding only until reconsidered in arbitration or litigation, but can be made final by agreement. The successful party can quickly apply to the court to enforce an adjudicator’s decision by summary judgment should the other party not comply. There are very limited grounds for disputing the validity of an adjudicator’s decision. Parties often name an adjudicator with a good reputation, and an adjudicator nominating body to appoint an adjudicator where the named adjudicator is unable to act.

4.3. Insurance 4.3.1.

4.3.2.

Statute requires that motor insurance be taken out for company vehicles112 and that employers maintain employer’s liability insurance to cover loss, damage, injury, or disease caused to a company employee, in most cases for not less than £5m for each occurrence.113 Failure to have this insurance in place is a criminal offence.114 It is also usual for contractors to also take out public liability insurance (covering the contractor against any injury to third parties (for example, members of the public) and against damage to third-party property, professional indemnity (and in some cases product liability) insurance (covering damages payable in the event of negligent design, where the contractor is carrying this out, and certain breaches of contract and statute), and works insurance (often known as construction all risks or CAR cover, covering risks in relation to the works and certain events such as physical loss or damage to the works, and loss or damage to materials, plant, equipment, and temporary structures on-site).

112 Section 1 . 113 Section 3 . 114 Section 5 .

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Single project insurance, latent defects insurance and liquidated damages insurance may also be available but are less commonly used. Various environmental insurance policies are available, which may afford coverage for loss from historical contamination, loss from contamination caused by ongoing operations, loss arising from cost overruns during remediation, loss arising from contractors operating on third-party sites, and pollution and environmental liabilities arising from business activities. Each policy needs to be carefully considered, as insurers tend to seek to exclude or restrict cover arising from existing pollution conditions that have been identified in a report or are reasonably foreseeable.

4.4. Government Guidelines 4.4.1.

4.4.2.

The government has a construction strategy, known as Construction 2025,115 through which it engages with industry representatives to agree on aspirations and policies for the construction industry and to provide information about public projects in the pipeline. For public projects, UK governments tend to produce guidance notes during their term of office, aimed at encouraging best practices, improving efficiency in the construction industry and explaining to the industry how policies will be implemented. The government has recently held trials of new approaches to construction on three public projects using collaborative forms of contracting and seen them delivered more quickly and cheaply than anticipated. Case study reports have been published, showing how practices adopted on these projects could be adopted by the industry more widely to improve project delivery. Construction of major social and economic infrastructure is a key plank in the current UK government’s plan for recovering from the downturn caused by the COVID-19 pandemic.

4.5. Licensing of Professionals and Contractors 4.5.1.

There are no specific licensing requirements for international contractors and construction professionals, although there are various licences and consents that must be obtained before, during and after the carrying out of projects in the UK. These include: (a) Planning permission: The employer must obtain planning permission from the planning authority prior to the commencement of the works if

115 HM Government, Construction 2025 (July 2013).

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(b)

(c)

(d)

the proposals amount to ‘development’ as defined under section 55(1) of the Town and Country Planning Act 1990 (UK).116 Listed building consent may also be needed for work to historic buildings.117 Following the grant of planning permission, there is a period where a decision can be challenged (the judicial review period).118 The parties may decide not to commence works until this period has expired. Third-party consents: If the works involve a party wall or are within six metres of an adjacent property then the client must usually serve a party wall notice on the adjacent owner.119 There may also be other third-party consents that are required from neighbouring landowners. Building Regulations approval: The building owner should obtain Building Regulations approval from the local building control, which must approve the plans prior to commencement to ensure that the proposed works are in line with the Building Regulations 2010 (UK).120 Approved Documents A–P provide practical guidance on how to comply with the Building Regulations.121 Health and safety requirements: A construction phase plan should be prepared before commencing work.122 The principal designer will need to prepare a health and safety file to hand over to the building owner at

116 . 117 . 118 Section 288 . 119 . 120 . 121 HM Government, Approved Document A: Structure (2004 ed, August 2013); HM Government, Approved Document B: Fire Safety (2006 ed, December 2018) vol 1; HM Government, Approved Document B: Fire Safety (2006 ed, December 2018) vol 2; HM Government, Approved Document C: Site Preparation and Resistance to Contaminates and Moisture (2004 ed, August 2013); HM Government, Approved Document D: Toxic Substances (1992 ed, October 2015); HM Government, Approved Document E: Resistance to the Passage of Sound (2003 ed, October 2015); HM Government, Approved Document F: Ventilation (2010 ed, October 2015); HM Government, Approved Document G: Sanitation, Hot Water Safety and Water Efficiency (2015 ed, 2015); HM Government, Approved Document H: Drainage and Waste Disposal (2015 ed, 2015); HM Government, Approved Document J: Combustion Appliances and Fuel Storage Systems (2010 ed, October 2015); HM Government, Approved Document K: Protection from Falling, Collision and Impact (2013 ed, 2013); HM Government, Approved Document L1A: Conservation of Fuel and Power (2013 ed, 2014); HM Government, Approved Document L1B: Conservation of Fuel and Power (2010 ed, April 2018); HM Government, Approved Document L2A: Conservation of Fuel and Power (2013 ed, 2014); HM Government, Approved Document L2B: Conservation of Fuel and Power (2010 ed, March 2015); HM Government, Approved Document M: Access to and Use of Buildings (2015 ed, 2015) vol 1; HM Government, Approved Document M: Access to and Use of Buildings (2015 ed, 2015) vol 2; HM Government, Approved Document P: Electrical Safety — Dwellings (2013 ed, 2013). 122 Regulation 12 .

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4.5.3. 4.5.4.

4.5.5.

4.5.6.

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completion.123 Contractors working with asbestos require a licence from the HSE.124 Contractors installing or modifying gas appliances must be on the Gas Safety Register.125 (e) Local authority licences and permissions: The building owner should obtain a licence from the local authority for any work that may affect public roads126 (for example, if scaffolding is to be erected) and must notify the local authority if demolition is to take place.127 The contractor should obtain confirmation from the local authority (or certain other approved inspectors) that the works comply with the Building Regulations as the project progresses,128 and obtain a completion certificate from the local authority (or approved inspector) confirming that the Building Regulations have been complied with.129 (f) Environmental compliance: Various environmental consents and licences may be required (for example, for the discharge of water into a river). Contractors producing, transporting or receiving controlled or hazardous waste require a licence from the Environment Agency.130 Consultants need to register with the relevant professional body. Note that it is an offence to use the title ‘architect’ without being on the Register of Architects maintained by the Architects Registration Board.131 Contractors and consultants also need to comply with local employment law. When hiring workers (local and foreign), the employer should ensure that it conducts its recruitment practices in a non-discriminatory way. There are no laws that require a minimum amount of local labour to be employed. The employer should ensure that all employees (local and foreign) have the legal right to work in the UK by conducting right to work document checks in accordance with the UK Home Office’s Full Guide for Employers on Preventing Illegal Working in the UK.132 EU workers with full free movement rights are free to reside and work in other EU states (including, prior to Brexit, the UK) without obtaining immigration permission. However, they have to be employed, self-employed, studying, or

Regulation 12 . . . Section 50 . Section 80 . Section 16 . Section 17 . Section 34(3) . Section 20 . Home Office, Full Guide for Employers on Preventing Illegal Working in the UK (October 2013).

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economically self-sufficient should they wish to reside for more than three months in the UK. Workers from outside the UK need immigration permission to work in the UK. A points-based system is in place and any migrant worker wishing to work in the UK will need to pass a points-based assessment. It is a statutory offence in the UK to employ someone who does not have the right to work in the UK. If an employer negligently employs someone without the right to undertake the work for which they are employed,133 the employer will be liable to a civil penalty fine of up to £10,000 for each illegal worker. Where the employer knowingly employs an illegal worker,134 the penalty is a prison sentence of up to two years or an unlimited fine. Individuals who are engaged as employees on projects have certain key rights: (a) the right to a statement setting out the employee’s main terms and conditions;135 (b) the right not to be discriminated against on the grounds of sex, race, disability, age, religion or belief, sexual orientation, gender reassignment, marital or civil partnership status, pregnancy or maternity,136 fixed-term or part-time status,137 and trade union membership or activities;138 (c) the right to be paid the national minimum wage;139 (d) rights under the Working Time Regulations 1998 (UK)140 to rest breaks, and to minimum annual leave, and the right not to work more than 48 hours per week on average (unless the individual has signed a valid opt-out of the 48-hour week); (e) the right to a minimum period of notice or, if dismissed, pay instead of that notice period;141 (f) the right not to be unfairly dismissed if the employee has the requisite continuous service (that is, one year if employment commenced before 6 April 2012 or two years if it commenced on or after that date);142 (g) the right to a redundancy payment if the employee has two or more years’ service;143 and

133 Section 15 . 134 Section 21. 135 Section 1 . 136 Section 4 . 137 . 138 . 139 . 140 . 141 Section 86 . 142 Part X . 143 Section 105 .

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protection under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (UK)144 where there is a business transfer or service provision change. 4.5.10. The obligation to make redundancy payments only arises where an employee is dismissed by reason of a genuine redundancy situation, being:145 (a) where the employer ceases altogether to carry on the business or intends to do so; (b) where the employer ceases to carry on the business in the place where the employee is employed or intends to do so; or (c) where the business no longer needs any, or as many, employees to carry out work of a particular kind, whether in the place where the employee is employed or generally, or expects that to be the case. 4.5.11. The end of a project (or part of it) may give rise to a relevant transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (UK)146 if there is a transfer of a business or a service provision change. A common example is if responsibility for providing services moves to a new contractor. In those circumstances, the employees assigned to the business or services that are transferring will automatically transfer to the new provider on their existing terms and conditions (except in respect of some limited pension rights) and with continuity of service.147 There are also obligations to provide certain information to the new provider and consult with appropriate representatives of the affected employees before the transfer.148 4.5.12. Some individuals may be engaged as workers (rather than employees), either by the business directly or through a third-party agency. Such individuals are not subject to all of the above rights, but businesses should be aware of the key rights. These are the right not to be discriminated against, the right to be paid the national minimum wage, and the rights under the Working Time Regulations 1998 (UK).149 If the individual is engaged as an agency worker, they also have the right to no less favourable terms and conditions (including pay) when compared to an equivalent individual hired directly by the business.150 There is generally a 12-week qualifying period.

144 . 145 Section 136 . 146 . 147 Section 4 . 148 Section 13 . 149 . 150 Section 36 .

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4.5.13. Self-employed individuals, for example, those engaged as consultants, also have the right not to be discriminated against.151

4.6. Codes of Practice 4.6.1.

4.6.2.

In relation to health and safety, previous editions of the Construction (Design & Management) Regulations (‘CDM Regulations’) were accompanied by the Approved Code of Practice published by the government. This provided more details on the application of the CDM Regulations. However, in line with the current government’s desire to reduce bureaucracy, the latest version of the CDM Regulations was not accompanied by an updated Approved Code of Practice but by much briefer government advisory guidance instead. Many of the industries represented in the construction industry, such as engineers, must adhere to certain codes of practice when, for example, designing certain elements of the works. They will also belong to professional or industry bodies, continuing membership of which requires them to follow a particular code of practice. Other codes of practice, such as those relating to measurement, are also relevant to construction projects.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

Several bodies publish standard form contracts in the UK for use on projects governed by English law being carried out in the UK and internationally. Each body produces a range of forms to deal with different procurement arrangements and different tiers of the industry: for example, main contracts, subcontracts, supply contracts, professional appointments and ancillary documents such as adjudication rules and performance security instruments. They also tend to publish guidance notes on how the most popular contracts operate. However, these often do not flag significant questions or legal questions that are not answered by the form, so it always pays to read a commentary written by lawyers outside the publishing organisation to identify the areas in which the contract may be weak. It is usual for both standard form and bespoke contracts to be amended at the contract negotiation stage. The amendments may range from minor to significant.

151 Section 3 .

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As the law changes, and as errors or areas requiring clarification are discovered, amendments to these forms are periodically issued. Where such amendments exist, these too will need to be located, negotiated, potentially amended, and properly incorporated into the contract. Furthermore, none of the forms are complete in themselves, since options must be chosen and blanks filled in. The result is that although standard forms are advocated as simple, off-theshelf answers to contractual requirements, their use requires considerable care. They are frequently misused and legal problems follow. Sometimes standard forms are used as a starting point for developing bespoke contracts, but it should be noted that standard forms are subject to copyright law and cannot be copied or otherwise reproduced. In any event, the UK building industry generally prefers standard form contracts above bespoke forms (although on many domestic projects, it is common to see a standard form used for the construction contract and a suite of bespoke appointments used for the professional team). The procurement method chosen, the nature of the works, the payment regime (for example, lump sum or cost-reimbursable), and the previous experience of parties involved largely determine which contract is most appropriate. Ultimately, it is probably not the form chosen which leads to a successful project, but the underlying relationships and attitudes between the parties, which it is difficult to prescribe in a contract. There are no reliable statistics confirming which contracts are most widely used in the market, but the most commonly encountered standard forms are discussed in the paragraphs below. The Joint Contracts Tribunal (‘JCT’), representing key sectors of the UK construction industry at different tiers of the contract structure, has produced the most widely used standard form construction contracts on the building side of the industry in the UK since the 1930s. The latest suite of contracts and ancillary documents was published in 2016. It includes a set of main contracts for local authority clients, a similar set for private clients, a design and build form, a management contract, intermediate and minor works forms, subcontracts, guidance notes, and ancillary documents. Other well-known standard form construction contracts include the conditions published by the Institution of Civil Engineers (‘ICE’, a registered charity promoting civil engineering and the qualifying body for all UK civil engineers). These are usually referred to as the ‘ICE Conditions’ and are mainly used in the engineering sector. They were withdrawn from sale in 2011 and relaunched by the Association of Consulting Engineers (‘ACE’) and the Civil Engineering Contractors’ Association as the Infrastructure Conditions of Contract (abbreviated to ICC, which could lead to confusion as this is the same as the abbreviation for the arbitration rules published by the International Chamber of Commerce). The ICE now endorses the NEC suite, a differently drafted, structured, and administered suite of contracts. The use of the NEC

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suite has significantly increased over the past decade, due to it being endorsed by the UK government on public sector projects (including high profile ones like the London Olympic Games in 2012) in the belief that the NEC suite’s collaborative approach will reduce disputes and save money in the long run. 5.1.7. Consultant bodies such as the Royal Institute of British Architects (‘RIBA’), the ACE, and the Royal Institution of Chartered Surveyors (‘RICS’) publish for their members their own standard form appointments. The drafting in these forms broadly favours the consultants’ position. 5.1.8. Internationally, the FIDIC forms are widely used, although increasingly the FIDIC EPC/Turnkey (colloquially known as the Silver Book) and the Plant and Design-Build forms (the Yellow Book) are used for complex engineering projects being built in the UK under project finance arrangements. The 1999 editions of the FIDIC standard form construction and engineering main contracts are most commonly used. It is not yet known how strong the uptake of the substantially revised second editions published in 2017 by the industry will be. 5.1.9. The FIDIC forms are published in several widely spoken languages. UK legislation does not dictate that English must be the language of the contract, but parties to any FIDIC contract must select a language for administering and interpreting the contract and this may be one, or neither, of the languages of the FIDIC form that the parties have signed. It is noteworthy that FIDIC is essentially derived from a 1950s ICE form, which itself was based on an earlier ACE form. Both contracts were designed for a common law system, even though FIDIC is used extensively on construction projects internationally and therefore finds itself being governed by civil law systems and subject to local laws based on civil law. 5.1.10. In particular sectors, other standard forms have an impact. On chemical and process engineering projects, domestic and international forms published by the Institution of Chemical Engineers (‘IChemE’) are used. For some UK plant and other electrical and mechanical works contracts, the forms published by the ACE, Institution of Mechanical Engineers, and Institution of Electrical Engineers (known as IMechE/IEE) are used, especially their MF/1 form. UK government and public sector bodies may also use the GC/Works series, although these more traditionally drafted and structured contracts have largely fallen out of favour in light of government promoting the use of newer, more collaborative forms such as the NEC suite. Those favouring a partnering approach, especially in the public sector, may opt for the PPC 2000 contracts published by the Association of Consulting Architects, or the FAC-1 contract, a framework alliancing contract developed by the King’s College London Centre of Construction Law in consultation with 120 organisations and endorsed by the UK’s Construction Industry Council and Constructing Excellence. Other bodies, such as the British Property Federation and the Association of Consultant Architects, produce a small number of standard form construction contracts.

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5.2. Most Commonly Used 5.2.1.

5.2.2.

Two of the most commonly used contracts published in the UK are the JCT Design and Build Contract 2016 (‘DB16’) and the NEC3 Engineering and Construction Contract (April 2013 Revision) (as well as the 2017 revision of this contract and the other contracts and associated documents in the NEC3 suite, known as NEC4, in which the risk profile is not substantially altered, hence why in this chapter, the provisions of only the NEC3 Engineering and Construction Contract will be set out). Where terms which appear in DB16 and the NEC3 Engineering and Construction Contract (April 2013 Revision) are capitalised in the following commentary, the definitions can be found in DB16 and the NEC3 Engineering and Construction Contract (April 2013 revision) respectively.

5.3. DB16 5.3.1. 5.3.2. 5.3.3.

5.3.4.

DB16 is a design and build contract forming part of the JCT 2016 suite. DB16 is similar to the JCT Design and Build Contract 2005 and its two subsequent 2009 and 2011 revisions. As a lump sum, fixed-price contract, DB16 is popular with employers. It passes design responsibility for completing the works on time and to a certain price to the contractor, as the contractor is considered the party best able to manage risks such as those inherent in completing the design. The employer’s administration of the contract is also aided by the fact that the employer appoints a team of design professionals to produce the initial design, who are then novated to the contractor. The way in which DB16 deals with a number of issues under English construction law is discussed in Section 6.

5.4. NEC3 Engineering and Construction Contract (April 2013 Revision) 5.4.1.

The New Engineering Contract is a suite of standard form construction and engineering contracts originally created by the ICE. It includes long- and short-form main, term, framework, and supply contracts, subcontracts, and professional appointments. Each contract comes with its own set of guidance notes and flowcharts which are intended to aid understanding of the clauses contained in the forms. There have been three editions of the suite: the first in 1993 (referred to as NEC or the New Engineering Contract); the second in 1995 (referred to as NEC2); and the most recent in 2005, which is commonly referred to as the ‘NEC3 suite’.

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The NEC3 suite (and its 2017 revision, the NEC4 suite) is now the only construction and engineering standard form suite supported by the ICE, and currently one of the suites recommended by the UK government for public sector construction and engineering projects. It is also sometimes used on UK private sector projects and, increasingly, on all kinds of public and private projects internationally (particularly in South Africa, New Zealand, and Hong Kong). Confusingly, the 2005 suite was revised in April 2013, but the latter is still referred to as the NEC3 suite. To further the confusion, parties most often use the term ‘NEC3’ to refer to the NEC3 suite’s form of main building contract only, which is called the Engineering and Construction Contract (the ‘ECC’). This could be the ECC’s 2005 or 2013 version. Parties may also talk simply about ‘the NEC’ or ‘the NEC3’, by which they usually mean the latest version of the NEC3 suite, but given the recently published NEC4 suite, parties should always make sure they are clear about which contract they are discussing, particularly at the early stages of a project when the contract form is being chosen. Given the NEC3 suite’s different approach to contracting (explained below), it makes sense to use the suite across a project, although there are examples of projects based mainly on another standard or bespoke suite of contracts which have used a contract from the NEC3 suite for a particular aspect of the design or works. In those cases, the term ‘(the) NEC3’ or even just ‘(the) NEC’ will clearly be used by the parties to refer to whichever contract the parties have chosen. It is therefore essential in negotiations to establish which revision is being used and whether the term ‘NEC3’ is referring to a particular contract or the suite generally. The NEC3 suite’s written style (plain English, the present tense, short sentences, and a rejection of the passive voice and cross-referencing) and, more importantly, its approach to contracting, differ significantly from the style and approach found in other common standard form construction contracts, including those produced by the ICE before the NEC3 suite’s introduction. This is because the NEC3 suite was drafted by project managers as a project management tool aimed at stimulating good, proactive management to produce more collaborative and less adversarial projects, something which UK government reports have been advocating since the 1960s. The NEC3 suite’s drafters argue that the more traditional standard forms promote a claims-driven culture and do not generate trust between parties, problems that the NEC3 suite seeks to overcome. As a result, the NEC3 suite is best suited for use by sophisticated parties on projects of significant complexity and value. It is inappropriate where the employer wishes to adopt a ‘hands-off’ approach to project and contract management, or is not resourced to provide the required level of engagement. Even where an employer’s agent is appointed on a project using a contract from the NEC3 suite, there will be a cost associated

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with this and the employer’s agent’s appointment will not remove the need for a high level of ongoing employer input. Using the NEC3 suite requires parties to spend significant time and effort in understanding how the NEC3 suite works and changing the way they think when negotiating and operating their contracts. For example: (a) Many in the industry have experience only of traditional ‘after the event’ delay analysis. The NEC3 suite approach of, for example, agreeing price and time effects of compensation events (that is, events which delay completion) in advance, will not be familiar; (b) Operating the NEC3 suite requires significantly more resourcing and administration than traditional contracts, particularly in preparing the Contract Data and Works Information. Drawing up the Accepted Programme also requires substantial time at the outset and throughout the project to ensure it is updated to reflect actual progress, as active programme management is a key tool in the NEC3 suite; (c) Other examples of the NEC3 suite’s features which will require additional resources than would normally be expected to administer a construction contract are that the effect of scope changes must be identified and managed before their implementation, and that failure to comply with contractual notice periods can lead to the detrimental treatment of the failing party; and (d) When a project is complex and runs into difficulty, meeting claims for compensation events can swamp even large experienced teams, on both the Project Manager’s and the Contractor’s side. ThefundamentalphilosophyoftheNEC3suiteisthattheEmployerownstheproject and its progress, meaning, for example, that the Project Manager is the ‘Employer’s person’ and that there are powers to buy acceleration, although many consider the NEC3 suite to have more downsides for employers than contractors. There is very little judicial precedent on the NEC3 suite’s wording and procedures, and the NEC3 suite expressly provides for matters to be worked out as they are encountered, rather than prescribed for in advance. This preference for project management over legal precision means there is also greater upfront uncertainty, especially for employers. It is argued that detailed legal analysis of the NEC3 suite (which tends to highlight the NEC3 suite’s supposed deficiencies and weaknesses) misses the point because it is intended as a project management tool based on the principle of collaborative working, under which parties place faithin relationshipsandtheproject managementprocessanddonot, therefore, need to legislate for every eventuality. However, if a dispute arises, it is the contract that the parties look to for the answers. Although judges are becoming increasingly familiar with the NEC3 suite, the danger is that the tribunal deciding it willfocusonwhattheNEC3suiteexplicitlysays,withouthavingabsorbedtheessential background values for operating the NEC3 suite successfully.

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The ECC consists of Core clauses, a choice of one of the six Main Option clauses (which set out clauses relating to pricing options), Secondary Option clauses, Dispute resolution clauses, the Contract Data, and the Works Information. Each pricing option can be purchased as a separate volume containing the clauses and Contract Data relating to that option, but a single volume ECC, containing all of the clauses and the Contract Data for each option, is also available and can be a convenient reference when comparing the way terms relating to, for example, compensation events, operate differently depending on the pricing option. It is possible to make further, bespoke amendments to the ECC by adding additional provisions, commonly known as Z clauses, although the drafting notes to the ECC suggest these should be kept to a minimum, particularly if they begin to undermine the NEC3 suite’s philosophy outlined in the previous paragraph. The Core clauses (Clauses 1 to 9, numbered, somewhat confusingly, as beginning at clause 10.1, followed by 10.2, 10.3, etc., with subsequent subclauses in Clause 1 numbered 11.1, 12.1, 13.1, 13.2, etc.; with Clause 2 being numbered 20.1, 21.1, 21.2, 22.1, etc., and so on in Clauses 3 to 9) address issues such as the Contractor’s responsibilities, time, testing and defects, payment, compensation events, title, risks and insurance, and termination. Significantly for UK construction standard forms, Clause 10.1 is an express obligation on the parties to act in a spirit of mutual trust and co-operation, which is often more difficult to construe in a contract governed by English law, which has no developed concept of a general duty of good faith compared with a contract governed by the law of a civil jurisdiction. The six Main Option pricing clauses are: Option A (priced contract with activity schedule), Option B (priced contract with bill of quantities), Option C (target contract with activity schedule), Option D (target contract with bill of quantities), Option E (cost-reimbursable contract), and Option F (management contract). Option C is a target-cost contract and is often chosen for public sector projects as it chimes more with the collaborative approach that the public sector is keen to promote than lump sum contracting (Options A and B). Therefore, it incorporates a pricing mechanism under which the Contractor is reimbursed for work carried out, but is incentivised to control costs by the agreed target cost in the contract. It is crucial that the Parties agree to a realistic target at the outset. This is not always easy to do, particularly if design work is at an early stage. If the Contractor meets or expends less than the agreed target cost over the course of the whole project, the Contractor will be paid a bonus, calculated under a formula agreed in the contract. If the Contractor exceeds the target, then the contractor will face a financial penalty, again as calculated under a contractually agreed formula. Option C uses an Activity Schedule to fix a target cost. The Contractor is paid what it must pay Subcontractors, to-

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gether with the Contractor’s own costs, plus a Fee. Savings or overruns against the target are shared. The target moves with Compensation Events. It is important that those operating Option C understand that the Actual Cost which the Contractor is paid is calculated carefully in each payment certificate to ensure that certain Disallowed Costs, as agreed between the parties and set out in the Contract, are not included. This ensures that the Contractor does not incur unnecessary expense but only uses labour, equipment, and materials that are required at, and appropriate for, each stage of the project. 5.4.10. Having chosen the required Options, the Contract Data must be completed with advice from the technical team. There are no default provisions, so each blank must be filled in or deleted. 5.4.11. Significant legal matters closely affecting the rights of the Parties which are normally found in the main conditions of standard form construction contracts are relegated to the Works Information (several references to which are included above), and so the Works Information must be prepared carefully, with technical advice. To be consistent with the ECC approach, the Works Information should contain forms of collateral warranty, bond (the bonded amount must be stated in Secondary Option X13) and parent company guarantee (which requires Secondary Option X4 to be selected), and requirements relating to copyright, subcontracting, CDM 2015, CIS, and deleterious materials, as well as detailed descriptions of the content of the works. 5.4.12. This way in which the ECC (whichever Main Option is chosen) deals with a number of issues under English construction law is discussed in Section 6.

6. Key Issues 6.1. Overview 6.1.1.

To gain an overview of the broad risk profile and history of the two forms reviewed below, please see Section 5 above.

6.2. Fitness for Purpose 6.2.1.

6.2.2.

Contractors and their insurers are reluctant to include a clause requiring that the completed works are fit for purpose in a construction contract (although they generally will warrant that goods and materials used in the works will be fit for purpose, as this requirement will be implied as a matter of law under the SGA in any event). There is some doubt as to the need for such a clause in many circumstances. The rights which the owner would otherwise have under the general terms of

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the contract and general principles of law may be sufficient for the owner to secure the comfort it seeks. DB16 does not include a fitness for purpose obligation in relation to the completed works (although the fitness for purpose of goods and materials used in the works will be implied as a matter of law under the SGA in any event). The requirements of DB16 are to design the works applying the standard duty of care for the applicable profession for the element of the design, usually that of an architect. There is a requirement to comply with all statutory requirements. The Works Information in the ECC would need to be drafted to include a fitness for purpose obligation in relation to the completed works (although the fitness for purpose of goods and materials used in the works will be implied as a matter of law under the SGA in any event), as the Works Information determines what a defect is by setting out the design obligations and testing regime. Secondary Option X15 allows the Contractor to design using reasonable skill and care, the design obligation placed on contractors in other common construction standard forms.

6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

6.3.4.

Construction contracts often include a liquidated and ascertained damages (‘LADs’, also known as LDs or delay LDs) mechanism, whereby the parties agree the level of daily or weekly damages that the contractor will pay as the employer’s sole total remedy for late completion caused by the contractor. Provided the selected amount of LADs is not unconscionably in excess of the greatest loss that could be suffered, English law will enforce LADs and not deem them to be penalties.152 Contractors sometimes succeed in capping their liability in respect of LADs to mitigate against the risk of a prolonged delay becoming too onerous. Depending on the terms of the contract, contractors often have relief from LADs in circumstances where the delay is not their fault. These are often negotiated so that delay risk is apportioned according to fault, control and the ability to manage risk. In practice, the cause of a delay may not be easy to determine. There may be concurrent events, both causing delay to the critical path: one for which the contractor is responsible, the other for which the employer is responsible (and from which the contractor is entitled to relief). Case law has held that where there is true concurrent delay (which in practice may be a rare event),

152 Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis (Consumers’ Association intervening) [2015] UKSC 67.

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the contractor will be allowed additional time but not any additional costs incurred as a result of the delay.153 Ideally, the parties will consider how this will be dealt with from both a contractual and practical perspective during contract negotiations, but this is typically not done and is discussed only once a potential concurrent delay arises. LADs also operate to limit liability and give cost certainty to the contractor for delay. Therefore, LADs can be of benefit to both parties. DB16 provides for the payment or deduction of liquidated damages from the Contractor at the specified rate. Secondary Option X7 in the ECC allows for daily liquidated damages for delayed completion of the whole of the works or any section. The amount, or amounts for each section, must be added in the Contract Data. It also requires the Project Manager to assess a reduction for early takeover by the Employer. Parties may wish to adopt Secondary Option X7 which allows the contractor a bonus for early Completion. The amount, or amounts for each section, must be added in the Contract Data. (Note that Secondary Option X5, dealing with Sectional completion, states that if this Option is chosen but unamended, each section operates as a discrete works package with its own completion date and defects date. The sections must be identified, and completion dates ascribed to them in the Contract Data. These sections should be less than the whole of the works, to which a separate completion date must be ascribed in the Contract Data). Proactive management is, however, the key tool for reducing the risk of late completion in the NEC3 suite. The ECC does this in Core clause 16 by encouraging the Project Manager and Contractor to work together to identify and resolve problems early, through a risk register system of written early warnings of any events that could increase the total cost of, or delay, the project. This means that the Contractor must give a warning, on behalf of other contractors, subcontractors, and the employer, even if there is no entitlement for the Contractor to recover from its counterpart. Failure to give early warning, which would have provided an opportunity for the employer to identify a more efficient way of resolving an issue, means the Contractor will be paid only for that method of dealing with the event. As well as Sectional completion dates, Key dates for the achieving of conditions specified in the Contract Data (which might not be easy to define) are a further feature of the ECC, aimed at delivering projects on time. Key dates facilitate cooperation where two or more contractors are working on-site simultaneously.

153 Walter Lilly & Company Ltd v Mackay & Anor [2012] EWHC 1773 (TCC) .

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6.3.10. Agreeing Compensation Events (of which there are 19, including changes in law and suspension by the Contractor for non-payment by the Employer), using the regime in Core clause 6, is another way the ECC seeks to reduce the risk of delay. Standard forms typically have separate provisions for extensions of time, costs, and variations. In the ECC, they are packaged together. If a compensation event occurs, the event will lead to an assessment of time and money (rather than consideration of an extension of time), an assessment of the value of the varied works, and a further assessment in respect of any damages or loss and expense. This is expressed to be an exclusive remedy. Accurate assessments relating to time depend on the Agreed Programme being updated constantly. It may be difficult for parties used to more traditional construction approaches to agree on a programme in the first place, which will make the ECC difficult to operate. 6.3.11. Regarding the different types of float: (a) time risk allowances (essentially the difference between the most optimistic (shortest) duration and the realistic (expected) duration of an activity) are Contractor-owned; (b) free float (essentially any spare time in the Contractor’s programme after time risk allowances have been included) is project-owned; and (c) terminal float (the amount of time between planned Completion and the required Completion Date) is Contractor-owned.

6.4. Latent Conditions 6.4.1. 6.4.2.

6.4.3.

Most contracts contain a clause dealing with latent conditions, meaning those that could not have reasonably been expected to be encountered. The latent condition clause is often amended. Owners seek to narrow the application of the clause and place more risk on the main contractor. This amendment is often accompanied by clauses that seek to protect the owner from deficiencies or inadequacies in the information that the owner may have given to the main contractor. There is considerable unhappiness amongst main contractors on this issue and many are now seeking to resist the amendments made by owners. Ground conditions and contamination in DB16 are likely to be the Contractor’s responsibility because the Employer will typically include ground condition surveys and similar documents in the Employer’s Requirements, for which the Contractor takes full responsibility (unless expressly agreed otherwise). Therefore, a Contractor who feels that the information supplied is inadequate or who has limited time to investigate the site conditions must make sure it is made clear in the contract that it is not responsible for verifying the adequacy of the ground condition reports contained in the Employer’s Requirements.

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The parties’ risk allocation relating to ground conditions and contamination is dealt with in wording included in the Works Information in the ECC.

6.5. Force Majeure 6.5.1.

6.5.2.

6.5.3.

Force majeure is not recognised under English law as a term of art, although English law does include the much narrower doctrine of frustration of a contract. For a contract to be frustrated, a radical change in the contractual obligation must have occurred and the unforeseen event must not be due to the actions of either party. A contract will not be frustrated in situations where the contract merely became more expensive to perform than one party had initially anticipated.154 As a result of the problems of establishing frustration, parties often incorporate force majeure clauses into construction and engineering contracts, allowing the contractor an extension to the completion date and, more commonly on international engineering contracts, the right to suspend its obligations and then terminate if the force majeure event continues for a certain period of time. Given the severity of this remedy, force majeure clauses (and particularly the definition of the force majeure events) are often heavily negotiated, as there is no standard definition under English law. For this reason, force majeure clauses should be very carefully drafted to set out clearly the events that will constitute force majeure and what will happen as a result. DB16 provides for the Contractor to obtain an extension of time for a force majeure event. Force majeure is not a Relevant Matter under DB16, meaning that the Contractor will not recover any additional costs incurred as a result of the force majeure event. The list of Compensation Events in the ECC does not include force majeure, but the types of events listed are so wide that many of the events listed in the ECC would in other contracts fall within the definition of force majeure.

6.6. Limitation of Liability 6.6.1.

6.6.2.

English law does not limit a party’s liability for damages. It is therefore common for parties to try to limit or exclude their liability for breach of a contract term or for consequential loss or loss of profits, or to limit their liability to a particular sum of money or equivalent limit. If an exclusion or limitation clause is to be effective under English law, it must satisfy the following three conditions: it must be incorporated into the

154 Chitty on Contracts (33rd Edition) Chapter 23 Discharge by Frustration.

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6.6.3.

6.6.4.

6.6.5.

6.6.6.

155 156 157 158 159 160

agreement, cover the breach in question, and not be caught by any of the statutory restraints. If the exclusion clause is contained in a signed written contract, it is assumed that the terms of the clause are binding. Conditions may also be incorporated into a contract by reason of the fact that the parties have consistently dealt on these usual trade conditions on many previous occasions. Further, conditions that are usual in a particular trade may be incorporated if both parties are in the trade and aware that such conditions are usually imposed. The clause must cover the exact contingency or loss which has occurred if it is to protect the party relying on it. For example, the exclusion of warranties will not necessarily exclude conditions. The Unfair Contract Terms Act 1977 (UK)155 (‘UCTA’) is the UK statute applying to clauses seeking to limit or exclude liability in respect of obligations arising from things done in the course of business. It distinguishes between cases where a party deals as a consumer and when not.156 UCTA does not apply to international supply contracts.157 These are broadly defined as contracts for the sale of goods by parties whose places of business or habitual residence are in the territories of different states and where the goods to be sold are being transferred from one state to another. UCTA applies different controls according to the nature of the liability which the parties wish to exclude or restrict. Terms seeking to exclude or restrict liability for death or personal injury, or for good title and no encumbrances over the goods, are wholly ineffective.158 A term excluding or restricting liability for negligence (the breach of a party’s duty to take reasonable care not to cause loss in the performance of a contract) is enforceable only to the extent that it satisfies the reasonableness test set out below.159 A term excluding or restricting liability for any of the SGA’s implied terms as to correspondence with description, satisfactory quality, fitness for purpose, and correspondence with sample (and their equivalent in the SGSA) is wholly ineffective as against a person dealing as a consumer and enforceable only to the extent that it satisfies the reasonableness test as against persons other than consumers.160 In contracts where one party is dealing as a consumer or on the other party’s standard terms of business, a term by which the supplier excludes or restricts its liability for breach of contract, or by which the supplier claims to be entitled to render a contractual performance substantially different from that which was reason-

. Section 2(4) . Section 26 . Section 2 . Section 11 . Section 11 .

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ably expected of the supplier, or render no performance at all, will be enforceable only to the extent that it satisfies the reasonableness test.161 6.6.7. In order to pass the UCTA reasonableness test, a contract term must have been ‘a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’.162 Schedule 2 to UCTA contains a non-exhaustive list of guidelines in assessing reasonableness (for example, the strength of the bargaining positions of the parties relative to each other, and whether any inducement was given to the customer to agree to the term), but this test applies only to those clauses seeking to restrict or limit liability for the SGA obligations as to description, satisfactory quality, and sample. 6.6.8. DB16 contains only one express limitation on the Contractor’s liability, in Clause 2.17.3. It covers design work only and it limits the Contractor’s liability ‘for loss of use, loss of profit or other consequential loss’ to the amount stated in the Contract Particulars. This limitation expressly does not apply to any LADs levied under the contract. Depending on the bargaining strength of the parties, the Contractor’s liability may be unlimited (in domestic office and retail projects) or capped at a total aggregate liability equal to the level of the Contractor’s professional indemnity insurance or a percentage of the contract price (as is increasingly common in domestic and international engineering and process plant contracts). 6.6.9. Secondary Option X18 in the ECC allows for various liability limits to be identified in the Contract Data. Limits are included for: (a) consequential and indirect loss (albeit rather narrowly drafted); (b) each loss of the Employer’s property; and (c) post-completion design defects. 6.6.10. There is also an overall cap in the ECC (in addition to caps for delay or performance damages), which excludes the Employer’s property loss, and a date when liability ends.

6.7. Duration of Exposure 6.7.1.

An innocent party will lose its right to bring a claim for breach of contract if it delays for a certain length of time. The Limitation Act 1980 (UK)163 provides a limitation period of six years from when a cause of action accrued under a

161 Section 16 . 162 Section 11 . 163 .

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6.7.2.

6.7.3.

6.7.4.

simple contract164 (usually expressed to be a contract signed under hand, as opposed to being signed as a deed) and 12 years from when a cause of action accrued under a deed.165 The cause of action in contract accrues not when the damage is suffered, but when the breach takes place.166 As this is not easy to identify on a construction project, the limitation period is usually taken to start running from the date of practical completion. If there has been fraud or mistake, the limitation period does not begin to run until the innocent party has discovered the fraud or mistake, or should have discovered it.167 Some contracts include a provision that reduces the statutory limitation period. It is permissible to do this, but the effectiveness of these contractual provisions is subject to the UCTA. Most construction contracts include a defects (liability) or rectification period of between six months and two years, within which the contractor has a right to return to the site to remedy a defect that manifests within that period. If the employer engages a different contractor to rectify the works within that period, the employer can recover from the original contractor only the amount that it would have cost the original contractor, which is usually an amount less than it cost the replacement contractor. As an incentive to the contractor to remedy defects, employers often hold a retention of between 2 % and 5 % of each monthly payment. DB16 provides for the contract to be entered into either under hand or as a deed. The standard limitation periods under the Limitation Act 1980 (UK) then apply, namely six years for a contract signed under hand168 and 12 years for a deed.169 DB16 provides a regime for the correction of defects during what is described in the contract as the Rectification Period, the duration of which is defined in the Contract Particulars. During this period the Contractor is obliged to correct any defects notified to it by the Employer. Once the Rectification Period ends, the Employer may issue a final list of defects. Following the correction of these defects, the Employer is obliged to issue a Certificate of Making Good Defects. After the issue of this certificate, the Contractor is no longer obliged to correct defects. However, the Contractor retains liability for any latent defects found in the works or design until the end of the relevant limitation period.  

6.7.5.

6.7.6.

164 165 166 167 168 169

Section 5 . Section 8 . Section 14 . Section 32 . Section 5 . Section 8 .

 

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Risks in the ECC are allocated on an absolute basis, rather than being shared. Employer’s risks are listed in the Contract Data and the Contractor takes the risk for everything else. This is a broad duty that lasts beyond completion until the Defects Certificate has been issued. Many employers select Secondary Option X16 in the ECC as it deals with retention. It requires specification of a retention-free amount (which may be zero) and retention percentage in the Contract Data.

6.8. Time Bars 6.8.1. 6.8.2.

The time period for the serving of a notice applying for an extension of time under DB16 does not operate as a time bar to the Contractor’s entitlement. Under the ECC, for Compensation Events that the Project Manager becomes aware of, the onus is on the Contractor to provide written details of the effect of the Compensation Events within eight weeks of the Project Manager becoming aware of the event. This operates as a condition precedent and a time bar to the Contractor’s entitlement. The Project Manager must make a decision within a week using the Accepted Programme, and uncertainty is dealt with by way of alternative quotes. The decision is final, as no change is permitted if the forecast assessment turns out to be incorrect.

7. Dispute Resolution 7.1.1.

There are no restrictions under English law on the choice of law or the venue for dispute resolution. These can and should be agreed by the parties and expressly incorporated into the contract. This is necessary because where the governing law is not clearly identified in the contract, various regulations, some enacted when the UK was in the EU and continue to be in force, will apply to determine the law applicable to contractual disputes between the parties. In short, the contract will be governed by the law of the country where the party who is required to effect the characteristic performance of the contract has its habitual residence and, if this cannot be determined, the contract is governed by the law of the country with which it is most closely connected.170

170 Rome Convention 1980 Article 4 .

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7.2. Alternative Dispute Resolution (‘ADR’) 7.2.1.

7.2.2.

ADR is popular for resolving construction disputes and encouraged by the English courts. Under the Civil Procedure Rules (UK)171 (‘CPR’) (the rules which govern civil procedure in the English High Court and Court of Appeal), all parties to the litigation have an obligation to consider whether some form of ADR might enable them to settle the matter without court proceedings.172 As the court may now consider cost penalties against a party who unreasonably refuses to mediate, the practice of mediation has increased and those advising the parties often consider mediation as a means of resolving the dispute. Popular ADR methods include: (a) Mediation, the most popular form of ADR, in which a neutral thirdparty mediator discusses the dispute and the parties’ positions in an attempt to reach an agreement between the parties, which is then formalised in a settlement agreement. Rather than using an appointing body such as the Centre for Effective Dispute Resolution, parties often appoint a mediator by agreement, choosing ones they have worked with previously. The vast majority of mediators in construction disputes tend to have some kind of legal qualification, rather than coming from one of the other construction professions. There is no state requirement that mediators undertake some form of training prior to appointment, but it is common for mediators to obtain accreditation by participating in one of the commercial mediation training schemes. (b) Early neutral evaluation, where an independent advisor provides an assessment of the merits of the claim, guiding the parties at an early stage on the strengths and weaknesses of their case and identifying the central issues in dispute. (c) Expert determination, where the parties to a dispute appoint an independent expert (often in relation to specified technical disputes only) and agree that whatever decision it reaches will be binding. (d) Dispute boards, often appointed by parties to large construction projects at the outset of a project. The board’s role is to consider and decide any disputes that arise over the course of the project. In doing so, the board becomes familiar with the background and issues involved. Whether the board’s decisions are final and binding or are non-binding recommendations depends on the particular contract and dispute board rules used. Often a distinction is made between a dispute review board,

171 . 172 See for example CPR Part 1 The Overriding Objective and paragraph 8 of the Practice Direction – Pre-Action Conduct and Protocols .

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which makes non-binding recommendations (in the hope that its findings will encourage the parties to resolve their differences without having to proceed to a more formal or binding form of dispute resolution), and a dispute adjudication board, which makes binding decisions. Both may be appointed on a project. For example, in the UK, the Olympic Delivery Authority established two panels in relation to the construction of the infrastructure for the London Olympics in 2012: The Independent Dispute Avoidance Panel (‘IDAP’) comprising ten construction professionals, and an Adjudication Panel, comprising 11 adjudicators who heard disputes that had not been resolved by the IDAP.

7.3. Adjudication 7.3.1.

Of the three most common methods of settling construction disputes formally (adjudication, litigation, and arbitration), adjudication is the quickest and cheapest. Statutory adjudication was introduced into the UK by the Construction Act and is discussed above in Section 4.2.7 and Section 4.2.8.

7.4. Litigation 7.4.1.

7.4.2.

The courts of England and Wales consist of the High Court of Justice (for civil cases) and the Crown Court (for criminal cases), with appeals being heard by the Court of Appeal. The Supreme Court, whose functions until October 2009 were carried out by the (Appellate Committee of the) House of Lords, is the highest court for both criminal and civil appeal cases in England and Wales. Any decision it makes binds every other court in England and Wales and often has a persuasive effect in other jurisdictions. The Judicial Committee of the Privy Council, consisting of the judges of the Supreme Court, remains the highest court of appeal for several independent Commonwealth countries, the British Overseas Territories, and the Crown Dependencies. England and Wales (but not Scotland and Northern Ireland) have a specialist civil court called the Technology and Construction Court (the ‘TCC’). It is part of the Business and Property Courts of England and Wales, which became operational on 2 October 2017 (the TCC used to be a branch of the Queen’s Bench Division of the High Court and replaced the Official Referees’ Court over a decade ago). The TCC is charged to deal specifically with construction, engineering, and technology disputes in England and Wales. The TCC is physically located in the Rolls Building in central London, where there are five full-time specialist judges, and in ten other regional centres around England and Wales, where there are full-time (Birmingham, Manchester and Liver-

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7.4.5.

7.4.6.

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pool) and part-time TCC judges. It hears both High Court and county court TCC cases at each of these centres. Construction claims valued at less than £250,000 should generally be issued in the TCC centres outside London unless the case concerns one of the identified exceptions (such as public procurement cases and cases with an international element or dealing with a novel or difficult point of law).173 Part 60 of the CPR and its associated Practice Direction set out the practice and procedures of the TCC along with the types of disputes the TCC specifically deals with. In addition, The Technology and Construction Court Guide (now in the fifth revision of its second edition)174 provides practical guidance for those litigating in the TCC. In November 2015, electronic working was introduced to all courts in the Rolls Building. Practice Direction 51J was omitted from the CPR and replaced by Practice Direction 51O (electronic working pilot scheme). The pilot scheme has been extended until 6 April 2021. Since 1 January 2014, parties involved in TCC litigation have also been required to adopt the TCC e-disclosure protocol and guidelines, published by the Technology and Construction Solicitors’ Association, the Technology and Construction Bar Association and the Society of Computers and the Law unless they have agreed on an alternative way of dealing with e-disclosure (whether by adopting another protocol or something tailored to their dispute).175 Parties must comply with the Pre-Action Protocol for Construction and Engineering Disputes (the ‘Protocol’) before commencing disputes in the TCC.176 Under the Protocol, the parties must consider whether some form of ADR would be more suitable than litigation. A failure to follow the Protocol may later lead to costs penalties. Even once proceedings are issued, the TCC still actively encourages the use of ADR. If the TCC considers at any stage that ADR would assist in settling the proceedings before trial, it can make an ADR Order granting a stay of proceedings while the parties engage in some form of ADR. Significant legislative changes to civil procedure, proposed in a 2010 report by Lord Justice Jackson on civil litigation costs, came into force on 1 April

173 TCC Guide (2nd Edition) paragraph 1.3.1. 174 . 175 The Technology and Construction Solicitors’ Association, The Technology and Construction Bar Association and The Society for Computers and Law, ‘TeCSA/SCL/TECBAR eDisclosure Protocol’ (Version 0.2, 9 January 2015); The Technology and Construction Solicitors’ Association, The Technology and Construction Bar Association and The Society for Computers and Law, ‘Guidelines to the TeCSA/ SCL/TECBAR eDisclosure Protocol’ (Version 0.2, 9 January 2015). 176 TCC Guide (2nd Edition) paragraph 2.2.1.

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2013. These apply to TCC litigation.177 The changes are aimed at making the dispute resolution process quicker and easier, and discouraging unnecessary or unmeritorious claims. The UK government believes that access to justice depends on costs being proportionate and unnecessary cases being deterred. There are some new rules on witness statements and disclosure (the process by which parties make relevant documents available to the other parties in the dispute), but the key change affecting litigants is the introduction of cost budgeting rules. In complex construction cases, the basic rule is that cost budgeting now applies to claims worth less than £10 million. However, the courts retain discretion to impose costs budgeting in any case.178 In practice, this means that before the first case management conference (‘CMC’), the parties must produce a budget in a prescribed form that records the costs that have already been incurred, as well as those likely to be incurred during the remainder of the proceedings (including the fees of any barristers working on the case), insofar as these can be anticipated. Before the first CMC, the parties’ lawyers must also liaise with each other to try and agree on each other’s budgets so that they are proportionate. The court may then make a costs management order that will record the extent to which budgets are agreed or approved. Importantly, when assessing costs, the court will not depart from the agreed budget without there being a good reason as to why further costs should be allowed. Where ‘significant developments’ in the litigation warrant it, they can increase their budgets, ideally by agreement with the other side. Only when the parties cannot agree does the judge step in to ensure that the budgets are proportionate. The new costs budgeting procedure is controversial because it involves a substantial investment of time, money, and effort early on in a case, and arguably brings real benefits only when a case proceeds all the way to trial, which is the exception rather than the rule. However, it has the advantage that, for the first time, litigants will see the other side’s budget and therefore know the size of the costs bill they could face if they lose. The rules have built-in contingencies for unexpected occurrences, so that, for example, a winning party would be able to recover the costs of defending a surprise application by the other side, even if it was not in their budget. In addition, in large cases, the court may order that, rather than try and estimate all the costs at the beginning of a case, the parties should produce budgets covering the early stages of the action, which they can update as the case progresses.179 As the procedure is relatively new, costs budget preparation is still an inexact science.

177 Cost budgeting applies to TCC cases. 178 CPR PD3E Cost Management . 179 Part 3 Civil Procedure Rules 1998, Rules 3.12 to 3.18 and Practice Direction 3E.

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Regarding disclosure, the new rules seek to control costs by imposing an obligation on the parties to file a report on disclosure describing what documents exist and the likely costs of giving standard disclosure. It is expected that the courts will take greater control of the disclosure process generally and will be required to limit the level of disclosure to what is necessary to deal with the case justly and at proportionate cost.

7.5. Arbitration 7.5.1.

7.5.2.

7.5.3.

7.5.4.

Arbitration is a private dispute resolution method governed in England and Wales by the Arbitration Act 1996 (UK).180 An arbitrator’s award is binding on the parties and enforceable at court.181 Unlike litigation and the UK’s statutory adjudication regime, parties to construction contracts must agree to refer disputes between them to arbitration if they wish to adopt arbitration as their final forum for dispute resolution. The arbitration agreement may be a free-standing agreement or, more commonly, a clause within a wider agreement. Parties can draft their own bespoke rules for their arbitration, but more usually use those published by one of the established arbitral institutions, such as the International Chamber of Commerce or the London Court of International Arbitration. Arbitration is now rarely used in England and Wales on domestic construction and engineering project disputes but is very common in disputes arising out of large, complex, international projects. This is because, in 2005, the JCT standard forms replaced arbitration with litigation as the default forum for disputes, as a result of the introduction of statutory adjudication and the TCC’s efficient handling of construction cases, both of which significantly reduced the market for the arbitration of domestic construction disputes. The UK is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards,182 commonly referred to as the New York Convention, and over 100 bilateral investment treaties for the protection of the investments of foreign entities, thus making arbitration an attractive method of dispute resolution on construction and engineering projects, given the increased certainty these treaties provide for the enforcement of arbitral awards.

180 . 181 Section 58(1) . 182 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959) .

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France 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 5.7. 6. 6.1. 6.2. 6.3. 6.4. 6.5.

Context 330 The Country 330 The Legal System 330 The Economy 331 The Construction Industry 332 Size and Nature 332 Participants 332 Work, Health and Safety 332 Protection of the environment 333 Quality assurance 335 Construction Contracting Dynamics 335 Legal underpinnings of contracts 336 Freedom of contract 336 Legal framework 336 Public policy 338 Statute Law 340 Implied terms contract 341 Construction of contract terms 341 Private and Public procurement 342 Government Involvement 343 Legislation and Regulation 343 Codes of Practice 343 Licensing of professionals and Contractors 344 Construction Contracts 344 Standard form for private contracts (CCAG privé) 344 Standard forms for public contracts (CCAG) 345 Common points between different forms of construction contracts 346 Amendment of Contracts and bespoke contracts 347 Most Commonly Used 347 Example 1 – CCAG Travaux 2014 348 Example 2 – NF P Standard n°03-001 348 Key Issues 348 Overview 348 Fit for Purpose 349 Late Completion 349 Latent Conditions 350 Force Majeure 350

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Limitation of liability 351 Duration of exposure 352 Time Bars 352 Dispute Resolution 353

1. Context 1.1. The Country 1.1.1. 1.1.2.

1.1.3. 1.1.4.

1.1.5.

1.1.6.

1.1.7.

France is a secular, social and indivisible republic. The fifth Constitution of 4 October 1958 is the highest norm in the internal hierarchy. The fifth Constitution establishes a democracy based on the separation of powers. Being a founding member state of the European Union, a major part of French legislation and case law comes from European Union Law. The French Republic is a semi-presidential republic with strong democratic traditions. The Constitution provides for the election of the President of the Republic and of the Parliament. The Prime Minister is the head of the Government and is appointed by the President. The ministers and secretaries of state are appointed by the President of the Republic upon a proposal of the Prime Minister. The Parliament is a bicameral body, consisting of the Senate and the National Assembly. The Parliament passes statutes and monitors the action of the Government. France is a unitary State divided into 18 administrative regions since January 1, 2016. The regions are further divided into 101 departments. In the 80’s, decentralisation laws established local government structures in those regions and departments.

1.2. The Legal System 1.2.1. 1.2.2.

1.2.3.

France uses a civil legal system. The judicial organisation is divided into two branches: (a) The judicial branch (“ordre judiciaire”) which handles criminal and civil disputes; and (b) The administrative branch (“ordre administratif”), which handles litigation against the State and public entities. The structure of the French judiciary system has two degrees of jurisdiction: (a) Lower courts of general jurisdiction; and

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(b)

1.2.4.

1.2.5.

1.2.6.

Courts of appeal which hear appeals from lower courts and review the facts of the case. The two highest Courts in the French jurisdiction system are the “Cour de cassation” (judicial litigation) and the “Conseil d’Etat” (administrative litigation). The highest courts have the power to interpret the law and derive principles from it, which is why the highest courts rule in law and not in fact, unlike courts of appeal, which rule in fact. The “Tribunal des conflits” is a jurisdiction in charge of resolving conflicts of jurisdiction between the ordre judiciaire and the ordre administrative. The Tribunal des conflits is composed equally of members from the Conseil d’Etat and members from the Cour de cassation. Outside the judiciary system, the “Conseil Constitutionnel” is a regulator of the functioning of the public authorities and a jurisdiction with varied competences. In particular, it is in charge of controlling the conformity of the law with the Constitution and it ensures the regularity of the election of the President of the Republic, the members of parliament and the referendum operations and proclaims the results.

1.3. The Economy 1.3.1.

1.3.2. 1.3.3.

1.3.4. 1.3.5. 1.3.6.

France is a member of the G7, a group of seven leading industrialised countries. In 2020, France is ranked as the sixth largest economic power in the world and the European Union’s second-largest economy in purchasing power parity terms. With 31 of the 500 biggest companies in the world, France ranks fourth in the Fortune Global 500 list of 2020, ahead of Germany and the United Kingdom. In 1999, France joined eleven other European Union members to launch a common currency, the euro, which completely replaced the French franc in 2002. In 2019, France derives 70 % of its electricity from nuclear power, the highest percentage in the world. France has a mixed economy which combines extensive private enterprise with substantial state enterprise and government interventions. GDP for 2018 was $2 777 535 239 278 according to the National Institute of Statistics and Economic Studies (“INSEE”).  

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2. The Construction Industry 2.1. Size and Nature 2.1.1. 2.1.2.

In 2019, construction industry provided employment to approximately 1 502 500 of employees for 148 billion euros excluding VAT of works. However, the current economic situation has certainly had a significant impact on all industries. In 2018, production in construction slowed significantly (+1.8 %, after +4.8 %) after stabilising. The branch’s value added also slowed (+0.1 %, after +3.1 %) and no longer contributes to GDP growth. For the whole of 2018, the number of authorised housing units amounted to 456,300 units, down 7.0 % compared with 2017.  

 

 

 

 

 

 

2.2. Participants 2.2.1.

2.2.2.

2.2.3.

2.2.4.

The key players of the construction industry are Bouygues, Vinci, Eiffage and Fayat. These companies are major groups with international activity. Bouygues has an expanded activity in Asia and Vinci in the Middle East. In 2018, three of the top four majors in the European construction sector were French; Vinci is the European leader with an annual revenue of 43,5 billions of euros, Bouygues ranks third with an annual revenue of 35,6 billion euros and Eiffage ranks forth with an annual revenue of 16,9 billion euros. The same year, on a global scale, Vinci was the fifth biggest construction company in the world, after four Chinese companies, and Bouygues was in eighth position. These major companies often have their own consulting engineers.

2.3. Work, Health and Safety 2.3.1.

2.3.2.

French law relating to health and safety matters on construction sites results primarily from two UE Directives: (a) Directive 89/391/EEC on the introduction of measures to encourage improvements in the safety and health of workers at work (Health and Safety of Workers Framework Directive), amended by Regulation 1882/ 2003, Directive 2007/30/EC and Regulation 1137/2008; (b) Directive 92/57/EEC on the implementation of minimum safety and health requirements at temporary or mobile construction sites (Construction Site Health and Safety Directive). The Employer is responsible to contract with a health and safety coordinator (“Coordonateur en matière de sécurité et de protection de la santé”) (Article

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2.3.5.

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R 4532-11 of the French Code of Labour Law (“Code du travail”). Employers, architects and the health and safety coordinators are required by law to take all necessary measures to ensure the safety and to protect the physical and mental health of their employees in accordance with to the provisions of Article L 4121-1 of the French Code of Labour Law. The infringement of these provisions of the French Labor Code may constitute an assault against the integrity of others or an endangerment of the lives of others and give rise to the Employer’s criminal liability. For example, these provisions impose an obligation on the Employer, the architect and the health and safety coordinator to: (a) Restrict access to the site to authorised persons only; (b) Coordinate the works to ensure maximum safety on site; (c) Create a health, safety and working conditions committee (“comité d’hygiène, de sécurité et des conditions de travail”) (CHSCT) for each construction sites; and (d) Develop a general co-ordination plan to promote health and safety (“plan général de coordination en matière de sécurité et de protection de la santé”). In addition, during the conception and construction phases of the project, the health and safety coordinator must document all information that will facilitate the prevention of safety risks during the duration of the project (“dossier d’intervention ultérieure sur l’ouvrage”). A breach of these obligations may result in tort and criminal penalties.

2.4. Protection of the environment 2.4.1.

2.4.2.

2.4.3.

2.4.4.

French law relating to protection of the environment in construction results primarily from two European Union Directives: (a) Directive 2001/42/EC on the assessment of the effects of certain plans and programs on the environment; and (b) Directive 2011/92/European Union on the assessment of the effects of certain public and private projects on the environment amended by Directive 2014/52/European Union. A project’s effect on the environment is regulated by a significant amount of legislation, contained for the most part in the French Environmental Code (“Code de l’environnement”). An Employer may have to obtain an environmental impact assessment (EIA) (Article L122-1 Article of the Environmental Code). This procedure aims at gathering information about the environmental impacts of a project. The EIA is a technical and scientific document, which includes, in particular: (a) A study of the pre-existing conditions of the site;

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(b)

A study of the indirect and direct, temporary or permanent consequences on the environment of the project, notably on the flora and fauna, ground, water, air, climate and neighbouring area; (c) The environmental reasons for opting for the agreed concept or design among the other options available; (d) The measures to be taken by the Employer to eliminate, reduce or compensate the damaging effects of the project on health and environment, as well as the estimated costs; and (e) An analysis of the method used to assess the effect of the project on the environment. 2.4.5. In public projects, the EIA is submitted to the local public authority for approval. 2.4.6. The Grenelle II Act of 12 July 2010 aimed at clarifying the scope and content of EIAs. These amended rules, complemented by the 29 December 2011 Decree, became enforceable on 1 June 2012. 2.4.7. The purpose of this reform was to harmonise the rules relating to EIAs with European Union directives regulating environmental matters. 2.4.8. The local public authority’s decision authorising a project sets out the measures that the Employer must take to avoid, reduce and, if possible, offset the negative environmental effects of the project. Administrative penalties are imposed if these measures are not taken. 2.4.9. As far as waste management is concerned, the Decree of 11 July 2011 provides for a new organisation of waste management plans. The movement of waste stemming from building and public works will be controlled according to the waste technical assessment (diagnostic technique déchets) for demolition or extensive renovation works. 2.4.10. Ordinance No. 2016-1058 of August 3, 2016 relating to the modification of the rules applicable to the environmental assessment of projects, plans and programs, as well as its implementing decree No. 2016-1110 of August 11, 2016, are intended to simplify the rules and ensure their compliance with European Union law. 2.4.11. The decree puts an end to the distinction in French law between “environmental assessment” and “impact study”. From now on, the concept of environmental assessment covers the entire procedure involved in decision-making, which includes, in particular, the preparation of an environmental impact assessment report and consultations (Article L. 122-1 III of the Environmental Code). 2.4.12. Generally, French law increasingly takes into consideration the environmental impact of real estate projects, i.e. through a plot ratio bonus (bonus de COS) (allowed density of construction) for low-energy buildings.  

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2.5. Quality assurance 2.5.1.

2.5.2. 2.5.3.

Parties are always free to institute a quality assurance system creating a duty for the Contractor to demonstrate compliance with the requirements of the Contract. In any case, the Contractor has a contractual responsibility to carry out works in accordance with the Contract. Beyond the freedom of contract, there are also three mechanisms protecting the Employer: (a) The warranty of perfect completion (“la garantie de parfait achèvement”): Article 1792-6 of the French Civil Code provides that “The warranty of perfected completion, to which a contractor is held during a period of one year after the approval, extends to the repairs of all shortcomings indicated by the employer, either through reservations mentioned in the memorandum of approval, or by way of written notice as to those revealed after the approval”; (b) The decennial liability (“la garantie décennale”) laid down in Article 1792 of the French Civil Code: the Contractor is presumed responsible for “damages, even resulting from a defect of the ground, which imperils the strength of the building or which, affecting it in one of its constituent parts or one of its elements of equipment, render it unsuitable for its purposes”; and (c) The professional indemnity insurance (“l’assurance responsabilité civile”). Some construction professionals (for example, architects) are legally required to subscribe to an insurance to cover all professional liabilities that may arise.

2.6. Construction Contracting Dynamics 2.6.1.

The French Civil Code first provides for a series of preliminary rules applicable to all contracts (articles 1101 to 1111-1 of the French Civil Code) including: (a) The notion of contract: a contract is defined as an agreement between two or more persons aimed at creating, modifying, transferring or extinguishing obligations (Article 1101 of the French Civil Code); (b) Freedom of contract: It will be define in the section 3.1. (Article 1102 of the French Civil Code); (c) Pacta sunt servanda (Article 1103 of the French Civil Code); and (d) Good faith: contracts must be negotiated, entered into and performed in good faith. This general duty pertains to public policy; consequently, the parties cannot agree to limit or exclude their duty of good faith (Article 1104 of the French Civil Code).

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In public projects, where public entities often impose adhesion contracts, contractors do not have much opportunity for negotiations. Overall, power relations are as follows: (a) Between the Employer and the Contractor, the Employer selects the contract; and (b) Between the Contractor and the sub-contractor, the Contractor generally proposes a contract as a basis for negotiations.

3. Legal underpinnings of contracts 3.1. Freedom of contract 3.1.1. 3.1.2.

3.1.3.

The principal of freedom of contract was not expressly recognised in the Civil Code until 2016, yet was implied in several statutory provisions. The French 2016 Reform of Contract Law has introduced in the Civil Code the Article 1102 which provides that parties are free to enter into any agreement, to choose their co-contractor and to determine the content of the contract, provided that they remain within the limits of “ordre public” (public policy). Under French law, this principle has two consequences: (a) A party cannot be forced to contract; and (b) Parties can enter into a binding agreement with whomever they choose.

3.2. Legal framework 3.2.1.

3.2.2.

3.2.3.

3.2.4.

The French legal system is based on statute law. The law in France is essentially made up of codified written rules called sources of law. Statute law is generally suppletive, with the exception of public policy provisions. French law can be divided into two main categories: private law and public (or administrative) law, which differs from the traditional distinction between criminal and civil law existing in Common law. Since the 19th century, a distinction has emerged between private and public construction contracts, whose regimes differ not only in the manner they are awarded, but also in their performance. France has a long tradition of strongly regulated public procurement, which has inspired the European Union and simultaneously spread to a large variety of different public contracts. Statutory law is predominant, as a “Code des marchés publics” has existed since the 1960’ and has rapidly evolved to adapt to the European Directives. A reform of public procurement, announced in July 2015, finally resulted in the entry into force of a new public procurement code “Code de la commande publique” (1 April 2019), resulting from Ordi-

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3.2.5.

3.2.6.

nance 2018-1074 of 26 November 2018 and Decree 2018-1075 of 3 December 2018, and which transposes new European directives of February 2014. Private law contracts are subject to the strict application of the pacta sunt servanda principle (apart from the mandatory public policy provisions). In contrast, public procurement contracts are governed by administrative law that recognises the contractor’s right to compensation in the event of unforeseeable circumstances (“imprévision”), which stems from the imperative requirements of mutability and adaptability to the evolving constraints of public service. Since the latest reform of French Private Contract law of 10 February 20161 and recent judicial and administrative developments, the difference between private and public construction contracts is even greater. For example: (a) The formation of the contract is governed by mutual consent in private law contracts; whilst the award of an administrative contract falls under a jurisdiction; (b) During the pre-contractual phase, the private employer (“Maître d’Ouvrage”) is bound by a reporting obligation derived from a principle of fairness in contractual relations, principle that does not apply in the pre-contractual phase of public law contracts;2 (c) During the performance of the contract, a right to the revision of a private law contract is now recognised if an unforeseeable event overturning the economy of the contract occurs, unless otherwise agreed between the parties, whilst administrative law tends to distance itself from this principle although it largely contributed to creating it; (d) In terms of liability, the employer in a private contract is, contractually, liable for the acts of third parties, that is, for the third parties he or she involves in the performance of his or her own obligations (e.g., consultants, engineers, etc.). By contrast, in administrative law the public employer is now exonerated from the faults of other participants, consultants, engineers, chief engineers, etc.; (e) Late or performance penalties which are also a “coercive” tool and are subject to be reduced or increased by the judge when they are manifestly excessive or derisory with respect to the damages suffered in private law contracts. In administrative contracts, in turn, the judge considers that such penalties are applicable, even if the Administration did not suffer any damages. They may only be reduced if they are proved to be manifestly excessive compared with penalties usually provided for in similar contracts;3 and  

1 Ordinance N° 2016-131 of 10 February 2016 reforming contracts law, further modified by Law n° 2018-287 of 20 April 2018. 2 Conseil d’Etat, Decision of 11 April 2014, No. 375051. 3 Conseil d’Etat, Decision of 19 July 2017, No. 392707.

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(f)

As regards the termination clause, finally; the Administration’s co-contractor cannot “invoke the Administration’s violations or failures in order to avoid its own contractual obligations or to take the initiative to unilaterally terminate the contract”. Moreover, the Administration can refuse to abide by a termination clause on grounds of general interest.4 3.2.7. Historically, French administrative law stems from case law, amended today by constitutional principles and laws, themselves largely driven by European law. 3.2.8. Although the doctrine of legal precedent does not apply to civil law courts, case law is essential in the French legal system as it helps interpret statutory law. 3.2.9. For instance, the following principles have been shaped by case law: (a) The good faith obligation of the contractual parties, based on new Article 1104 of the Civil Code; (b) The lump sum price regime based on Article 1793 of the Civil Code; in contracts where the price is global and definitive, additional works are included in the price, unless otherwise agreed or in case of express, unambiguous acceptance of additional costs by the employer. However, the contractor can claim payment for supplemental work if it leads to disruption of the general economic conditions of the contract; (c) The subcontracting regime based on the Act 75-1334 of 31 December 1975; and (d) The scope of decennial liability based on Article 1792 of the Civil Code. 3.2.10. Case law contributes to giving its full range and strength to basic construction law rules.

3.3. Public policy 3.3.1. 3.3.2.

3.3.3.

3.3.4.

Public policy rules restrict parties’ freedom to choose the terms on which they contract. Rules of public policy cannot be excluded or limited. Article 6 of the Civil Code provides that it is not permitted to derogate by agreement from laws which are matters of public policy and relate to accepted standards of moral behaviour. The Civil Code does not, however, define public policy. As a consequence, its content has been decided by courts in accordance with social and economic conditions and ideas. Rules of public policy stem from enacted law, decrees and general principles of law.

4 Conseil d’Etat, Decision of 8 October 2014, No. 370644.

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The following developments present examples of rules of public policy that may be relevant for construction contracts. 3.3.6. The French Cour de cassation has ruled on the public policy character of the Law No. 75-1334 enacted the 31 December 1975, relating to subcontract agreements for construction projects located in France, regardless of the law chosen by the parties. 3.3.7. This Law is in large part mandatory and very protective of subcontractors, notably in relation to the risk of not being paid for their works in case of default by the main contractor. 3.3.8. In the meaning of this law, sub-contracting is the fact for a contractor to entrust part of the performance of the works in its scope with another contractor.5 The right to subcontract is not limited, and does not depend on the type of works to be performed: subcontracting is thus possible even for design works (i.e., the engineer and the architect are entitled to subcontract their obligations). By exception, however, in public construction contracts the main contractor cannot sub-contract the whole works and must remain directly in charge of at least a part of it.6 3.3.9. The French Court of cassation has imposed its mandatory application on any Contractors where construction projects are located in France. Indeed, the Cour of cassation’s decision held that a German subcontractor could take a direct action before the French courts against a Belgian Employer even though the main contract and the subcontract were governed respectively by Swiss and German laws (Decision rendered the 30 January 2008 No. P 06-14.641). 3.3.10. Regardless of the nature of the sub-contract (private or public), the main contractor is liable vis-à-vis the employer for the sub-contractor’s actions (e.g., in case of delay, or damages caused by the subcontractor). Indeed, the main contractor is responsible for all damage, loss or delay, even when evidencing that the subcontractor is at fault.7 3.3.11. If found liable, the main contractor will then seek the sub-contractor’s liability for breach of its obligations under the sub-contract. The main contractor may seek compensation for the total amount of damages he paid to the employer; there are no implied terms or legislation limiting the sub-contractor’s liability to the amount of the sub-contract. Therefore, parties sometimes include such a limitation clause in the sub-contract. 3.3.12. The statute No. 71-584 of 16 July 1971, regarding holdback warranties in works contracts, is also a rule of public policy. It intends to ensure the execution of works and, after the taking-over, the completion of outstanding works. This  

 

5 Law No. 75-1334 of 31 December 1975 on sub-contracting, Article 1. 6 Law No. 75-1334 of 31 December 1975 on sub-contracting, Article 1. 7 Cour de cassation, 3rd Civil Chamber, 13 March 1991, No. 89-13.833.

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law provides that a maximum amount of 5 % of the final market value may be held back by the Employer for advance payments requested by the Contractor. To be applicable, the holdback warranty must be specified in the contract. 3.3.13. Alternatively, the Employer may require Contractors to lodge a security in advance, within the limits of the amount of 5 % of the final market value. In this case, there can be no withholding on advance payments. 3.3.14. The statute No. 78-12 of 4 January 1978 regarding liability and insurance in construction fields, also known as the “Spinetta law”, is a rule of public policy. This Act establishes a presumption of liability for Contractors for a period of 10 years from the taking-over for damages which imperil the strength of the building or which, in affecting one of its constituent parts or one of its elements of equipment, render it unsuitable for its purposes. 3.3.15. Contractors cannot easily exonerate from liability. Thus, the existence of foreign causes, which can result from (i) a third party’s fault, (ii) the Employer’s fault or (iii) an event of force majeure are the only defences available to them.  

 

3.4. Statute Law 3.4.1. 3.4.2. 3.4.3.

3.4.4. 3.4.5.

3.4.6.

3.4.7.

The Civil Code dated 1804, also known as the Napoleonic Code, was the first of a series of codes promulgated in the very beginning of the 19th century. Between 1804 and 2016, only four articles of the Civil Code pertaining to contract law were amended, leaving the remainder untouched. A significant reform of contract law was passed on 10 February 2016, and came into force on 1 October 2016, and applicable to contracts entered into as from that date. Another reform was then passed on 20 April 2018, and is applicable to contracts entered into after 1 October 2018. As a result, three sets of rules may apply to contracts in France. As a principle (subject to various exceptions): (a) Contracts entered into before 1 October 2016 remain submitted to the “old” law of contract, mostly defined in the 1804 Civil Code; (b) Contracts entered into between 1 October 2016 and 1 October 2018 are submitted to the 2016 Law reform; and (c) Contracts entered into after 1 October 2018 are submitted to the 2018 Law reform. To date, the application by the French Cour de cassation of the new rules of contract law are very rare. As a result, any presentation of French contract law must remain prudent, as scholars do not yet benefit from the courts’ interpretations. In addition, it should be noted that the name of the French Construction and Housing Code (“Code de la construction et de l’habitation”) may be misleading

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as this code contains safety and regulatory issues, whilst the majority of the construction legislation (contractual obligation, builders’ guaranties and subcontracting rules) is provided for by articles 1792 et seq. of the Civil Code. The rules relating to construction permits are located in the Town Planning’s Code (“Code de l’urbanisme”). Finally, provisions of the Public Procurement Contracts Code (“Code des marchés publics”) apply to the contracts concluded by the State, its public’s bodies (“établissements publics”) – to the exclusion of those of an industrial and commercial nature –, the local authorities and their public bodies.

3.5. Implied terms contract 3.5.1.

There are no implied terms in the French legal system as the French Civil Code applies to supplement a contractual agreement.

3.6. Construction of contract terms 3.6.1. 3.6.2.

As a principle, French law provides for the parties’ freedom to determine the content of their contract.8 However, this freedom is limited in two ways that are addressed in turn below.

Express and implied terms 3.6.3. The first limit to the parties’ freedom to determine the content of their contract is the judge’s power to add to the parties’ express obligations. 3.6.4. Indeed, under French contract law, the parties undertake to abide not only by the express terms of their agreements, but also by all of the consequences which derive from equity, usage or legislation.9 3.6.5. Courts can thus infer implied terms, such as a duty to ensure the safety of the other party. Unfair contract terms 3.6.6. The second limit to the parties’ freedom to determine the content of their contract is that courts can subtract from the parties’ agreement, by ruling out contractual provisions. For example, between a professional and a consumer, clauses abusives (unfair terms) are deemed void.10 8 French Civil Code, Article 1102. 9 French Civil Code, Article 1194. 10 A list of unfair terms can be found on the website of the Commission des clauses abusives: http:// www.clauses-abusives.fr/textes-de-reference/.

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Moreover, as of 1 October 2016, are deemed not-written: (a) A provision pursuant to which a party is exonerated from performing its principal (“essential”) obligation.11 As a result, a limitation clause can be deemed inexistent if it has for effect of providing a remedy that is considered too low compared to the obligation breached; (b) Standard terms creating a “significant imbalance” (“déséquilibre significative”) in the rights and obligations of the parties.12 This new provision could be interpreted extensively, thus creating legal uncertainty. It is thus highly recommended to carefully negotiate agreements instead of imposing standard terms, and to document such negotiations.

3.7. Private and Public procurement 3.7.1. 3.7.2. 3.7.3.

Again, a distinction between private and public contracts must be made. Private procurement is free and is subject to the relevant contractual rules on the formation of a contract. The various mandatory procedures for awarding public procurement contracts are contained in a complex legal framework arising from 2014 European Union Directives: (a) The “Code des marchés publics” of 1 September 2006 and Ordinance No. 2005-649 of 6 June 2005 on procurement contracts concluded by certain public or private entities not subject to the “Code des marchés publics”, were amended to implement new European Union Directives Nos. 2014/2413 and 2014/25.14 The previous regulation was replaced by (i) Ordinance No. 2015-899 of 23 July 2015 on public procurement contracts, and (ii) Decrees Nos. 2016-360 on public procurement contracts and 2016-361 on defence or security public procurement contracts, of 25 March 2016; and (b) In addition, Ordinance No. 2016-65 of 29 January 2016 and Decree No. 2016-86 of 1 February 2016 on concession contracts implement

11 French Civil Code, Article 1170. 12 French Civil Code, Article 1171. 13 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC. 14 Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC.

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European Union Directive 2014/23.15 They have entered into force on 1 April 2016 and apply to procedures commenced as from that date. The above regulation (i.e.: 2015 and 2016 Ordinances as well as 2016 Decrees) has been recently codified in a new code entitled “Code de la commande publique” (hereinafter CCP). The mandatory procedures for awarding public procurement contracts are to be followed in specific circumstances that depend on (i) the definition of the purchaser involved, and (ii) the purpose of the contract.  

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

The legislation concerning construction in the private and public sectors is a matter of European Union Member States competence, including legislation regarding the environment, contract rights and duties, permits that must be obtained, legal remedies for delayed performance and inadequate performance. However, there is some important EU Secondary Legislation which needs to be taken into account (i.e. Regulations, Directives, Decisions, and Recommendation and opinions). For example, Directive 89/106/EEC (construction products), Directive 2001/95/ EC (general product safety), Directive 92/57/EEC (health and safety at construction sites), Directive 89/665/EEC (procedures and remedies, public works and supply contracts), Directive 93/37/EEC (public works contracts), Directive 93/ 38/EEC (public procurement in water, energy, transport, telecommunications projects), Directive 98/4/EC (amending Directive 93/38/EEC), Directive 85/ 337/EEC (environmental impact assessments, public and private projects), Directive 91/692/EEC (standardisation of environmental reports) and Directive 92/43/EEC (conservation of flora and fauna and natural habitats) create obligations related to construction.  

4.1.3.

4.2. Codes of Practice 4.2.1.

No code of practice relevant to the construction industry has been published in France. In fact, French provisions dealing with construction law already provide a strong legislative framework.

15 Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts.

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4.3. Licensing of professionals and Contractors 4.3.1.

4.3.2.

In principle, there are no legal licensing requirements for construction professionals, including the Contractor, but some independent bodies such as Qualibat certify their level of expertise and practices. This certification may be required in the tender document, especially in the public sector and by insurance companies. Access to certain construction professions is strictly regulated, for example architecture, health and safety co-ordination and building surveying.

5. Construction Contracts 5.1. Standard form for private contracts (CCAG privé) 5.1.1.

5.1.2.

5.1.3.

5.1.4.

The most common standard form was established under the authority of the “Agence française de normalisation” (“AFNOR” – the French Agency for Standardisation), whose standard norm “NF P 03 001” is called “Cahier des Clauses Administratives Générales – Privé” (CCAG “privé”). It results from a consultation of all private construction industry stakeholders. Its current version is dated 20 October 2017. The CCAG “privé” was designed as a standard form of contract for building works governed by private law. Consequently, it contains express references to the French Civil Code, particularly the fixed-price regime and the regime for post-acceptance guarantees and insurance, expressly referring to the mandatory regime of constructors’ decennial liability and its required insurance. It allows for modifications to be made in the course of the works. If the employer expressly undertakes to refrain from modifying the works during their performance (“ne varietur” contract), a specific annex applies (Annex D). The standard is adopted for a pure construction contract, without responsibility for the design or the financing. In general, it is considered balanced as regards the rights and obligations of the two parties. Professional practice is also at the origin of standard forms of contracts for: (a) Architects, established notably by the “Ordre des architects” (French Order of Architects); and (b) Subcontracts, established by various professional federations (e.g., the Fédération Nationale des Travaux Publics “FNTP” – the National Federation of Public Works, or the Fédération Nationale du Bâtiment et des Travaux Publics (“FNBTP” – the National Federation of Building and Public Works). These forms are relatively simplified, and the major construction companies, with a large flow of subcontractor contracts, often use their own standard templates.  

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Again, the use, or not, of these standard forms does not affect the nature of the contract. This is particularly important with regards to subcontracts, that are governed in large part by public policy. Thus, if a contract, irrespective of its denomination, corresponds to the legal definition of a contract for the subcontracting of works, it will be subject to Law No. 75-1334 of 31 December 1975 on subcontracting, which contains a number of mandatory rules pertaining to public policy (obligations to “declare” the subcontractor to the Employer, and to issue a bank guarantee, or to establish a direct payment by the employer – see below, Sub-contracting), that are thus to be complied with notwithstanding (i) any provision to the contrary in the contract, or (ii) the absence of provision to that effect.

5.2. Standard forms for public contracts (CCAG) 5.2.1.

5.2.2.

5.2.3.

5.2.4.

The public purchaser also uses a standard form of contract, the “Cahier des clauses Administratives Générales” (“CCAG”), that is approved and published by ministerial order for each main category of service covered by the public procurement: (i) regular supply, or services (fourniture courante ou services – FCS); (ii) industrial procurements (marchés industriels – MI); (iii) intellectual services (prestation intellectuelles – PI), that are especially used for architecture and maîtrise d’œuvre (engineering) services; (iv) Information and Communication Technologies (Technologies de l’information et de la communication – TIC); and, (v) finally, construction works (Travaux – TX). Both PI and TX CCAG are routinely used in the construction industry. The use of these standard forms is optional for local authorities that have a constitutional right to govern freely.16 In practice, however, local authorities overwhelmingly rely on these standards, which the purchasers and managers of public projects are familiar with. The various CCAGs were modified in 2009–2010, the previous versions dated from 1976 to 1980. They are ongoing works to reform the CCAGs which are expected for 2021. The two most common CCAGs are the CCAG Travaux and CCAG PI. They represent a very substantial portion of the public construction contracts in France. They both contain time bar clauses if formal “service orders” (“ordres de service”) are not challenged within 15 days from the day they are noticed,17 or in case of any dispute18 or dispute following the reconciliation of the final

16 French Constitution of 4 October 1958, Article 72. 17 CCAG Travaux 3.8.2; CCAG PI 3.8. 18 CCAG PI 37.

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account.19 Finally, some public companies or large public purchasers have developed their own standard forms of contracts. For example, the Société Nationale des Chemins de Fer (“SNCF” – national company of French railways) uses particular specifications and general conditions for its 2003 CCAG Travaux. The RATP (Régie Autonome des Transports Parisiens, the public operator of the Parisian metro) also uses its own CCAG, different from the regular one. Similarly, Commission on Atomic and Alternative Energy (CEA) uses General Conditions of Purchase (conditions générales d’achat (CGA)) that include a common base applicable to all types of services, then three subsections A, B and C, the latter relating to construction contracts. It is not possible to detail here the content of all these standard forms, or to compare them in detail with the standard CCAG Travaux. However, it is stressed that, like the CCAG Travaux, they are basic construction contracts, without responsibility for design or financing. If the general balance (risk allocation) of these forms does not profoundly differ from that of the CCAG Travaux, the administrative processes and procedures differ in the details (e.g., time limits, forms of notices, dispute resolution procedure, etc.).  

5.3. Common points between different forms of construction contracts 5.3.1.

A few key points are similar in both administrative CCAG Travaux and the CCAG Privé standard forms of contract: (a) Same structure: general conditions, complemented by specific conditions; (b) Monthly interim payments; (c) 5 % retainer on amounts paid to cover potential defects at the completion of the works, possibly substituted by a bank guarantee20; (d) Interests payable to the contractor for failure by the employer to make payments in time; (e) Performance bonds are not mandatory, subject to the employer’s will, to be eventually included in the specific conditions; (f) No cap on liability or liquidated damages for delay; and (g) Time bar clauses relating to challenging service orders of a duration of fifteen days (CCAG Privé sets out time bar provisions relating to “change  

19 CCAG Travaux 50.2. 20 The CCP introduced a lower retainer (3 %) for public contracts awarded by the State to a small business corporate.  

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orders” only whereas the CCAG Travaux provisions concern all “service orders”).

5.4. Amendment of Contracts and bespoke contracts 5.4.1.

5.4.2. 5.4.3.

5.4.4.

It is common for the contract between the Employer and the Contractor to be used in its amended form. The amendments may range from minor to significant. Both the CCAG Travaux and NF Standards can be completed with special conditions that modify general conditions. In a negotiated procedure of a public procurement, the contracting authority or entity, as the case may be, may negotiate with the candidates selected to have the tenders suited to its needs, provided that (i) the “minimal requirements” and selection criteria stipulated are not amended, and (ii) amendments resulting from negotiations are noticed to every competitor in order to respect their equality of treatment. In private projects, Employers often provide personalised contracts.

5.5. Most Commonly Used 5.5.1. 5.5.2.

Standard forms of construction contracts vary depending on the private or public nature of the works. In the public sector, construction contracts are generally made up of: (a) A letter of appointment containing the price, date for delivery and other essential terms of the agreement; and (b) The CCAG Travaux (i.e. general conditions) is defined by law. The new set of construction CCAG 2009 entered into force on 1 January 2010 and has been amended by the decree of March 3, 2014. These general conditions can be incorporated by reference but are not compulsory; The special conditions (“Cahier des Clauses Administrative Particulières” or CCAP) are defined contractually, to adapt the general conditions to the specific nature of the project. In the private sector, the main standard form of contract is the AFNOR NF P 03 001 Standard, which provides a standard form of general conditions that can be amended for use. The main parties involved in construction contract include: (a) The Employer, known as the “maître d’ouvrage”. The Employer often delegates part or all of his responsibilities to a “maître d’ouvrage délégué” for managing the project on his behalf;  

5.5.3.

5.5.4.

5.5.5.

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(b)

(c)

(d) (e)

The architect called the “maître d’oeuvre” and consulting engineers known as the “bureau d’études techniques”. They are in charge of designing the project and following-up of the construction phase of the project; The health and safety protection coordinator (“coordinateur de sécurité et de protection de la santé”) appointed by the Employer, in accordance with mandatory rules, to monitor and manage health and safety risks during the life of the project; The Contractor, in charge of the construction works; and Subcontractors appointed by the Contractor with the approval of the Employer in accordance with mandatory rules regulating subcontracting.

5.6. Example 1 – CCAG Travaux 2014 5.6.1. 5.6.2.

The CCAG Travaux is only applicable if chosen by the parties as a reference and can only be used in construction works involving a public entity. The last version of the CCAG Travaux was issued by the decree of 3 March 2014 and entered into force on 1 April 2014.

5.7. Example 2 – NF P Standard n°03-001 5.7.1.

5.7.2.

5.7.3.

The content of private contracts is governed by the freedom of contract. Therefore, parties can submit their contract to the “cahier des clauses administratives générales applicable aux travaux de bâtiment faisant l’objet de marchés privés” (the AFNOR Standard). Those general conditions were drafted by the “French standards Association” and correspond to standard number NF P 03 001. The last version of the AFNOR Standard for construction contract was issued on 20 October 2017. Despite their official nature, those conditions are not binding. However, their use can be imposed by insurance companies.

6. Key Issues 6.1. Overview 6.1.1.

In the CCAG Travaux, the Contractor shoulders many responsibilities, as Article 29.1.3 states that the Contractor is in charge of building plans, calculation notes, and studies of details. Therefore, the role of engineers is less significant under French Law than under English Law.

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6.2. Fit for Purpose 6.2.1.

6.2.2.

6.2.3. 6.2.4.

Except in case of a design and built contract, the Contractor is not directly in charge of the fitness for purpose of a construction. Still, he must deliver a strictly conforming and flawless work. The French system is actually close to the “fit for purpose” solution but turns out to be more severe. For instance, a Contractor who had built a house 33 cm below the general level provided by the drawings was compelled to demolish and rebuilt it entirely to comply with the duty to deliver a house conforming to contractual technical specifications, without regards to whether or not the house was fit for its purpose (Cass, civ. 3rd 11 may 2005, n°03-21.136). After the completion, the decennial liability covers partially some “fit for purpose” issues. Contractors must not build anything that they know to be unsafe or otherwise badly designed.

6.3. Late Completion 6.3.1.

6.3.2. 6.3.3.

6.3.4.

French law does not have an established set of rules on concurrent delay and its effect as to the contractor’s right to an extension of time. However, French courts will usually try to apportion the delay of the completion of the works between the delay events caused by the Employer and those caused by the Contractor. A liquidated damages clause is enforceable under French law. In the CCAG Travaux, the Contractor may be subject to fixed-rated liquidated damages in the event of a delay in the completion of the works. The Employer has only to establish that the delivery of the entire or part of the works was delayed for the liquidated damages to be payable (Article 20.1 of the CCAG Travaux). In order to balance the rights and obligations of the Employer and those of the Contractor, the NF Standard regulates liquidated damages for construction delays. Unless specified differently, the liquidated damages are set out as follows: 1/1000 of the amount of the contract price per calendar day of delay in the implementation of the works, within the limit of 5 % of the value of the contract (Article 9.5 of the NF Standard). However, parties are free to derogate from the NF Standard and stipulate higher liquidated damages. The return payable by the Contractor under a liquidated damages clause can be compensated by the cost of remaining work owed by the Employer to the contractor.  

6.3.5. 6.3.6.

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6.4. Latent Conditions 6.4.1. 6.4.2.

6.4.3.

6.4.4.

6.4.5.

6.4.6.

6.4.7.

6.4.8.

The types of risks and their allocation vary according to the nature of the construction project. The main risks for most projects are unforeseen events, errors and omissions or contradictions in the design specifications on which the Contractor relied to prepare his offer. Such risks are generally borne by the Contractor, who assures the Employer that he has fully reviewed the design specification and conducted all necessary additional studies. Since the latest reform of French Private Contract law of 10 February 2016, a right to the revision of a private law contract during the performance of the contract is now recognised if an unforeseeable event overturning the economy of the contract occurs, unless otherwise agreed between the parties (Article 1195 of the French Civil Code). However, it has been ruled by the Court of Appeal of Douai that this right to the revision of a private contract is inapplicable in a lump-sum contract subject to the Article 1793 of the French Civil Code, as this Article 1793 derogates from the general rule (Court of Appeal of Douai, 23 January 2020, n° 19/01718). In public works the Contractor may, in certain circumstances, have the right to an adjustment of the contract price due to unforeseen events, and by a way of consequence ask the Employer to pay additional charges. The theory of enforceability, whereby the parties or judges can, if necessary, revise or terminate a contract in the event of an unforeseeable change of circumstances, is contemplated in the CCAG Travaux and was introduced in 2000 in the NF Standard. The Article 9.1.2 of the NF Standard provides that the price stipulated in the contract remunerates the Contractor of all expenses, charges and obligations reasonably foreseeable. In the case of difficult or constrained access to the building site or damage to nearby buildings and infrastructures, the Contractor and its insurance will usually bear these risks.

6.5. Force Majeure 6.5.1.

6.5.2.

As a principle, a party is liable when it fails to perform its obligations. However, Article 1218 of the Civil Code provides for the exclusion of liability for force majeure. Liability will be entirely excluded in the event of (i) an unforeseeable, (ii) unavoidable, (iii) and external (completely outside a party’s control) event.

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6.5.3.

6.5.4.

6.5.5. 6.5.6.

6.5.7.

6.5.8.

The effect of force majeure event on the contract varies according to the nature of the event. It may either suspend the performance of the contract, or terminate it if the performance is not possible. The parties have complete contractual freedom regarding force majeure provisions. They can choose to apportion the risks between them and decide that the Contractor will bear all risks associated with force majeure or, on the contrary, entirely exclude his liability. Therefore, the force majeure clause should be drafted very carefully. Strike, for example, may be excluded. The CCAG Travaux does contain a force majeure clause stating that in a “case of losses or damage caused to its sites by a natural phenomenon which was not reasonably foreseeable, or in cases of force majeure, the Contractor shall be compensated for the damage suffered” (Article 18.3). Under those general conditions, the Contractor has the right to compensation in the event of force majeure. The NF Standard also contains a force majeure clause which provides in Article 9.2 that “in the event of force majeure, losses and damage suffered by one of the parties shall, as soon as they are known, be reported to the other party”. Article 22.2.1 also provides that force majeure may lead to an automatic termination without compensation where the pursuit of the work has become impossible.

6.6. Limitation of liability 6.6.1.

6.6.2.

6.6.3.

Under French law, parties are free to exclude or restrict liability, i.e. liability for indirect or consequential loss or future loss including business profits, with the exception of the legal warranties that contractors must provide, as they are mandatory. Notwithstanding these warranties, the parties are free to limit or exclude contractually their respective liabilities, including indirect or consequential losses, loss of profits, or insufficient economic success. However, these clauses will not be valid in case of gross negligence (“faute lourde”) or willful misconduct (“faute dolosive”), or if the contractual liability provided is insignificant, as a result of a too broad exclusion clause. Cap of liabilities are common in private contracts. They are generally expressed as a percentage of the contract price, the exact figure mostly depending on the potential financial costs of delays or other breach of a contractor’s obligations leading to termination and retendering of the contract.  

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6.7. Duration of exposure 6.7.1. 6.7.2.

6.7.3.

6.7.4.

6.7.5. 6.7.6.

6.7.7. 6.7.8.

French law prescribes a time limit to bring an action related to construction. The Contractor is liable for a duration of ten years of the damages, even resulting from a defect of the ground, which imperils the strength of the building or which, affecting it in one of its constituent parts or one of its elements of equipment, render it unsuitable for its purposes21, according to the mandatory “garantie décennale” (decennial liability). The parties ordinary contractual liability may be engaged for a period of five years, starting on the day the plaintiff knew or should have known the facts giving rise to the claim. The French legislator has adopted a significant reform of the statute of limitations in civil matters, which came into force the 19 June 2008 and has been retained by the reform of 2016. This statute modifies the limitations or prescription periods. Under the new legislation, the same prescription period of five years is now applied in contractual and tort law (under Article 2224 of the Civil Code) and in commercial matters (under Article L. 110-4 of the Commercial Code). However, the beginning of the prescription period cannot be postponed for more than twenty years (Article 2232 of the Civil Code). The five-year limitation period is a considerable break from the old system, as the law used to provide for a thirty-year limitation period for contractual and discrimination claims and a ten-year limitation period for most commercial claims and tort action.

6.8. Time Bars 6.8.1.

6.8.2.

The NF Standard contains a time limitation clause in Article 19.6.3: “the Contractor shall have 30 days from the notification of the final memorandum to submit observations to the Architect and notify the Employer simultaneously. After this time limit, it is deemed to have accepted the general memorandum which then becomes the general and final memorandum”. The final memorandum shall specify all debts owed to the Contractor. Thirty days after the notification of the final memorandum, the Contractor is no longer entitled to challenge the final memorandum. The silence of the Contractor within this time period is a presumption of approval.22

21 French Civil Code, Article 1792. 22 Court of Appeal of Paris, 24 November 1999.

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The CCAG Travaux also contains a time limitation clause in Article 50.3.2. In the event of a dispute, the Contractor shall draft a claim specifying the amount and the grounds of the dispute. Under Article 50.3.2, if the Employer does not comply with the claim, the Contractor has 6 months to bring an action before the relevant court.

7. Dispute Resolution 7.1.1.

All types of dispute resolution methods are available in France. Arbitration and other means of alternative dispute resolution mechanisms are well developed and enforced. 7.1.2. However, the administrative courts may have exclusive jurisdiction in the public sector. 7.1.3. Parties to construction disputes may always, prior to bringing an action to court or arbitration, request the judge to order a wide range of interim measures, including judicial expertises (“référé expertise”), or provisional payment of an undisputed amount (“référé provision”), like for example a DAB decision for which no notice of dissatisfaction would have been issued under the FIDIC Red Book. 7.1.4. A distinction should be made between domestic and international construction projects. 7.1.5. Most frequently, disputes arising out of private domestic projects are resolved before the relevant French courts or the court chosen by the parties in their agreement. Parties can also choose to submit their dispute to arbitration. 7.1.6. In private international projects, parties frequently submit their dispute to arbitration (either ad hoc or institutional). 7.1.7. On 13 January 2011, France passed a new decree on arbitration, confirming that the country is arbitration-friendly. It consolidated the established principles of arbitration set out by case law and international practices. 7.1.8. French courts support arbitration proceedings. The Paris Court of Appeal is well-known for its case law in favour of arbitration. Paris is therefore often chosen as the place for international arbitration whether the construction project underlying the dispute is located in France or not. 7.1.9. On 12 February 2018, two international chambers within the Paris Commercial Court and the Paris Court of Appeal have been inaugurated, before which the parties may agree on the application of a Protocol allowing them, for instance, to produce exhibits and conduct oral debates in English. 7.1.10. The Article 21-2 of the NF Standard contains a clause relating to dispute resolution which provides for the right of the parties to provide for arbitration:

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“Disputes relating to the validity, interpretation, performance, non-performance or termination of the contract will be submitted, prior to any legal action, to mediation or conciliation. The professional contracting with a private individual is obliged to include in the market documents a clause allowing the consumer to have recourse to a consumer mediator whose contact details he gives. Where the dispute has not been resolved amicably, if the parties have not agreed on an arbitration procedure, the consumer is entitled to have recourse to a consumer mediator”. 7.1.11.

7.1.12. 7.1.13.

Article 50 of the CCAG Travaux describes the process of disputes resolution: (i) Parties shall use their best efforts to settle any dispute amicably; (ii) In the event of a dispute, the Contractor shall draft a claim containing the basis upon which the claim is made and its amount; (iii) If the Employer does not comply with the request, the Contractor may bring an action before the relevant administrative court. Article 50.5 of the CCAG Travaux also provides that parties may decide to resolve their dispute through arbitration. In public contracts, the parties can only submit their dispute to arbitration (i) if the project is international or (ii) if the public entity involved has expressly given the authorisation by decree (see Article 128 of the Public Procurement Contracts Code).

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Germany 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 3. 3.2. 3.3. 3.4. 3.5. 3.6. 4. 4.1. 4.2. 5. 5.1. 5.2. 5.3. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 6.10. 6.11. 6.12. 6.13. 6.14.

Context 356 The Country 356 The Legal System 356 The Economy 358 The Construction Industry 359 Size and Nature 359 Participants 360 Work, Health and Safety 361 Protection of the Environment 361 Quality Assurance 362 Legal Underpinnings of Contracts 362 Freedom of Contract 363 Legal Framework 363 German Anti-Bribery and Anti-Corruption Law 363 Liens and Mortgages 364 Public Procurement 364 Government Involvement 367 Legislation and Regulation 367 Licensing of Professionals and Contractors 368 Construction Contracts 368 Available Contracts 368 Amendment of Contracts and Bespoke Contracts 370 Most Commonly Used 371 Key Issues 372 Overview 372 Remuneration 373 Periods of Completion, Delays and Late Completion 375 Distribution of Risk (‘Gefahrtragung’) 376 Termination 376 Limitation of Liability 377 Penalties 378 Acceptance and Final Approval 378 Warranties 379 Limitation Periods 379 Payment and Security for Claims 380 Sureties, Performance and Warranty Bonds 381 Fit for Purpose 382 Latent Conditions 382

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Force Majeure 383 Time Bars 384 Dispute Resolution 384

1. Context 1.1. The Country 1.1.1.

Germany, officially the Federal Republic of Germany, is a federal parliamentary republic in western central Europe with a total area of 357,022 km². It is bounded by the North Sea and the Baltic Sea, and has borders with Austria, Belgium, the Czech Republic, Denmark, France, Luxembourg, the Netherlands, Poland and Switzerland. The country consists of 16 states. Each state has its own constitution. The states, which are collectively referred to as Länder, are largely autonomous in their internal organisation. With approximately 83.2 million inhabitants (as at the end of 2019), Germany is the most populous member state within the European Union.1 It is also one of the major economic and political powers of the European continent.

1.2. The Legal System 1.2.1.

1.2.2.

The German legal system is founded on the principles laid out in the so-called Grundgesetz für die Bundesrepublik Deutschland [Basic Law for the Federal Republic of Germany] (‘Grundgesetz’) of 23 May 1949.2 The Grundgesetz determines the framework for Germany’s political system and has the status of a supreme law constitution. The Grundgesetz specifies basic rights of the people and contains provisions governing the organisation of the country. Changes to its provisions are difficult and require a 2/3 majority in the Federal Parliament (‘Bundestag’) as well as the Federal Council (‘Bundesrat’).3 Some basic provisions such as human dignity and the principle of democracy cannot be changed at all. The political system in general is governed by five constitutional principles, these being the federal state (‘Bundesstaat’), democracy, republic, the rule of law, and the social state, under Article 20 of the Grundgesetz.

1 www.destatis.de/EN (website of the German Federal Office for Statistics). 2 . 3 Art. 79 (2) Grundgesetz.

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1.2.5.

1.2.6.

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Germany is a federation. The individual federal states as mentioned above are not purely administrative units. They are independent states with their own legislative, executive and judicial bodies. The Grundgesetz further regulates the allocation of legislative and administrative powers between the Federation (‘Bund’) and the 16 federal states.4 In general, the Federation has greater responsibility for legislation. The federal states are responsible for passing laws in respect of their local government and their internal organisation and also in policy areas such as education and culture. However, the federal states also influence the legislative procedure through their representation in the Federal Council of Germany (‘Bundesrat’). Under Article 20(2)(2) of the Grundgesetz, the state power is exercised by the people through elections. The main body is the Federal Parliament (‘Bundestag’).5The Federal President (‘Bundespräsident’) is the head of the state.6 He is chosen by election by the Federal Assembly (‘Bundesversammlung’). The office of the Federal President is more of a representative nature. The ‘Guidelines of Politics’ are determined by the ‘Bundeskanzler’, the head of the Federal Government.7 The Bundeskanzler is elected by the Bundestag and selects the Federal Ministers at his or her discretion. The German principle of the rule of law is emphasised in numerous provisions of the Grundgesetz. For example, Article 20(3) of the Grundgesetz determines the direct link between judicial decisions, executive power, law and justice. By declaring itself to be a social state, Germany sets itself the task of providing humane social conditions. The legislature has the discretion to choose how it puts this principle into practice. The Federal Constitutional Court (‘Bundesverfassungsgericht’) is the German Supreme Court responsible for constitutional matters. It has the power of judicial review of legislation. Furthermore, the Federal Constitutional Court is responsible for resolving disputes between the several constitutional bodies. It is also responsible for resolving claims of individuals who claim infringement of their basic rights by a state authority. The main source of German law is codified in statute. Most of the important laws, such as the Bürgerliches Gesetzbuch [Civil Code] (Germany) (‘BGB’),8 the Handelsgesetzbuch [Commercial Code] (Germany) (‘HGB’),9 and the Zivilpro-

4 Section II, Art. 20 et seq. Grundgesetz. 5 Provisions relating to the Bundestag are contained in Section III, Art. 38 et seq. Grundgesetz. 6 Provisions relating to the Bundespräsident are contained in Section V, Art. 54 et seq. Grundgesetz. 7 Provisions relation tot he Fedearl Government are contained in Section VI, Art. 62 et seq. Grundgesetz. 8 . 9 .

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zessordnung [Civil Procedure Code] (Germany) (‘ZPO’)10 were developed prior to the Grundgesetz in 1949. Some of these are well over 100 years old. They are constantly revised and provide a structured backbone to Germany’s legal system. The Grundgesetz is the supreme law. All other laws must be in conformity with the Grundgesetz. Where the Constitutional Court finds otherwise, it may repeal the respective law; the Constitutional Court has exercised this right numerous times in the past. The legal system in general differs between public law (‘Öffentliches Recht’) and private law (‘Privatrecht’). Public law regulates the relations between a citizen and the state or two bodies of the state, and includes criminal law. Private law regulates the relations between private persons or private entities. German law has been subject to many different influences over the centuries. At the start of the Renaissance, it was influenced by Roman law, e.g., the Corpus Iuris Civilis, and later by Napoleonic law, in the form of the Napoleonic Code. Germany has both federal and regional courts. Together they form a part of a single court system. The court system is divided into five divisions: ordinary (civil and criminal jurisdiction); administrative; tax; employment; and social. Each of these divisions is divided into three levels, apart from the tax division, which has only two levels. Among the regular three divisions, the first and second are regional, and the third level of jurisdiction is federal.  

1.2.9.

1.3. The Economy 1.3.1.

Germany has a social market economy. It has the largest economy within Europe. The service sector contributes 69.3 % of the gross national product (‘GNP’), industry another 24.2 %, construction 5.6 %, leaving the remaining 0.9 % for agriculture (all figures relating to 2017).11 Germany’s GDP in 2019 was EUR 3.449 trillion, which is the world’s 4th highest.12 37 of the world’s 500 largest stock-market-listed companies are headquartered in Germany. Well-known brands such as Mercedes, Siemens, Adidas and Volkswagen are part of the traditional German industry. Aside from this, the construction industry also serves as an economic driver to generate prosperity in Germany. The Federal Republic of Germany has a long history of promoting free trade and is now one the world’s leading trade nations. Its industry is also determined by agreements among the European Union member states and EU leg 

 

 

 

1.3.2.

10 . 11 https://de.wikipedia.org/wiki/Wirtschaft_Deutschlands. 12 https://www.destatis.de/EN/Themes/Economy/National-Accounts-Domestic-Product/_node.html.

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islation. As a member of the EU, Germany belongs to the largest single market in the world with a population of around 500 million inhabitants.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction industry contributes greatly to the creation and growth of jobs in the German economy. The collapse of Lehman Brothers and the financial crisis in 2012 had an obvious dampening effect. In the main construction sector, where new-building construction is a major element, nominal construction sales increased only slightly against the financial-crisis background, after extremely strong growth in the previous year. In the building completion and finishing sector, consisting mainly of maintenance and repair activities, sales generated by the skilled building trades declined by almost 3 %. Additionally, construction investment increased nominally, by only 1 %, and declined by almost 1.5 % in real terms.13 Because of its subsidiaries and affiliated companies, the German construction industry is also successful abroad. In recent years, German building output at an international level has accounted for more than €21 billion annually.14 The construction industry includes the main construction and finishing trades. There are about 73,000 companies active in the main construction trades, which are generally small or medium-sized. They offer shell construction and civil engineering services. Around another 44,000 companies provide mainly finishing, interior fittings and renovation services. With a total of 2.2 million workers, the construction industry is one of Germany’s largest employers. The size and impact of the construction industry can also be seen with regard to college graduates. In 2016, graduates in fields such as science, technology, engineering and mathematics accounted for 80 % of the university graduates employed in the sector.15 As a consequence of climate change, the construction industry has become increasingly focused on environmental research. The major focus of research and development lies in optimising the energy efficiency of buildings and constructing them in a way that is primarily energy-efficient and sustainable. The German industry offers new solutions when it comes to developing new building materials and technologies.  

 

 

2.1.2.

2.1.3.

 

2.1.4.

13 https://www.destatis.de/EN. 14 https://www.destatis.de/EN. 15 https://www.destatis.de/EN.

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2.2. Participants 2.2.1.

2.2.2.

Contracting in the private industry always involves two main participants: the employer and the contractor. The ways to structure the rights and obligations of these main participants are endless and depend to a great degree on the project. However, some structures are more common than others and these will be more closely described below. In relation to public procurement, the Gesetz gegen Wettbewerbsbeschränkungen [Act against Restraints of Competition] (Germany)16 provides a list of those participants who are subject to these rules. § 99 of the GWB differentiates between three types of contracting authorities. These are: (a) Public sector customers, which are defined and specified in GWB § 99. These can be: (i) Regional or local authorities, as well as their special funds (GWB § 99(1)); (ii) Other legal entities under public or private law, which were established for meeting non-commercial needs in the general interest (GWB § 99(2)); (iii) Associations whose members fall under §§ 99(1) or 99(2) of the GWB; amd (iv) Natural or legal entities under private law, and legal persons governed by public law, other than those referred to in § 99(2), who receive funds for civil engineering works; the construction of hospitals; sports; recreational or leisure facilities; school, university or administrative buildings; or related services and competitions from bodies falling under GWB ss 99(1), (2) or (3), of which more than 50 % of these projects are subsidised. (b) Sectoral customers, which are defined and specified in GWB § 100. These can be: (i) Contracting authorities in accordance with GWB §§ 99(1)–(3), who carry out a sectoral activity in accordance with GWB § 102; or (ii) Natural or legal entities under private law, pursuing a sectoral activity in accordance with GWB § 102. (c) Franchisors (GWB § 101).  

16 26 June 2013, BGB1 I, 2013, 1750 (‘GWB’).

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2.3. Work, Health and Safety 2.3.1.

2.3.2.

The German system for health and safety at work has a dual structure. It involves safety and health provisions at the state level and accident-insurance companies at the autonomous level. The state passes legislation and issues regulations, and the accident-insurance companies set out accident-prevention rules. Employers must abide by legislation such as the Arbeitsschutzgesetz [Labour Protection Act] (Germany)17 and ordinances such as the Arbeitsstättenverordnung [Workplace Ordinance] (Germany)18 and the Baustellenverordnung [Ordinance on Health and Safety at Construction Sites] (Germany).19 These safety laws and ordinances must be observed to guarantee safety for the employee. The Gemeinsame Deutsche Arbeitsschutzstrategie [Joint German Health and Safety Strategy] (‘GDA’) was evolved by the governments of the federation, the states and the accident-insurance companies. The purpose of the GDA is to guarantee, develop, and improve the safety and health of people at work on the basis of an agreed and systematically applied safety and health policy.

2.4. Protection of the Environment 2.4.1.

2.4.2.

Provisions relevant to environmental protection are found throughout Germany’s legal system. Construction permits, for example, contain thresholds for noise and gas emissions, as regulated by the Bundesimmissionsschutzgesetz [Federal Emissions Control Act] (Germany).20 Furthermore, building projects must comply with provisions geared to protecting the groundwater from toxic substances. Established by an act of the Federal German Parliament in 1974, the Umweltbundesamt [Federal Environment Agency] (‘UBA’) is the central authority for environmental protection in Germany. This agency is under the supervision of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, and is responsible for the protection of the environment as well as protecting humans from adverse environmental hazards. The UBA has the power to advise certain governmental institutions on various environmental mat-

17 7  August 1996, BGB1 I, 1996, 1246 (‘ArbSchG‘). 18 12 August 2004, BGB1 I, 2004, 2179 (‘ArbStättV’). 19 10 June 1998, BGB1 I, 1998, 1283 https://www.baua.de/EN/Topics/Work-design/Sectors/Construc tion-work/pdf/Construction-Site-Ordinance.pdf?__blob=publicationFile&v=5 (‘BaustellV’). 20 17 May 2013, BGB1 I, 2013, 1274 https://germanlawarchive.iuscomp.org/?p=315 (‘BImSchG’).

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ters. Furthermore, they have the task of informing the general public on almost all questions regarding environmental protection. The Federal Environment Agency also works cross-border. The UBA staff, with over 1,500 employees, actively participates in many international forums, such as the WHO Collaborating Centre for Air Quality Management and Air Pollution Control and research forums in the field of drinking-water hygiene, as well as with the national liaison office for UNESCO on matters of environmental education.21

2.5. Quality Assurance 2.5.1.

2.5.2.

The importance of quality assurance is based on the principal of getting things right the first time by avoiding defects during construction. Quality assurance in construction is guaranteed by German contract law. Builders are required to render work that is free of material and legal defects. In the event of defects, the principal has the legal remedies described below.22 In the construction industry, quality assurance is further defined by Deutsche Industrie-Norm (‘DIN’) standards. DIN standards define what should be considered ‘state of the art’. They indicate the generally recognized rule of technology. The builder’s work must generally be in line with the applicable DIN standards; any violation will likely be regarded as a material defect and will trigger warranty claims by the principal.23

3. Legal Underpinnings of Contracts 3.1.1.

Private contractors and employers are free to negotiate their contracts. Public authorities are bound by procurement rules set out under the Vergabe und Vertragsordnung für Bauleistungen [Rules on Public Procurement and the Directive on Award and Contracting of Construction Works] (‘VOB’) with regard to contracts for executing building works.24 In employing architects and engineers, private contractors and employers are bound by the [Rules for the Award of Contracts for Freelance Services] (‘VOF’). The rules of the VOF apply for all projects with a value exceeding certain thresholds.25

21 https://www.umweltbundesamt.de/en. 22 Section 634 BGB (German Civil Code). 23 This is the standing opinion expressed by the German Federal Court of Justice. 24 Current version: VOB/B 2016; https://dejure.org/gesetze/VOB-B. The provisions of the VOB standard contract form will be dealt with in detail in Sections 5.3 and 6. 25 The text can be downloaded here: https://www.bmwi.de/Redaktion/DE/Downloads/Gesetz/ verdingungsordnung-freiberufliche-leistungen.html. The VOF rules are not addressed in this chapter.

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3.2. Freedom of Contract 3.2.1.

3.2.2.

3.2.3.

Vertragsfreiheit [freedom of contract] is a manifestation of party autonomy and allows the parties in a building project to draw up a contract that is individual and meets their contractual needs. Freedom of contract is protected under the Grundgesetz.26 Freedom of contract, however, is limited to a certain degree. Agreements that are in violation of statutes, such as those pertaining to VAT rules, are void. Also, under BGB s 138(1), contracts that are contra bonos mores are void. These include contracts which oppressively restrict a person’s independence or economic freedom. The parties are also free to agree on which standard business terms and conditions (‘Allgemeine Geschäftsbedingungen’ or ‘AGB’) will apply. If they do so, the terms agreed upon will be subject to judicial review of general terms and conditions.

3.3. Legal Framework 3.3.1.

Construction and architectural law are subject to private law. The BGB did not have its own types of contract until the end of 2017. In order to deal with building contract matters, it was necessary to have recourse to the regulations on contracts for work (under BGB s 631) and services (under BGB s 611). The law on contracts for work and services was reformed, such that building contract law is now expressly included in the BGB. These reforms came into force on 1 January 2018. There are now regulations on building contracts (under BGB s 650a) and consumer building contracts (under BGB s 650i), as well as regulations on the typical obligations arising from architect and engineering contracts (under BGB s 650p). Recourse to the more general provisions of the contract for work and services (BGB s 631 et seq), or the contract for service (BGB s 611 et seq is no longer required.

3.4. German Anti-Bribery and Anti-Corruption Law 3.4.1.

Participants in the building process are bound by German anti-bribery and anti-corruption law. Most of the relevant provisions are set out in the Strafgesetzbuch [Criminal Code] (Germany) (‘StGB’),27 which differentiates between

26 The general right of freedom in Art. 2(1) Grundgesetz includes the fredom of contract. 27 .

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bribery in public office (Sect. 334), bribery in commercial business transactions (Sect. 299) and electoral bribery (Sect. 107a). Germany was classified as an ‘active’ enforcer of foreign bribery prohibitions by Transparency International’s Progress Report on the OECD Anti-Bribery Convention.28 In Phase 3, from 1 January 2011 to 31 December 2017, more than 121 cases were reported.29 In contrast to US anti-bribery and corruption regulations, under German law only individuals are subject to criminal liability.30

3.5. Liens and Mortgages 3.5.1.

3.5.2.

The BGB sets out the possibility for a building contractor to secure his claims under a contract by means of an equitable mortgage. Pursuant to § 650e of the BGB, which was inserted after 1 January 2018, a building contractor may demand the granting of an appropriate mortgage on the client’s developed property for a building or part of a building. In addition, where the work has not yet been completed, the contractor may demand a mortgage for that portion of the remuneration corresponding to the work the contractor has already performed, and for any expenses not included in the remuneration. Under BGB § 650f, the contractor of a building may demand security from the principal in the form of an equitable mortgage in the amount of the agreed remuneration plus up to 10 % for additional commissions, minus any amounts already paid. If the principal does not furnish this security within a reasonable set period, the contractor may refuse performance or even withdraw from the contract.  

3.6. Public Procurement 3.6.1.

The first rules regulating public contracts were introduced in the early 20th century. The Imperial Government of Germany set up the Reichsverdingungsausschuss [Committee for Public Procurement] in the 1920s. The committee published its official guidelines in 1926, containing standard rules for the awarding of public construction contracts. The Deutscher Verdingungsaus-

28 Gillian Dell and Andrew McDevitt, Exporting Corruption: Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention (Transparency International, 2018) 49–51. 29 Gillian Dell and Andrew McDevitt, Exporting Corruption: Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention (Transparency International, 2018) 49–51. 30 Companies cannot be held “guilty” and are only subject tot he regulations on administrative offenses (‘Ordnungswidrigkeitsgesetz’).

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schuss für Bauleistungen [German Committee for the Award of Public Contracts in Construction] was founded in 1947. This committee continues its work to this day. Now called the Deutscher Vergabe und Vertragsausschuss für Bauleistungen [German Committee for Public Procurement Regulations in Construction] (‘DVA’), this Committee revises public procurement regulations in Germany. As a member of the European Union, Germany is subject to EU law. The EU Procurement Directives have had a noticeable impact on the public procurement sector in Germany. The European Union took steps to harmonize the public procurement legal framework within their member states, adopting Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts31 and Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC.32 These directives have been fully transposed into German law, by means of amendments to the GWB and the Vergabeordnung [Ordinance on Award of Public Contracts] (Germany).33 This transposition of EU law into German law through amendment of existing Acts is somewhat unusual compared to other directives. Aside from the changes to the GWB and VgV, the directives have influenced other legislation, such as the Sektorenverordnung [Regulations on Public Procurement and Award of Contracts in the Transport, Water and Energy Sectors] (Germany),34 Vergabe- und Vertragsordnung für Bauleistungen [Rules on Public Procurement and Award of Contracts for Construction Services] (Germany) (‘VOB’), Vergabe- und Vertragsordnung für Leistungen [Rules on Public Procurement and the Award of Contracts for Services] (‘VOL’)35, and Vergabe- und Vertragsordnung für freiberufliche Dienstleistungen [Rules on Public Procurement and Award of Contracts for Freelance Services] (‘VOF’). GWB §§ 97–12 contain a system of judicial remedies, as designated by the EU directives, to apply to the public procurement process. The GWB is applicable in this respect only where EU thresholds are met. The VgV is based on GWB § 113, and for the most — and most important — part, follows these EU thresholds. Since these thresholds are applicable regardless of whether the member state has implemented the EU laws, these provisions of the VgV represent de-

31 [2014] OJ L 94/1 (‘Directive 2014/23/EU’). 32 [2014] OJ L 94/65 (‘Directive 2014/24/EU’). 33 12 April 2016, BGB1 I, 2016, 624 https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/ Others/VergabeVerordnung.pdf?__blob=publicationFile&v=3 (‘VgV’). 34 12 April 2016, BGB1 I, 2016, 624, 657 https://www.bmwi.de/Redaktion/DE/Downloads/Gesetz/ sektorenverordnung-sektvo-konsolidierte-nicht-amtliche-fassung.pdf?__blob=publicationFile&v=8 (only available in German (‘SektVO’). 35 VOL version 2016 see: https://www.bmwi.de/Redaktion/DE/Downloads/V/vol-a-abschnitt-1.pdf? __blob=publicationFile&v=4 (not publicly available in English).

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3.6.6.

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clarative law in cases in which the thresholds are met. The SektVO is applicable for procurement procedures of entities operating in the water and energy services sectors. It is issued by the Federal Ministry of Economics and Technology and is based on the old version of GWB §§ 97(6) and 127(1)–(2), (8)–(9).36 The current version of the SektVO, which entered into force on 18 April 2016, is based on Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on Procurement by Entities Operating in the Water, Energy, Transport and Postal Services Sectors and Repealing Directive 2004/17/EC.37 German law sets out basic rules and principles for public procurement. GWB § 97 defines fundamental rules in this respect, such as transparency, competition, economic efficiency, and equal treatment. The applicable public procurement rules will depend on which thresholds are met and, in particular, whether the contract will be below or above the thresholds of the European Union. The various thresholds are specified in the GWB. In principle, any contract awarded by a public authority to a third party falls within the scope of European procurement law if its estimated value exceeds one of the thresholds. New thresholds were introduced with effect from 1 January 2020.38 For public bodies and for companies operating in water, energy, or transport, the threshold for work contracts is €5.350 million. For supply (utility) contracts, and service contracts for public bodies and entities, the thresholds differ: €428,000 for entities in the sectors (water and energy), and another €139,000 or €214,000 depending on the public body. Below these thresholds, German public procurement law applies, with the consequence that the contracts must only be published nationally, and that different legal remedies will apply to the procurement process. GWB § 103 divides public contracts into supply (utility) contracts (§ 103(2)), construction contracts (§ 103(3)) and service contracts (§ 103(4)), and provides legal practitioners with a statutory definition of a public contract.39

Rudolf Weyand, ‘Introduction to SektVO: Section 1’ in Vergaberecht. [2014] OJ L 94/243 (‘Directive 2014/25/EU’). According to EU-Regulation (EU) 2019/1827 – 1930 dated 30.10.2019. Jan Ziekow, ‘§ 99 GWB, Section 5’ in Jan Ziekow and Uwe-Carsten Völlink (eds), Vergaberecht.

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

As parties to a building project, architects and engineers must be registered with the Chamber of Architects or the Chamber of Engineers in order to apply for a building permit.40 In general, there is no inherent restriction on an individual’s freedom to build (‘Baufreiheit’).41 This freedom to build is set out by Article 14 of the Grundgesetz,42 although it is subject to various further statutory requirements under subsection 1 of that Article. For instance, the builder must obtain a construction permit prior to erecting a building.43 This construction permit is a statement from the relevant authority that the proposed structure and its intended use will not violate current laws. Construction permits must be obtained not only for constructing a building, but also for demolition or a change in the permitted use of a building. The responsible authorities for construction permits are the Bauamt [Construction Office] or the Bauaufsichtsbehörde [Construction Supervisory Board]. They examine the compatibility of the project with federal land-use planning and zoning laws (‘Bauplanungsrecht’).44 As a second step, the responsible authorities determine the compatibility of the project with state building regulations (‘bauordnungsrecht’), which, in addition to other matters, clarify how buildings may be designed and constructed. In contrast to the federal land-use planning and zoning laws, these building regulations fall within the legislative power of the individual German states.

40 This is subject to stipulations in the individual Building Regulations (‘Bauordnungen’) of the Federal states (‘Bundesländer’). 41 Hans J.Schneider, ‘Chapter IV’ in Rüdiger Volhard, Dolf Weber and Wolfgang Usinger (eds), Real Property in Germany: Legal and Tax Aspects of Development and Investment (Knapp, Fritz, 6th ed, 2002) 51. 42 Cf Grundgestz Article 14 on ‘Property — Inheritance — Expropriation’: (1) Property and the right of inheritance shall be guaranteed. Their content and limits shall be defined by the laws. (2) Property entails obligations. Its use shall also serve the public good. (3) Expropriation shall only be permissible for the public good. It may only be ordered by or pursuant to a law that determines the nature and extent of compensation. Such compensation shall be determined by establishing an equitable balance between the public interest and the interests of those affected. In case of dispute concerning the amount of compensation, recourse may be had by the ordinary courts. 43 Hans J. Schneider, ‘Chapter IV’ in Rüdiger Volhard, Dolf Weber and Wolfgang Usinger (eds), Real Property in Germany: Legal and Tax Aspects of Development and Investment (Knapp, Fritz, 6th ed, 2002) 51. 44 German planning/zoning laws determine the purpose for which a property may be used.

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Other permits might be necessary in certain cases, especially where environmental issues or monument protection is involved.

4.2. Licensing of Professionals and Contractors 4.2.1.

4.2.2.

Construction professionals and contractors do not require a construction-specific license to do business. Some contractors require a license under the Gewerbeordnung [Trade, Commerce and Industrial Code] (Germany) (‘GewO’),45 which is granted by the Gewerbeaufsichtsämtern [Trade Supervisory Authorities]. Architects must be registered in the list of architects kept by the Architektenkammer [Chamber of Architects] of their respective state. To be registered, architects must have the required degree of education and must hold professional-liability insurance. The same applies for engineers. Architects and engineers may also require a license under the GewO.

5. Construction Contracts 5.1. Available Contracts 5.1.1. 5.1.2.

5.1.3.

Various kinds of contracts are used in the building industry, depending largely on the different roles of the participants. Disregarding whether architects and engineers are involved (either hired by the principal or working on the building contractor’s side), it is mainly the role of the building contractor that will determine which of the various available contracts will be used. German law distinguishes between the following roles, or types, of contractors: (a) ‘Totalunternehmer’ is a general contractor undertaking the complete planning, design, and performance obligations for a turn-key project. In some cases, this type of general contractor will assume further obligations depending on the building’s intended use: e.g., for a hospital or a hotel, the totalunternehmer will also be responsible for the proper configuration of the facilities, including fittings and interior; (b) ‘Generalübernehmer’ is a contractor who, similarly to the totalunternehmer, agrees to provide the planning and erection of a turn-key project, but who subcontracts the performance of the actual building works to a third party;  

45 https://www.gesetze-im-internet.de/gewo/index.html (not publicly available in English).

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‘Generalunternehmer’ is a general contractor who provides all necessary works and services, usually including planning and design, for turn-key erection of a building. The generalunternehmer normally undertakes a major part of the construction works, but may also make use of subcontractors and suppliers for certain parts of the works; ‘Nachunternehmer’ is a subcontractor to a main or general contractor, who performs individual works and services; ‘GMP-Modelle’ are construction contracts on the basis of a guaranteed maximum price. Here the most critical factor is that of the remuneration. The remuneration is capped at a maximum but is flexible within this limit. These models call for greater cooperation between the principal and the builder, since the scope of work and requirements are not final on the date of contracting and will have to be optimised. This type of contract should provide sufficient incentive for the contractor to stay within the limit; ‘Projektsteuerungsverträge’ are Project Management Contracts, typically negotiated to handle certain building operations such as school centres, hospitals, or even power stations. They may be integrated as part of the contractor’s function as totalunternehmer or generalübernehmer as described above. Project management plays a key role in professional construction management.46 The obligation of the contractor is a combination of supervisory and organising duties. Project management can be part of either a service contract or a work contract under BGB § 631, depending on the particulars of the case. The content of the agreement will determine whether a project management contract is a service or work contract. If the contractor is obligated to produce a certain result, the rules governing work contracts will be applicable; and ‘Bauträger’ is a contractor who is obligated to transfer ownership in real estate in combination with the erection of a building or condominium. The contract used in such cases is considered sui generis (unique) because it contains elements of a real-estate sale and purchase agreement as well as a work contract.

46 Historically, project management was regulated by the Honorarordnung für Architekten und Ingenieure [Fee Scale for Architects and Engineers] (Germany) 10 July 2013, BGB1 I, 2013, 2276 (‘HOAI’). The term ‘project management’ became part of the HOAI in 1977. Under a 2009 amendment to the HOAI, ‘project management’ was deleted. The former HOAI [31] defined project management on a legal basis. It enumerated works to be rendered, such as clarifying conditions for the assignment of planners and others in the planning process (project participants), updating planning objectives and clarifying conflicting aims, keeping the client informed and ensuring punctual decisions by the client and coordination and control of financing, promotion and licensing procedures.

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Architectural services are generally provided in the form of a contract to produce a work (or ‘contract for work and services’), governed by the BGB. The architect agrees to render a certain result, in return for which the principal will pay an agreed fee. The fees are defined by the Honorarordnung für Architekten und Ingenieure [Fee Scale for Architects and Engineers] (Germany).47 The HOAI covers the most common services in particular areas, with the fees depending on the degree of difficulty and the building costs. Architectural contracts can also be made in the form of a contract for services only. In this case, the architect agrees to provide technical support to a building project. The contract between the principal and the architect will not incorporate the contractual conditions that regulate the execution of construction work and that are set out by VOB Part B (‘VOB/B’). Aside from the construction contracts described above, there are other types of construction-related contracts that are deemed neither work nor service contracts from a legal point of view, e.g., contracts to manufacture and deliver prefabricated parts. These contracts are often concluded as sale and purchase contracts under BGB §§ 433 et seq. If the seller contracts not only to supply material, but also to install it, it is debatable whether the contract may be deemed a sales and purchase contract, or a contract for works and services, for which different legal remedies may apply.  

5.2. Amendment of Contracts and Bespoke Contracts 5.2.1.

Contracts for construction are freely negotiable, due to the principle of freedom of contract described earlier. If they have been based on the statutory provisions of the BGB (§ 650a, in conjunction with §§ 631 et seq), then contractual provisions may be altered within the limits of reasonableness (i.e., if this is not in breach of good faith). These limitations are far more restrictive if one party’s general terms and conditions have been used, and it should be noted that German courts will consider such restrictions to apply even if the terms and conditions are being used for the first time but intended to be used more often thereafter.48 Also, even where the business parties can be deemed to have had equal bargaining power, courts are not likely to accept the argument that the other party had sufficient opportunity to study the first party’s terms and conditions or accepted them unchanged; this will be insufficient to render inequitable terms  

5.2.2.

47 10 July 2013, BGB1 I, 2013, 2276https://www.gesetze-im-internet.de/hoai_2013/ (not publicly available in english) (‘HOAI’). 48 Sect. 305 BGB.

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and conditions valid. For example, penalties or liquidated damages exceeding 5 % of the contract value, or an obligation to provide a first-demand guarantee, will be held invalid if contained in general terms and conditions.49 Accordingly, standard contract forms, such as FIDIC contracts or the provisions of the VOB/B, must be reviewed in this context (e.g., the short-notice provisions set out by FIDIC contracts might be subject to challenge). Whereas the VOB/B conditions of contract, as a whole, have been found by German courts to be balanced and valid, and any amendment thereof which benefits the party insisting on their application could be problematic.50 Despite this, it is quite common practice for standard forms to be amended, sometimes to a significant extent.  

5.2.3.

 

5.2.4.

5.2.5.

5.3. Most Commonly Used 5.3.1.

5.3.2.

5.3.3.

5.3.4.

5.3.5. 5.3.6.

In Germany, construction contracts are either based on the provisions of the BGB under §§ 650a et seq, in conjunction with §§ 631 et seq, or they are made subject to the VOB rules mentioned above. Although these VOB rules were initially established and developed for contracts entered into by public bodies, they also found their way into the private sector. In the following paragraphs, the provisions of the VOB/B that contain the ‘general conditions of contract relating to the execution of construction work’ are compared with the provisions of the BGB. Whereas the provisions of the VOB/B may only be altered to a limited extent by the parties to a contract, bespoke contracts based on the provisions of the BGB regularly contain amendments to the statutory provisions where allowed. Interestingly, aside from the VOB Rules, no other sample construction contracts have been developed by the construction industry to a degree that would enable them to be considered as standard contract forms. Only in rare cases involving international elements are FIDIC contract forms used. Although FIDIC contract forms are not discussed in this chapter, it should be noted that the use of FIDIC contract forms under German law may raise questions concerning the validity of certain provisions, in view of the restrictive legislation and jurisprudence on terms and conditions in German law. Certain provisions regarding limitation of liability, securities, notice provisions and the like found in FIDIC contracts might be held invalid under German law.

49 Federal Court of Justice (‘BGH’), decision on 23.01.2003, Case no. VII ZR 210/01. 50 See: Kapellmann/Messerschmidt, commentary to VOB, parts A/B 7th Ed 2020, VOB/B § 1, margin 130 et seq.

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The VOB is acknowledged as part of the German Standards administered by the DIN Deutsches Institut für Normung e.V. [German Institute for Standards].51

6. Key Issues 6.1. Overview BGB §§ 631 et seq and 650a et seq 6.1.1. The main obligation of the contractor is the delivery and erection of the works without defects (BGB §§ 631, 633). The scope of works and services should be defined as precisely as possible, for example, by reference to a description of the works, plans, or a requisition. 6.1.2. The main obligation of the principal is the payment of the agreed remuneration. If remuneration has not been agreed, a customary remuneration is deemed to have been agreed on (BGB § 632). 6.1.3. The principal is obligated to accept or give final approval to the works if they are found to be free of defect (BGB § 640). The remuneration is due upon acceptance of the works (BGB § 641). Interim payments might apply under certain circumstances (BGB § 632a) or may be agreed to. In the event of defects, the principal is entitled to withhold an appropriate amount of the remuneration until the defect has been rectified; this is limited to 200 % of the costs necessary to rectify the defect (BGB § 641(3)). 6.1.4. Remedies available for the principal are listed in BGB § 634. The principal may demand that the defect be rectified (BGB § 635), whereby the contractor can choose between rectification of the defect or a new delivery. 6.1.5. After expiry of a deadline for rectification, the principal may choose to rectify the defect itself, or through a third party, and may claim the expenses incurred thereby. 6.1.6. Under certain circumstances, the employer may withdraw from the contract or may reduce the remuneration. The principal may claim damages or reimbursement of futile expenses. 6.1.7. The limitation period for defect claims is regulated in BGB § 634a. For construction contracts for buildings and the like (in contrast to machines), the limitation period is regularly five years from acceptance. 6.1.8. Statutory provisions do not provide for a performance bond to be provided by the contractor, or for retention money to be withheld until the end of the de 

51 The English version has been translated by the DIN translation service and is not publicly available free of cost.

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fect liability period. However, statutory law provides for certain securities in favour of the contractor (see Section 3.5). As of January 2018, the individual construction contract types were included in the BGB. The provisions now contained in BGB §§ 650a et seq. deal with the special features of construction contract law, and supplement the general provisions on contracts for work and services. They also include customers’ rights to issue orders, which were previously only contained in the VOB/B. Thus, under BGB § 650b, a client can now instruct a building contractor to subsequently extend or change the scope of services owed to date.

VOB/B 6.1.10. The VOB/B sets out the contractual conditions for execution of construction work. They are considered standard contract terms and thus are subject to judicial review under BGB §§ 305 et seq., which regulates the validity of terms and conditions. Clauses critical to the key issues are discussed below. 6.1.11. The VOB/B addresses almost all aspects of construction contracts, such as interruptions, delays, changes in construction, elimination of defects, warranties, payment, and acceptance. 6.1.12. In addition, by the parties agreeing on the application of VOB/B, the ‘General Technical Specifications in Construction Contracts (ATV)’ as set out in VOB pt C are deemed to be included in the contract by way of reference to VOB/B § 1(1)(2).

6.2. Remuneration 6.2.1. 6.2.2.

6.2.3.

In Germany, numerous types of remuneration can be found in both contract forms (GBG provisions and VOB/B conditions). The range covers unit/price contracts as well as lump-sum contracts. Where the provision of services is most relevant, the parties may agree on hourly rate contracts. Cost-plus-fee arrangements, as well as guaranteed maximum price contracts, are allowed and are used on occasion. Whereas BGB § 632 addresses remuneration only briefly, VOB/B § 2 contains detailed provisions regarding the remuneration of the contractor. VOB/B § 2(3) is often relevant to unit/price contracts. It stipulates that if the volume of work changes by more than 10 %, a new price must be agreed. This price must take into account the increase or reduction in costs due to such change in volume. For lump-sum contracts, VOB/B § 2(7) stipulates that the agreed lump sum may change only if the work executed differs from the work envisaged by the contract to such an extent that neither the client or the contractor cannot reasonably be expected to be bound by the lump sum. In this event, the compen 

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sation must be adjusted to allow for the increase or reduction in costs on the basis of the original price calculation. Furthermore, VOB/B § 2(8) becomes relevant where work is carried out by the contractor without instruction, or there is an unauthorised departure from the provisions of the contract. In principle, such works will not be remunerated unless they are subsequently accepted by the client, or if the work was necessary for the completion of the contract.

Planning and Design Responsibility: Site Conditions 6.2.6. Whereas the BGB does not address the responsibilities of the parties in planning or design, the VOB/B addresses this aspect in § 3. 6.2.7. According to VOB/B § 3, the principal has a primary obligation to provide the contractor with relevant documentation, including surveys of the site and its demarcation. The contractor has a secondary obligation to check documents for inconsistencies and to notify the principle in the event of any problems. These obligations to check and inspect documents are considered ancillary obligations that would make the contractor liable for damages if not observed. As a rule, the principal/client or the contractor may be held liable for contributory negligence if either does not observe its respective obligations. Variations 6.2.8. While the previous provisions of the BGB did not explicitly address the question of deviations from the originally agreed portfolio of services, the new BGB § 650b was introduced as part of the reform of the new building contract law. This regulation is based on VOB/B § 4, which deals in detail with subsequent changes to agreed services. 6.2.9. Under VOB/B § 4(1)(3), the client is entitled to issue any instructions (including variations) that may be necessary for the work to be executed in accordance with the contract. VOB/B § 4(1)(4) provides that a contractor who considers a client’s instructions to be unreasonable or inexpedient must notify the client of their objections, but should nevertheless follow such instructions as long as they are not in conflict with statutory or other official provisions. In this case, the client will bear any extra costs if implementation of the instructions unduly impedes the completion of the contract. 6.2.10. Under BGB § 650b, the employer is in principle allowed to request variations. The contractor has to provide an offer for the works covered by the change request. The parties must agree on the requested variation within 30 days. If they do not, the employer might instruct the change, subject to paying the contractor a reasonable price, including risk allowance and profit. The contractor may ask for an advance payment of 80 % of their offered price.  

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6.3. Periods of Completion, Delays and Late Completion 6.3.1.

6.3.2.

6.3.3.

6.3.4.

6.3.5.

6.3.6.

6.3.7. 6.3.8.

Whereas the BGB does not address periods of completion of work, only dealing with delays and remedies available in the event of delays for which the contractor is responsible, the VOB/B covers both aspects. VOB/B § 5 addresses the periods of completion of work and defines contractual periods as those periods for the commencement, the advancement, or the completion of the works which are stipulated in the contract as binding. Otherwise, individual time-limits listed in a works progress schedule only count as contractual periods if expressly agreed in the contract. If no commencement date has been specified, the contractor must commence work within 12 working days of being requested to do so. VOB/B § 5(3) contains an obligation for the contractor to accelerate the work if the workforce, equipment, or materials are inadequate for meeting envisaged deadlines. VOB/B § 6 deals specifically with hindrances and work interruptions, and stipulates that a contractor must properly notify the principal in such cases, failing which the contractor may only be entitled to claim allowance for the hindrance of the work if the cause and effect of the hindrance were obvious to the principal. VOB/B § 6(2) provides that deadlines must be extended where the interruption is caused by either: (i) circumstances within the principal’s sphere of liability; (ii) by strike action or by a lock-out initiated by the principal’s trade association, or imposed on the contractor’s firm or on the firm working directly for him; or (iii) by force majeure or other circumstances beyond the control of the contractor. Weather conditions shall not count as a hindrance if they are normal for the time of year. Extension of deadlines must not only cover the duration of the interruption, but also a margin to allow for the resumption of operations, and for adverse weather conditions if the delay means that work will continue into a season where such conditions are to be expected. Where one party is responsible for the cause of the interruption, the other party shall be entitled to indemnification for any damages it can prove it incurred. This does not include loss of profit, which can only be claimed in cases of intent or gross negligence. Finally, if the interruption lasts longer than three months, then upon expiration of that period, either party may terminate the contract by giving written notice. The BGB does not contain such detailed provisions on these issues. Under the BGB, if the contractor is late in delivering work, the principal may set out a deadline for completion of the work and threaten to withdraw from the contract if the contractor does not fulfil its obligations within the deadline. Alternatively, the principal may claim damages resulting from delay, but only after expiry of an additional reasonable deadline.

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In contrast, § 5(4) of the VOB/B states that the principal may seek damages but remain within the contract, or may set the contractor a reasonable deadline to fulfil the contract and serve notice of intention to withdraw from the contract if the contractor has not done so by the deadline.

6.4. Distribution of Risk (‘Gefahrtragung’) 6.4.1.

6.4.2.

6.4.3.

Under § 644(1)(1) of the BGB, the contractor bears the risk until the work has been accepted or finally approved. If the principal is in default in relation to giving final approval to the work, then as of that time the risk passes to the principal. In contrast, § 7(1) of the VOB/B provides that if work that has been either wholly or partly executed is damaged or destroyed prior to its acceptance by force majeure, war, riot, or other circumstances objectively considered to be beyond the control of the contractor, the contractor is entitled to claim for the portion of the works that had been executed at the contract prices, as well as costs the contractor had already incurred and were included in the contract prices for work not yet executed. Because VOB/B § 7 deviates in this way from the distribution of risk as set out by the BGB, § 7 is often derogated from in contracts, even if the contract as a whole is subject to the VOB provisions.

6.5. Termination 6.5.1.

A contract for works and services may be terminated by the principal at any time before completion of the works, regardless of whether the contract is based on the BGB or the VOB/B. VOB/B § 8(1) refers to BGB § 648, which provides that the contractor is then entitled to demand the agreed remuneration, but must allow set-off of any expenses the contractor saves as a result of the termination of the contract, or any earnings he may acquire or wilfully fails to acquire from other use of his workforce. Regarding the portion of the work not yet carried out, BGB § 648 presumes that the contractor is entitled to 5 % of the remuneration attributable to that portion. This means that if the contractor claims such remuneration, it is the burden of the principal to prove otherwise. An extraordinary right of termination is not foreseen under the provisions of §§ 631 et seq. of the BGB, but may result from general principles of German contract law in cases where it becomes unacceptable for a party to continue the contract. Under BGB § 650r(1), the customer is only granted a special right of termination within the scope of the architectural contract. Up to 2 weeks  

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after submission of the planning documents, the customer may terminate the architectural contract. However, per BGB § 650r(3), the customer must reimburse the contractor for the services rendered up to the date of termination. Again, the provisions of the VOB/B are more precise. VOB/B § 8(2) provides the principal with the right to terminate the contract if the contractor becomes insolvent or if an insolvency proceeding is initiated against the contractor. VOB/B § 8(3) addresses cases in which the contractor has not remedied defects before completion, despite having been requested to do so within a reasonable time period, or has not fulfilled its obligations within a deadline extended due to delays. A further specific termination right is mentioned in VOB/B § 8 (4), pursuant to which the principal is entitled to withdraw from the contract if the contractor has entered into a price agreement that is in violation of fair trade in order to gain the contract. On the other hand, the contractor is also provided with termination rights: e.g., under VOB/B § 9(1), the contractor may terminate if the principal neglects to perform an action incumbent on it, making it impossible for the contractor to execute the work, or if the principal fails to make a due payment or otherwise defaults as a debtor. Furthermore, in cases involving interruptions of more than three months, either party may exercise an extraordinary right of termination under VOB/B § 6(7).  

6.5.5.

6.6. Limitation of Liability 6.6.1.

6.6.2.

6.6.3.

The general liability principle applies in both contract scenarios. That is, contracting parties are liable to each other for their own culpable actions, and for culpable actions of their representatives under the law of vicarious agents.52 Unless otherwise agreed, liability of the parties is unlimited. However, in practice one will seldom find a contract — whether it is based on the BGB or the VOB/B — that does not contain a limitation-of-liability clause, typically excluding indirect and consequential damages as well as loss of profit, loss of use, etc. Particular care must be taken in drawing up a limitation-of-liability clause, in particular if this is to be part of general terms and conditions. Liability for intentional acts can never be excluded53; liability for gross negligence can only be excluded in individually negotiated contracts, and only for gross negli-

52 BGB §§ 276, 278; VOB/B § 10(1). 53 BGB § 276 (3).

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gence of vicarious agents. Liability for gross negligence cannot be excluded in general terms and conditions. Liability for breach of cardinal obligations can also not be excluded in general terms and conditions, even if it is only for cases of simple negligence. Legal advice is essential in drafting limitation-ofliability clauses under German law.

6.7. Penalties 6.7.1.

6.7.2. 6.7.3.

In contrast to principles commonly applicable in other law jurisdictions, under German law a contractual penalty can be agreed upon. This might apply in cases of delay or underperformance of otherwise guaranteed parameters. For a party to pursue penalties, it must show that the other party is in default. Penalties may be asserted even if no damages have been incurred. Penalties are generally allowed under German contract law and are not only a specific remedy for works and services contracts. Provisions concerning contractual penalties may be found in §§ 339 et seq. of the BGB; these sections are also referred to in VOB/B § 11(1). It is important to note that, under both contract scenarios, if the principal has already accepted the work it may only demand payment of a penalty if it reserved this right at the time of acceptance.54

6.8. Acceptance and Final Approval 6.8.1.

6.8.2.

6.8.3.

6.8.4.

Under BGB § 640, the principal is obliged to accept the performed work as being in accordance with the contract once the work is finished. The principal may not refuse acceptance on the grounds of insignificant defects.55 The new BGB § 650g now also provides the right for the contractor to pursue a determination of the status of the works if the principal is not willing to formally accept the works. The principal is also deemed to have accepted the work if he fails to do so without cause within a reasonable time-limit set by the contractor after completion of the works. VOB/B § 12(1) defines this reasonable period as 12 working days, unless a different deadline is agreed. Under VOB/B § 12(4), one party may demand a formal acceptance, where the parties hold an inspection and sign a written record of final approval. If no formal acceptance is agreed, the parties may carry out an informal acceptance.

54 BGB § 341(3); VOB/B § 11(4). 55 BGB § 640(1)(2).

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Under both contract scenarios, if a principal has accepted a work knowing that it had defects, the only legal remedies that remain for the principal are to demand cure of the defects, to remedy the defect itself and demand reimbursement for the expenses, or lastly, if these fail, to revoke the contract. The principal cannot, however, seek damages. The VOB/B specifically addresses the question of when acceptance is deemed to have been made. Under VOB/B § 12(5), where no request for final acceptance was made, the work is deemed accepted 12 working days after written notification of its completion, or, if the client has begun to use the work or part of the work, the work shall be deemed accepted six days after its first use.

6.9. Warranties 6.9.1.

6.9.2.

The contractor is under a warranty obligation for defective work even if it is not at fault for the defects. The extent of warranty will depend on the agreed features and quality of the work to be supplied. The parties may also agree on a guarantee. The guarantee is the strongest form of warranty under German law. If a guarantee is agreed, the contractor cannot exchange or even limit the legal rights of the builder. In the case of substandard performance, statutory provisions provide the principal with certain rights. It may demand supplementary performance under BGB § 635v; it may choose substitute performance or reduce the agreed remuneration under BGB § 638; and under certain circumstances, it may cancel the contract under BGB §§ 636, 323 or 326. Finally, the employer has a right to claim damages under BGB §§ 634, 280(1), (3), 281, or 283, if the contractor has not been able to cure the defect or refuses to do so. Unless otherwise agreed, warranty periods in Germany are not considered guarantee periods, but rather are limitation periods for the exercise of rights. Accordingly, they are addressed in the following Section.

6.10. Limitation Periods 6.10.1. Statutory limitation periods are set out by the BGB. Under BGB § 195, the contractor has three years to claim the remuneration owed by the principal. The limitation period begins to run upon expiry of the calendar year in which the claim arose. 6.10.2. As mentioned in Section 6.9, there are also special periods for warranty claims which differ between the provisions in the BGB and the VOB/B. 6.10.3. As set out in BGB § 634a, the principal’s claims due to defects are limited to five years, both in the case of construction and in the case of planning or supervisory services for the purpose of construction, these being the most

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common in construction contracts. In contrast, VOB/B § 13(4) provides that where no limitation period for warranty claims has been agreed in the contract, the limitation period is taken to be four years for structures; two years for other works involving construction, maintenance or alteration; and two years for parts of heating installations in contact with fire, except for parts of industrial furnaces in contact with fire or flue gases, for which the limitation period is one year. The limitation period normally begins to run upon acceptance of the works.

6.11. Payment and Security for Claims 6.11.1.

Unless otherwise agreed, payment for the works becomes due upon acceptance.56 The legislature has implemented acceleration provisions however, in view of the difficulties a contractor normally encounters in financing works. 6.11.2. According to BGB § 632a, a contractor may demand partial payments from the principal for work carried out in accordance with the contract in the amount in which the contractor has received and increased value by virtue of the work. 6.11.3. If the contractor demands advance payment from a consumer in accordance with BGB § 632a, the total amount of payment may not exceed 90 % of the agreed total remuneration.57 Within a property developer contract, the contractor may only demand advance payments from the purchaser if they have been agreed in accordance with a regulation based on Article 244 of the Introductory Act to the BGB.58 VOB/B § 16(1), also allows for partial payments, upon request, for work that has been carried out in accordance with the contract and can be verified. 6.11.4. Advance payments are often agreed. These are addressed in VOB/B § 16(2), which stipulates that advance payments may also be agreed after a contract has been signed but that, if the principal so requests, adequate security must be provided for them. Such payments will yield interest at 3 % above the base interest rate. 6.11.5. The VOB/B also sets out provisions on final payment. Final payment must be effected as soon as possible after the final invoice submitted by the contractor has been checked and approved, and no later than 30 days after its receipt. Under VOB/B § 16(3), unless otherwise expressly agreed, the 30-day period may be extended to no more than 60 days if it is objectively justified due to  

 

56 BGB § 641 (1). 57 BGB § 650m. 58 BGB § 650m.

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the special nature or features of the contract. The principal may object to an invoice on the grounds that it is not verifiable, but if the principal fails to do so within the periods set out above, it cannot later invoke unverifiability of the invoice. Likewise, if the contractor has accepted final payment without reservations, and the contractor was informed in writing that it was a final payment and advised that its acceptance without reservation would exclude subsequent claims, this will exclude any subsequent claims by the contractor. 6.11.6. Securities are customary in the construction industry. Apart from a security for an advance payment, which would have to be provided by the contractor upon receipt of payment, in certain cases where the financial standing of the principal is in doubt, further payment securities might be requested by the contractor and agreed between the parties. 6.11.7. The contractor is also protected by the right under BGB § 650e to demand an equity mortgage over the principal’s land to secure the contractor’s contractual claims. Another important right given to the contractor is the security which may be demanded of the principal under BGB § 650 f. Under this provision, a contractor may demand a security from the principal for the total outstanding remuneration plus a maximum additional 10 % for associated incidental claims at any time during the performance of the contract. Such security is normally provided by means of a guarantee or surety by a bank or credit insurer. If the contractor requests such a security from the principal, the contractor will bear the cost of establishing the security, up to a maximum amount of 2 % per annum.  

 

 

6.12. Sureties, Performance and Warranty Bonds 6.12.1.

The principal will often seek securities for the performance of the works and for securing potential warranty claims. 6.12.2. These are not mentioned in the statutory provisions relating to contracts for works and services, or in the VOB Rules. They are subject to agreement within allowed limits. For performance bonds, German courts have regularly allowed a limit of up to 10 % of the contract value; for warranty bonds, this is reduced to 5 %. Contractual provisions that require warranty bonds in addition to retention money are held to be invalid, as are provisions that request to issue warranty bonds before the return of performance bonds.59  

 

59 Confirmed in the decision by the Federal Court of Justice (‘BGH’) on 1.10.2014, Case No. VII ZR 164/ 12.

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6.12.3. First-demand guarantees will come under special scrutiny by the German courts. These can only be validly agreed upon in individually negotiated contracts in any event, not in standard terms and conditions.60

6.13. Fit for Purpose 6.13.1. Fit for Purpose is a generally accepted requirement for works to be completed without defects. In terms of the general contract law, the contractor’s obligations as to quality are contained in the German Civil Code (‘BGB’). In Sect. 633 (2) of the BGB, the term ‘Mangel’ (defect) is defined in detail.61 The wording supports the concept that the contractor has to comply with the specifications as agreed in the construction contract. However, if no quality obligations are agreed, the statute also requires the contractor to provide a completed building which is fit for its purpose. German courts interpret this fitness for purpose obligation to apply in every case, even those where the expressed standards fall below the fitness for purpose standard. This means, for example, that the contractor of a leaking roof is liable for that defect even if the leak is caused by a design defect on the part of the architect. 6.13.2. The German standard construction contract form VOB/B contains express quality obligations. In particular, the works have to comply with the objective standard ‘anerkannte Regeln der Technik’ (state of the art), cl. 13 Nr. 1 S. 3 of VOB/B, and the completed works have to be fit for their intended purpose, cl. 13 Nr. 1 S. 3 of VOB/B.

6.14. Latent Conditions 6.14.1. German quality obligations usually refer to the completed building (in contrast to e.g. English law which appears to address the steps that are necessary in order to produce a building.  

60 Since decisions by the Federal Court of Justice (‘BGH’) in 2002, on 18. 4. 2002 – Case No. VII ZR 192/ 01 published in BGHZ 150, 299= NJW 2002, 2388 and on 4. 7. 2002 – Case No. VII ZR 502/99 published in BGHZ 151, 229= NJW 2002, 3098. 61 Sect. 633 (2) BGB reads: The work is free of material defects if it is of the agreed quality. To the extent that the quality has not been agreed, the work is free from material defects if it is suitable for the use envisaged in the contract, or else if it is suitable for the customary use and is of a quality that is customary in works of the same type and that the customer may expect in view of the type of work. It is equivalent to a material defect if the contractor produces a work that is different from the work ordered or too small an amount of the work.

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6.14.2. Accordingly, German law does not distinguish between apparent and latent defects (except for notification requirements). Also latent defects fall under the regular warranty periods and do not provide timewise more extensive rights for an employer.

6.15. Force Majeure 6.15.1. There is no definition of Force Majeure (‘Höhere Gewalt’) in German statutory law. In cases of Force Majeure the remedies provided for impossibility (‘Unmöglichkeit’) in Sect. 275 BGB62 or the doctrine of frustration (‘Wegfall der Geschäftsgrundlage’) in Sect. 313 BGB63 are applied. 6.15.2. If an obligation becomes impossible to be fulfilled, the debtor of the obligation is relieved and loses its right to claim for the counter-obligation according to Sect. 326 BGB. In case Sect. 313 BGB applies (which is not often accepted by the courts) contracts may be amended if it is not reasonable to insist on the original contract stipulation because of the changed circumstances or contracts are demed terminated.

62 Sect. 275 BGB reads: (1) A claim for performance is excluded to the extent that performance is impossible for the obligor or for any other person. (2) The obligor may refuse performance to the extent that performance requires expense and effort which, taking into account the subject matter of the obligation and the requirements of good faith, is grossly disproportionate to the interest in performance of the obligee. When it is determined what efforts may reasonably be required of the obligor, it must also be taken into account whether he is responsible for the obstacle to performance. 63 (1) If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration. (2) It is equivalent to a change of circumstances if material conceptions that have become the basis of the contract are found to be incorrect. (3) If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may revoke the contract. In the case of continuing obligations, the right to terminate takes the place of the right to revoke.

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6.16. Time Bars 6.16.1. Under German law the general time bar for all kind of claims – always subject to specific provisions – is three years starting from the end of the year when the claim has arisen.64 6.16.2. Unless otherwise agreed in a contract, the time bar for claims due to defects related to contracts for works and services (‘Werkvertrag’) – which is commonly referred to as the warranty period – under German statutory law is two years from date of acceptance of the works65, in the case of a building this is extended to five years.66

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

Historically, disputes in the construction industry were resolved through litigation or arbitration, with the support of expert opinions and evaluations. This remains common practice today. Though the construction industry has long noted that there is a need ‘for assertive, temporarily binding resolutions of disputes available during the planning and construction stage’ (thus describing the principles of adjudication), adjudication is a new concept for Germany which has not yet taken off. There are certain organisations which promote adjudication, such as the Deutscher Baugerichtstag e. V. [German Judiciary Association for the Building and Construction Industry’), the Deutsche Gesellschaft für Baurecht e. V./ Deutscher Beton- und Bautechnik Verein e. V. [German Association for Construction Law/‘German Association for Concrete and Construction Engineering], Verein zur Förderung der alternativen Streitbeilegung im Baubereich e. V. — ASIB [Association for the Promotion of Alternative Dispute Resolution in Building Law] and the Deutsche Institution für Schiedsgerichtsbarkeit (DIS) e. V. [German Institution of Arbitration], all of which have developed their own adjudication rules. The Deutsche Gesellschaft für Baurecht e. V./Deutscher Beton- und Bautechnik Verein e. V. have developed Alternative Dispute Resolution Rules for the Construction Industry (SL-Bau) covering mediation, conciliation, adjudication, and arbitration. Revised rules have been set-up with effect from 1 July 2020.67  

 

 

 

 

7.1.4.

 

 

64 Sect. 195 BGB. 65 Sect. 634a (1) No. 1 BGB. 66 Sect. 634a (1) No. 2 BGB. 67 The rules are available (only in German on the websites of both organisations: www.betonverein. de and www.dg-baurecht.de.

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The Deutsche Institution für Schiedsgerichtsbarkeit (‘DIS’) e. V., which is the leading German institution for arbitration, provides a wide range of dispute settlement methods, including adjudication. Not all of the DIS Rules have been specifically drafted with regard to construction matters; they are aimed at more general application. DIS has developed Conflict Management Rules (‘CMR’), Conciliation Rules (‘ConR’), Mediation Rules (‘MedR’), Rules of Expert Determination (‘EDR’), Rules on Expertise (‘ER’) and Rules on Adjudication (‘AR’), in addition to their core Arbitration Rules which have been revised in 2018. All of these sets of rules are available on the DIS website, including in English.68 7.1.6. Attempts have been made for years to establish statutory adjudication for the construction industry that would meet the following requirements: (a) Applicable for all disputes under building and architectural contracts; (b) Initiation of the proceedings at the request of one party; (c) Maximum duration of the procedure — 60 days; (d) Adjudicator authorised to take appropriate measures for clarification of facts; and (e) Decisions that are temporarily binding but which may be challenged by court decisions or arbitration awards. 7.1.7. Recommendations to lawmakers have included the request to establish a special procedure for recognition and enforcement of adjudication decisions within the ZPO, to define minimum requirements for qualification as an adjudicator, and to establish adjudication rules that take into account the various existing adjudication rules of the different organisations. 7.1.8. However, to date, lawmakers have not been persuaded to pass legislation. 7.1.9. Their hesitancy might be due to the fact that, at least for domestic cases, the German court system allows for efficient and speedy dispute resolution, with most of the regional (state-level) courts providing specialised chambers competent to hear construction cases. 7.1.10. Also, arbitration is often alternatively chosen as a means of dispute resolution. 7.1.11. ZPO Book 10 provides arbitration rules which follow the UNCITRAL Model Law on International Commercial Arbitration.69 These rules automatically apply in ad hoc arbitrations and are complementary where the arbitration rules of an institution such as the DIS have been agreed upon.  

68 ‘DIS-Rules’, DIS (Web Page, 2019) . 69 UNCITRAL Model Law on International Commercial Arbitration, UN GAOR, 40th sess, Supp No 17, UN Doc A/40/17 (21 June 1985) annex I (‘UNCITRAL Model Law’).

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7.1.12.

The first codification of arbitration law on a federal level in ZPO Book 10 was made in 1879 and adopted a favourable approach to arbitration. It consisted of only 24 sections, which were to a large extent already based on the same principles which today underlie the UNCITRAL Model Law; in particular, party autonomy and limited court intervention. 7.1.13. With some minor amendments, in particular concerning the recognition and enforcement of foreign awards, the law remained in force largely unchanged until 1 January 1998, when the new German arbitration law came into force. The revision of the law was intended to make German arbitration law more user-friendly, and to bring it in line with international practice. The 41 sections of the new German arbitration law in ZPO Book 10 are to a large extent a verbatim adoption of the UNCITRAL Model Law. The new law was accompanied by a detailed explanatory note which describes the rationale underlying each Article, which is a valuable tool for interpreting the law.70 7.1.14. The most important characteristic features of German arbitration law are the following: (a) Territoriality, i.e., adoption of the territorial approach with the place of arbitration as the decisive element; (b) Party autonomy with few limits; (c) Wide discretion of the Tribunal in the conduct of the proceedings; (d) Limited court intervention and swift court proceedings; (e) Competence of the Tribunal to rule on its own jurisdiction and early determination of the Tribunal’s jurisdiction by the courts; (f) Prevention of delay and obstructive behaviour; and (g) Promotion of amicable solutions. 7.1.15. With regard to interim measures, German arbitration law provides for concurrent jurisdiction of arbitral tribunals and courts for granting interim relief, provided that the arbitral tribunal has been established. An emergency arbitrator being available before the establishment of the arbitral tribunal has not yet been introduced into German arbitration law, and is also not yet considered within the most important institutional rules of the DIS. 7.1.16. Germany is a signatory of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards,71 the European Convention on International  

70 Schiedsverfahrensneuregelungsgesetzes vom 22. 12. 1997 [Arbitration Law Reform Act] BGBl. Part I, No. 88 dated 30.12.1997. The text of the reformed stipulations of Sections 1025 et seq. German Civil Procedure Code (‘ZPO’) is available under https://www.gesetze-im-internet.de/englisch_zpo/englisch_ zpo.html#p3530. 71 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959).

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Commercial Arbitration,72 the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (‘ICSID Convention’),73 the Energy Charter Treaty (‘ECT’)74 and numerous bilateral treaties with foreign states.

72 European Convention on International Commercial Arbitration, opened for signature 21 April 1961, 484 UNTS 349 (entered into force 7 January 1964). 73 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966). 74 Energy Charter Treaty, opened for signature 17 December 1994, 2080 UNTS 95 (entered into force 16 April 1998).

Glenn Haley

Hong Kong 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9.

Context 390 The Country 390 The Legal System 391 The Economy 391 The Construction Industry 392 Size and Nature 392 Participants 392 Work, Health and Safety 393 Protection of the Environment 393 Quality Assurance 394 Construction Contracting Dynamics 395 Legal Underpinnings of Contracts 395 Freedom of Contract 395 Legal Framework 396 Public Policy 397 Statute Law 397 Implied Contract Terms 398 Construction of Contract Terms 399 Private and Public Procurement 399 Government Involvement 400 Legislation and Regulation 400 Codes of Practice 400 Licensing of Professionals and Contractors 401 Construction Contracts 402 Available and Most Commonly Used Contracts 402 Example 1 – General Conditions of Contract for Civil Engineering Works 403 Overview 403 Fit for Purpose 404 Late Completion 404 Latent Site Conditions 405 Force Majeure 406 Limitation of Liability 407 Duration of Exposure 408 Time Bars 408 Dispute Resolution 409

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Example 2 – Standard Form of Building Contract — Private Edition – Without Quantities 410 Overview 410 Fit for Purpose 410 Late Completion 411 Latent Conditions 412 Force Majeure 412 Limitation of Liability 413 Duration of Exposure 413 Time Bars 413 Dispute Resolution 414

1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

The current political status of Hong Kong dates back to the 19th century Anglo-Chinese War. Historically, Hong Kong was part of China but in 1842 and 1860, after the Anglo-Chinese war, parts of Hong Kong were ceded by China to the UK. The remaining part of Hong Kong was then leased to the UK for a period of 99 years starting from 1 July 1898. Accordingly, from that date onwards the whole of Hong Kong was under British rule. In 1984, the Chinese government and the British government signed the SinoBritish Joint Declaration pursuant to which the entirety of Hong Kong was to be handed back to China with effect from 1 July 1997.1 It was agreed between China and the UK that the capitalist system practised in Hong Kong under British rule would remain unchanged for a period of 50 years until July 2047. This is known as the ‘One Country, Two Systems’ principle whereby Hong Kong, though politically part of China, practices a capitalist system different from the socialist system historically adopted in China. As a result of the ‘One Country, Two Systems’ principle, Hong Kong now stands as a Special Administrative Region with its own mini-constitution known as the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (‘Basic Law’).

1 Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China on the Question of Hong Kong, signed 19 December 1984, 1399 UNTS 33 (entered into force 27 May 1985) (‘Sino-British Joint Declaration’).

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1.2. The Legal System 1.2.1.

1.2.2.

The legal system of Hong Kong has been heavily influenced by English law as a result of the British rule. Unlike other parts of China, Hong Kong is a common law jurisdiction. Under the Basic Law, all pre-1997 laws previously in force in Hong Kong, including the common law and rules of equity, were retained and maintained, except for any that contravene the Basic Law and those that were subject to any amendment by the Hong Kong legislature2. The Basic Law further provides that the courts of Hong Kong may refer to the precedents of other common law jurisdictions3. English precedents, in particular, are considered highly persuasive in Hong Kong courts. The executive, legislative and judicial functions of Hong Kong are intended to be separate and independent, so that the three branches can keep one another in check to prevent abuse or misuse of power by any one branch. Judicial independence is a core value in Hong Kong. It means that judicial decisions are not to be affected by the executive branch, the legislature, or any other influential people. The integrity of the judicial system and the ability of the Hong Kong judiciary to remain neutral are important reasons why Hong Kong law and the Hong Kong courts are often chosen by parties to govern contracts and settle disputes.

1.3. The Economy 1.3.1.

Hong Kong has long been practising the principles of market economy. In recent years some commentators have observed an increased level of government intervention4 but even so, many believe that the economic policy of Hong Kong can be described as ‘laissez-faire’, i.e. that the economy is largely regulated by the market with minimal intervention by the government. Such policy is sometimes referred to as ‘positive non-intervention’ by the government5.  

2 Article 8 of the Basic Law . 3 Article 84 of the Basic Law . 4 See, for example, BBC, Is Hong Kong really the world’s freest economy? (Jan 2012) , and SCMP, Hong Kong raises stamp duty to tame surging home prices in the world’s least affordable city (Nov 2016) . 5 Chief Executive, Big Market, Small Government (Sep 2006) .

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Historically, Hong Kong has been a free port with an open market economy and relatively low tax rates. This has encouraged and attracted investments from all over the world. Such economic freedom has been key to the prosperity of businesses and the growth of Hong Kong’s economy.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

The construction and engineering industry plays a significant role in the economy of Hong Kong. It has registered steady growth over the years with the government’s support and efforts to promote economic growth through investments in residential and transport infrastructure projects. Statistics from the Hong Kong government reveal that the gross value of construction works performed totalled HK$421.7 billion (approximately AUD79 billion and USD54 billion) in 2018,6 excluding the value of work done by the architectural, surveying and engineering services industry, which work closely with the construction sector. With the gradual rolling out of the Ten Major Infrastructure Projects announced by the government in 2007–087, the resultant demand for construction works has had steady growth which is expected to maintain for the coming few years.

2.2. Participants 2.2.1.

2.2.2.

The Hong Kong government plays a major role in the local construction sector because a sizeable portion of the construction projects in Hong Kong relate to infrastructure. Construction projects in Hong Kong have for a long time attracted the participation of large international construction companies and expatriate construction professionals. Recently, a greater number of China-based construction companies have begun to play a part in the Hong Kong construction market. Accordingly, the participation of local and China-based players in the Hong Kong market is expected to remain strong for the coming few years.

6 Census and Statistics Department, Hong Kong Special Administrative Region, Key Statistics on Business Performance and Operating Characteristics of the Building, Construction and Real Estate Sectors in 2018 (Released on 29  November 2019) . 7 Development Bureau, LCQ4: Costs of Ten Major Infrastructure Projects (Apr 2014) .

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2.3. Work, Health and Safety 2.3.1.

2.3.2.

In 2018, there were 3,541 instances of industrial accidents in the construction industry, 14 of which were fatal.8 The Hong Kong government recognises the importance of occupational safety and has established several statutory safeguards for workers in Hong Kong. For example, the Occupational Safety and Health Ordinance (Chapter 509 of the Laws of Hong Kong)9 provides for the safety and health protection of employees in workplaces, both industrial and non-industrial. This Ordinance stipulates the roles that employers, occupiers of premises and employees have to play a part in creating a safe and healthy workplace. The Occupational Safety and Health Regulations (Chapter 509A of the Laws of Hong Kong)10 sets out certain basic requirements for accident prevention, fire precaution, workplace environment control, hygiene at workplaces, and first aid, as well as what employers and employees are expected to do in manual handling operations. The Factories and Industrial Undertakings Ordinance (Chapter 59 of the Laws of Hong Kong)11 provides for the safety and health protection of workers in the industrial sector. This Ordinance imposes general duties on proprietors and persons employed at industrial undertakings to ensure safety and health at work. Under this Ordinance, there are 30 sets of subsidiary Regulations (including the Construction Sites (Safety) Regulations (Chapter 59I of the Laws of Hong Kong)12) covering various aspects of hazardous work activities in factories, building and engineering construction sites, etc. The subsidiary Regulations prescribe detailed safety and health standards for work situations, plant and machinery, processes and substances.

2.4. Protection of the Environment 2.4.1.

Hong Kong values sustainability and environmental protection alongside the pursuit of development and economic growth. The Environmental Protection Department plays an important role in overseeing the environmental protection regime, developing relevant policies, monitoring environmental quality and handling pollution incidents.

8 Occupational Safety and Health Branch, Labour Department, Hong Kong Special Administrative Region, Occupational Safety and Health Statistics Bulletin Issue No. 19 (August 2019) . 9 . 10 . 11 . 12 .

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The environment is prone to pollution caused by construction activities. Various Ordinances relevant to construction-related pollution have been enacted to regulate the industry and minimise unnecessary impact on the environment. For example, the emission of construction dust and the use of asbestos in building works are regulated by the Air Pollution Control Ordinance (Chapter 311 of the Laws of Hong Kong)13. Discharge to the sewage system is regulated by the Water Pollution Control Ordinance (Chapter 358 of the Laws of Hong Kong)14. Noisy construction works and the use of powered mechanical equipment are controlled by the Noise Control Ordinance (Chapter 400 of the Laws of Hong Kong)15. One inevitable byproduct of construction activities is construction waste. Generally, reusable construction waste goes to public filling areas while non-inert construction waste ends up in landfill16. The Hong Kong government has also been devising waste reduction strategies in order to reduce the strain on landfill capacity17.

2.5. Quality Assurance 2.5.1.

The Hong Kong Quality Assurance Agency established by the government administers the Quality Scheme for the Production and Supply of Concrete (‘QSPSC’), which is a product certification scheme for concrete used in construction works. Structural concrete used in all public works contracts must be obtained from concrete suppliers certified under the QSPSC. QSPSC requires suppliers to operate in accordance with ISO 9001 requirements. Concrete samples are also subject to laboratory testing. Certification under QSPSC ensures that up-to-standard concrete is used to fulfil contractual requirements18.

13 . 14 . 15 . 16 GovHK, Construction Waste (November 2019) . 17 Environmental Protection Department, Problems & Solutions (June 2013) . 18 HKQAA, Quality Scheme for the Production and Supply of Concrete (QSPSC) (June 2020) .

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2.6. Construction Contracting Dynamics 2.6.1.

Multi-layer sub-contracting is a prevalent practice in the Hong Kong construction industry. An industry-wide survey conducted by the government in 2011 revealed that over 90 % of main contractors in Hong Kong have engaged subcontractors, and about 60 % of subcontractors have further engaged sub-subcontractors down the stream.19 Subcontracting is also common for construction-related professionals. About 68 % of consultants have engaged subconsultants20. The relationship between the main contractor and the sub-contractors is often adversarial. The recent encouragement by the government of the use of NEC contracts (discussed in Section 5.1.4) hopefully will promote a more collaborative or partnering relationship between the main contractor and its subcontractors. However, it is likely to take time for the long-term relationship between contractors to shift.  

 

 

2.6.2.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Hong Kong recognises and upholds the basic principle of freedom of contract. The parties’ freedom to agree contractual terms is a general one and is not limited to the construction field. The courts of Hong Kong respect the parties’ freedom to contract and generally give effect to contractual clauses as written, subject to the restrictions stipulated in the Control of Exemption Clauses Ordinance (Chapter 71 of the Laws of Hong Kong)21 which requires, in certain circumstances (see Section 6.6.1 below), terms purporting to exclude or restrict liability for breach of contract or tort to be subject to the test of reasonableness. Between sophisticated commercial parties, it would be uncommon for the restrictions to apply or, if they do, for such terms to be deemed unreasonable.

19 Development Bureau, Survey on Payment Practice in the Construction Industry (2012) , paragraph 7. 20 Development Bureau, Survey on Payment Practice in the Construction Industry (2012) , paragraph 7. 21 .

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3.2. Legal Framework 3.2.1.

3.2.2.

22 23 24 25 26 27 28 29 30 31 32 33

In Hong Kong, a number of statutes underpin the regulatory regime in relation to construction and engineering projects. Most relevant is the Buildings Ordinance (Chapter 123 of the Laws of Hong Kong)22, which sets out various requirements relating to the planning, design and construction of buildings, such as registration and discipline of contractors, approvals for commencing building works, and inspections and repairs of buildings. Specific regulations and requirements in relation to issues relevant to the construction industry, such as the health and safety of workers, environmental protection, town planning, employment of workers, and the prohibition of bribery, are also provided for in the following statutes: (a) Occupational Safety and Health Ordinance (Chapter 509 of the Laws of Hong Kong)23; (b) Factories and Industrial Undertakings Ordinance (Chapter 59 of the Laws of Hong Kong)24; (c) Air Pollution Control Ordinance (Chapter 311 of the Laws of Hong Kong)25; (d) Noise Control Ordinance (Chapter 400 of the Laws of Hong Kong)26; (e) Waste Disposal Ordinance (Chapter 354 of the Laws of Hong Kong)27; (f) Water Pollution Control Ordinance (Chapter 358 of the Laws of Hong Kong)28; (g) Dumping at Sea Ordinance (Chapter 466 of the Laws of Hong Kong)29; (h) Environmental Impact Assessment Ordinance (Chapter 499 of the Laws of Hong Kong)30; (i) Town Planning Ordinance (Chapter 131 of the Laws of Hong Kong)31; (j) Construction Workers Registration Ordinance (Chapter 583 of the Laws of Hong Kong)32; (k) Employment Ordinance (Chapter 57 of the Laws of Hong Kong)33;

. . . . . . . . . . . .

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(l)

Employees’ Compensation Ordinance (Chapter 282 of the Laws of Hong Kong)34; and (m) Prevention of Bribery Ordinance (Chapter 201 of the Laws of Hong Kong)35.

3.3. Public Policy 3.3.1.

3.3.2.

3.3.3.

Generally, although contracts that are freely agreed to by the contracting parties should be recognised and enforced by the Hong Kong courts, there are some limited exceptions. In some cases, contracts are rendered unenforceable by the Hong Kong courts due to illegality36 or contravention of public policy37. Contracts which are illegal by statute or common law are more severely dealt with than those which are not strictly illegal but are merely void for public policy reasons. For example, a clause which attempts to exclude or oust the court’s jurisdiction over the contract is void as against public policy. However, Hong Kong courts generally are supportive of arbitration. Professionally and properly drafted arbitration clauses commonly seen in construction contracts are considered valid by the Arbitration Ordinance (Chapter 609 of the Laws of Hong Kong)38. Hong Kong is a pro-arbitration and pro-enforcement jurisdiction. The court does not redraft a clause which contravenes public policy. If only one clause is void as against public policy, the rest of the contract is likely to stand and be enforced, with the offending clause severed39.

3.4. Statute Law 3.4.1.

34 35 36 37 38 39

The law of Hong Kong is a combination of statute law and common law. As far as the making of contracts is concerned, the position in Hong Kong is largely governed and developed by common law, with limited statutory interference except, for instance, the Control of Exemption Clauses Ordinance (Chapter 71 of the Laws of Hong Kong) as mentioned in Section 3.1.1 and statutory formalities required for specific types of contracts.

. . Chan Yau v Chan Calvin [2014] 5 HKLRD 304, 305. Lam S. Lei v Chan Chit (2008) HKEC 146 at [44]. . Beale, Chitty on Contracts (Sweet & Maxwell, 32nd edn, 2015) 1372.

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Statutes are in place to ensure the quality and reliability of construction works. For example, there are mechanisms under the Construction Workers Registration Ordinance (Chapter 583 of the Laws of Hong Kong) and the Buildings Ordinance (Chapter 123 of the Laws of Hong Kong) which provide that workers in the construction industry should be registered. This is further set out in Section 4.3 below. A few statutes concerning environmental protection, including the Environmental Impact Assessment Ordinance (Chapter 499 of the Laws of Hong Kong), the Air Pollution Control Ordinance (Chapter 311 of the Laws of Hong Kong), the Water Pollution Control Ordinance (Chapter 358 of the Laws of Hong Kong) and the Waste Disposal Ordinance (Chapter 354 of the Laws of Hong Kong), as explained in Section 2.4, are in place to control and regulate the negative impacts that construction works can have on the environment.

3.5. Implied Contract Terms 3.5.1.

3.5.2.

There are certain terms which the courts generally imply into construction contracts. For example, it will normally be implied that: (a) the parties agree to take all actions that are necessary on their respective parts to bring about the completion of the works40; (b) the employer is to cooperate with the contractor in order to allow it to carry out the works in a regular and orderly way, and not to hinder or prevent the contractor from doing so41; (c) the certifier is to act impartially (and must be allowed to do so)42; and (d) the contractor is to be paid for work done43. The Hong Kong Courts follow the English approach to the implication of terms, including the BP Refinery (Westernport) Pty Ltd v Shire of Hastings test, which provides that a term may be implied on the facts where all of the following requirements are met: (i) the term is reasonable and equitable; (ii) it is necessary for business efficacy; (iii) it is a matter which is considered to be ‘so obvious’ that the parties must have intended it; (iv) it is capable of clear expression; and (v) it does not contradict any express term of the contract.44

40 Mackay v Dick (1881) 6 App. Cas. 251 at page 263. 41 Allridge (Builders) Ltd v Grandactual Ltd (1996) 55 Con LR 91 at [123]; Jardine Engineering Corp Ltd & Ors v Shimizu Corp [1992] 2 HKC 271. 42 BR and EP Cantrell v Wright and Fuller [2003] BLR 412 at [97] to [100]. See Jardine Engineering Corp Ltd & Ors v Shimizu Corp [1992] 2 HKC 271. 43 Furst & Ramsey, Keating on Construction Contracts (Sweet & Maxwell, 10th edn, 2016), 90 [4-022]. 44 (1977) 180 CLR 266, 283 (Lord Simon of Glaisdale, Viscount Dilhorne, Lord Keith of Kinkel).

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Terms also are implied by statute. For example, s 16 of the Sale of Goods Ordinance (Chapter 26 of the Laws of Hong Kong)45 provides for an implied condition that goods sold in the course of business are of merchantable quality and reasonably fit for purpose.

3.6. Construction of Contract Terms 3.6.1.

3.6.2.

Rather than construing contracts with a literal interpretation approach, the Hong Kong courts increasingly are construing contracts in context and in a way intended to give effect to the commercial purpose of the terms. The English authority of Rainy Sky SA v Kookmin Bank sets out the court’s current approach to contractual interpretation.46 If the wording of the contract is ambiguous when construed against its factual context, the courts can and will adopt a purposive approach to interpret such wording in a way most consistent with business common sense47. It should be noted that the court’s power to interpret contracts purposively is not without limit. The notion of commercial or business common sense is only to be applied when the contractual wording is ambiguous or is capable of more than one meaning. The court will honour the parties’ freedom of contract and give effect to the natural meaning of the contractual terms where there is no reason to depart from the natural language48.

3.7. Private and Public Procurement 3.7.1.

3.7.2.

In very broad terms, there are three main procurement methods used in Hong Kong, namely traditional general contracting, design and build contracting, and management contracting. Traditionally, general contracting is most widely used and tends to be the default method used in the construction industry in Hong Kong. Professionals in the construction industry are familiar with the general contracting structure and the roles of parties under it. Under the traditional general contracting method, construction work is procured only after or near the end of the design function, which is carried out by the design team. As explained in Section 6, the government’s standard forms of contract fall under the category of general contracting.

45 . 46 [2011] 1 WLR 2900. See also Maeda Kensetsu Kogyo Kabushiki Kaisha aka Maeda Corporation & Anor v Bauer Hong Kong Ltd [2020] HKCA 158. 47 Wealthy Catering Holdings Ltd v Superior Luck Ltd and Another [2018] HKEC 2724 at [180]. 48 Luan Gang v Simpson Marine Ltd [2018] HKCA 228 at [23], [30].

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Recently, newer procurement methods such as design and build and management contracting provide alternative options for clients to choose to suit their objectives such as time, cost and quality. Both private and public procurement predominantly are done by way of tendering, either on a competitive or negotiated basis, or both. The tender procedures adopted by the government for public procurements are set out in the Stores and Procurement Regulations issued by the Financial Secretary under the Public Finance Ordinance (Chapter 2 of the Laws of Hong Kong)49 Open and competitive tendering generally is used. Many government departments, public bodies and statutory bodies put up tender notices or invitations on their websites for access by the public. On the other hand, tender procedures adopted by the private sector can vary widely. Without the need to be accountable to the public, private clients may tend more towards the use of selective or negotiated tendering with potential contractors.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

As noted in paragraph 2.2.1 above, the government plays a significant role in the construction market in Hong Kong, as it commissions many public construction projects. The Public Finance Ordinance (Chapter 2 of the Laws of Hong Kong) provides a statutory framework for the control and management of Hong Kong’s public finances, which pays for the projects procured by the government. The process of procurement by the government is governed by the Stores and Procurement Regulations. The Regulations are supplemented by circulars and memoranda issued from time to time.

4.2. Codes of Practice 4.2.1.

As part of the regulatory regime which aims at ensuring that certain standards of financial capability, expertise, management and safety are maintained by the contractors carrying out government works, the government prescribes certain codes of practice for contractors. Contractors included in the relevant list(s) of approved contractors maintained by the Development

49 .

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Bureau of the government in respect of its specialty works must comply with the Contractor Management Handbook (‘Handbook’).50 The Handbook binds the contractors included in the government’s lists. Noncompliance with the codes of practice set out in the Handbook may lead to regulatory actions of different levels of severity, such as suspension from tendering or removed from the lists51.

4.3. Licensing of Professionals and Contractors 4.3.1.

4.3.2.

Any person who wishes to carry out construction works on construction sites must be registered as a construction worker under the Construction Workers Registration Ordinance (Chapter 583 of the Laws of Hong Kong). A person cannot personally carry out construction work on a construction site unless they are named in the register. The Architects Registration Ordinance (Chapter 408 of the Laws of Hong Kong)52, the Engineers Registration Ordinance (Chapter 409 of the Laws of Hong Kong)53 and the Surveyors Registration Ordinance (Chapter 417 of the Laws of Hong Kong)54 respectively require architects, engineers and surveyors to be registered. The Building Authority maintains a register of authorised architects, engineers and surveyors who are qualified to perform the duties and functions of an authorised person under the Buildings Ordinance (Chapter 123 of the Laws of Hong Kong). Registration committees of each type of professional set out above are established under the Buildings Ordinance (Chapter 123 of the Laws of Hong Kong) to make recommendations for the inclusion of applicants who wish to be included in the relevant registers.

50 Development Bureau, Contractor Management Handbook (Handbook, rev B-15, 20 July 2018) . 51 Development Bureau, Contractor Management Handbook (Handbook, rev B-15, 20 July 2018) ., at s 5.2.3. 52 . 53 . 54 .

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5. Construction Contracts 5.1. Available and Most Commonly Used Contracts 5.1.1.

5.1.2.

5.1.3.

5.1.4.

Contracts for construction in Hong Kong broadly are classified into the following types: (a) remeasurement contracts containing Bills of Quantities or measurement contracts containing a Schedule of Rates; (b) lump sum contracts with drawings and specification; (c) lump sum contracts with firm Bills of Quantities; (d) cost reimbursement contracts; and (e) design and build contracts involving both design and construction by the contractor, which is normally priced as a lump sum. The Hong Kong government, being the largest employer in the construction market, has over the years developed a set of standard forms of contract based largely on the well-established English forms. Until recently,55 the government has used its General Conditions of Contract for Civil Engineering Work56 for its civil engineering projects. This well-established form is a lump sum contract with firm Bills of Quantities, which has been regarded as the preferred procurement approach for all civil engineering works for many years. Another commonly used form of contract in the construction market is the Agreement & Schedule of Conditions of Building Contract for Use in the Hong Kong Special Administrative Region: Standard Form of Building Contract — Private Edition — Without Quantities, jointly developed and published by the Hong Kong Institute of Architects, Hong Kong Institute of Surveyors and the Hong Kong Institute of Construction Managers in 2006. Recently, the Hong Kong government has advocated for the adoption of the NEC suite of contract forms for its projects. Starting from the fiscal year 2015–16, all new works contracts procured by the government are to adopt the full suite of NEC3 contracts as far as possible57. The Hong Kong government has begun to transition from NEC3 to NEC4 upon the release of NEC4 in June 2017. The collaborative, partnering and risk sharing based approaches set out

55 See Section 5.1.4. 56 General Conditions of Contract for Civil Engineering Works (Government of the Hong Kong Special Administrative Region, 1999 ed) (‘GCC’). 57 Development Bureau, The NEC Journey (December 2017) .

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5.1.6.

5.1.7.

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in NEC4 tie in with the government’s aim to improve the quality, time and cost management of infrastructure projects58. Some of the very large organisations in Hong Kong have their own in-house standard forms, including the Mass Transit Railway (‘MTR’)59 and the Airport Authority60. In the following Sections, we discuss the key issues in relation to two standard form contracts used in Hong Kong: (a) The General Conditions of Contract for Civil Engineering Works; and (b) The Agreement & Schedule of Conditions of Building Contract for Use in the Hong Kong Special Administrative Region: Standard Form of Building Contract — Private Edition —Without Quantities. In Hong Kong, it is common for employers to amend extensively the standard form contracts using special conditions of contract on a project-by-project basis. The discussion contained below represents what the two standard form contracts in their generic unamended forms contain.

6. Example 1 – General Conditions of Contract for Civil Engineering Works 6.1. Overview 6.1.1.

6.1.2.

The General Conditions of Contract for Civil Engineering Work (‘GCC’) form of contract was based broadly upon the UK Institute of Civil Engineer’s standard form for construction from the 1960s61, with updates and revisions to reflect characteristics unique to Hong Kong.62 The GCC is a traditional construction-only contract under which the contractor is paid a fixed-price lump sum subject to variations. It was widely used in

58 Development Bureau, Construction 2.0 – Time to Change (September 2018) . 59 See, for example, MTR, SHATIN TO CENTRAL VLINK: GREEN ROOFS AND LANDSCAPING WORKS FOR SCL (CONTRACT NO.: 11236) (adopting Standard Form – the Conditions of Contract for Civil Engineering and Building Works Construction) (Oct 2015) . 60 HKAA, General Conditions of Contract Building and Civil Works, Issue No. 11 (Aug 2015) . 61 Soo, Construction Law and Practice in Hong Kong (Sweet & Maxwell, 4th edn, 2018), 615 [19.010]. 62 See Soo, Construction Law and Practice in Hong Kong (Sweet & Maxwell, 4th edn, 2018), 615 [19.010].  

 

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public construction projects employed by the government before the recent surge of NEC3 contracts in Hong Kong.

6.2. Fit for Purpose 6.2.1.

6.2.2.

The GCC is generally intended to be used in construction-only procurements where the contractor has no design responsibility. Because of this, there is no express provision regarding fitness for purpose. For any parts of the works where the contractor bears the design responsibility (which is possible under the GCC), a warranty that the materials and goods in connection with the contractor’s design will be reasonably fit for the purpose for which it is intended and of good quality is usually added by way of a ‘special condition of contract’ (‘SCC’)63. There is no obligation for the contractor to ensure that its design is fit for the purpose for which it is intended, only that the materials and goods are fit for purpose.

6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

Contractors must complete the works under a GCC contract within the time stated in the Appendix to the Form of Tender. Timing of completion is usually stated by way of the number of days from the commencement date of the works (inclusive). If the contractor encounters or reasonably foresees that it may encounter one or more causes of delay to the progress of the works, it must give written notice specifying the effect and probable extent of delay64. Although a matter that is often debated in the industry, it is thought by many that the notice provisions under this contract do not constitute conditions precedent to an extension of time claim. The engineer is to consider whether to grant an extension of time for the completion of works in view of the cause(s) of delay. The GCC sets out a number of causes under which an extension of time may be granted65. Where the contractor fails to complete the works by the completion date but is not entitled to an extension of time, or where the progress of works is delayed beyond the expiry of previously extended time, the employer is entitled to re-

63 See SCC 15: ‘Works Bureau Technical Circular 18/2000’ (Circular Ref No WB(W) 250/32/3, 15 May 2000) A25–A32 . 64 GCC, cl 50(1)(a). 65 GCC, cl 50(1)(b).

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cover liquidated damages from the contractor using a prescribed rate per day, set out in the Appendix to the Form of Tender, which is to represent a genuine forecast of the probable loss if the completion date is not met66. GCC cl 52 deals with liquidated damages. It has been drafted on the basis that if any part of the works is designated as a ‘section’, the remainder of the works is also designated as a ‘section’. Where a contract contains sections, liquidated damages are to be calculated for each section instead of for the whole of the works.

6.4. Latent Site Conditions 6.4.1.

6.4.2.

Most public civil engineering or building projects67 allocate all risks of latent conditions or unforeseen physical conditions to the contractor. The GCC does not contain any provisions in respect of latent site conditions by which the risk of latent physical conditions that could not reasonably have been foreseen by an experienced contractor at the time of tender is allocated to the government. This is different from the position in other international standard forms of contract which tend to have unforeseen ground conditions clauses in substantially similar formulation68. The position under the common law is that the risk of unforeseen ground conditions rests exclusively with the contractor. The case of Mitsui Construction Co Ltd v Attorney General addressed the situation where the required quantities of temporary support and lining for the construction of water supply tunnels turned out to be much greater than in the Bill of Quantities, due to the difficult and unexpected ground conditions.69 The GCC form used at the time contained no latent site conditions clause. The government contended that the contractor should bear the risk of encountering differing site conditions. Nonetheless, the contractor ultimately succeeded in getting a re-rating based on a proper construction of the specific contract, based primarily on the rerating provisions of the contract70.

66 GCC, cl 52. 67 With the exception of procurements using the Hong Kong standard forms of contract of the Mass Transit Railway Corporation and the Airport Authority. 68 See, for example, NEC3 Engineering and Construction Contract, April 2013, cl 60.1(12). 69 [1987] HKLR 1076. 70 [1987] HKLR 1076., at pages 1084 and 1085.

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6.5. Force Majeure 6.5.1.

6.5.2.

6.5.3.

71 72 73 74 75 76 77 78 79 80

The GCC contains special risks and frustration clauses which address the situation where there are events beyond the control and without the fault or negligence of either party. The special risks provided for in the GCC are: (a) War (regardless of whether war has been declared) in any part of the world which financially or otherwise materially affects the execution of the works71; (b) An invasion of Hong Kong72; (c) Civil war, rebellion, revolution or military or usurped power in Hong Kong73; (d) Riot, commotion or disorder in Hong Kong otherwise than amongst the employees of the contractor, or any sub-contractor or specialist contractor currently or formerly engaged on the works or specialist works74; and (e) Acts of foreign terrorists in Hong Kong75. The special risks provided for in the GCC generally are political or military in nature, and do not include irresistible forces of nature or acts of God. The occurrence of any of these special risks entitles the government to terminate the contract. Unless and until the contract is terminated, the contractor is to continue to use its best endeavours to complete the execution of the works76. If the contract is terminated as above, the contractor is entitled to be paid for work already carried out77 and the cost of materials reasonably ordered for the works which, when delivered to the contractor, the contractor is liable to accept78, as well as any cost reasonably incurred by the contractor in the expectation of completing the works79. Since the contractor is not to blame for the happening of special risks, the contractor is not liable for the damage caused by the occurrence of such special risks. Rather, the employer bears the risk of the occurrence of special risks and is obliged to indemnify the contractor against all liabilities in relation to this80.

GCC, cl 21(4)(a). GCC, cl 21(4)(b). GCC, cl 21(4)(d). GCC, cl 21(4)(c). GCC, cl 21(4)(c). GCC, cl 84(1). GCC, cl 84(3)(a). GCC, cl 84(3)(b). GCC, cl 84(3)(c). GCC, cl 84(4)(a).

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The dispute settlement clause survives termination by reason of the occurrence of special risks. Settlement of disputes under the GCC is discussed in Section 6.9 below.

6.6. Limitation of Liability 6.6.1.

6.6.2.

The general common law rules regarding unenforceability of contract provisions apply to construction contracts. For example, terms which are insufficiently certain81, lack consideration82 or are an unreasonable restraint of trade83 may be unenforceable. The Control of Exemption Clauses Ordinance (Chapter 71 of the Laws of Hong Kong) also renders unenforceable certain clauses purporting to exclude or restrict liability for negligence (e.g., for death or personal injury) or under contract (where one of the parties is dealing as a consumer or on the other’s written standard terms of business). The GCC does not place a cap on the amount of the contractor’s liability to the employer (i.e., the government). However, the GCC does place a limitation on the types of causes leading to the damage, loss or injury to the works or constructional plant for which the contractor is liable. The contractor does not have to bear the cost of making good any damage or injury arising from any ‘excepted risk’ under the GCC84. The contractor’s liability is also to be reduced proportionately to the extent that acts or negligence of the government have contributed to the damage or injury85. Similarly, the GCC does not place a cap on the amount of the government’s liability to the contractor. Limitation of liability is provided by way of a procedural requirement that the contractor gives proper notice of its claims within the prescribed time limits. The government is not liable to the contractor for any matter arising out of or in connection with the contract or the works unless the contractor makes a claim for extension of time86, higher rate87 or additional payment88 (as the case may be) within 28 days of the event(s) giving rise to such a claim.  

6.6.3.

 

6.6.4.

81 See, for example, Arnhold & Co Ltd v Attorney General [1989] HKLY 83. 82 Beale, Chitty on Contracts (Sweet & Maxwell, 33rd edn, 2018), 404 [4-001]; Soo, Construction Law and Practice in Hong Kong (Sweet & Maxwell, 4th edn, 2018), 51 [4.008]. 83 Beale, Chitty on Contracts (Sweet & Maxwell, 33rd edn, 2018), 1305 [16-106]; Soo, Construction Law and Practice in Hong Kong (Sweet & Maxwell, 4th edn, 2018), 193 [6.013]. 84 GCC, cl 21(3). 85 GCC, cl 22(3). 86 GCC, cl 50(1)(a). 87 GCC, cl 64(1). 88 GCC, cl 64(2).

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6.7. Duration of Exposure 6.7.1.

6.7.2.

6.7.3.

Under the GCC, the contractor is exposed to liability for the whole of the project duration until the expiry of the ‘maintenance period’ as named in the Appendix to the Form of Tender. The maintenance period is otherwise known as the ‘defects liability period’. The duration of the maintenance period varies from contract to contract. It typically lasts for 12 months. The contractor is liable to carry out the maintenance works to make good any defect, imperfection, shrinkage, settlement or other fault identified within the maintenance period89. The contractor is to bear the cost of such repair works that are necessitated by the contractor’s negligence, materials or workmanship not in accordance with the contract, or any other failure on the part of the contractor to comply with the contractual obligations. The cost of any maintenance or repair work necessitated by causes other than those described above are to be borne by the employer90. Maintenance or rectification works as notified by the engineer are to be carried out during the maintenance period or within 14 days of its expiry91. Upon the expiry of the maintenance period, and when all maintenance and rectification works referred to above are completed, the completion of the contractor’s obligations to execute the works is signified by the issuance of a ‘maintenance certificate’ which entitles the contractor to the release to it of retention money92.

6.8. Time Bars 6.8.1.

6.8.2.

89 90 91 92 93

The time bar for actions to be brought under the GCC is governed by statute. Under s 4 of the Limitation Ordinance (Chapter 347 of the Laws of Hong Kong)93, a party must bring a claim for breach of contract within six years (for contracts not executed under seal), or 12 years (for contracts executed under seal), from when the cause of action accrued, that being the date of the breach of contract. For actions in tort (such as claims for negligence), a party must bring an action within six years of the date the cause of action accrued, subject to exceptions. In general terms, a claim for negligence ‘accrues’ when the act of negli-

GCC, cl 56(2). GCC, cl 56(3). GCC, cl 56(2). GCC, cl 80(1). .

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gence causes damage. This can cause obvious problems if the damage is not visible until some time later. Notably, this limit is extended where the plaintiff discovered the cause of action after the date that it accrued, which is particularly important where an employer wishes to claim for latent defects. Specifically, a plaintiff may bring an action within three years from the earliest date that it had both the required knowledge and the right to bring the action. This exception is subject to a longstop which bars claims brought more than 15 years after the date of the alleged negligent act or omission.94

6.9. Dispute Resolution 6.9.1.

6.9.2.

94 95 96 97 98

Like many internationally used standard forms of contract, the GCC contains a tiered dispute resolution mechanism which provides for disputes to be decided first by the engineer, failing which the matters can be referred to mediation or arbitration. All disputes that arise between the contractor and the government at the first instance are to be referred to and settled by the engineer, whose decisions are final and binding unless reversed or revised in mediation or arbitration. If the engineer fails to give a decision, or if either contracting party is dissatisfied with any such decision, the dispute can be referred to mediation in accordance with the Construction Mediation Rules of the Hong Kong Special Administrative Region95. If mediation fails, or if either contracting party refuses to mediate in respect of the dispute, the dispute can then be referred to arbitration in accordance with the Arbitration Ordinance (Chapter 609 of the Laws of Hong Kong)96, which very closely follows the UNCITRAL Model Law97. The Hong Kong International Arbitration Centre Arbitration Rules (‘HKIAC Rules’) apply to the arbitrations arising from the GCC unless the parties agree otherwise98. The clause is silent as to the version to be adopted but the preamble of the HKIAC Rules (1993, 2012 and 2014 rules) state that an arbitration clause which adopts the HKIAC Rules will be interpreted as having adopted the latest version of the HKIAC Rules as amended and adopted by the HKIAC.

Limitation Ordinance (Chapter 347 of the Laws of Hong Kong), ss 31–2. GCC, cl 86(1). Chapter 341 of the Laws of Hong Kong was repealed. GCC, cl 86(2). GCC, cl 86(5).

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7. Example 2 – Standard Form of Building Contract — Private Edition – Without Quantities 7.1. Overview 7.1.1.

7.1.2.

7.1.3.

The Agreement & Schedule of Conditions of Building Contract for Use in the Hong Kong Special Administrative Region: Standard Form of Building Contract — Private Edition — Without Quantities (‘Standard Form of Building Contract’) is published by the Standard Form of Building Contracts Joint Contract Working Committee (‘SFBC JCWC’), the stakeholders of which include the Hong Kong Institute of Architects, the Hong Kong Institute of Construction Managers and the Hong Kong Institute of Surveyors. This edition of the contract (‘Private Edition — Without Quantities’) is generally used in the private sector, as opposed to the GCC, which is used for public projects. This edition of the Standard Form of Building Contract is a lump sum contract which appends a Schedule of Quantities Rates setting out the build up to the contract sum. There are other versions of the form, such as ‘With Quantities’.

7.2. Fit for Purpose 7.2.1.

7.2.2.

Under this contract, the contractor does not have an express obligation to ensure that the works are fit for purpose. However, where it is responsible for the selection of materials and goods in accordance with a performance specification or otherwise, the materials and goods must be fit for the purpose stated in the contract.99 The contractor’s workmanship must be of the standard and quality described in the contract, which is subject to the Architect’s satisfaction100. The Contractor also has an obligation to: (a) take responsibility for the care of the works;101 (b) carry out the construction of and complete the works using materials, goods and workmanship of the types, standards and quality specified in the contract;102 (c) carry out the architect’s design with reasonable skill and care and bear the responsibility for such work;103 and

99 GCC, cl 8.1(2). 100 Standard Form of Building Contract, cl 2.1(1)(i). 101 Standard Form of Building Contract,cl 2.1(h). 102 Standard Form of Building Contract,cl 2.1(1)(i). 103 Standard Form of Building Contract,cl 2.2.

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exercise, in the performance of their obligations under the contract, all the skill, care and diligence to be expected of a competent contractor experienced in carrying out work of a similar scope, nature and size of the works.104

7.3. Late Completion 7.3.1.

7.3.2.

7.3.3.

7.3.4.

The contractor has an obligation to complete the works or a section of the works by the completion date, which is a date stated in the Appendix to the contract105. If the contractor fails to complete the works by this date, the employer may levy liquidated and ascertained damages (‘LADs’)106 against the Contractor at the rate stated in the Appendix to the contract.107 If the completion date is shifted after the LADs have been levied and paid, the employer has to refund to the contractor the amount of LADs paid or allowed to the employer for the period from the original completion date to the revised completion date.108 The completion date may be extended pursuant to cl 25 of the Standard Form of Building Contract. This provision entitles the architect to award the contractor with an extension of time if the completion of the works or section is delayed by one or more of 22 ‘listed events’.109 To secure the extension of time, the contractor must issue to the architect two detailed notices of delay. If the contractor issues the first notice, but not the second, the architect is still able to award an extension of time.110 The Standard Form of Building Contract is silent on the scenario where the contractor fails to issue both notices pursuant to the contract but later makes an application for an extension of time, either by issuing the notices late or by presenting a claim in formal dispute resolution proceedings. Despite the wording in cl 25, which states that the contractor ‘shall’ give notice, it is thought to be unlikely that the notice provisions under the Standard Form of Building Contract constitute conditions precedent to an extension of time claim. This is further supported by the language used in cl 28.3, which expressly states that the notice provisions in cls 28.1–28.2,

104 Standard Form of Building Contract,cl 2.3. 105 Standard Form of Building Contract,cl 8.1(5). 106 Standard Form of Building Contract,cl 24.2. 107 Before the employer can levy LADs, the architect must certify that the contractor has failed to complete the works on time pursuant to cl 24.1. 108 Standard Form of Building Contract cl 24.3. 109 Standard Form of Building Contract,cls 25.1(3)(a)–(v). 110 Standard Form of Building Contract,cl 25(4).

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which deal with the time limit for notices to be given and information to be submitted, are ‘condition[s] precedent to the Contactor’s entitlement to additional payment’ under cl 28. An extension of time under this contract does not of itself entitle the contractor to any money. In order to recover costs associated with the delay, the contractor must make a separate loss and expense claim under cl 27 of the Standard Form of Building Contract.

7.4. Latent Conditions 7.4.1.

As with the GCC, the Standard Form of Building Contract does not contain any provisions in respect of latent site conditions. The risk therefore lies with the contractor.

7.5. Force Majeure 7.5.1.

7.5.2.

Pursuant to Standard Form of Building Contract cl 25.1(a), the contractor can apply for an extension of time if it is delayed by a force majeure event. Force majeure is not a defined term, but the contractor is also able to apply for an extension of time in respect of ‘excepted risks’, which are defined111 as: (a) war, invasion of Hong Kong, terrorism, civil war, rebellion, revolution or military or usurped power in Hong Kong, riot, commotion or disorder in Hong Kong (other than amongst employees of the contractor or any person for whom the contractor is responsible); (b) the architect’s design insofarthat such design causes damage, loss or injury; (c) a cause due to the architect’s or employer’s neglect or default; (d) ionizing radiation or radioactive contamination; and (e) pressure waves caused by aircraft or other aerial devices. Force majeure and excepted risks do not entitle the contractor to payment of loss or expense, nor do they entitle the parties to terminate the contract, although both parties are entitled to terminate the employment of the contractor if the whole of the works or substantially the whole of the works has been suspended for a continuous period of 120 days or more due to ‘hostilities involving Hong Kong’,112 which may conceivably overlap with force majeure and some of the excepted risks.

111 Standard Form of Building Contract, cl 1.6. 112 Standard Form of Building Contract, cl 37.1.

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7.6. Limitation of Liability 7.6.1.

As with the GCC, the Standard Form of Building Contract does not limit the contractor’s liability to the employer or vice versa.

7.7. Duration of Exposure 7.7.1.

As discussed above, the contractor’s exposure to LADs stops when the works are completed, i.e., when the architect issues the ‘substantial completion certificate’ for the works.113 As with the GCC, the contractor is exposed to liability from execution to the expiry of the defects liability period.114 The defects liability period is stated in the Appendix to the Standard Form of Building Contract and commences on the day after the date of substantial completion of the works or a section. As for the GCC, the defects liability period for the Standard Form of Building Contract typically lasts for 12 months. During the defects liability period, the contractor is under an obligation to rectify defects, shrinkages or other faults which are identified during that period. Unlike the GCC, the contractor’s obligation to rectify is limited to such faults as are caused either by materials, goods or workmanship not in accordance with the contract, by natural causes, or as a result of a ‘specified peril’ occurring during the construction period prior to substantial completion115. The contractor is not required to rectify at its own cost any damage caused by a specified peril occurring after substantial completion116. The contractor is under an obligation to rectify these matters within a reasonable time of being notified by the Architect117.  

7.7.2.

7.7.3.

7.8. Time Bars 7.8.1.

113 114 115 116 117 118

Matters of limitation are discussed in the corresponding section on the GCC.118

Standard Form of Building Contract, cl 17. Standard Form of Building Contract. Standard Form of Building Contract, cl 17.3(1). Standard Form of Building Contract, cl 17.6. Standard Form of Building Contract, cl 17.3(3). See Section 6.8.

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8. Dispute Resolution 8.1.1.

The Standard Form of Building Contract also contains a tiered dispute resolution mechanism, which provides for a dispute to be resolved as follows: (a) The ‘designated representatives’ (one senior executive designated by each party) must endeavor to settle disputes that arise during the carrying out of the works;119 (b) If the dispute is not resolved within 28 days of it being referred to the designated representatives, either party may refer the dispute to mediation conducted in accordance with the HKIAC Mediation Rules120 (unless agreed otherwise by the parties), with the mediator to be agreed between the parties;121 (c) If the dispute is not settled by mediation within 28 days of the commencement of the mediation, either party may refer the dispute to arbitration conducted in accordance with the Arbitration Ordinance (Chapter 609 of the Laws of Hong Kong)122 and (unless agreed otherwise by the parties) the Domestic Arbitration Rules of the HKIAC123, with the place of the arbitration as Hong Kong.124 The arbitrator has wide powers to: (i) rectify the contract; (ii) direct measurements or variations; (iii) assess and award any sum which ought to have been the subject of or included in a certificate; and (iv) open up, review and revise, without limitation, the giving, submitting or issuing of any agreement, approval, assessment, authorization, certificate, confirmation, consent, decision, delegation, direction, dissent, determination, endorsement, instruction, notice, notification, opinion, request, requirement, statement, termination or valuation.125

119 Standard Form of Building Contract cls 41.1–41.2. 120 . 121 cl 41.3. 122 Chapter 341 of the Laws of Hong Kong was repealed and replaced in 2011 with Chapter 609 of the Laws of Hong Kong. 123 Hong Kong International Arbitration Centre, 2014 HKIAC Domestic Arbitration Rules . 124 Hong Kong International Arbitration Centre, 2014 HKIAC Domestic Arbitration Rules . cl 41.4. 125 Hong Kong International Arbitration Centre, 2014 HKIAC Domestic Arbitration Rules . cl 41.6.

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India 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6.

Context 416 The Country 416 The Legal System 416 The Economy 417 The Construction Industry 418 Size and Nature 418 Participants 419 Work, Health and Safety 419 Protection of the Environment 423 Quality Assurance 425 Construction Contracting Dynamics 426 Legal Underpinnings of Contracts 426 Overview 426 Freedom of Contract 426 Legal Framework 427 Public Policy 428 Statute Law 430 Implied Contract Terms 441 Construction of Contract Terms 443 Private and Public Procurement 445 Government Involvement 446 Legislation and Regulation 446 Codes of Practice 448 Licensing of Professionals and Contractors 450 Construction Contracts 450 Standard Contracts 450 Amendment of Contracts and Bespoke Contracts 451 Most Commonly Used 452 Example – The Standard EPC Agreement for Highways 453 Key Issues 453 Overview 453 Extension of Time/Delay in Completion 453 Variations 455 Latent Conditions 456 Force Majeure 456 Land Acquisition 457

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Limitation of Liability 458 Duration of Exposure/Time Bars Dispute Resolution 460

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

India is a constitutional republic governed under a parliamentary system. Previously a colony of Great Britain, India gained independence in 1947 and adopted the Constitution of India (‘Constitution’) in the year 1950. As originally enacted, the preamble to the Constitution described the nation as a ‘sovereign democratic republic’. In 1976, by virtue of a constitutional amendment, this was changed to read ‘sovereign socialist secular democratic republic’. The Republic of India comprises of 29 (twenty-nine) States and 7 (seven) Union territories. The Constitution is applicable to the entire country. All regional or local laws must conform to the Constitution. Where such laws are ultra vires the Constitution, they can be struck down by any of the High Courts or the Supreme Court of India. The Constitution provides for the division of legislative powers between the central (i.e. union) and the state (i.e. regional) legislatures, with the legislatures at both levels exercising concurrent jurisdiction over certain matters.  

 

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

India maintains a common law system similar to that of England. The judiciary consists of the Supreme Court at the Union level, High Courts at the State (regional) level, and District and Sessions Courts at the district level. The Apex court in India is the Supreme Court, which is located in New Delhi. It is conferred upon with appellate and advisory jurisdiction, which is more specifically stipulated under Articles 131–142 of the Constitution, although with very limited original jurisdiction. The High Courts situated in Mumbai, Kolkata and Chennai are also the principal civil courts of original jurisdiction for these cities, while the High Courts in states other than these three exercise only appellate and writ jurisdictions over the respective States and Union Territories. Two or more States may share a common High Court. Appeals from decisions of the High Courts may progress to the Supreme Court on questions of law in dispute. Subordinate to the High Court of each state are the District Courts, which fall within the administrative control of the High Court of the state to which the District Court belongs.

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Additionally, there are numerous quasi-judicial bodies that are involved in dispute resolution, such as tribunals and regulators, including the Securities Appellate Tribunal, the Armed Forces Tribunal, the National Company Law Tribunal, the Debt Recovery Tribunal, Consumer Dispute Redressal Forum, Real Estate Regulating Authorities and the Motor Accident Claims Tribunal. The jurisdiction of such bodies is defined by the scope of the respective legislation under which they are established.

1.3. The Economy 1.3.1.

1.3.2.

According to the IMF (International Monetary Fund), as of 2017, the Indian economy is nominally worth US$2.6891 trillion.2 India has one of the largest economies by market exchange rates, and, at US$9.45 trillion,3 it has the third largest economy in the world if measured by purchasing power parity. India is also one of the world’s fastest-growing economies. The Central Statistics Office of the Government of India (‘CSO’) reported the advance estimates in relation to the growth rate of India’s GDP at constant market during 2019– 20 is estimated to be at 4.2 percent.4 During the next five years, investment through public private partnerships is expected to be US$31 billion.5 India has been placed in the top 100 of the World Bank’s Ease of Doing Business

1 ‘5. Report for Selected Countries and Subjects’, International Monetary Fund (Web Page, October 2018) . 2 ‘5. Report for Selected Countries and Subjects’, International Monetary Fund (Web Page, October 2017) . 3 ‘World Economic and Financial Surveys: World Economic Outlook Database’, International Monetary Fund (Web Page, October 2017) . 4 Central Statistics Office, Ministry of Statistics & Programme Implementation, ‘PRESS NOTE ON PROVISIONAL ESTIMATES OF ANNUAL NATIONAL INCOME 2019-2020 AND QUARTERLY ESTIMATES OF GROSS DOMESTIC PRODUCT FOR THE FOURTH QUARTER (Q4) OF 2019-2020’ (Press Note, 29 May 2020) mospi.gov.in/sites/default/files/press_release/PRESS%20NOTE%20PE%20and%20Q4%20esti mates%20of%20GDP.pdf. 5 India Brand Equity Foundation, Roads (Report, December 2017) .

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(‘EoDB’) global rankings,6 since 2017. This being a result of the country’s sustained business reforms over the past several years.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

By 2025, the real estate sector in India is expected to contribute approximately 13 %7 to India’s GDP, and by 2030, the Indian real estate market is expected to reach US$1 trillion.8 According to CSO, financial, real estate and professional service sectors are likely to see a growth rate of 6.4 % in the year 2019–20209, whereas the growth in the construction industry is estimated to be 3.2 %.10 A growth spurt in the construction industry is likely to impact the growth in the labour and skilled workers market. The construction sector can be broadly divided into two key segments: (a) Buildings (including residential, commercial, institutional and industrial buildings); and (b) Infrastructure (including roads, railways, dams, canals, airports, power systems, telecommunication systems, urban infrastructure such as water supply, sewerage, drainage and rural infrastructure). There are various councils and industry bodies which discuss and address issues faced by the industry and also act as intermediaries through which the industry can raise issues with the government. As regards the ‘buildings’ sector, there previously existed a regulatory vacuum. This has now been filled by the government through the enactment – Real Estate (Regulation and Development) Act, 2016 (India) (‘RERA’). RERA empowers state governments to create a regulatory authority and compels the registration of the project of the developers and real estate agents.11 In addition, RERA casts certain obligations upon promoters,12 al 

 

 

2.1.2.

2.1.3.

2.1.4.

6 World Bank, ‘Rankings & Ease of Doing Business Score’, Doing Business (Web Page, 2019) . 7 ‘Indian Real Estate Industry’, India Brand Equity Foundation (Web Report, April 2018) . 8 ‘Indian Real Estate Industry’, India Brand Equity Foundation (Web Page, April 2019) . 9 Ministry of Finance, Government of India, Annual Report 2019-2020 . 10 Press Information Bureau, Ministry of statistics &Programme Implementation (Web Report, Jan 2020) . 11 RERA s 9 . 12 RERAch III.  

 

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lottees13 and real estate agents, who are required to comply with regulations, orders or directions made in exercise of the regulatory authorities’ powers under the Act.14 Project layout and development plans must be submitted to the relevant regulatory authority by the developers and other interested parties.15

2.2. Participants 2.2.1.

The construction industry in India is extremely fragmented. Industry participants broadly comprise real estate agents, builders, engineering, procurement and construction (‘EPC’) contractors, subcontractors, architects, engineers, and labour unions and their members. There are also several public sector companies, who act as key players in major government contracts.

2.3. Work, Health and Safety 2.3.1.

Whilst there are several statutes governing the work, health and safety of labourers in the construction industry, some of these statutes are considered archaic. As a result, many workers are left unregulated. In this regard, the government has sought to promote the empowerment of individuals employed in this sector through legislative amendments, which has subsequently resulted in substantive changes within the construction industry.16 The statutes providing for the general work hours and conditions, health and safety of the labourers and employees include the following:

Industrial Employment (Standing Orders) Act, 1946 (India) 2.3.2. This statute requires employers to have certain contractual terms, including provisions on working hours, leaves, productivity goals, dismissal procedures and worker classifications, approved by a government body. 2.3.3. The Ministry of Labour and Employment released a notification on 16th March 2018, publishing the Industrial Employment (Standing Orders) Central (Amendment) Rules, 2018 (India), which amends the Industrial Employment (Standing Orders) Act, 1946 (India). Following this amendment, fixed term employment, previously only available in the apparel manufacturing sector, is now allowed

13 RERAch IV. 14 RERAs 34. 15 RERAss 3–4. 16 The government has proposed a statutory framework on occupational safety and health, providing incentives to employers and employees to achieve higher health and safety standards.

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across all sectors. In this regard, a ‘fixed term employment workman’ is defined as a person who has been engaged on the basis of a written contract of employment for a fixed period.17 This amendment protects fixed term employment workers by making them eligible for all statutory benefits available to permanent workers in proportion to their period of service, even if the duration of their employment does not extend beyond the qualifying service period. Payment of Wages Act, 1936 (India) 2.3.4. This statute was enacted to ensure that wages payable to employed persons are disbursed by employers within the prescribed time limit and no deductions other than those authorised by law are made. Section 6 requires that workers be paid in money rather than in kind. 2.3.5. The Payment of Wages (Amendment) Act, 2017 (India) simplifies the transfer of monies to employees. This amendment Act also gives the government the discretion to notify specific industries or establishments where wages shall only be paid by cheque or by crediting them to the bank account of the employee. Additionally, it provides an option for employers to credit the wages in the employee’s bank account. Minimum Wages Act, 1948 (India) 2.3.6. The Minimum Wages Act, 1948 (India) fixes the minimum wage for different sectors of employment. Subject to these fixed minimum wages, the Union and State governments have the discretion to set wages according to the type and location of work. However, the provisions of the Minimum Wages Act, 1948 (India) and the Payment of Wages Act, 1936 (India) do not cover a substantial number of workers, as the applicability of both these Acts are restricted to scheduled employments or establishments.18 Payment of Bonus Act, 1965 (India) 2.3.7. This statute applies to all factories and establishments with over 20 (twenty) people.19 It requires bonuses be paid to employees drawing a salary or wage 17 Industrial Employment (Standing Orders) Central Rules, 1946 Schedule 1 (2) (a) (3A) and Schedule 1 (2) (h) . 18 Press Information Bureau, Government of India, Ministry of Labour & Employment, ‘The Code on Wages Bill 2017’ (Press Release Press Release No  170541, 5 September 2017) ; Minimum Wages Act, 1948 . pib.gov.in/PressReleseDetailm.aspx?PRID=1581199> . 19 Payment of Bonus Act, 1965 . Payment of Bonus (Amendment) Act, 2015 https://labour.gov.in/sites/default/files/The%20Payment %20of%20Bonus%20 %28Amendment%29 %20Act%2C%202015.pdf.  

 

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of up to INR 21,000 (Twenty One Thousand Indian Rupees) and provided that the employee has worked in the establishment for not less than thirty working days in that year. The statute also provides for a special provision with respect to payment of bonus linked with production or productivity. Further, bonuses are to be paid out of the entity’s profits. Payment of Gratuity Act, 1972 (India) 2.3.8. This statute applies to establishments with over 10 (ten) workers. Gratuities are payable to employees on superannuation, resignation, retirement or on death or disablement. The government mandates that this payment is at the rate of 15 (fifteen) days of the employee’s salary for each completed year of service, subject to a payment ceiling, which was previously set at INR1 (one) million. 2.3.9. A recent amendment to the Act removed the 12 (twelve) week maternity leave cap for calculating the period of ‘Continuous Service’ under s 2A. It also increases the ceiling on the amount of gratuity payable to an employee and empowers the central government to increase the limit from time to time. Currently, the limit is set at INR2 (two) million. Employee’s Compensation Act, 1923 (India) 2.3.10. This Act requires certain classes of employer to pay compensation to workers for injuries caused by accidents during their employment. The Act also sets out the method by which the amount of compensation payable is to be calculated. 2.3.11. The Employees Compensation (Amendment) Act, 2017 (India) imposes a duty on the employer to inform every employee, at the commencement of their employment, of their right to receive compensation under this Act. It also imposes a penalty on the employer for non-compliance thereof. Employees’ State Insurance Act, 1948 (India) (‘ESI Act’) 2.3.12. The ESI Act was enacted with the objective of protecting workers’ interests in circumstances resulting in loss of wages or earning capacity due to injuries suffered during employment. 2.3.13. In this regard, the Employees’ State Insurance Scheme, an integrated measure of social insurance, was conceived to protect ‘employees’ as defined under the ESI Act.20 The scheme provides full medical care to employees registered under the ESI Act during periods of incapacity and while restoring health and working capacity. It also provides financial assistance to compen-

20 ‘Employees State Insurance Scheme’, National Portal of India (Web Page, 22 October 2018) .

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sate for the loss of wages during sickness, maternity and employment injuries.21 2.3.14. The Employees’ State Insurance Corporation was established under the ESI Act and provides health and social security insurance. Maternity Benefit Act, 1961 (India) 2.3.15. This Act creates rights to payment of maternity benefits for any female employee who has been working in an establishment for a period of at least 80 (eighty) days during the 12 (twelve) months immediately preceding the date of her expected delivery. 2.3.16. The Maternity Benefit (Amendment) Act, 2017 (India) increases the duration of paid maternity leave that a female employee may avail of from 12 weeks to 26 weeks. It also provides for maternity leave of 12 (twelve) weeks for a mother who adopts a child below the age of three months or a commissioning mother (i.e. a woman using a surrogate to bear a child).  

Building and Other Construction Workers Welfare (Regulation of Employment and Conditions of Service) Act, 1996 (India) (‘BOCW Act’) 2.3.17. The BOCW Act was passed to enact safety, health and welfare measures for workers employed in the building and construction sector. Given that various states in India may choose the date and manner of adoption of certain statutes,22 the BOCW Act has thus far only been adopted by a limited number of states in India.23 The states which have adopted this statute have taken steps and established welfare boards for the benefit of its workers.24 2.3.18. The Supreme Court has issued both specific and general directions to the Ministry of Labour and Employment and the state governments to ensure meaningful implementation of the BOCW Act.25 In the landmark case of Lanco Anpara Power Ltd v State of Uttar Pradesh,26 the Supreme Court expanded the ambit of the BOCW Act and held that workers engaged in the construction of

21 Employees’ State Insurance Corporation, Frequently Asked Questions on ESI Scheme (Booklet, 2017) and . 22 Constitution Art 245 . 23 BOCW Act s 62 . Since this is a central act, the States are empowered to make rules for implementing the BOCW Act. Please note there is no central database which allows one to review the name and total number of states which have passed rules and implemented the BOCW Act. 24 BOCW Act ch 3. 25 National Campaign Committee for Central Legislation on Construction Labour v Union of India (2018) 5 SCC 607. 26 (2016) 10 SCC 329.

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a factory registered under the Factories Act, 1948 (India) did not fall under the exclusion carved out under the BOCW Act. 2.3.19. With a view to consolidate and reform labour laws in India, the government enacted the Code on Wages, 2019 (India)27 on 8th August 2019 however, the provisions of the Code are not yet notified (as at 2020). Once notified, this will come into force. The Code seeks to consolidate and subsume four labour law statutes, being the Minimum Wages Act, 1948 (India), the Payment of Wages Act, 1936 (India), the Payment of Bonus Act, 1965 (India), and the Equal Remuneration Act, 1976 (India). After the Code is enforced, these four statutes will be repealed.28 The Code under s 6 read with s 9 lays down a ‘national minimum wage’ to be set by the government for different geographical areas and without any corresponding wage ceiling.29 This Code ensures the timely payment of wages to all employees, irrespective of their sector of employment. The Ministry of Labour and Employment has also sought to simplify, amalgamate and rationalise central labour laws. The Code on Industrial Relations (India), Code on Social Security (India) and Code on Occupational Safety, Health and Working Conditions (India) are the proposed Codes which will subsume a vast portion of Indian labour law.30 This will streamline Indian labour law by removing the multiplicity of definitions and authorities, allowing for ease of compliance without undermining workers’ age security or social security.31

2.4. Protection of the Environment 2.4.1.

The construction sector is one of the primary consumers of natural resources and energy. The need to use these resources optimally and efficiently has gained prominence over time, and it has become increasingly pertinent to consider and evaluate innovative ways to ensure sustainable development. In line with this understanding, the Indian government’s Ministry of Environment, Forest and Climate Change (‘MoEFCC’) has published guidelines making it mandatory to conduct an Environment Impact Assessment for each construc-

27 . 28 Press Information Bureau, Ministry of Labour & Employment, Government of India, ‘The Code on Wages Bill 2017’ (Press Release, 5 September 2017) . 29 Code on Wages 2019 [section 6 read with section 9] http://egazette.nic.in/WriteReadData/2019/ 210356.pdf. 30 Press Information Bureau (n 970). 31 Press Information Bureau (n 970).

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tion project.32 The MoEFCC has empanelled Qualified Building Environment Auditors (‘QBEA’) to address the challenges of environment, health and safety that may arise during pre and post building construction activities. The purpose of making accreditation by QBEA mandatory under statute is primarily to ensure ease of doing ‘responsible business’ and to streamline the process of obtaining permissions or approvals in the construction industry.33 Sustainable development concepts require that resources, energy, and the ecology are well maintained and well managed. The Building Materials and Technology Promotion Council was established by the Urban Development Ministry to ensure access to technologies for the sustainable development of housing as well as cost-effective, environment-friendly and disaster-resistant building materials, and to promote the use of the same. The Construction Industry Development Council (‘CIDC’) was jointly set up by the Planning Commission (now Niti Aayog) with the Indian construction industry, in order to provide the impetus and organisational infrastructure necessary to raise the level of quality across the construction industry in India.34 Together with the state governments, the CIDC has taken up initiatives to promote and practice green construction. In this regard, a ‘green building’ is defined by the Indian Green Building Council as one which utilises less water, optimises energy efficiency, conserves natural resources, generates less waste and provides a healthier space for occupants, as compared to a conventional building. Many builders are also now cognisant of consumers’ growing awareness of the adverse impacts of construction on the environment and have sought to obtain Leadership in Energy and Environmental Design Certifications for their construction projects. The Bureau of Energy Efficiency (‘BEE’), a statutory body under the Ministry of Power is another key body in the area of environmental protection, with its mission being to enhance energy efficiency. The BEE has developed guidelines regarding green buildings for the use of renewable energy, and formulated the Energy Conservation Building Code, 2017 (India) (‘ECBC’),35 which is applicable to large commercial buildings with a connected load of 100kW and above, or

32 http://moef.gov.in/wp-content/uploads/2018/07/SO1533E-14092006_0.pdf. Under the Environment (Protection) Act, 1991 (India) s 3, the central government has powers to take any and all such measures as it deems necessary or expedient for the purpose of protecting and improving the quality of the environment. The central government may issue such binding guidelines as it may deem fit. 33 National Accreditation Board for Education and Training, Quality Council of India, Scheme for Accreditation of Qualified Building Environment Auditors (QBEAs) (Report, April 2017) . 34 Construction Industry Development Council . 35 .

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120kVA and above. The ECBC lays down parameters for builders, designers and architects to integrate renewable energy sources in building designs. The ECBC aims to optimise energy savings whilst maintaining comfort levels for occupants, preferring life cycle cost effectiveness to achieve energy neutrality in commercial buildings.

2.5. Quality Assurance 2.5.1.

2.5.2.

2.5.3.

2.5.4.

Quality assurance in the construction industry in India has been lacking. The CIDC has adopted skills improvement programs to enhance the knowledge and expertise of industry participants and members. The use of ready-mix concrete and prefabrication techniques have significantly improved quality standards. The Bureau of Indian Standards (‘BIS’) has further begun formulating performance standards intended to overhaul the existing prescriptive industry standards. The BIS is the apex statutory organisation responsible for laying down standards and ensuring compliance with these standards, although it does not have the authority to enforce the same.36 The standards are recommendatory in nature, which precludes strict adherence by stakeholders. In 2016, the Bureau of Indian Standards Act, 1986 (India) was passed, empowering the government to mandate that goods or articles, processes, systems or services of certain industries must bear a ‘standard mark’ under a licence or certificate of conformity. This can be necessitated on the grounds of public interest or for the protection of human, animal or plant health, safety of the environment, prevention of unfair trade practices, or national security.37 It also permits the BIS to recall goods and articles already on the market if they do not conform to the standards.38 In addition to domestic standards the ISO 9000 series certification, a set of international standards on quality management and assurance,39 has also been accorded a significant degree of importance in the industry.

36 While the standards laid down by the BIS may not be mandatory, the government enforces mandatory certification on various occasions through quality control orders, for public health and safety: Department of Commerce, Ministry of Commerce and Industry, Government of India, ‘Bureau of Indian Standards (BIS)’, Indian Standards Portal (Web Page) . 37 BIS Act s 16 . 38 BIS Act s 18. 39 ‘ISO 9000 Family — Quality Management’, International Organization for Standardization .

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2.6. Construction Contracting Dynamics 2.6.1.

Construction contracts typically involve several parties such as contractors, subcontractors, suppliers, architects and engineers. A single construction project comprises several contractual relationships to be maintained at multiple stages, which entails entering several contracts. The form of the contract will typically be influenced by the bargaining power of each party. As one party’s bargaining power increases, the other party’s ability to influence negotiations will likely be limited. In such cases, the principle of contra proferentum plays an important role in the event of a dispute. It also offers protection to parties not involved in the drafting of the contract.

3. Legal Underpinnings of Contracts 3.1. Overview 3.1.1.

The law of contract in India is governed by the Indian Contract Act, 1872 (‘ICA’). The ICA dictates the general principles of contract law applicable in India and is based on the principles of English common law. Even though the ICA is based on common law, a substantial part of it is codified. While formulating contracts pertaining to sale and purchase of goods, the provisions of the Sale of Goods Act, 1930 (‘SGA’) are taken into consideration. Matters pertaining to taxation, restrictive clauses, applicable law, jurisdiction etc, are given special attention to avoid conflicts. Most provisions of the ICA and SGA can be contracted out. The Supreme Court has held that it is an established principle of contract construction that where the terms sought to be enforced by one party are ambiguous, an interpretation against that party is to be preferred (i.e. verba chartarum fortius accipiuntur contra proferentem).40 As regards construction contracts, this principle has been followed by the High Court of Delhi in determining the validity of an arbitral award.41  

3.2. Freedom of Contract 3.2.1.

There is no specific legislation dealing exclusively with construction contracts. Rather, the ICA applies equally to construction contracts, as with any other type of contract.

40 Bank of India v K Mohan Das (2009) 5 SCC 313. 41 Delhi Metro Rail Co Ltd (DMRC) v Voestalpine Schine (2018) 250 DLT 239.

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The ICA recognises the parties’ freedom to contract. However, the freedom envisaged is not absolute and is limited by certain provisions of the ICA. As per the ICA, the essential elements of a valid contract are as follows: (a) Free consent of parties to enter into the contract; (b) Lawful consideration; (c) Lawful object; and (d) Competency of parties to contract.

Pacta sunt servanda 3.2.3. The maxim ‘pacta sunt servanda’ is a principle of international contract law relating to private contracts. It states that the contractual terms lay down the understanding between the parties. Non-fulfilment of the parties’ respective obligations is a breach of the contract. The ICA is guided by the same principle, entitling the party who suffers from the breach of contract to receive, from the party who has committed the breach, compensation for any loss or damage caused to them. 3.2.4. In the case of Central Inland Water Transport Co Ltd v Brojo Nath Ganguly,42 the Supreme Court interpreted the maxim as meaning ‘contracts are to be kept’. The principle underlying the maxim has been widely applied by various courts in India.

3.3. Legal Framework 3.3.1.

3.3.2.

In India, there is no national framework exclusively applicable to the construction industry. Indeed, the National Building Code of India, 2005 (India) and common general conditions of contract are not mandatorily applicable to construction contracts. The Indian construction sector has grown manifold in recent years, yet the sector remains largely unorganised. The minimal statutory regulation of industry practice is vastly detrimental to the sector at a macro level. In this regard, the Planning Commission (now Niti Aayog) has amended and enacted the National Building Code of India, 2016 (India), providing new and improved guidelines for regulating building construction activities across the country. It serves as a model code for adoption by all agencies involved in construction works. It also introduces detailed provisions for streamlining and expediting the various approvals required and has also provided for computerising approval processes. These measures have been taken with a view to improving India’s EoDB ranking in the built environment sector.

42 1986 AIR SC 1571.

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Judges contribute to the development of the common law through the interpretation of ambiguous statutory provisions, as well as by providing substance to the law where there is a gap in the statute as laid down by the legislature. In this respect, it may be said that judges lay down the law of the land. In India, the Supreme Court and High Courts are courts of record and therefore the judgments passed by these courts form legal precedents, which are binding on subordinate courts. The doctrine of ‘stare decisis et non quieta movere’, which translates as ‘to stand by decisions and to not disturb settled matters’, is applicable to the decisions of the Supreme Court as per the Constitution, thereby making its decisions binding on all Indian courts. These precedents are thereafter applied by the courts in deciding cases. In the event contradictory opinions are expressed by two or more High Courts or other subordinate courts, the conflict is often resolved by the Supreme Court. Occasionally, judges are required to decide on a novel issue in relation to which no relevant precedent exists. In such cases, judges must exercise discretion in applying the law to the facts at hand. The Supreme Court in C Ravichandran Iyer v Justice AM Bhattacharjee,43 stated: [T]he role of the judge is not merely to interpret the law but also to lay down new norms of law and to mould the law to suit the changing social and economic scenario to make the ideals enshrined in the Constitution, meaningful and a reality. The society demands active judicial roles which formerly were considered exceptional but now a routine.

3.3.5.

As regards construction contracts, judges are often required to interpret contractual provisions that are not only commercial, but also of a technical nature.

3.4. Public Policy 3.4.1.

The concept of ‘public policy’ has not been defined under any Indian statute. However, the concept has been greatly discussed and analysed on account of the Arbitration and Conciliation Act 1996 (India) (‘Arbitration Act’) wherein it is stated that the conflict with the public policy is one of the grounds for setting aside an arbitral award.44 Public policy is not the policy of a particular government; it connotes matters that concern the public good or the public interest. The doctrine of public policy has been described by the Supreme

43 (1995) 5 SCC 457. 44 Arbitration Act s 34(2)(b)(ii) .

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Court as being ‘an illusive concept’, an ‘untrustworthy guide’, and of ‘variable quality’ and even as an ‘unruly horse’.45 In the case of Renusagar Power Co Ltd v General Electric Co,46 while dealing with s 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (India) (now repealed and covered by Part 2 of the Arbitration Act), the Supreme Court held that the enforcement of a foreign arbitral award could be refused on the ground that it is contrary to public policy if the enforcement would be contrary to the fundamental policy of Indian law, the interests of India, or justice or morality. In the context of a domestic award, as distinguished from a foreign award, the expression ‘public policy’ has a wider meaning. In the interpretation of the doctrine of public policy, courts may intervene and permit recourse against an arbitral award based on an irregularity which the court considers to have caused or will cause substantial injustice to the applicant. Extreme cases where the arbitral tribunal has erred in its conduct of the arbitration to such an extent that justice requires for it to be rectified, may justifiably fall within the ambit of the doctrine of public policy and enable courts to intervene under s 34 of the Arbitration Act and permit recourse against the arbitral award. The Supreme Court in Oil & Natural Gas Co Ltd v SAW Pipes Ltd,47 widening the scope of the principles defined in Renusagar Power Co Ltd v General Electric Company, held that: [A]n arbitral award could be set aside if it is against the public policy of India, that is to say, if it is contrary to: (a) Fundamental policy of Indian law, (b) The interest of India, (c) Justice or morality, or (d) If it is patently illegal.48

3.4.5.

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45 46 47 48 49 50

The judgment led to the further expansion of the meaning of the expression ‘public policy’ as provided under s 34 of the Arbitration Act, which lead to several petitions challenging arbitral awards being filed in the courts on the ground of ‘patent illegality’. Providing clarity in the aftermath of the uncertainty created by Oil & Natural Gas Co Ltd,49 the Supreme Court, in Associate Builders v Delhi Development Authority50 held:

Gherulal Parekh v Mahadeodas Maiya (1959) AIR SC 781. (1994) AIR SC 860. (2003) AIR SC 2629. Oil & Natural Gas Co Ltd v SAW Pipes Ltd (2003) AIR SC 2629 (emphasis added). Oil & Natural Gas Co Ltd v SAW Pipes Ltd (2003) AIR SC 2629. (2015) 3 SCC 49.

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(a)

3.4.7.

3.4.8.

Where a judgment of a superior court is disregarded by an inferior court it would violate the ‘fundamental policy of Indian law’, (b) The term ‘the interest of India’ concerns itself with India as a member of the world community in its relations with foreign powers, (c) The terms ‘justice’ and ‘morality’ in the context of setting aside an arbitral award under the public policy ground can only mean that an award shocks the conscience of the court, and (d) An award would be ‘patently illegal’ if: (i) It contravenes the substantive law of India; the illegality must be so significant that it goes to the root of the matter and it cannot be of a trivial nature, (ii) It contravenes the Arbitration Act itself, or (iii) The tribunal fails to decide the dispute in accordance with the terms of the contract and interprets the contract in a manner that no fair-minded or reasonable person would. Section 34(2)(b)(ii) of the Arbitration Act states that a domestic arbitral award may be set aside if the court finds that it is in conflict with the public policy of India, for example, if the making of the award was induced or effected by fraud or corruption.51 Section 48 of the Arbitration Act provides that a foreign arbitral award may similarly be set side where it is contrary to public policy. In Shri Lal Mahal Ltd v Progetto Grano Spa,52 the Supreme Court distinguished between the grounds for setting aside an award that is opposed to public policy under s 48(2)(b) and 34(2)(b)(ii) of the Arbitration Act. It was held that the narrower grounds defined under the Renusagar Power Co Ltd v General Electric Company,53 are applicable in cases involving the setting aside of foreign awards under s 48, whereas the broader grounds laid down in Oil & Natural Gas Co Ltd v SAW Pipes Ltd,54 are applicable for setting aside domestic awards under s 34.

3.5. Statute Law Arbitration 3.5.1. In India, arbitration is governed by the Arbitration Act. The Arbitration Act is based on the UNCITRAL Model Law on International Commercial Arbitration 1985 and the UNCITRAL Arbitration Rules 1976. It is a composite piece of legislation which provides for both domestic arbitration and foreign seated com51 52 53 54

. (2014) 2 SCC 433. (1994) AIR SC 860. (2003) AIR SC 2629.

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mercial arbitration. India is also a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Arbitration clauses can commonly be found in construction contracts. Awards passed by arbitral tribunals are often challenged in the case of an arbitration other than international commercial arbitration before the principal Civil Court of original jurisdiction in a district which includes the High Court in exercise of its ordinary original civil jurisdiction and in the case of international commercial arbitration, the High Court in exercise of its ordinary original civil jurisdiction. Arbitration is the most popular form of alternative dispute resolution (‘ADR’) arrangement incorporated in construction contracts and requires the consent and mutual agreement of the parties. Such arbitration clauses will typically provide for the manner of appointment of arbitrators, the number of arbitrators and the governing curial and procedural law of the contract. For transnational EPC contracts, explicit mention of the governing law of the agreement as well as the seat (and venue, if different) of the arbitration is of utmost importance to ensure that the arbitration clause retains its intended effect as the primary means of dispute settlement. Arbitrations under EPC contracts can be institutional arbitrations or ad hoc arbitrations. The increasing trend is to provide for institutional arbitration. Arbitral institutions increasingly preferred by contracting parties include the London Council of International Arbitration (‘LCIA’), International Court of Arbitration under the International Chamber of Commerce and the Singapore International Arbitration Council (‘SIAC’). Also, the Mumbai Centre for International Arbitration (“MCIA”) was established in 2016 and is a first-of-its-kind arbitral institution in India, established by a joint initiative between the government of Maharashtra and the domestic and international business and legal communities.55 In 2006 the SIAC, in cooperation with the CIDC, established an arbitration centre in New Delhi called the ‘Construction Industry Arbitration Council’ (‘CIAC’). The CIAC provides facilities for international as well as domestic commercial arbitrations and hosts international conferences on ADR systems in the context of commercial contracts. If an arbitration institute is made the governing body, then the rules and procedures governing the arbitral proceedings will be those of the institution. In the case of ad hoc arbitrations, specifying the governing procedural law is of paramount importance. Where the arbitration clause is silent on the applicable procedural laws, the laws of the seat of arbitration are deemed to apply, as per customary practice, and will normally determine the procedure adopted by the tribunal as well as the degree of involvement or intervention, as appropriate,

55 ‘About’, Mumbai Centre for International Arbitration (Web Page) .

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that courts exercising jurisdiction over the seat will have. However, although this is common practice, it is not mandatory to adopt the law of the seat of the arbitral proceedings as the governing law. The Arbitration and Conciliation (Amendment) Act, 2015 (India) resulted in several changes being made to the Arbitration Act. These changes may be explained as follows: (a) A clear distinction was drawn with regards to the definition of ‘court’ in the context of a domestic arbitration, as opposed to an international commercial arbitration. In particular, only a High Court of competent jurisdiction will have authority in cases of international commercial arbitration; (b) When an order for interim protection is passed by the court before commencement of arbitral proceedings, the time-period for commencement of those proceedings is 90 days from the date of the order. This is to encourage parties to resolve the dispute on its merits through arbitration; (c) Declarations on the part of the arbitrator regarding his independence and impartiality have been made more onerous. A detailed schedule was added to the Act, listing grounds on which doubts as to the impartiality and independence of the arbitrator may be justifiably raised; (d) If parties request the Supreme Court, High Court, or any person or institution designated by such court to appoint an arbitrator, such appointment must be done within 60 days from the date of service of notice on the opposing party; (e) Following the amendment, interim orders of the arbitral tribunal are enforceable as though they were a court order; and (f) The time-period within which the arbitral tribunal must pass the award must be 12 months from the date the matter was referred to the tribunal. This period can be extended by a period not longer than six months. If the award is not made within the extended period of 18 months, then the mandate of the arbitrator will terminate unless the court further extends the period. The Arbitration and Conciliation (Amendment) Act, 2019 (India) came into force from 9 August 2019. The Act provides for the creation of an independent body called the ‘Arbitration Council of India’, which will establish standards, grade arbitral institutions, accredit arbitrators, and thereby encourage the use of institutional arbitration. In 2016, the state government of Maharashtra set up the MCIA in the commercial hub of Mumbai. This was a major step towards making the city an International Financial Services Centre56 and providing a platform

56 The International Financial Services Centre (‘IFSC’) is a centre that is set up to undertake and cater only to those transactions that are carried out outside India by overseas financial institutions and overseas branches or subsidiaries of Indian financial institutions. The Reserve Bank of India treats an IFSC unit as non-resident. It is akin to the Dubai International Finance Centre.

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for Indian businesses to negotiate and resolve commercial disputes via arbitration. The MCIA rules were formulated with the help of eminent arbitration specialists from India and around the world. The key provisions in the rules include: (a) Clear time constraints for the arbitral tribunal to deliver its final award; (b) Accelerated timelines for low-value, simple disputes; (c) Provision for an emergency arbitrator to decide upon urgent interim relief applications before the main tribunal is appointed, as consistent with the rules of the LCIA and SIAC; (d) The consolidation of two or more arbitrations pending under the MCIA Rules if the parties agree and if all claims made in the arbitrations are made under the same arbitration, as consistent with the rules of the LCIA and the SIAC; and (e) Provision for parties to apply for an expedited arbitration procedure, whereby the award shall then be passed within six months from the date on which the tribunal is constituted.57 Conciliation or Mediation 3.5.8. ‘Conciliation’ is not defined in the Arbitration Act. Essentially, this method provides the disputing parties with an opportunity to explore options offered by an objective third party, i.e. the conciliator or mediator, to assess if settlement is possible. As with arbitration, the Arbitration Act also covers both domestic and international disputes in the context of conciliation.58 International conciliation is confined only to disputes of ‘commercial’ nature, with the definition of international commercial conciliation similar to that of international commercial arbitration.59 3.5.9. A 1999 amendment to the Code of Civil Procedure, 1908 (India) (‘CPC’), specifically the insertion of s 89, empowered courts to refer pending cases to arbitration, conciliation, judicial settlement or mediation, ‘where it appears to the court that there exist elements of settlement which may be acceptable to the parties’. The purpose of this is to facilitate early and amicable settlement between the parties. In contrast, the Arbitration Act does not contain any provi 

57 Mumbai Centre for International Arbitration, Arbitration Rules of the Mumbai Centre for International Arbitration (2nd ed, 15 January 2017) cl 12.3(d) . 58 V Nageswara Rao, ‘Conciliation Proceedings under the Indian Arbitration Conciliation Act of 1996 and CPC — An Overview’ (Conference Paper, International Conference on ADR and Case Management, 3–4 May 2003) ; Law Commission of India, Amendments to the Arbitration and Conciliation Act 1996 (Report No 246, August 2014) . 59 Arbitration Act cl 1 .

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sion to similar effect in the absence of an agreement between the parties to that effect. 3.5.10. Section 89 of the CPC gives the court jurisdiction to formulate the terms of a possible settlement and, upon receiving the observations from the parties, reformulate those terms, as well as refer same for arbitration, conciliation, judicial settlement, or mediation. 3.5.11. Despite s 89 of the CPC, the courts have no power, authority or jurisdiction to refer unwilling parties to arbitration if there is no arbitration agreement. In Kerala State Electricity Board v Kurien E Kalathil,60 the Supreme Court held that in the absence of an arbitration agreement, the court could only refer the parties to arbitration with their written consent. A similar view was taken by the Supreme Court in M/S Afcons Infrastructure Ltd & v M/S Cherian Varkey Construction,61 where it was held that if there is no agreement providing for reference of disputes to arbitration, the court cannot exercise the power under s 89 to do same. However, the existence of an arbitration agreement is not a condition precedent for exercising powers under s 89 of the CPC regarding the four ADR processes. Lok Adalats 3.5.12. The Legal Services Authorities Act, 1987 (India) (‘LSA Act’) gave statutory identity to the system of ‘Lok Adalats’, literally translating to the ‘people’s court’. It is an ADR mechanism that encourages out-of-court settlements in India. Section 21 of the LSA Act provides that every award of a Lok Adalat shall be deemed to be a decree of a civil court. It further provides that every award made by a Lok Adalat shall be final and binding on all the parties to the dispute and no appeal against such award may be made to any court. 3.5.13. Per s 22 of the LSA Act, the Lok Adalat shall have certain powers of a civil court under the CPC while trying a case. All proceedings before a Lok Adalat shall be deemed to be judicial proceedings. Following an amendment in 2002, a chapter concerning ‘pre-litigation conciliation and settlement’ was introduced into the LSA Act, under which a Permanent Lok Adalat, having a pecuniary jurisdiction of up to INR10 million, was established. The Permanent Lok Adalat facilitates the compulsory pre-litigation conciliation and settlement of cases relating to public utility services such as transport, postal, telegraph, etc. As with general Lok Adalats, the award of the Permanent Lok Adalat is binding on the parties.62

60 Kerala State Electricity Board v Kurien E Kalathil AIR 2000 SC 2573. 61 M/S Afcons Infrastructure Ltd v M/S Cherian Varkey Construction 2010 (6) ALD 155 (SC). 62 ‘Permanent Lok Adalat’, National Legal Services Authority (Web Page, 2016) .

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Dispute Review Boards or Dispute Adjudication Boards 3.5.14. Dispute Review Boards or Dispute Adjudication Boards (the ‘Board’) are very effective in the context of construction contracts.63 Typically, the traditional ADR methods only come into play when the project is complete and the parties have already become adversaries. In contrast, the Board provides a ‘jobsite’ dispute adjudication process, whereby the Board visits the project site regularly throughout construction and is kept advised of the contract as it progresses. The Board typically seeks to encourage the resolution and settlement of a dispute as soon as it arises before any adversarial feeling between the parties grow. 3.5.15. The Board generally consists of three members. Each party will individually appoint one member. The third member (the chairman) is selected by the two members and approved by the parties. All members are expected to have: (a) Experience with the type of construction; (b) Familiarity with interpreting contractual documents; (c) Adequate knowledge of the construction industry; and (d) Independence (i.e., they must not have any affiliation with the parties).64 3.5.16. For large projects necessitating significant multi-disciplinary technical knowledge and expertise, the parties may empanel more than one Board; one for each area of specialisation.65 3.5.17. After recording the parties’ submissions, the Board may recommend a settlement. If the settlement proposal is not acceptable to both parties, they may request the Board make further efforts, or pursue litigation or arbitration, as the case may be. Although increasing in popularity, the use of the Board as a forum for construction contract dispute settlement is not yet the norm. 3.5.18. In India, the system of ‘Dispute Review Boards’ was first introduced in 1994 by the World Bank in the Standard Bidding Document – Procurement of Works, whereby the use of a three member Board was mandatory for projects financed by the World Bank with an estimated cost of US$50 million and above.66 3.5.19. In 2016, the Indian Council of Arbitration, being an allied body of the Federation of Indian Chambers of Commerce and Industry (‘FICCI’), in partnership  

63 PM Bakshi, ‘Construction Contracts: Some Legal Aspects’ (2000) 37(3) ICA Arbitration Quarterly . 64 PM Bakshi, ‘Construction Contracts: Some Legal Aspects’ (2000) 37(3) ICA Arbitration Quarterly. 65 Indian Council for Arbitration, Improving the Functioning of Dispute Review Boards (DRB) in India: Standard Operating Procedures for Dispute Boards in India (World Bank, April 2016) . 66 Indian Council for Arbitration, Improving the Functioning of Dispute Review Boards (DRB) in India: Standard Operating Procedures for Dispute Boards in India (World Bank, April 2016).

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with the World Bank, laid down a Standard Operating Procedure for Institutional Dispute Board Services in India. 3.5.20. The National Highways Authority of India (‘NHAI’) has created a dispute resolution board under which disputes concerning EPC contracts for the construction of roads may be resolved by arbitration or mediation. The NHAI enters into various contracts with contractors and consultants to implement highway projects, in relation to which disputes frequently arise. In 2017, the NHAI had claims of almost INR570 million with regard to contractual disputes before the Indian courts, and claims of INR380 billion in relation to such disputes before various arbitral tribunals.67 To address this issue, the NHAI introduced a ‘Conciliation & Settlement Mechanism for Contractual Disputes’ clause into its contracts, to facilitate the early resolution of claims, preferably through out-of-court settlements.68 Consumer Protection 3.5.21. A consumer is a user of goods or services. A commercial organisation can also be a consumer. The test is whether the goods or services acquired are for the purchaser’s own consumption or for commercial purposes such as resale. 3.5.22. Any person paying consideration in exchange for goods or services is entitled to expect that the goods or services be of the nature and quality promised to him by the seller. As the common law of contract is dominated by the principle of freedom of contract, consumers can often only be protected by means of legally imposed obligations, such as statutory controls on exemption clauses in contracts for the supply of goods and services. 3.5.23. In India, there are various earlier pieces of legislation that protect consumer interests to a certain extent, reflecting the need to recognise and enforce consumer rights. These include the ICA, the SGA, the Agricultural Produce (Grading and Marketing) Act, 1937 (India), the Indian Standards Institution (Certification Marks) Act, 1952 (India), the Prevention of Food Adulteration Act, 1954 (India), the Standards of Weights and Measures Act, 1976 (India), and the Trade and Merchandise Marks Act, 1958 (India). However, the need for simpler and quicker access to redress for consumer grievances lead to the enactment of the Consumer Protection Act, 1986 (India).

67 National Highways Authority of India (Web Page, 2019) ; NHAI/ Policy Guidelines/ Conciliation & Settlement of Contractual Disputes/ 2017 No. 2.1.22/2017 (2 June 2017). – . 68 National Highways Authority of India, Conciliation and Settlement Mechanism for Contractual Disputes (2 June 2017). .

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3.5.24. In this regard, Consumer Protection Act 2019 (India), which came into force on 20 July 2020 has replaced the Consumer Protection Act, 1986 (India) by broadening the scope of the Act and imposing stricter penalties for misleading advertisements, adulteration of food and e-commerce activities. The Act envisages the creation of a Central Consumer Protection Authority, which will probe into instances of false or misleading advertisements and unfair trade practices. It seeks to enhance the pecuniary jurisdiction of the district and state Consumer Disputes Redress Commissions to INR10 million and INR100 million respectively. The Act also mandates that redress for a dispute has mediation requirements attached to them, to facilitate dispute resolution where the possibility of settlement exists. Further, under the new Act, ‘celebrities’ can be held liable for their endorsements. 3.5.25. If a consumer is not satisfied by the decision of the District Consumer Dispute Redress Forum, an appeal may be made to the State Consumer Disputes Redress Commission (‘SCDRC’). Against the order of the SCDRC, a consumer can appeal to the National Consumer Disputes Redress Commission (‘NCDRC’). The NCDRC has pecuniary jurisdiction over consumer disputes of INR100 million or more. In the context of the construction industry, the NCDRC has held builders liable on the grounds of having an unsatisfactory explanation for the delay in delivery of possession, notwithstanding a clause limiting the builder’s liability in such instances in an agreement between the parties.69 In a recent case, the Supreme Court held that the provisions under the Consumer Protection Act, 1986 prescribing limitation periods within which a consumer must file a complaint could not be strictly construed if the service provider has been instrumental in causing the delay.70 3.5.26. The growth of consumer protection has led to the increasing inclusion of exemption clauses in commercial contracts, including those relating to construction. An exemption clause can be described as a clause in a contract or a term in a notice, which appears to exclude or restrict a liability or a legal duty that would otherwise arise. Exemption clauses can be broken down into three main categories: (a) Exclusion clauses which exclude liability completely; (b) Limitation clauses which restrict liability in some way, such as the quantum of damages payable; and (c) Indemnity clauses, which pass the risk of legal action on to the other party. 3.5.27. According to the doctrine of ‘fundamental breach’, if there is a prominent breach in the performance of the contract, the defence of an exemption or ex-

69 Lalit Kumar Gupta & Ajay Kumar Gupta v DLF Universal Ltd (2003) 2 CPC 283, [13]. 70 National Insurance Co Ltd v Hindustan Safety Glass Works (2017) 5 SCC 776.

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clusionary clause provided in the contract would not be available to the supplier. This principle has proven useful in cases involving deficiency of service under the Consumer Protection Act, 1986 (India). In Punjab Water Supply Board v Udaipur Cements Works,71 where the contracted goods were not supplied and it was held by the Supreme Court that this failure to supply constituted a breach of contract and not a deficiency of service. The matter was then remanded back to the NCDRC for adjudication accordingly, wherein it was held by the NCDRC that there could be deficiency of service even in a case of breach of contract. Thus, principles of contract were interpreted in favour of the consumer and in agreement with consumer laws. 3.5.28. The Commercial Courts, Commercial Division and Commercial Division of High Courts (Amendment) Bill, 2018 (India) came into effect from 3 May 2018. It has reduced the specified value of a commercial dispute as provided in the Commercial Courts, Commercial Division and Commercial Division of High Courts Act 2015 (India), from INR10 million to INR300,000 in order to facilitate the efficient resolution of commercial disputes with a lesser value.72 This amendment is in line with the goal of improving India’s EoDB ranking as the World Bank takes into account the enforceability of contracts valued at US$5,000 or higher.73 Proportionate Liability 3.5.29. The concept of tortious liability holds a prominent place in Indian law. Archetypal construction defect cases are based on the contracts between the property owner and developer, and contracts between the contractor and subcontractors, including suppliers, architects and engineers involved in the construction process. These parties owe a general duty to exercise a reasonable degree of care, skill and knowledge that is ordinarily employed by such building professionals. This duty of care is owed to all who may foreseeably be injured by the construction defect, including subsequent purchasers. Developers and general contractors are responsible for the negligence of the subcontractors they engage. 3.5.30. The complainant may make an allegation of negligence, breach of contract or warranty, strict liability and in some instances, fraud or negligent misrepre-

71 (1996) AIR SC 537. 72 Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018 S. 2 (1) (i) . 73 World Bank, ‘Enforcing Contracts Methodology’, Doing Business (Web Page, 2019) .  

 

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sentation against the defendant. Ultimately, the aim is to ensure that the wrongdoer remedies the situation. Bribery and Corruption 3.5.31. Anti-bribery legislation in India has gained prominence in recent years due to the increased awareness of public money being misappropriated for ulterior motives, such as political gains. In the construction industry in particular, substantial sums of ‘black money’ exist in circulation for the purpose of fasttracking building and construction clearances.74 There have also been reports of major landowners and developers engaging in bribery to procure additional Floor Space Index (‘FSI’) for construction projects.75 3.5.32. In order to curb the free flow of black money in India, the government announced demonetisation of INR500 and INR1,000 currency notes from November 2016.76 This measure was introduced as a restraint on not only black money, but also counterfeit and illegal currency notes. In order to mitigate corruption in the country, Parliament passed the Lokpal and Lokayuktas Act, 2013 (India), which provides statutory authority for the establishment of an anti-corruption Lokpal (Ombudsman) that aims to promote accountability of public officials, including the Prime Minister. 3.5.33. The Right to Information Act, 2005 (India) (‘RTI Act’) was enacted ‘to provide for setting out the practical regime of right to information for citizens’.77 Under the RTI Act, any citizen may request information from a ‘public authority’ (defined as a body of government or ‘instrumentality of State’),78 who is required to adhere to the request within a period not exceeding 30 days. The RTI Act also requires every public authority to computerise their records for open dissemination and to proactively publish certain categories of information to minimise citizens’ recourse to formal requests for information. The RTI Act has been effectively implemented to expose instances of abuse of power or process and corruption, including that in relation to government and construction contracts.

74 Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, Government of India, Black Money (White Paper, May 2012) . 75 Reuben Abraham, Kshitij Batra and Sahil Gandhi, ‘Dismantling the Permit Raj in Housing’, Livemint (online, 28  March 2017) . 76 Department of Economic Affairs, Ministry of Finance, Notification (F.No. 10/03/2016-Cy.I, 8 November 2016) . 77 RTI Act preamble . 78 RTI Act s 6.

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3.5.34. The Prevention of Corruption Act, 1988 (India) is a federal law enacted to combat corruption in government agencies and public sector businesses in India. In Central Bureau of Investigation, Bank Securities and Fraud Cell v Ramesh Gelli,79 the Supreme Court expanded the definition of ‘public servant’ under the Prevention of Corruption Act, 1988 (India) to include all officials of private banks. The court’s broad interpretation demonstrated a clear intention to widen the scope of vigilance against corruption. 3.5.35. The Prevention of Money Laundering Act, 2002 (India) seeks to prevent money laundering and provide for the confiscation of property derived from such misconduct. 3.5.36. The Central Vigilance Commission (‘CVC’) was established by the government in February 1964 on the recommendations of the Committee on Prevention of Corruption to advise and guide government agencies in the field of vigilance. An ordinance promulgated by the President in 1988 lead to the CVC being made a multi-member commission with ‘statutory status’.80 Thereafter, in September 2003, the Central Vigilance Commission Act, 2003 (India) was passed by the government, consolidating the powers, functions and role of the CVC. Under this Act, the CVC is empowered to enquire into offences alleged to have been committed under the Prevention of Corruption Act, 1988 (India) by certain categories of public servants of the central government, corporations established by or under any central government companies, and societies and local authorities owned or controlled by the central government. 3.5.37. The CVC has also launched a citizen-centric anti-corruption scheme entitled Vigilance Eye (‘VIGEYE’).81 The objective of VIGEYE is to provide citizens with an accessible means of expressing grievances and complaints to the CVC, such as via mobile phones and the internet, as well as to enlist the general public’s help in fighting the menace of corruption. 3.5.38. The Whistle Blowers Protection Act, 2014 (India) provides a mechanism to investigate alleged corruption and misuse of power by public servants while protecting those who expose alleged wrongdoing in government bodies, projects and offices. The wrongdoing might take the form of fraud, corruption or mismanagement. Although the Act received presidential assent on 9 May 2014, it has not yet come into force. The government is now seeking to dilute the provisions of the same by an Amending Bill put forward in 2015.82 The Bill

79 (2016) AIR SC 1063. 80 Central Vigilance Commission, Government of India, ‘Special Chapter on Vigilance Management in Public Sector Insurance Companies vis-à-vis the Role and functions of the CVC’ (File No. 98/VGL/62, 15 October 2001) 1–2 . 81 Central Vigilance Commission (Web Page, 2010) . 82 .

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seeks to prohibit disclosures that prejudicially affect the sovereignty and integrity of India, the security, strategic, scientific or economic interests of the State, or friendly relations with foreign States, or lead to the incitement of an offence, etc.83 These proposed amendments have been modelled on the provisions of s 8(1) of the RTI Act.84 Agent’s Lien 3.5.39. Section 221 of the ICA deals with an agent’s lien on the principal’s property. It provides that in the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of same has been paid or accounted for to him. That is, a legal lien merely confers upon the agent, being the holder of the articles in respect of which the lien is claimed, a passive right to detain said articles until the debt is paid. Such a lien cannot be enforced by sale of the goods.85

3.6. Implied Contract Terms 3.6.1.

3.6.2.

Under the ICA, acceptance of certain terms may be implied into a contract where it is indicated otherwise than by words.86 Parties may fail to expressly include certain terms for various reasons. For instance, they may consider the terms too obvious to be explicitly mentioned or they may have understood their respective obligations from facts or circumstances that would indicate the intention of the parties, in accordance with standard industry practice or already established practices in their mutual dealings. In the event of a dispute regarding contractual interpretation, the court will be required to consider both express and implied contractual terms.87 A term will only be implied if, in the opinion of the court, it is necessary to give business efficacy to the contract, such that both parties must have intended it to be a term of the contract.88 Therefore, if the contract as it exists is effective and workable, no term will be implied.89 The interpretation of contractual

83 . 84 . 85 Kavita Trehan v Balsara Hygiene Products Ltd (1992) AIR Del 103. 86 ICA s 9 http://legislative.gov.in/sites/default/files/A1872-09.pdf>. 87 Khardah Co Ltd v Raymon & Co India Private Ltd (1962) AIR SC 1810. 88 Deviprasad Khandelwal & Sons v Union of India (1969) AIR Bom 163. 89 Navnitlal & Co v Kishinchand & Co (1956) AIR Bom 151.

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language will also be subject to trade usage. In this regard, terms may be implied into contracts on the basis of accepted industry practice, as the parties are presumed to have contracted in accordance to customs or usages commonly known in their locality or trade. Terms may be also implied by statute into certain classes or types of contracts. Under the Sale of Goods Act, 1930 (India) there are implied conditions as to the title of the seller,90 as well as the fitness and quality of the goods, unless the circumstances of the contract are such as to show a different intention.91 The implication of terms depend on the intention of the parties to be gathered from words used in the agreement and surrounding circumstances.92 The court may consider, for example, the parties’ relationship, their previous course of dealings and the nature of their contract.93 Thus, a term will not be implied where the implied term would have the effect of contradicting or overriding an express term, or where the matter is otherwise subject to an express term, unless the agreement provides otherwise.94 In Nabha Power Ltd v Punjab State Power Co Ltd,95 the Supreme Court held that: The explicit terms of a contract are always the final word with regard to the intention of the parties. The multi-clause contract inter se the parties has, thus, to be understood and interpreted in a manner that any view, on a particular clause of the contract, should not do violence to another part of the contract.96

3.6.5. 3.6.6.

There cannot however, be an implied contract with the government, as this would contravene the constitutional requirements pertaining to formality.97 Often, insufficient thought is given to implied terms when parties enter into construction contracts. Substantial time and effort are dedicated to ensuring that all the necessary express terms are incorporated, yet parties often neglect

90 Sale of Goods Act, 1930 s 14 . 91 Sale of Goods Act, 193 s 16 . 92 Manubhai Prabhudas Patel v Jayantilal Vadilal Shah 2012 GLH (1) 565. 93 Laxmi Ginning and Oil Mills v Amrit Banaspati Co Ltd AIR 1962 P&H 56. 94 Nabha Power Ltd v Punjab State Power Co Ltd (2017) 12 SCALE 241. 95 Nabha Power Ltd v Punjab State Power Co Ltd (2017) 12 SCALE 241. 96 2017 6 AWC 5485 SC [49]. 97 Constitution Art 299(1).  

 

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the fact that many terms may be implied in any case, some of which cannot be contracted out of. Several terms find common usage in the formation of construction contracts. These terms include: (a) ‘Fixed price’, whereby the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation; (b) ‘Cost plus’, whereby the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee; (c) ‘Lump sum’, whereby the service provider agrees to provide a defined service for a specific period and the client agrees to pay a fixed amount of money for the service; and (d) ‘Unit price’, whereby the project is divided into units and the charge for each unit is defined. For further information on the principles guiding the construction of implied contract terms, please refer to s 3.7.

3.7. Construction of Contract Terms 3.7.1.

There are various principles to consider in the construction of contract terms, as set out further below. (a) Key Rule: the key rule is to interpret the contract so as to determine the parties’ true intention.98 The language actually used in the contract is the basis for identifying such intention. As a norm, words are to be given their ordinary meaning except for technical terms, which are to be interpreted as per their technical meaning.99 (b) Whole contract: in determining the true meaning of the contract, the clauses and terms must be construed harmoniously with each other.100 The court must consider the contract as a whole, bearing in mind the object of the entire contract even where it is only the meaning of a particular clause that is in dispute. If a clause can be given some reasonable meaning, it cannot be regarded as superfluous.101 (c) Contemporaneous contracts: an agreement may be arrived at through several contemporaneous instruments or contracts. All such instruments are to be read together.102

98 Hansalaya Properties and v Dalmia Cement (Bharat) Ltd 2008 (106) DRJ 820. 99 Ganga Saran v Firm Ram Charan Ram Gopal (1952) AIR SC 9. 100 MOH Uduman v MOH Aslum AIR 1991 SC 1020. 101 Bihar State Electricity Board, Patna v Green Rubber Industries AIR 1990 SC 699. 102 S Chattanatha Karyalavar v Central Bank of India (1965) AIR SC 1856.

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(d) (e)

(f)

(g)

(h)

(i) (j)

Incorporation by reference: parties may incorporate terms into a contract by cross-reference.103 Substance over description: the court may refer to, but is not bound by, the descriptions given by the parties to the contract.104 Instead the court, in construing an agreement, is to ascertain the real nature or substance of the transaction.105 Titles or headnotes: where titles or headings are used, the court will consider the operative or substantive part of the agreement. Headings or titles given by the parties, as descriptive elements, cannot affect the interpretation of contractual terms.106 Businesslike construction: commercial contracts are not to be construed pedantically, but rather in a manner that gives the contract business efficacy.107 The Supreme Court has adopted the ‘business efficacy’ test,108 as laid down by the English courts,109 which states that ‘a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended’.110 Implied terms: terms must not be implied where doing so would contradict or override express terms, or where the matter is the subject of an express term.111 If the contract, as it exists, is effective and workable, no term can be implied.112 A term will only be implied if, in the opinion of the court, it is necessary to give efficacy to the contract, such that both parties must have intended it to be a term of the contract.113 Statutorily implied terms: the SGA sets out implied conditions as to the title of the seller, as well as fitness and quality of the goods.114 Construction against grantor: where the impugned contract is of the nature of a grant or other disposition unilaterally prepared by one party,

103 Alimenta SA v National Agricultural Co-operative Marketing Federation of India Ltd (1987) AIR SC 643. 104 Commissioner of Income Tax, Punjab Haryana v Panipal General & Woollen Mills Ltd (1976) AIR SC 640. 105 Commissioner of Income Tax, Punjab Haryana v Panipal General & Woollen Mills Ltd (1976) AIR SC 640. 106 H M Kamaluddin Ansari & Co v Union of India (1984) AIR SC 29. 107 Sundaram Finance Ltd v State of Kerala (1966) AIR SC 1178. 108 Satya Jain (D) Thr LRs v Anis Ahmed Rushdie (D) Tr LRs (2013) AIR SC 434. 109 The Moorcock (1889) 14 PD 64 (Bowen LJ). 110 The Moorcock (1889) 14 PD 64 (Bowen LJ). 111 Nabha Power Ltd v Punjab State Power Co Ltd (2017) 12 SCALE 241. 112 Navnitlal & Co v Kishinchand & Co (1956) AIR Bom 151. 113 Deviprasad Khandelwal & Sons v Union of India (1969) AIR Bom 163. 114 SGA ss 14, 16 .

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then in the event of an ambiguity, it may be construed against the party that prepared it.115 (k) Conduct of parties: the court may take into consideration the parties’ understanding of the contract at the time it was executed or soon afterwards. Subsequent conduct may also be considered if the terms are ambiguous.116 (l) Surrounding circumstances: surrounding circumstances must not be used to interpret the language if the contract is clear and unambiguous. However, in interpreting ambiguous terms, the court may take into consideration all surrounding facts and circumstances,117 including correspondences exchanged.118 The purpose is to arrive at the true intention of the parties, as opposed to what the parties may subsequently contend to be the case.119 (m) Prior negotiations: negotiations between the parties before the contract is executed cannot be relied upon in the event of a dispute arising regarding interpretation or ambiguity.120 (n) Statutory bodies: even where a party to the agreement is a statutory or public body, the contract is still to be construed in accordance with the usual principles enshrined within the ICA.121 (o) Exclusion clauses: exclusion clauses are to be construed strictly so as not to destroy the parties’ true intention as conveyed by the contract.122

3.8. Private and Public Procurement 3.8.1.

Government procurement may be facilitated by entry into a contractual agreement with the union or state government. Such contracts have been accorded constitutional recognition.123 In addition to the requirements of the ICA such as offer, acceptance and consideration, a government contract must also comply with the provisions of Article 299 of the Constitution.124 Further, per Arti-

115 State of Maharashtra v M N Kaul (1967) AIR SC 1634. 116 Abdulla Ahmed v Animendra Kissen Mitter (1950) AIR SC 15. 117 Central Bank of India Ltd v Hartford Fire Insurance Co Ltd (1965) AIR SC 1288. 118 Transmission Corporation of Andhra Pradesh Ltd v GMR Vemagiri Power Generation Ltd (2018) (3) SCALE 47. 119 Transmission Corporation of Andhra Pradesh Ltd v GMR Vemagiri Power Generation Ltd (2018) (3) SCALE 47. 120 Bomanji Ardeshir Wadia v Secretary of State of India (1929) AIR PC 34. 121 Kerala State Electricity Board v Kurien E Kalathil (2000) 3 LRI 474. 122 Skandia Insurance Co Ltd v Kokilaben Chandravadan (1987) AIR SC 1184. 123 SP Sathe, Administrative Law (Lexis Nexis Butterworths, 7th ed, 2004) 578. 124 State of Bihar v Majeed (1954) AIR SC 245.

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cle 299, implied contracts between the government and other parties are prohibited.125 As regards contractual interpretation, no other general distinction is made between a government contract and a contract between two private parties. Subject to the formalities prescribed by Article 299 of the Constitution, the contractual liability of the government will remain the same as that of any individual under the ordinary law of contract.126 Certain privileges are however accorded to the government under the statute of limitation.127 These include longer periods of limitation as regards enforcement of rights by or on behalf of the Union,128 as well as privileges in respect of the government’s ability to impose liabilities with preliminary recourse to the courts.129 Further, under s 80 of the CPC, notice is required to be served on the government two months prior to the institution of a suit against the government to give the government an opportunity to reconsider the legal position and make amends or settle the claim, if so advised, without litigation.130 Despite these privileges, the State and its instrumentalities will not be allowed to function in an arbitrary manner, even in the matter of entering into contracts. The decision of the State, either in entering into the contract or refusing to enter into a contract, must be fair and reasonable.131

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

The Constitution provides for the division of legislative power between the Union (i.e. federal or national legislature) and the state legislatures. National legislation is applicable to every state in the country.132 Each state may, subject to certain limitations, adopt national legislation with amendments, and any laws adopted will be applicable within that particular state only.133 Each  

125 KP Chowdhary v State of Maharashtra (1967) AIR SC 203. 126 State of Bihar v Abdul Majeed (1954) AIR SC 245. 127 Indian Limitation Act, 1963 . 128 Nav Rattanman v State of Rajasthan AIR 1961 SC 1704. 129 Sathe (n 1075) 382. 130 . 131 Y Konda Reddy v State of Andhra Pradesh (1997) AIR AP 121. 132 Constitution Art 246, sch 7. 133 Constitution Art 246, sch 7.

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state may also, subject to certain limitations, enact legislation applicable exclusively to that state.134 The government has enacted several pieces of legislation, at both union and state levels, which relate to matters pertinent to the construction industry. The BOCW Act was introduced to protect the safety and welfare of construction workers engaged by contractors in infrastructure projects. Under the BOCW Act, contractors are required to register their firm or company with the designated registering authority. However, the BOCW Act requires the appropriate government to make rules to comply with the provisions of this Act. During the construction stage of any infrastructure project, contractors and principal employers must comply with the provisions of the BOCW Act.135 The Contract Labour (Prohibition and Regulation) Act, 1970 (India) regulates the process of engaging contractors and contract labour. The Act provides for the registration of contractors (if more than 20 workers are engaged) and for the appointment of a Tripartite Advisory Board that investigates particular forms of contract labour.136 Where contract labour is engaged for a production process that is perennial in nature, the Tripartite Advisory Board may recommend its abolition under s 10 of the Contract Labour (Prohibition and Regulation) Act, 1970 (India). The Public Liability Insurance Act, 1991 (India) seeks, inter alia, to provide for public liability insurance so that immediate relief may be extended to persons affected by accidents that occur in the handling of ‘hazardous substances’. Under s 4 of the above Act, any entity that owns a dangerous substance must, before the substance is handled, obtain one or more public liability insurance policies to insure against liability. The Employees’ State Insurance established under the Employees’ State Insurance Act, 1948 (India), provides health and social security insurance in this regard. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 (India) requires every establishment or contractor, that employs five or more interstate migrant workers, to register itself.137 The purpose of this regime is to ensure and protect migrant workers’ rights to equal wages, displacement allowances, home journey allowances, medical facilities, etc.

134 Constitution Art 246, sch 7. 135 BOCW Act s 62 . 136 Contract Labour (Prohibition and Regulation) Act, 1970 s 3 . 137 Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 S. 1 (4) (a) https://labour.gov.in/sites/default/files/TheInter-StateMigrantWorkmen(RegulationofEmploymentandConditionsofService)Act1979.pdf.

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In relation to the work, health and safety of the participants in the construction industry, the government has enacted further legislation.138

The Building and Other Construction Workers’ Welfare Cess Act, 1996 (India) provides for the levy and collection of a cess (a contribution in the form of a tax) on the cost of construction incurred by the employers, for the purpose of augmenting the resources of the BOCW Boards constituted by the state governments under the BOCW Act. The cess is assessed at a rate not exceeding 2 %, but not less than 1 %, of the cost of construction incurred by an employer.139  

4.1.8.

4.1.9.

 

The Planning Commission (now Niti Aayog) jointly with the Indian construction industry has set up the CIDC to undertake activities for the development of the Indian construction industry. The CIDC is the first body in India to provide both the impetus and the organisational infrastructure necessary to raise quality levels across the industry. There is no Indian equivalent of the Unfair Contract Terms Act 1977 (UK). There is largely no restriction on the rights of the contracting parties to exclude or limit their liability through exemption clauses in their agreements. The position is different as regards contracts involving services which are regulated, like financial services. There is however the possibility of striking down unconscionable bargains or obtaining relief under the Consumer Protection Act, 2019 (India).

4.2. Codes of Practice 4.2.1.

4.2.2.

Codes of practice pertaining to the construction industry have been established in India. Such codes can largely be found in all sectors of development including transport, industry, agriculture, etc. Numerous studies of these codes of practice reveal that various existing methods of construction are outdated and that some designs are overburdened with antiquated safety factors and regulations.140 These methods and designs fail to cater for advancements in the industry, such as the use of new building

138 See, e.g., Industrial Employment (Standing Orders) Act, 1946; Payment of Wages Act, 1936; Payment of Gratuity Act, 1972; Workmen’s Compensation Act, 1923. See also Section 2.3. 139 Building and Other Construction Workers’ Welfare Cess Act, 1996 s 3 . 140 D Jayakumar and P Ravikumar, ‘Building Reguation, Violation Recent Need in Chennai Metrolpolitan City-Status Report’ [sic] (2016) 13(4) Journal of Mechanical and Civil Engineering 71 ; National Building Code of India, 2005 .  

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materials and the developments in building design and construction techniques.141 Further, it has become apparent that the codes lack uniformity and are often neither specification-oriented nor performance-oriented.142 These studies resulted in the formation of the National Building Code of India, 2005 (India) (‘National Building Code’) to unify building regulations across the country. The then Indian Standards Institution (now BIS) was also established by the Planning Commission of India during this time.143 Following the publication of the National Building Code, a campaign was launched by the Indian Standards Institution to drive implementation, and popularise the contents and use of the National Building Code in construction activities.144 The National Building Code has regulations which can be adopted or enacted for use by various departments. It lays down a set of minimum provisions to protect the safety of the public in relation to structural sufficiency, fire hazards and accessibility of buildings.145 Provided these basic requirements are fulfilled, building professionals will otherwise retain freedom of choice over the materials used and methods of construction adopted.146 The National Building Code also covers aspects of administrative regulations and general building requirements.147 The construction industry has undergone a paradigm shift due to a change in the nature of occupancies, characterised by the prevalence of high-rise buildings, and the greater dependence on building services, which are often complicated. A comprehensive revision of the National Building Code was conducted to address these aspects, with the amended standards reflected in the National Building Code of India, 2016 (India). The changes included, inter alia, a thorough revision and updating of the requirements for building accessibility for the disabled and the elderly.148

141 National Building Code of India, 2005 (India) . 142 National Building Code of India, 2005 (India); Jayakumar and Ravikumar (n 1092). 143 National Building Code of India, 2005 (India) . 144 https://law.resource.org/pub/in/bis/S03/is.sp.7.1.2005.pdf; https://archive.org/details/gov.law. is.nbc.2005/page/n2. 145 https://law.resource.org/pub/in/bis/S03/is.sp.7.1.2005.pdf; https://archive.org/details/gov.law. is.nbc.2005/page/n2. 146 https://law.resource.org/pub/in/bis/S03/is.sp.7.1.2005.pdf; https://archive.org/details/gov.law. is.nbc.2005/page/n2. 147 https://law.resource.org/pub/in/bis/S03/is.sp.7.1.2005.pdf; https://archive.org/details/gov.law. is.nbc.2005/page/n2. 148 National Building Code of India, 2016 (India) [http://www.disabilityindia.co.in/Access-India/ national.php].

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4.3. Licensing of Professionals and Contractors 4.3.1.

4.3.2.

4.3.3.

While there are no guidelines or mandates specifically on the licensing of professionals, the Secretariat for the Committee on Infrastructure has published certain guidelines on the best practices to be adopted by ‘consultants’.149 ‘Consultants’, in this context, refers to those advising project authorities on the financial, legal or technical aspects of the project.150 In cases where construction project management is outsourced, the ‘manager’ of the project may constitute a ‘consultant’ for the purpose of ensuring implementation of the project in a fair and transparent manner. The 2009 report of the Planning Commission of India on ‘Improvement in Accreditation and Certification Systems’151 analysed the existing system of accreditation of various professions in India, emphasising the need to ensure uniformity of skills and knowledge of engineers. There is no legislation in India specifically governing contractor licencing. Thus, by law, contractors are not required to obtain any form of licence per se. However, in practice, some form of accreditation is required. The entity commissioning the construction is required to obtain permissions and permits from various local authorities (viz the municipalities in each city or district), and the relevant state and union (where the matter falls within the purview of the union government) departments depending on the nature of work involved.152

5. Construction Contracts 5.1. Standard Contracts FIDIC 5.1.1.

Standard forms issued by FIDIC are commonly used as a template or base contract for construction contracts in India. Many employers will then make the necessary amendments to tailor the contract to local requirements, displacing or modifying standard FIDIC terms as required. In certain cases, gov-

149 Secretariat for the Committee on Infrastructure, Government of India, Best Practices: Selection of Consultants (Report, May 2009) . 150 Secretariat for the Committee on Infrastructure, Government of India, Best Practices: Selection of Consultants (Report, May 2009). 151 Planning Commission Sub-Committee on Improvement in Accreditation and Certification Systems, Report and Recommendations (Report, May 2009) . 152 Author’s observation.

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ernment agencies, such as the public works departments and the Indian railways, have their own standard form contracts. Model Concession Agreement (‘MCA’) 5.1.2. The MCA is a standard form contract published by the Secretariat for Public Private Partnerships (‘PPP’) and Infrastructure, and is applicable to PPPs, i.e. construction projects between private project developers and the government. The MCA sets out the terms of execution of a project, and is signed between the concessionaire and the government, to form the core of a PPP. 5.1.3. The most common form of PPP is the Build-Operate-Transfer (BOT) model, whereby the private entity is responsible for designing, building and operating the project or facility for a specified period, before subsequently transferring it to the public sector body.  

Other Standard Form Contracts 5.1.4. Government authorities will publish standard form construction contracts with every construction project tender released.153 Most sectors of the construction industry also have standard contracts on par with international norms.154

5.2. Amendment of Contracts and Bespoke Contracts 5.2.1.

Standard form contracts, though widely used, are usually amended as specifically required by the parties to the contract. Such amendments are also required to ensure that the contract is valid under Indian law. For example, to ensure the validity of a FIDIC agreement in India, it is essential to amend the agreement such that it does not amount to a restraint of legal proceedings, as that would be held prima facie void as per the ICA.155 Amendments are generally made to the following clauses: (a) Obligations; (b) Representations and Warranties; (c) Termination; (d) Liability and Indemnity; (e) Limitation; (f) Dispute Resolution; (g) Force Majeure;

153 NHAI Act s 15 . 154 NHAI Act s 15. 155 ICA s 28 .

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(h) (i)

Governing law and Jurisdiction; and Copyright and Intellectual Property Rights, etc.

5.3. Most Commonly Used FIDIC 5.3.1.

FIDIC is a standard form construction contract commonly used between private parties. However, in construction contracts between a private entity and a government body, FIDIC contracts are not widely prevalent. Instead, the government-published model agreements, such as MCAs, are typically adopted.

Other Commonly Used Contracts 5.3.2. EPC contracts may vary in terms of the assignment of responsibility and related penalties. There is often a flexible relationship between different members of the industry. 5.3.3. There are various project delivery mechanisms that may be adopted, depending on the particular local conditions. The size and nature of the project will also influence the choice of project delivery mechanism. The types of project execution most commonly used are: (a) Item rate contracts, whereby the contractor, through an appointed consultancy, does the engineering. Under these contracts, bills of quantity (ies) are furnished and the prices are to be fixed by the tendered item; (b) Lump sum turnkey (LSTK) contracts, being the preferred project delivery mechanism in the energy and industrial sector for projects ranging from US$500 million–1 billion. This model has gained popularity as the contractor bears the responsibility for the design, procurement and construction processes. The LTSK model also ensures efficiency and mitigates project completion time and costs, as the onus of successful project delivery is borne by the contractor; (c) Escalation and inflation protection contracts; (d) Design contracts, which include the client’s design requirements; (e) EPC contracts, which may vary in terms of the stakeholders involved and the assignment of risk, these factors being typically dependent on the nature of the project itself. The procurement process may consist of numerous steps; and (f) EPC management (EPCM) contracts, which have gained popularity. This model provides greater scope for local contractors to play an important role in effectively managing time and costs.

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5.4. Example – The Standard EPC Agreement for Highways 5.4.1.

The Ministry of Road Transport & Highways (‘MoRTH’) has published a Standard EPC Agreement for national highways and centrally sponsored road works (‘Standard Agreement’) proposed to be implemented on EPC mode. This standard form contract can be found on the website of the National Highways and Infrastructure Development Corporation, a company wholly owned by the MoRTH. The primary authority using this contract is the NHAI.

6. Key Issues 6.1. Overview 6.1.1.

Every contract comes with its own set of actual and potential issues. This Section highlights certain key issues which are common in India across general construction and EPC contracts, and provides a brief overview of the current position in the context of the Standard Agreement referred to at Section 5.4.

6.2. Extension of Time/Delay in Completion 6.2.1. 6.2.2.

6.2.3.

A term commonly found in construction contracts is the Extension of Time (‘EoT’) clause coupled with a claim for liquidated damages. Various factors may contribute to a request for an EoT being made, including actual default on the part of any party or a force majeure event. The grant or denial of such a request is where the dispute typically arises. In the context of the Indian construction sector, scenarios or factors that commonly result in requests for EoT include: (a) Site handover: delays may arise in the handover of the site by the employer to the contractor. This is commonly due to delays in acquiring land, obtaining the necessary licences and approvals, and even gaining physical access; (b) The existence of multiple contractors: often, due to the large scale of a project, several contractors are allotted various stages of the contract. Multiple contractors may also be engaged where individual contractors lack sufficient resources, or to reduce reliance on a single contractor. Where a contractor is unable to complete their obligations in the agreed time frame, handover to the contractor responsible for the subsequent stage is delayed. This is one of the most common causes of request for EoT that eventually results in claims for liquidated damages;

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(c)

6.2.4.

6.2.5. 6.2.6.

6.2.7.

6.2.8. 6.2.9.

Variations in the scope of work of a project: such changes inevitably require contractors to deviate from the pre-existing schedule of work and reallocate their resources, such as manpower, equipment, and raw materials, resulting in delays in the project delivery. These variations often necessitate the procurement of additional resources, which may differ from those already required. This in turn has a cascading effect on project costs and may require contractors to obtain alternative sources of funding, contributing further to project delay; (d) Force majeure events: although beyond the control of the parties, force majeure events such as landslides, adverse environment and geological conditions, labour strikes, etc. are often a cause for delay in construction contracts in India. In such cases, the affected party may have a legitimate right under the contract to seek an EoT for completion of the contract. A request for EoT is either met by the grant of an extension of time requested, a claim for liquidated damages, or both. Delays are detrimental to the interests of both the contractor and the authority, as the latter suffers a loss as it is unable to generate income from the relevant project by the expected date in accordance with the forecasted timeline. From the contractor’s perspective, delays affect the profitability of the project, as the contractor is required to invest more resources than initially budgeted for. These cost escalations often result in disputes between the parties, which only further delays project completion. The Standard Agreement primarily discusses EoT under cls 10.5, 11.14, 23.2 and sch E s (4). Under cl 10.5, requests for EoT can be made at the highway construction stage on the grounds of delays in obtaining right of way, environmental clearances or approval of railway authorities, or delays due to variations in the scope of work or the occurrence of a force majeure event, any delays, impediments or prevention caused by or due to the NHAI, NHAI personnel or any of other contractors employed by NHAI on the site. Clause 11.14 specifies timelines within which a probable delay must be notified to the NHAI. This clause reflects best practice and seeks to ensure the NHAI’s cognisance of potential claims by the contractor. Clause 11.17.4 provides for the grant of EoT in cases involving the suspension of works due to reasons not attributable to the contractor. Schedule E s (4) provides that in case of any deficiency or defect in the construction of the works156 which may require more time than the time origin-

156 Construction under the Standard Agreement includes design, developing, engineering, procurement, supply of plant, materials, equipment, labour, delivery, transportation, installation, processing, fabrication, testing, and commissioning of the highway, including maintenance during the construction period, removing defects, if any, and other activities incidental to the construction.

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ally agreed, the contractor is required to rectify the defect within such time as may be reasonably expected from reasonably skilled and experienced contractors engaged in the same type of work as provided for in the Standard Agreement.

6.3. Variations 6.3.1.

6.3.2.

6.3.3.

6.3.4.

6.3.5.

6.3.6.

Most large-scale construction contracts contain clauses that provide for changes to the scope of work set out in the contract. Such changes often concern the specifications relating to any item of construction work and may comprise of the addition or omission of particular items of work to or from the project. As is often the case in India, variations may also arise where the ground or land conditions differ from those assumed or agreed upon. Variation clauses typically set out the procedure for making alterations to the scope of work, as well as any payments and restrictions attaching to such amendments. In some cases, changes to the scope of work may constitute a variation of contract. The contractor and project heads must ensure that the recording, tracking, and reporting processes can be properly implemented in cases of any potential contractual variation. Inadequate pre-planning and project design may cause further delays. Generally, the contract will specify the remedies available to the party affected by material variations. Material variations usually give the affected party the right to a change order, which may specify a certain amount of costs. Substantial costs may lead to one of the parties opting to terminate the contract. Although the contract will typically provide for a formal change order process, in practice the formal process is rarely followed. An example of a case involving variations to the contracted scope of work is that of State of U P v Ram Nath International Construction Private Ltd,157 where the Supreme Court rejected the claim that a contractor was not entitled to higher rates in spite of the existence of material changes to the drawings and designs. Clauses 2 and 13 of the Standard Agreement specify the scope of work and set out the procedure for change of scope and the payments required to be made for any change in scope.

157 (1996) AIRSC 782.

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6.4. Latent Conditions 6.4.1.

6.4.2.

As the project progresses, contractors may encounter latent conditions in the site substrata, which may adversely impact the rate of progress, and ultimately impinge upon the expected timeline and schedule of the project. Latent conditions may also delay handover of the site by one contractor to the next, thereby resulting in requests for EoT or claims for liquidated damages. The Standard Agreement does not explicitly mention the issue of latent conditions. However, cl 8.8 covers the manner in which geological and archaeological discoveries must be dealt with. This circumstance may be construed as a latent condition if encountered during the process of site excavation for construction of the highway.

6.5. Force Majeure 6.5.1.

6.5.2.

6.5.3.

6.5.4.

Force majeure clauses can be found in most construction contracts in India. A force majeure event is one which is beyond the control of either party. Force majeure is typically defined to include acts of God, terrorism, etc. The way in which these clauses are drafted will significantly impact the determination of requests for EoT and the granting of claims for liquidated damages, where these are permitted under the agreement. The principle of force majeure does not have statutory recognition in India. Rather, the principle is enshrined in a different (and limited) form within the ICA, as the doctrine of frustration of contract.158 Section 56 of the ICA provides that an agreement to implement an act which is impossible is void. Section 56 further provides that in the event the act becomes impossible or unlawful, the contract requiring such an act will become void. Further, no compensation will be required to be paid for an act that the promisor knew or would have known with the exercise of reasonable diligence, to be impossible or unlawful. Frustration of contract has been recognised by various courts in India as the ‘aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done’.159 Clause 21 of the Standard Agreement is an example of a force majeure clause. The clause defines force majeure events as including political, non-political, and indirectly political events. These terms are also given meaning by the

158 ICA s 56. 159 Satyabrata v Mugneeram (1954) AIR SC 44.

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clause. Given the broad nature of the clause, it is typically an aspect of the agreement that will be renegotiated by the relevant parties.

6.6. Land Acquisition 6.6.1.

6.6.2.

6.6.3.

6.6.4.

The land acquisition process is fairly long and drawn out in India. This is due to the delays often caused by disputes as to the appropriate amount of compensation to be awarded, as well as the various clearances and approvals to be obtained. All property is said to vest with the government unless previously allotted or sold to a private person. In cases of land acquisition, compensatory amounts may be awarded to the existing occupants. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (India) (‘LARR Act’) provides for a mandatory ‘rehabilitation and resettlement’ (‘R&R’) scheme in relation to land acquisitions under s 16. The R&R provisions are applicable to all land acquisitions by union and state governments. With regard to land acquisition by private entities, including companies, the R&R provisions will only apply if the acquisition is of more than the prescribed limit as determined by the relevant state government. There are however, certain exemptions. Acquisitions of land for the construction of national highways are explicitly exempted from the R&R obligations. Further, land acquisitions under the legislation prescribed in Schedule IV of the LARR Act (for example the Railway Act, 1989 (India), and the National Highway Act, 1956 (India)) are also excluded from the mandatory R&R scheme. However, the process of determining the amount of compensation to be awarded for such acquisition often results in litigation, which inevitably delays project completion. A recent example of this is the acquisition of land for the new airport at Navi Mumbai. In this case, the dispute arose due to the earlier occupants’ reluctance to accept the amount of compensation offered by the government in acquiring the land, contending the amount to be insufficient in light of the anticipated increase in property rates.160 The land acquisition process also requires certain clearances and approvals, such as ‘No-Objection Certificates’, to be obtained from various authorities. For example, in a case where the land in question is in close proximity to any defence or armed forces property, approvals from such authorities will be required. Clearance or approvals may also be statutorily mandated. For instance, approval from the Environment Ministry may be required under the Environment Protection Act, 1986 (India).

160 Indirabai Narayan Bivalkar v State of Maharashtra 2015 (4) ALL MR 77.

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The government is creating a process such that the award of contracts takes place only after a certain percentage of land has been acquired. The Standard Agreement does not specifically address the issues that land acquisitions may trigger, such as compensation and obtaining the necessary clearances and approvals. This is problematic as such issues could foreseeably be, and in fact are, one of the leading causes for a request of an EoT.

6.7. Limitation of Liability 6.7.1.

6.7.2.

6.7.3. 6.7.4.

6.7.5.

Construction contracts generally contain limitation of liability clauses in the form of exceptions, indemnities and penalties, etc. Contractors must bear the risk of additional costs arising in the future unless otherwise specified and agreed in the contract. It is difficult to exclude liability for these items in standard form contracts where the counterparty is a government entity. However, it is possible if dealing with a private counterparty. It is normal to exclude indirect or consequential loss and loss of profits. The owner is expected to take out an insurance policy to cover any potential loss of profits. Clauses that contemplate potential contractor liabilities in the event of a change in law and taxes clauses, are also typically inserted. When multiple contractors are working on-site, contractors are only liable for their scope of work and they do not assume integration risk, unless this has been expressly agreed to. Assumption of this risk carries a price that must be borne by the owners. The Standard Agreement embodies the provisions on indemnity and limitation of liability in cls 20.1.3, 20.1.4, 25.1.1, 25.2 and 25.5. The indemnity clauses in 20.1.3 and 20.1.4 provide indemnities to the authority and contractor respectively. Clause 20.1.3 provides that the contractor will indemnify the NHAI against any losses, damages, costs, charges or claims, arising out of, or in consequence of any breach by the contractor of the Standard Agreement during the execution of the works or remedying of any defects therein in case of death of, or injury to, any person, or loss of, or damage to, any property (other than the actual works). Clause 20.1.4 provides that the NHAI shall indemnify the contractor from and against any and all losses, damages, costs, charges, proceedings or claims, arising out of, or with respect to, the use or occupation of land or any part thereof by the NHAI, the right of the NHAI to execute the work or any part of it on, over, under, in or through the land, or damage to the property which is an unavoidable result of the execution and completion of the work, or remedying any defects, or death or injury to any person, or loss of or damage to property, resulting from any act or due to the negligence of NHAI or its agents, servants or other contractors who are not employed by the contractor.

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Clauses 25.1 and 25.2 provide for general indemnities by the contractor in favour of NHAI. Clause 25.5 excludes claims or recovery of any indirect, incidental or consequential costs, expenses, loss or damage, including any loss of profit except where specifically provided in the Standard Agreement.

6.8. Duration of Exposure/Time Bars 6.8.1.

6.8.2.

6.8.3.

6.8.4.

Indian law prescribes certain time frames within which claims may be brought forward by affected parties. This is generally provided under the Limitation Act, 1963 (India). Under the Limitation Act, 1963 (India), an action for breach of contract may be brought within three years from the date of the breach.161 Any agreement which provides that a claim for the breach of any terms of the agreement should be brought within a time frame shorter than the period prescribed by law, is void to the extent that the period defined in the agreement is lesser than the period prescribed under the Limitation Act, 1963 (India). This is provided under s 28(b) of the ICA. Most construction contracts in India have a provision specifying the time frame within which an action for contractual breach must be brought, and the Standard Agreement is no different. The primary issue with such a provision arises when one of the parties is non-Indian and a standard form of contract (such as FIDIC) is adopted in its base form without amendments tailoring the standard terms to Indian laws. In such a scenario, when a dispute arises, the non-Indian party will be unable to bring its claim as the Indian party can take recourse to s 28(b) of the ICA. In Union of India v Simplex Concrete Piles India Private Ltd,162 the Supreme Court held that any clause in an arbitration agreement limiting the time within which a claim may be made by a party is against public policy and void. In some cases, the parties may agree to extend the period of limitation. In Gobardhan v Dau Daya,163 a full bench of the Allahabad High Court held that contracts extending the period of limitation are void under s 22 of the Limitation Act, 1963 (India), as they defeat the provisions of the Limitation Act, 1963 (India). Hence, by virtue of the maxim vigilantibus non dormientibus jura subveniunt (‘the law aids the vigilant and not those who slumber’), the limitation period in which a dispute must be referred to adjudication is important.

161 Limitation Act, 1963 sch item 55. 162 (2003) 3 ARBLR 536 Delhi. 163 (1932) AIR All 273.

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7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

As discussed in detail in Section 3.5, there are several ADR mechanisms available for the resolution or settlement of disputes arising in relation to construction contracts, with arbitration being the most commonly adopted mechanism. Clause 26.1 of the Standard Agreement provides that where disputes arise in relation to the Standard Agreement the parties shall, in the first instance, attempt to resolve the dispute amicably by conciliation as per the procedure set forth in cl 26.2 of the Standard Agreement. Clause 26.2 states that when a dispute arises, the parties may appoint the Engineer of NHAI, or any other person that they find mutually acceptable, as a conciliator to facilitate settlement of the dispute. Parties also have the option to approach the Chairman of the NHAI or the Contractor’s Board of Directors to facilitate dispute resolution. Clause 26.2 also outlines timelines for the resolution of the dispute and the signing of the written terms of settlement, failing which, the parties may thereafter refer the dispute to arbitration under cl 26.3 of the Standard Agreement. Clause 26.3 states that the arbitration must be settled under the rules of the Society for Affordable Redressal of Disputes (‘SAROD’). Clause 26.3.6 of the Standard Agreement provides that a party who challenges the arbitral award in a court must make an interim payment of 75 % of the amount of the award to the other party, pending final settlement of dispute, as well as an irrevocable bank guarantee of 120 % of the arbitral award amount. Invocation of arbitration can be an issue in itself, depending on the way the arbitration clause is drafted. Further, Indian laws permit appeals from arbitral awards before the High Courts. This again leads to prolonged litigation and adversely impacts project timelines and costs. The key aspect of a dispute resolution clause is providing for the appropriate governing law. Often parties agree to institutional arbitration but fail to expressly identify the substantive law governing such institutional arbitration. This may be particularly problematic where the parties involved are transnational. In one such case, the Supreme Court of India held that in the event that most provisions are governed by or construed by Indian law, then it can be reasonably interpreted that the parties’ intention is to maintain Indian law as the substantive law of the agreement.164 Accordingly, the arbitration would be conducted with Indian law as the substantive law. Some construction contracts also provide for internal dispute resolution mechanisms to be utilised prior to the institution of any arbitration proceedings.  

 

7.1.4.

7.1.5.

7.1.6.

164 Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552.

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Italy 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8.

Context 462 The Country 462 The Legal System 462 The Economy 467 The Construction Industry 468 Size and Nature 468 Participants 469 Work, Health and Safety 472 Protection of the Environment 476 Quality Assurance 479 Construction Contracting Dynamics 481 Legal Underpinnings of Contracts 483 Freedom of Contract 483 Legal Framework 483 Public Policy 486 Statute Law 487 Implied Contract Terms 487 Construction of Contract Terms 488 Private and Public Procurement 490 Government Involvement 492 Legislation and Regulation 492 Codes of Practice 492 Licensing of Professionals and Contractors 492 Construction Contracts 493 Available Contracts 493 Amendment of Contracts and Bespoke Contracts 494 Most Commonly Used 497 Example – The Form of Independent Contract for Private Works Drafted by ANCE 498 Key Issues 498 Overview 498 Fit for Purpose 498 Late Completion 500 Latent Conditions 501 Force Majeure 503 Limitation of Liability 505 Duration of Exposure 505 Time Bars 506

https://doi.org/10.1515/9783110712728-016

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6.9. 6.10. 6.11. 7.

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Variations 508 Anti-Bribery 510 Assignment of the Contract and Subcontracting Dispute Resolution 514

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1. Context 1.1. The Country 1.1.1. 1.1.2.

1.1.3.

Italy is a parliamentary republic. Italy became a republic after the results of a popular referendum held on 2 June 1946. The Costituzione [Constitution] of Italy was adopted on 22 December 1947 (‘Constitution’). Power is divided among the executive, the legislative and the judicial branches. The Italian Parliament consists of two houses: the Chamber of Deputies and the Senate of the Republic. According to the principle of full bicameralism, the two houses perform identical functions. The executive branch of government is led by a Prime Minister, officially President of the Council of Ministers [Presidente del Consiglio dei Ministri], appointed by the President of the Republic, who in turn appoints the members of the Council of Ministers, subject to a parliamentary vote of confidence.

1.2. The Legal System Overview 1.2.1. The Italian legal system is based on Roman law. Thus, Italy belongs to the wide family of ‘civil law’ countries, as opposed to ‘common law’ countries. 1.2.2. The Italian legal system was extensively influenced by the Napoleonic Code1 and subsequent statutes as to civil and commercial law. The first civil code of the then newly created Kingdom of Italy was introduced in 1865, and a commercial code was enacted in 1882. In 1942 a new Codice Civile [Civil Code] (Italy) (‘CC’) composed of 2969 Articles was passed.2 It was at that time an innovative piece of legislation. It overcame the traditional distinction between civil and commercial codes, merging them in one single document. It went through several amendments and integrations and it is still the applicable civil code in Italy. The code is structured in six libri (books or subject areas), covering the

1 Code civil des Français [French Civil Code] (‘Napoleonic Code’). 2 Regio Decreto 16 Marzo 1942, n 262 [Royal Decree 16 March 1942, No 262] (Italy).

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following areas: Book I: Individual Rights & Family Code; Book II: Inheritance Law; Book III: Real and Personal Property; Book IV: Obligations and Contracts; Book V: Labour, Employment and Companies; and Book VI: Protection of Individual Patrimonial Rights. Although the CC still contains the main basic rules constituting the Italian legal system, most legislation is now provided by way of special legislation on specific matters, such as building and planning, environment, health and safety, banking and finance, insurance and consumer protection legislation. The Constitutional Court, which judges on the constitutionality of laws, is a post-World War II innovation, and its activity is rather limited compared to its equivalent in other countries, such as the United States of America.

The Hierarchy of Sources of Law 1.2.5. The hierarchy of Italian law is complex. 1.2.6. At the apex is the Constitution. It is a fairly rigid document and not subject to casual amendment: pursuant to Article 138 ‘constitutional laws’ which are amendatory must, in effect, be approved twice by both Houses, first by simple majority and second by absolute majority. 1.2.7. Beneath are Leggi [Ordinary Laws], approved by the Parliament (both Houses) and enacted by the President of the Republic. At the same level are the Decreti Legge [Law Decrees] and the Decreti Legislativi [Legislative Decrees]. Decreti Legge are Acts of the Government having full force of law during their 60-days validity. Upon expiry of this term they lose their force if not converted into fully-fledged laws by both Houses. Decreti Legislativi are Government Acts, which derive their force of law from a Parliament law delegating the legislative power to the Government. 1.2.8. At the same level as ordinary laws are the Regional Laws and Provincial Laws for the autonomous provinces of Trento and Bolzano and the Regional Statutes of the Regions. Article 117 of the Constitution sets forth the subject matters which are reserved to the exclusive State’s legislation and those of concurrent State-Regions legislation, as well as those reserved to the Regions. 1.2.9. Furthermore, other norms of secondary rank, which are subordinate to acts having the force of law, are government regulations (in the form of Decrees of the President of the Republic, Decrees of the President of the Council of Ministers and Decrees of Ministries), and regulations passed by the regions, provinces and municipalities. 1.2.10. Finally, there are the circolari ministeriali [ministerial notices] whose scope of application is limited to the administration that has adopted the circular. They are used to clarify how higher-ranked norms are interpreted and applied by the relevant administration. It is worth noting that as part of the EU and international legal systems,the international and European norms forms part of the Italian juridical system.

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1.2.12.

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Pursuant to Article 10 of the Constitution the Italian legal system conforms itself to generally accepted rules of international law; according to scholars such rules are of constitutional value. International treaties are ratified by law and enters into the Italian legal systems with the same rank. The same apply to the EU treaties, while EU secondary legislation (regulations, directives and decisions) provides for their effects in the legal systems of the EU member countries. Pursuant to Article 288 of the Treaty on the Functioning of the European Union3, in order to exercise the Union’s competences, the institutions shall adopt regulations, directives, decisions, recommendations and opinions. An EU “regulation” is a binding legislative act which must be applied in its entirety across the EU. An EU “directive” is a legislative act that sets out a goal that all EU countries must achieve, but it is left to the individual countries to devise their own laws on how to reach these goals; it is generally accepted however that when a transposition of a directive into national law has not taken place or has been done incorrectly, the terms of the directive are unconditional and sufficiently clear and precise and the terms of the directive give rights to individuals, the individual(s) may rely on the directive and invoke directly its provisions against a member country to enforce the right granted thereunder4. A “decision” is binding on those subjects to whom it is addressed (e.g. an EU country or an individual company) and is directly applicable for its addressees. Other EU acts include recommendations and opinions. A “recommendation” is a non-binding act which allows the EU institutions to make their views known and to suggest a line of action without imposing any legal obligation on those to whom it is addressed. An “opinion” is an instrument that allows the institutions to make a statement in a non-binding fashion, thus without imposing any legal obligation on those to whom it is addressed. Green papers and white papers are preparatory documents for future legislation and as such are not binding, but may be used to construe subsequent legislation. With specific reference to civil law matters, including construction projects, the hierarchy of the sources of law is disciplined in the preliminary provisions to the Civil Code regarding the “Disposizioni sulla legge in generale” [Provisions on the law in general]. According to Article 1, the hierarchy of the sources of law is the following: statutes and laws, regulations, corporative norms and usage.  

1.2.13.

3 See the Consolidated version of the Treaty on the Functioning of the European Union, in Consolidated version of the Treaty on the Functioning of the European Union OJ C 202, 7.6.2016, p. 1–388 (EN). 4 See EU Case law Judgment of the Court of 14 July 1994, Paola Faccini Dori v Recreb Srl, Case C-91/92, and other case law mentioned therein.

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The Judicial System 1.2.14. Art. 104 of the Constitution guarantees the independence of the judiciary from the executive and legislative powers of the State by specifying, at Article 101, that the “judges are subject only to the law”. 1.2.15. The Ministry of Justice is the core of the government’s justice policy. It deals with the organization of justice and courts and with the administrative aspects of the functioning of civil and criminal courts, such as the management of notarial archives; monitoring of chartered professions; management of the judicial records register; international cooperation; and handling of the applications for mercy to be submitted to the President of the Republic. 1.2.16. The Italian judiciary system provides for different kind of jurisdictions: ordinary (civil and criminal), and special courts, such as the TAR (Regional Administrative Court), and Consiglio di Stato for financial, military and tax matters. Ordinary Judges 1.2.17. The judges of ordinary jurisdiction courts are ‘ordinary’ magistrates, who are established and governed by the rules of the judiciary system, mainly contained in Regio Decreto 30 Gennaio 1941, n 12 [Royal Decree 30 January 1941, No 12] (Italy). 1.2.18. They are supervised by a self-governing and independent body, the Consiglio Superiore della Magistratura [Supreme Council of Magistrates] (‘CSM’), who is entrusted with the exclusive power to appoint, assign, move, promote and punish ordinary judges and prosecutors (Art. 104–10 of the Constitution). 1.2.19. According to the Regio Decreto 30 Gennaio 1941, n. 12 [Royal Decree 30 January 1941, No 12] Civil and criminal justice is administered by the following: (a) Justice of Peace: they act as the court of first instance for matters reserved to them by the law, usually civil matters with limited value; (b) Tribunals: they act as the judge of first instance in all civil and commercial matters not otherwise expressly attributed to other judges. as well as the judge of second instance for the review of decisions rendered by the Justice of Peace; tribunals can sit in monocratic or collegiate (3 judges) sessions depending on the subject matter; (c) Juvenile Courts: they are the first instance judge for civil, administrative and criminal trials involving children or adolescents who have not attained the age of majority; (d) Assize Courts: they are provided only as first instance courts for certain criminal trials; (e) Surveillance Magistrates and Surveillance Courts: they are competent only for criminal enforcement procedures; (f) Courts of Appeal: they act as the second instance judge and are in charge of the procedure of recognition and enforcement of foreign decisions and arbitral awards;

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(g)

Assize Courts of Appeal: they act as the second instance judge for the review of decisions rendered by the Assize Courts; and (h) Court of Cassation: it acts as the judge of third instance for the review of decisions of the courts of appeal and ensures the correct and uniform interpretation and application of law by inferior courts. It also has jurisdiction over conflicts of competence among lower courts, conflicts of jurisdiction among ordinary and special courts, and disputes over the jurisdiction of Italian or foreign courts on certain matters. 1.2.20. The Superior Court of Public Water and the Regional Courts of Public Water are ‘special’ civil judges with jurisdiction over public waters matters. 1.2.21. The ordinary judicial bodies are distinguished by monocratic judges and collegiate judges. At first instance the judge is usually monocratic, except for some limited cases provided by law where it is collegiate. Courts of Appeal, the Court of Cassation, the Courts (in the cases provided by law) and the Juvenile Courts operate as collegiate bodies. 1.2.22. The special jurisdictions are: (a) Regional Administrative Courts (TAR) and the Council of State, which is the Administrative Court of second instance: they exercise the administrative jurisdiction; (b) Provincial and Regional Tax Commissions: they exercise jurisdiction over tax matters between the tax administration and the taxpayer; (c) Court of Auditors [Corte dei Conti]: it exercises control over the management of public financial resources by the state administrations; and (d) Military Courts, Military Courts of Appeal, Military Surveillance Courts: they exercise military jurisdiction. Constitutional Review of Laws 1.2.23. The Constitutional Court is entrusted with the constitutional jurisdiction. It checks the validity and compatibility of the laws with the Constitution and is also called upon to settle conflicts of powers between different administrations of the State. Access to Justice 1.2.24. Access to justice is subject to the payment of a unified contribution tax (and stamps) whose amount is proportionate to the subject matter and to the amount in dispute. The unified contribution tax for civil matters is regulated under Decreto del Presidente della Repubblica 30 Maggio 2002, n. 115 [Decree of the President of the Republic 30 May 2002, No 115] runs from €43 to a maximum of €3,372 for judgments in the Court of Cassation. Certain matters such as family law matters and labor and mandatory social security law matters are exempted from the unified contribution tax.

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1.2.25.

The unified contribution tax for proceedings in front of administrative courts runs from a minimum of €2,000 to a maximum of €6,000 for disputes relating to public procurement contracts, increased by 50 % in appeal judgments and by 100 % in Court of Cassation judgments. Proceedings on decisions of denial of access to environmental acts and information are exempted from the unified contribution tax. Other proceedings in front of administrative courts, such as building and zoning matters, are subject to unified contribution tax of €650 for first instance proceedings and €975 for appeal proceedings. 1.2.26. In order to limit the filing of claims and appeals against first instance decisions, in this respect Art. 96 of the Italian Code of Civil Procedure provides for certain pecuniary sanctions in cases of proceedings started or resisted in bad faith or gross negligence [liti temerarie] and in cases of appeals which are manifestly groundless5. A special system of pecuniary sanctions is also set out for cases of liti temerarie filed in administrative proceedings with respect to certain categories of public procurement contracts, pursuant to Art. 26 of Decreto Legislativo 2 Luglio 2010, n 104 [Legislative Decree 2 July 2010, No 104] (the “Code of Administrative Procedure”).  

 

1.3. The Economy 1.3.1.

1.3.2.

1.3.3.

Italy’s diversified industrial economy is the eighth largest in the world, with a per capita GDP of USD40,385.29 in 2016.6 There are important economic disparities between the highly developed industrial north and the less developed agricultural south. Similar to most other advanced OECD economies, Italy has a small and diminishing primary sector, while its services sector contributes almost two-thirds to the total gross value added (‘GVA’). The major players of the economy are a few very large corporations in private hands and still run by the founding families, as well as certain large public corporations where the government still has a major shareholding. With the exception of these large players, often closely interconnected among themselves, the strongest components of the economy are the clusters of small and medium-sized family-owned companies in so-called industrial districts, mostly in the north-east and the center of the country. Many of these companies produce for export machine tools and high-quality consumer goods, in-

5 In this sense, see the recent Section II of the Civil Supreme Court of Justice, court order issued on 11th of October 2018. 6 ‘GDP (Current US$)’, World Bank Open Data (Web Page, 2019) .

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cluding clothing, furniture, kitchen equipment and white goods. Italy trades mainly with countries in the EU, although trade with emerging economies such as China and Russia has risen significantly. Major imports include transport equipment, chemical and pharmaceutical products, and energy products. Major exports are mechanical machinery equipment, transport equipment, textiles and clothing, and chemical and pharmaceutical products.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

Currently the construction industry, including new residential buildings, extraordinary maintenance and non-residential public works, contributes 8 % to the GDP of Italy.7 The volume of construction activity in the two decades after the second world war was consistently high, concentrating on infrastructure, housing and factories. Since then, there has been a gradual slackening, a trend that is likely to continue in the long run. In the 1990s public works projects were almost paralyzed by corruption investigations and over the last ten years the volume of public works has been severely affected by the economic downturn and heavy pressure on public finance. According to the 2019 “Osservatorio Congiunturale sull’industria delle Costruzioni” prepared by ANCE [Report, January 2019], the Italian construction industry was valued at €175.2 billion (USD244 billion) in 2011 but was badly affected by the economic crisis, where the industry shrank between 2009 and 2011 and housing demand lowered as a result. The Italian construction industry grew in real terms in 2018 by 1.5 % due to recovery in residential, infrastructure and commercial construction, thus covering the reduction in public projects. However, pursuant to the ANCE Report, a new overall downturn in the construction industry is expected in 2019. According to the 2019 “Osservatorio Congiunturale sull’industria delle Costruzioni” prepared by ANCE [Report, January 2019], investment in public works in Italy fell by around €60 billion in the last decade, and the small growth that was expected in 2018 did not take place.8 Among the causes of the downturn in investments of public funds in public works is the collapse of expenditure by local public entities and regions, pri 

2.1.2.

2.1.3.

 

2.1.4.

2.1.5.

7 Direzione Affari Economici e Centro Studi, Associazione Nazionale Costruttori Edili, Osservatorio Congiunturale Sull’industria delle Costruzioni (Report, January 2019). 8 Direzione Affari Economici e Centro Studi, Associazione Nazionale Costruttori Edili, Osservatorio Congiunturale Sull’industria delle Costruzioni (Report, January 2019).

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2.1.7.

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marily because of prohibition of expenditure due to the need to satisfy the requirements set by the UE Stability and Growth Pact9 and more recently, the enactment of Decreto Legislativo 18 Aprile 2016, n 50 [Legislative Decree 18 April 2016, No 50] (Italy) bringing the new ‘Public Contracts Code’), whose new rules require time to be mastered by the public administration. Currently, a plan of about €140 billion is expected to be employed for public works in the next 15 years, comprising of €6.6 billion by ANAS10 for road infrastructures and €9.3 billion by the National Railways company. The factors that hamper recovery include reduced long-term credit supply to developers and delays in payments by public bodies, as well as an overall decline in infrastructure public debt funding. Yet the construction sector is still of crucial importance to the Italian economy, both in terms of investments and number of employees.

2.2. Participants Contractors 2.2.1. On the contractors’ side, the Italian construction industry is fragmented in a myriad of small and medium-sized enterprises with very few relatively big domestic players; multinational companies are also present in Italy directly or through local branches or joint ventures. In this scenario, very few corporations have a turnover comparable with other major players on the international arena. According to a report published by Associazione Nazionale Costruttori Edili (‘ANCE’), the Italian industry association of construction businesses,11 the 10 biggest Italian construction companies with international exposure in 2017 were the following: Salini Impregilo SpA (now denominated Webuild SpA), Astaldi SpA, Pizzarotti S.p.A., CMC di Ravenna Società Cooperativa, Rizzani de Eccher, Bonatti SpA, Ghella S.p.A., Trevi, Sicim and Società Italiana per Condotte d’Acqua S.p.A. 2.2.2. Due to the recent economic and financial crises, the construction industry has suffered a considerable shrinkage as a result of which many players, including some of the big corporations, have undergone or are undergoing restruc-

9 For further information, please refer to the following link https://ec.europa.eu/info/businesseconomy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-preven tion-correction/stability-and-growth-pact/legal-basis-stability-and-growth-pact_en. 10 ANAS is a government-owned company devoted to the construction and maintenance of Italian motorways and state highways. 11 ANCE, with main offices in Rome and local subsidiaries, is the most important association of building industry businesses. It assists its members on legislative, regulatory, economic and technical matters. The 2018 report is based on data reflecting 2012 activities.

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turing or reorganization procedures. It is highly likely that the landscape of the Italian construction industry will change again in the near future. Employers 2.2.3. On the employers’ side, the most important players are the public contracting authorities such as the state, regional or local authorities and bodies governed by public law, and the concessionaires in the field of infrastructure projects (motorways, railways, ports, harbors, etc.). 2.2.4. Other major players in private projects include domestic and foreign investment funds and corporations, especially for the development of shopping malls and residential or mixed-use buildings in or around the main cities in the north of the country. Regulatory Bodies 2.2.5. The rules on construction projects require the involvement of administrative and regulatory authorities. 2.2.6. The government (mainly the Ministry for Economic Development, the Ministry of Economy and Finance and the Ministry of Infrastructure and Transport) plays an important role as a legislator (when it passes emergency legislation derogating the usual public procurement rules for special cases), as a drafter of new legislation and as a regulatory authority. 2.2.7. Other important players in the construction industry are the municipalities in whose territory the project has to be carried out, as they are required for the issuance of construction permits. Also important are the landscape supervisory bodies in charge of ensuring the protection of landscapes and environmental heritages that must be taken into account. 2.2.8. Also playing an important role in the public works contracts is ANAC, the National Anti-Corruption Authority for evaluation and transparency of public administrations. ANAC is an independent authority in charge of anticorruption tasks and is also vested with some “soft law” powers in relation to public contracts. 2.2.9. ANAC has powers of inspection and sanctions in order to guarantee compliance with the principles of transparency, rightfulness and competition among operators. It also participates in the regulatory function of the Minister of Infrastructures and Transport, by its power of proposal. 2.2.10. ANAC is also in charge of administrative tasks, such as keeping the register of the SOAs,12 commissioners, referees and contracting authorities with in-house

12 SOA is the acronym for Società Organismo Attestazione, which are independent private firms with public functions, entitled to produce quality certifications attesting to the compliance of economic operators with certain quality assurance standards, after checking the fulfillment of the requirements.

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companies, and the task of supervising the qualification system. It can issue binding opinions on contentious matters relating to public tenders. Project-Specific Players 2.2.11. The most important players within individual construction projects are: (a) Committente [owner, employer or principal]: the person or entity on behalf of which the works are carried out. In the case of public procurement, the principal is the contracting authority holding decision-making powers along with any expense powers for the management of the construction contract. In more complex transactions, the developer (a different entity from the Owner) is entrusted to procure the execution of the project; (b) Progettista [designer]: has the specific role of producing the plans, drawings and designs in relation to a project. Engineers and architects to be entrusted with the design responsibility must be duly registered with the relevant professional associations [ordini professionali]; (c) Appaltatore [contractor or general contractor]: the party carrying out the works. It can be a natural or legal entity, a European Economic Interest Grouping (‘EEIG’) or a consortium. Its duties and obligations in private construction contracts are regulated by CC Articles 1655–77 [contratto di appalto], and by the Public Contracts Code; (d) Direttore dei lavori [clerk of the works]: the person appointed for the direction and surveillance of the works, to ensure compliance of the construction with the urban planning laws, technical norms and building permit. They represent the interests of the employer or the contractor, who may both appoint a clerk of the works; (e) Capo cantiere [building site director or construction foreman]: an employee of the contractor, acting in accordance with the contractor’s directions and instructions. They ensure order over the day-to-day management of the site and progress of the works, in cooperation with the clerk of the works; (f) Subappaltatori [subcontractors]: they perform parts of the work covered by the main contract, on the basis of an agreement with the main contractor; they are not directly responsible vis-à-vis the owner. Under Art. 105 of the Public Contracts Code subcontracting must be authorized by the contracting authority; in private projects, unless otherwise agreed, subcontracting is not allowed without the consent of the owner or employer; (g) Compagnie di assicurazione [insurance companies]: insurance companies play a very important role in the private construction industry, while in public works their influence is quite limited because Italian norms on public procurement expressly provide the type of policies to be executed by the contractors, sub-contractors and designers involved in a project,

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albeit their magnitude is rather limited in value (i.e. Art. 103 of the Public Contracts Code); (h) Finanziatori [financers or lenders]: they play a primary role in both public and private projects, as well as on those contractual structures to which they are not formally a party; (i) Project manager: they can be a representative of the employer, appointed to supervise and coordinate the project and the various subjects involved. Although not mandatory under Italian Law, project managers are often appointed for major projects; and (j) Coordinatore per la sicurezza in fase di progettazione [Health and safety coordinator during the design phase of the works]; Coordinatore per la sicurezza in fase di esecuzione dei lavori [Health and safety coordinator during the execution phase of the works]; Responsabile dei lavori [Responsible of the works]: as detailed under Decreto Legislativo 9 Aprile 2008, n. 81 [Legislative Decree 9 April 2008, No 81] (Italy) (‘Health and Safety Act’), they are, within the limits of their respective tasks, in charge of ensuring the implementation of any applicable health and safety protection measures or provisions for workers involved in the construction works. Other professionals can be mandatorily involved on construction projects under public procurement rules — for instance, the Responsabile del procedimento, who is an employee of the public administration under Article 10(5) of the Public Contracts Code, acting as the principal and is responsible for the surveillance of the public works.  

2.2.12.

2.3. Work, Health and Safety 2.3.1.

Work 2.3.2.

2.3.3.

2.3.4.

Italian legislation on work, health and safety is quite complex and spread over a variety of legal instruments.

Italian labour law is quite strict in general and the construction industry is no exception; rules are set to prevent irregularities in employment procedures and in the employment relationship. Basic principles on subordinated and autonomous work are set out in the fifth book of the CC, which provides for the main rights and duties of the employer and the employees. Specific statutes provide for termination of the employment agreement and its consequences, with a main distinction between firms employing more or fewer than 15 employees. Particularly relevant for the construction industry are concerns about irregular employment of the workforce. In this regard, Art. 36 bis of Legge 4 Agosto 2006, n 248 [Law 4 August 2006, No 248] (Italy) requires the employer to:

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2.3.5.

2.3.6.

2.3.7.

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(i) notify the hiring (‘comunicazione dell’assunzione del lavoratore’) to the competent Center for Employment (‘Centro per l’impiego’); and (ii) provide an identification card to any worker employed on the site (‘tessera di riconoscimento’). Moreover, all workers employed on the site (including self-employed ones) must visibly wear their identification card. Failure to comply with these provisions is punished by administrative penalties of up to €500 for each worker. The employer is jointly liable with any other employers or self-employed workers for any violations of identification provisions. There are no special or additional requirements applying to workers who are citizens of EU or EEA13 member states, but in the case of foreign non-EU/EEA workers, the employer must ascertain whether the worker is in possession of a valid residence permit [permesso di soggiorno] for being hired as a dependent worker or self-employed worker. In the case of employment of foreigners in breach of the rules on the residence permit, Art. 22 (12) of the Decreto Legislativo 25 Luglio 1998, n 286 [Legislative Decree 25 July 1998, No 286] (Italy) (the “Immigration Law”) provides for imprisonment of the responsible employer for six months to three years and a fine of €5,000 for each illegally employed worker. Under certain circumstances (e.g., workers being clandestine or iniquity of the economic conditions imposed by the employer), the employment of a foreigner without a regular residence permit may also complement the more serious crime of exploitation of clandestine immigration [sfruttamento dell’immigrazione clandestina] pursuant to the Immigration Law and CC Article 416. Italian labour law sets almost all terms and conditions of the employment relationship. However, collective bargain agreements [contrattazione collettiva] established by the representative associations of employers and employees (at national or local level) in each relevant economic sector or industry play a significant role in detailing many aspects, amongst which it is worth mentioning the main contents of the individual employment agreements executed within a specific business industry; the maximum working hours, the basic wage requirements, leave and paid permits, voluntary insurance schemes, the relationship with trade unions, and health and safety norms at the workplace. Particularly relevant for foreign investors wishing to carry out projects in Italy are the provisions on certain specific liabilities of the employer vis-à-vis the contractor’s employees. The most important are discussed below.  

2.3.8.

2.3.9.

13 The EEA brings together the EU member states and the three EEA European Free Trade Association States (Iceland, Liechtenstein and Norway) into an internal market governed by shared basic rules.

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CC Article 1676: Employer’s Liability for Payment of Wages and Social Security 2.3.10. Article 1676 of the CC provides that the employer is liable vis-à-vis the contractor’s workers for any unpaid wages and social security contributions owed by the contractor. Consequently, the employees of the contractor who have worked on the site are entitled to directly request the employer to pay any sums owed to them, within the limit of any outstanding amount owed by the employer to the contractor for the relevant project. This right of action is time barred after five years. 2.3.11. According to case law14, CC Article 1676 does not apply to the employer–subcontractor relationship. Therefore, the employer is not liable vis-à-vis the employees of the sub-contractor who have not been paid; they have an action only against the (main) contractor. Joint Liability for Unpaid Wages Pursuant to Decreto Legislativo 10 Settembre 2003, n 276 [Legislative Decree 10 September 2003, No 276] (Italy) Article 29(2) 2.3.12. Pursuant to Article 29 of Decreto Legislativo 10 Settembre 2003, No 276 [Legislative Decree 10 September 2003, No 276] (Italy), if the employer is an entrepreneur, they are jointly liable with the contractor and with any sub-contractor for any unpaid wages (including relevant severance indemnity funds [trattamento di fine rapporto] (‘TFR’)), social security contributions and insurance premiums due to the workers employed on the project. The employer who has made such payment is also obligated to satisfy the relevant tax obligations for such payments. Such joint liability is subject to a two years statute of limitation after the termination of the construction contract. This liability is uncapped. 2.3.13. The employees and the social security agencies each have a direct action against the employer. Unlawful Trading of Workforce 2.3.14. The main feature of a lawful construction contract [contratto di appalto] under Italian law is that the contractor performs the works as an independent entrepreneur, consequently (i) assuming the relevant responsibilities as to the organization; and (ii) taking the entrepreneurial risk inherent to the performance of the construction contract. 2.3.15. A general principle of Italian labour law under Article 4 of Decreto Legislativo 10 Settembre 2003, n 276 [Legislative Decree 10 September 2003, No 276] (Italy) (implementing Legge 14 Febbraio 2003, n 30 (‘Legge Biagi’) on employment and labour market) is that nobody can act as a mere intermediary or dealer of a workforce. The only exceptions are the duly authorized work agen-

14 Corte di Cassazione Civile [Civil Court of Cassation], No. 12048, 9 August 2003.

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cies, provided they are registered with the Italian Ministry of Employment and Social Policies, and the secondment of workers by the employer to third parties in accordance with applicable rules. 2.3.16. As a consequence, construction contracts lacking the above features may be qualified as a contract for illegal trading of a workforce. In such a case, pursuant to Article 38 of Decreto Legislativo 15 Giugno 2015, n 81 [Legislative Decree 15 June 2015, No 81] (Italy) (the ‘Jobs Act’), the workers employed by the ‘fake contractor’ or ‘user’ may file a petition with the labour division of the competent court to be declared as employees of the employer from the commencement date of the illegal intermediation of the workforce. Health and Safety 2.3.17. Provisions on health and safety at the workplace have been consolidated in a single piece of legislation, the Health and Safety Act (i.e. Decreto Legislativo 9 Aprile 2008, n. 81 [Legislative Decree 9 Aprile 2008, n. 81]), which sets out general principles and detailed measures for the purpose of ensuring workplace safety. 2.3.18. The Health and Safety Act also implements Council Directive 92/57/EEC of 24 June 1992 on the Implementation of Minimum Safety and Health Requirements at Temporary or Mobile Construction Sites (Eighth Individual Directive within the Meaning of Article 16(1) of Directive 89/391/EEC),15 and as such it imposes several duties on the employer (as owner of the project), the contractor and any sub-contractors, to ensure the adoption of adequate measures for safeguarding the health and safety of the workers employed on the project. 2.3.19. According to the Health and Safety Act, the employer — as owner of the project — is mainly responsible for the coordination and implementation of health and safety measures on the building site. The employer may appoint a responsabile dei lavori [responsible of the works] for the performance of the employer’s obligations under the Health and Safety Act, who becomes responsible for the works, the works’ safety, and the workers’ safety. If appointed, the responsible of the works takes the place of the employer as regards the health and safety liabilities, to the extent that the relating duties are formally and expressly provided by the employer’s proxy. 2.3.20. The employer (or the responsible of the works, if appointed) must ensure that a piano di sicurezza e coordinamento [health and safety plan] (‘PSC’) is drafted at the stage of works planning and handed over to the contractors, who must abide by it.  

15 Council Directive 92/57/EEC of 24 June 1992 on the Implementation of Minimum Safety and Health Requirements at Temporary or Mobile Construction Sites (Eighth Individual Directive within the Meaning of Article 16(1) of Directive 89/391/EEC) [1992] OJ L 245/6 .

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2.3.21.

Pursuant to Art. 91 of the Health and Safety Act, on sites where more than one contractor is employed, a coordinatore per la sicurezza in fase di progettazione [health and safety coordinator during the design phase of the works] meeting the professional and experience requirements set out by the Health and Safety Act must be appointed and is entrusted with the preparation and drafting of: (i) the PSC, whenever a number of contractors are executing the project works; and (ii) the documentation for evaluation and prevention of those risks to which the workers are exposed in the project concerned. 2.3.22. Pursuant to Art. 92 of the Health and Safety Act, the coordinatore per la sicurezza in fase di esecuzione dei lavori [health and safety coordinator during the execution phase of the works] must also be appointed and is responsible for the implementation and coordination of the health and safety measures provided in the PSC, and to ensure coordination and cooperation between the different work’ activities. These two roles may be vested in the same person if they meet the requirements provided by Article 89 of the Health and Safety Act. 2.3.23. Each company working on the site must prepare its own Safety Operation Plan (‘POS’) and suggest amendments and implementation measures for the PSC. 2.3.24. Decreto Legislativo 9 Aprile 2008, n 81 [Legislative Decree 9 April 2008, No 81] (Italy) provides further that the Ministry of Welfare inspectors may suspend the site activity should they find out that the employed personnel are not registered in the payroll or any other documentation relating to workers that must be kept on site, as well as in the event of serious and repeated infringements of health and safety measures. The most serious infringements of the Health and Safety Act are: (i) lack of the risk assessment document; (ii) nonperformance of mandatory training; and (iii) lack of a prevention unit. Breach of these obligations triggers the criminal or administrative liability of the employer or of the responsible for the works.

2.4. Protection of the Environment 2.4.1.

The implementation of EU environmental directives has paved the way for Italian environmental laws in all sectors, including water, air, waste, and environmental impact assessment. Decreto Legislativo 3 Aprile 2006, n 152 [Legislative Decree 3 April 2006, No 152] (Italy) (the ‘Environmental Code’) is the central piece of legislation in this field. It has been amended and integrated many times, such as by Decreto Legislativo 29 Giugno 2010, n 128 [Legislative Decree 29 June 2010, No 128] (Italy), which added to the Environmental Code the rules on Integrated Pollution Prevention and Control (IPPC) and by Decreto Legislativo 16 Giugno 2017, n 104 [Legislative Decree 16 June 2017, No 104]

Italy

2.4.2.

2.4.3.

Air 2.4.4.

Water 2.4.5.

477

(Italy), for the correct implementation of Directive 2014/52/EU of the European Parliament and of the Council of 16 April 2014 Amending Directive 2011/92/EU on the Assessment of the Effects of Certain Public and Private Projects on the Environment.16 In addition, construction projects must also comply with the rules and regulations adopted at the local level by the competent regions, provinces and municipalities. The Environmental Code provides several regulations in relation to environmental damage, based on the ‘polluter pays’ principle, attributing liabilities for pollution to the entity, normally the contractor, who has effective possession and availability of the site. The Environmental Code provides for: (a) A system of preventive and restorative measures, set by pt VI title II of the Environmental Code (Articles 304–10), which are applicable on a strict liability basis, therefore liability is incurred by the mere occurrence of an environmental damage and of any imminent threat thereof, as a result of the activities listed in Annex 5 of the EC; (b) A special procedure for reclamation of contaminated sites is provided under Articles 239–53 (pt IV title V); (c) A damage compensation regulation under pt VI title III of the Environmental Code (Articles 311–18) in case of environmental damages (or imminent threat thereof) as a result of any activity and on the basis of a negligence criterion of liability; and (d) A system of measures under pt IV title VI, provided in relation to certain criminal or administrative liabilities, in which context the most significant violation is the abandonment of waste or its uncontrolled storage.

Italy first adopted air pollution legislation in 1966, with additional regulations setting guidelines for controlling pollution added in the 1980s. Part V of the Environmental Code requires the authorization of air emissions before the installation, substantial modification, or transfer from one place to another of plants discharging air emissions. Environmental and building permits contain requirements relating to the thresholds for gas emissions.

Part III of the Environmental Code regulates the protection of water from pollution and thus implements the relevant EU directives. The regional legal re-

16 Directive 2014/52/EU of the European Parliament and of the Council of 16 April 2014 Amending Directive 2011/92/EU on the Assessment of the Effects of Certain Public and Private Projects on the Environment [2014] OJ L 124/1 .

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quirements must be adapted to the requirements laid down in the Environmental Code. In this context, it must be noted that there is a consensus, among the professionals involved, on the need for the development of the sector and improvement of the national infrastructure network for water. Waste 2.4.6. Directive 2008/98/EC of the European Parliament and the Council of 19 November 2008 on Waste and Repealing Certain Directives, which sets down the fundamental principles and rules for definition and management of waste,17 was incorporated into the Italian legal framework by Part IV of the Environmental Code, to which the regional legal requirements must also be adapted. It must be noted that for the purpose of creating the so-called ‘recycling society’, the legislators have identified specific objectives and have envisaged a genuine prevention programme. With reference to the objectives for recycling, Article 181 of the Environmental Code provides that reuse of waste from construction and demolition must be increased, by 2020, by 70 %. Interventions on damaged asbestos are still regulated by Legge 27 Marzo 1992, n 257 [Law 27 March 1992, No 257] (Italy), by Decreto Ministeriale 6 Settembre 1994 [Ministerial Decree 6 September 1994] (Italy) and by Decreto Ministeriale 29 Luglio 2004, No 248 [Ministerial Decree 29 July 2004, No 248] (Italy).  

Environmental Impact Assessments 2.4.7. In Italy, the early fully centralized environmental impact assessment (‘EIA’) system, carried out under the strict supervision and responsibility of the Ministry of the Environment, has been replaced by a renewed methodology better aligned with EIA Directives, first presented by Decreto Legislativo 3 Aprile 2006, n. 152 [Legislative Decree 3 April 2006, n. 152] (Italy) and reformulated by Decreto Legislativo 16 Gennaio 2008, n. 4 [Legislative Decree 16 January 2008, No 4] (Italy). Its implementation is facilitated by the decentralisation of responsibilities to regional and provincial administrations for the supervision of EIA for projects classified under Annex 2 of the Environmental Code. This administrative devolution in the long term should render the Italian EIA system more flexible and efficient. However, limitations subsist in new regulations, like the discontinuity between the initial preliminary design, often including main analysis of alternatives and the definitive design, developed in parallel with the EIA, which hinders an integrated appraisal of impacts, mitigation, costs and alternatives. Better is the situation for projects concerning

17 Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on Waste and Repealing Certain Directives [2008] OJ L 312/3 .

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the realization or the upgrade of infrastructures or developments of national strategic relevance; in this case the EIA is accomplished within prolonged procedures and studies, and subjected to more rigorous institutional arrangements for environmental accountability and direct linkages with planning and regulatory regimes and objectives. 2.4.8. For EIA procedures, the latest integrations to the Environmental Code occurred by Decreto Legislativo 16 Giugno 2017, n 104 [Legislative Decree 16 June 2017, No 104] (Italy) allow presentation of design documents with an information and detail level equivalent to that of the feasibility project or at a level that allows the full assessment of the impacts. Applicant and Administration will dialogue to decide on any additions and/or amendments to the project submitted to the approval of the Administrations. 2.4.9. For projects that fall within the jurisdiction of the government, the applicant may request, as an alternative to the ordinary procedure, the issuance of the ‘Single Environmental Authorization’ (i.e. the “A.U.A.”), which is a special kind of authorization introduced by Decreto del Presidente della Repubblica 13 Marzo 2013, n 59 [Presidential Decree 13 March 2013, No 59]. The AUA replaces any other authorization eventually needed to execute the activity. The AUA can be granted only in cases where the applicant is a small or medium size company and the project does not require the issuance of the EIA for its realization. Alongside this, a single procedure of regional competence is envisaged. 2.4.10. The rules for the EIA procedure are homogeneous throughout the national territory. The procedures will be digitized and the publication obligation in the newspapers can also be eliminated.  

2.5. Quality Assurance 2.5.1.

Under Italian law, quality assurance systems are plans which incorporate a technical report and a set of prescriptions related to the complexity of the work and the possible critical phases in the performance path, with the aim of avoiding or reducing the safety risks to workers.

Private Construction Projects 2.5.2. In private construction projects, the Health and Safety Act requires that certain quality assurance systems are adopted and abided by. 2.5.3. The minimum requirements of the quality assurance systems are in Attachment XV of the Health and Safety Act. They comprise of the description of the site, the evaluation of the possible risks associated with the project, the design and organizational choices, the individual protection measures that must be adopted, the envisaged duration of the works, and the coordination

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measures in case of a plurality of contractors and sub-contractors on the project. The quality assurance systems form an integral part of the construction contract. The employer is under a duty to ensure, directly or through the responsible for the works, that quality assurance systems are abided by the workers.

Public Procurement Construction Projects 2.5.5. In public procurement construction projects, quality assurance systems are regulated pursuant to Article 87 of the Public Contracts Code. 2.5.6. Where contracting authorities require the production of certificates drawn up by independent bodies attesting that the economic operator complies with certain quality assurance standards, including on accessibility for disabled persons, contracting authorities must refer to quality assurance systems based on the relevant European standards series certified by accredited bodies. They must recognise equivalent certificates from bodies established in other Member States. They must also accept other evidence of equivalent quality assurance measures where the economic operator concerned had no possibility of obtaining such certificates within the relevant time limits for reasons that are not attributable to that economic operator, provided that the economic operator proves that the proposed quality assurance measures comply with the required quality assurance standards. 2.5.7. Where contracting authorities require the production of certificates drawn up by independent bodies attesting that the economic operator complies with certain environmental management systems or standards, they must refer to the Eco-Management and Audit Scheme (‘EMAS’) of the European Union or to other environmental management systems as recognized in accordance with Article 45 of Regulation (EC) No 1221/200918, or other environmental management standards based on the relevant European or international standards by accredited bodies. 2.5.8. Where an economic operator demonstrably had no access to such certificates, or no possibility of obtaining them within the relevant time limits for reasons that are not attributable to that economic operator, the contracting authority must also accept other evidence of environmental management measures, provided that the economic operator proves that these measures are equivalent to those required under the applicable environmental management system or standard.

18 Regulation (EC) No 1221/2009 of the European Parliament and of the Council of 25 November 2009 on the Voluntary Participation by Organisations in a Community Eco-Management and Audit Scheme (EMAS), Repealing Regulation (EC) No 761/2001 and Commission Decisions 2001/681/EC and 2006/ 193/EC [2009] OJ L 342/1 (‘Regulation (EC) No 1221/2009’).

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Under Article 95 of the new Public Contracts Code, the contract is assigned, in most cases, to the economically advantageous offer, identified on the basis of the best quality to price ratio, and evaluated by objective criteria, such as qualitative, environmental or social aspects related to the object of the contract. These criteria can include: (a) The quality, which includes technical merit, aesthetic and functional characteristics, accessibility for people with disabilities, adequate design for all users, certifications regarding the safety and health of workers such as OSHAS 1800119, social and environmental characteristics, containment of energy consumption and environmental resources of the work or product, innovative features, and marketing and related conditions; and (b) The possession of an EU eco-label in relation to the goods or services covered by the contract, equal to or higher than 30 % of the value of the supplies or services covered by the contract.  

Quality Management Certification 2.5.10. Pursuant to Article 84 of the Public Contracts Code, in order to obtain quality certification by SOA and participate in public procurement procedures, economic operators are required to submit evidence of their quality management certification in accordance with system of qualification provided by the European norms UNI EN ISO 900020. 2.5.11. Quality management certification in accordance with European norms UNI EN ISO 9000 is not required for private construction projects.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

In private construction contracts the contracting dynamics vary in relation to the respective contractual powers of the employer and the contractor. Normally, in large projects, the employer imposes its own standard contract, which is often subject to only minor amendments to accommodate certain requests of the contractors. The same applies to the relationship between the main contractor and the subcontractors, who often enjoy very limited contracting power.

19 The OSHAS 18001 regulations are provided by the British Standard Institution. For further information, please refer to the following link https://www.bsigroup.com/. 20 The UNI EN ISO 90000 regulations are provided by the Italian Standard Institution. For further information, please refer to the following link http://www.uni.com/index.php.

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Regarding contracts for the supply of goods and equipment, normally the general terms and conditions of sale or supply set by the supplier are applicable. Consultants are often appointed on the basis of quite basic appointment contracts, which may be based on the model forms of appointment prepared by the relevant professional associations (e.g., architects, engineers, etc.). Nevertheless, in large projects these contracts are more heavily negotiated. In project finance projects, although finance providers do not often impose a specific standard, they often have an important role in the contract negotiation aimed at identifying, allocating and mitigating the construction risks. In Italy it is very rare that internationally renowned standards like FIDIC are used. Insurance companies are often requested by both parties to assist in assessing the most suitable insurance products in relation to the features of the project. Usually, however, the type of policies required by employers are quite standard, and they consist of a contractor’s all risks policy (‘CAR’) or erection all risks policy (‘EAR’), along with a third-party liability policy covering against personal injury and death and damages to property (‘RCT’). The situation may be more complicated for foreign employers, who must adapt their insurance requirements — often consisting of ‘standard’ conditions — to the type of policies and conditions available in the Italian insurance market. In this respect, risk assessment and management on the employer’s side often requires specific evaluations during the negotiation phase. In construction projects governed by public procurement rules, the main (construction) contract is prepared by the public administration as employer, and subject to minor amendments on the basis of commercial negotiations between the parties. It is worth noting that in public works projects the strict and detailed regulation does not leave the parties much room to maneuver. In public private partnerships,21 bidders are requested to provide with their offer, inter alia, a ‘draft contract’ [bozza di convenzione] containing the regulation of the future relationship between the selected bidder and the public administration. As regards insurance coverage within public construction contracts, any relevant insurance requirements are set by the Public Contracts Code and the enacting Regulation,22 which details the type of policy, the maximum covered amounts and the guarantee conditions which the contractors are expected to stipulate.  

2.6.5.

2.6.6.

2.6.7.

2.6.8.

21 Public Contracts Code pt IV. 22 Decreto del Presidente della Repubblica 5 Ottobre 2010, n 207 [Decree of the President of the Republic 5 October 2010, No 207] (Italy).

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3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

3.1.3.

3.1.4.

3.1.5.

Pursuant to CC Article 1321, a contract is “the agreement of two or more parties to establish, regulate or extinguish a patrimonial legal relationship among themselves”.23 CC Article 1322 establishes the principle of freedom of contract, providing that the parties can freely determine the contents of the contract within the limits imposed by the law. While the CC regulates some of the most common types of contracts (e.g., sale of goods, supply, lease, independent contract, carriage, mandate, commission, forwarding, agency, brokerage, deposit, loan, banking contracts, insurance, gambling and wagering, and suretyship and settlement), CC Article 1322(2) provides that the parties can also execute contracts different from the ones which are regulated in the CC, provided that the interests they satisfy are worthy of protection according to the legal system. CC Article 1323 provides that all contracts, even those that are not the types expressly regulated, are subject to the general rules contained in book IV title II (on obligations and contracts). Under the CC, the general rules on contracts apply to all contracts, unless they are derogated by specific provisions applicable to the relevant type of contract or by agreement of the parties (in this latter case, only to the extent the legal provision the parties wish to derogate is not mandatory). Finally, certain contracts, such as labour contracts, agricultural contracts, company contracts and consortium contracts, are regulated in other books of the CC, in particular book V on labor, employment and corporations.  

3.2. Legal Framework 3.2.1.

The Italian legal framework is different for private construction contracts and public procurement contracts.

Private Construction Projects 3.2.2. In private construction projects, the contracts are governed by the CC. The types of contracts governed by the CC are the ‘independent contract’ (CC Articles 1655–77), independent labor contract (CC Articles 2222–8) and indepen-

23 Mario Beltramo, The Italian Civil Code (Oceana, 3rd ed, 2007). All translations of the CC are taken from this source.

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3.2.3.

3.2.4.

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dent intellectual work (CC Articles 2229–38). The CC regulates the general provisions of contracts and obligations (to the extent they are not derogated by the specific regulation on independent contract) and the will of the parties (to the extent permitted under the law). While the most significant provisions regulating the main relevant contracts for the construction industry are contained in the CC, several pieces of complementary legislation are also relevant, in particular those relating to health and safety at work, environmental protection, sub-supply and insolvency procedures. There is a great variety of decisions rendered by the courts, especially on the independent contract and other regulated types of contracts provided for under the CC, to define those aspects of the law that are not expressly regulated. While court decisions are not binding, in practice when drafting and interpreting contracts, case law is taken into account, and first and second instance courts seldom deviate from the principles spelled out by the Supreme Court of Cassation, especially for decisions rendered by the joint divisions [a sezioni unite], which is what happens when lower courts or different divisions of the same Supreme Court of Cassation have decided according to diverging criteria. To fill in the gaps that are not regulated by the CC and other complementary legislation relevant for private construction projects contracts, several rules on public procurement contracts are reproduced in private construction legal documentation.

Public Procurement 3.2.6. Over the last 25 years the Italian public procurement system has been subject to continuous and often radical changes, to implement relevant EU legislation and case law. 3.2.7. The first radical reform of public works procurement was introduced by Legge n 109 of 11 February 1994 (‘Legge Merloni’), whose purpose was ‘to improve the efficiency, the effectiveness, the transparency and the quality of public works’.24 Since then this law and its secondary legislation has been amended several times. 3.2.8. New rules were then introduced by Decreto Legislativo 12 Aprile 2006, No 163 [Legislative Decree 12 April 2006, No 163] (Italy), which enacted the Public Contracts Code, implementing European Community Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 Coordinating the Procurement Procedures of Entities Operating in the Water, Energy, Transport

24 Legge Merloni Art 1.

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and Postal Services Sectors25 and Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts.26 In 2010, Decreto del Presidente della Repubblica 5 Ottobre 2010, n 207 [Decree of the President of the Republic 5 October 2010, No 207] (Italy) containing the Regulation (a piece of secondary legislation) for the practical execution of the Public Contracts Codes provisions was also enacted. More recently, the Italian public procurement legal framework was radically reviewed by competent legislative bodies to streamline the procedures, facilitate the documentary evidence requirements, amend the quality certification system and reduce exceptions to general rules, so as to comply with the newly adopted European Directives on public procurement procedures27 and concession contracts.28 The legal framework for public procurement projects is regulated in detail by the new Public Contracts Code (as amended by Decreto Legislativo 19 Aprile 2017, n 56 [Legislative Decree 19 April 2017, No 56] (Italy)), and recently modified by the Decreto Legge 18 Aprile 2019, n. 32 [Law Decree 18 April 2019, No. 32], converted in law by the Law 17 Giugno 2019, n. 55 [Law 17 June 2019 No. 55] to implement Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts,29 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC30 and Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on Procurement by Entities Operating in the Water, Energy,

25 Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 Coordinating the Procurement Procedures of Entities Operating in the Water, Energy, Transport and Postal Services Sectors [2004] OJ L 134/1 . 26 Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts [2004] OJ L 134/114 . 27 See Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC [2014] OJ L 94/65 ; Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on Procurement by Entities Operating in the Water, Energy, Transport and Postal Services Sectors and Repealing Directive 2004/17/EC [2014] OJ L 94/243 . 28 See Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts [2014] OJ L 94/1 . 29 See Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts [2014] OJ L 94/1 . 30 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC [2014] OJ L 94/65 .

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Transport and Postal Services Sectors and Repealing Directive 2004/17/EC).31 In addition to the rules contained in the Public Contracts Code, public procurement is regulated by other provisions contained in specific decrees and other regulatory instruments, such as the ANAC guidelines and its ‘soft laws’ and a “regolamento”, i.e. a detailed regulation containing specific provisions for the implementation of the Public Contracts Code is expected to be enacted by the end of 2019. 3.2.10. Great importance is also attached to the judgments rendered by the Administrative Courts (the Administrative Regional Court as the tribunal of first instance and the Council of State as the appeal body) and the opinions and decisions of ANAC.  

3.3. Public Policy 3.3.1.

3.3.2.

3.3.3.

In Italy, as is the case in almost all legal systems, the law refers to two different kinds of public policy (or ‘order public’): international public policy and domestic public policy. A narrower, economic public policy is also emerging in more recent times. International public policy is generally known as the ensemble of principles governing the legal system as a whole, deriving mainly from the constitution, the fundamental principles of criminal and private law (on marriage, inheritance, etc), but also of public international law (such as the protection of fundamental rights of individuals). In Italian private international law doctrine, international public policy is referred to by domestic courts when they intend to block (ex post) the application of a foreign law if its effects are deemed contrary to the fundamental values of the Italian legal system, as well as when reviewing foreign judgments and arbitral awards, for their recognition and enforcement. Domestic public policy is the ensemble of the core values of the legal system (e.g., the principle of property, sanctity of life, democracy, etc). Within domestic public policy, Italian scholars identify a more confined set of main norms, relevant to economic activity, that form the economic public policy of the country. The economic public policy is the most relevant concept for construction contracts, as construction contracts will often be governed by Italian law, and the related disputes decided by a domestic (Italian) court or by an arbitral tribunal seating in Italy. The main principles of the economic  

3.3.4.

31 Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on Procurement by Entities Operating in the Water, Energy, Transport and Postal Services Sectors and Repealing Directive 2004/17/EC [2014] OJ L 94/243 .

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public policy can be derived from the Constitution and the European Treaties, based on free economic initiative and free competition. The CC does not provide for a definition of public policy nor of economic public policy, albeit it often refers to public policy as the benchmark for assessing the validity of a contract or covenant32. In respect of construction law matters, the provision contained in CC Article 1669, according to which the contractor holds a decennial liability vis-à-vis the client and third parties for damages caused by inherent construction defects, is regarded as a matter of public policy; such liability is set in the general interest of having safe and stable buildings33.

3.4. Statute Law 3.4.1.

The Italian legal system is a civil law system based on codes and written legislation rather than the binding values of precedents. Therefore, almost all governing law in Italy is statute law. With reference to construction law matters, the most relevant pieces of legislation outside of the CC are the Decreto del Presidente della Repubblica 6 Giugno 2001, n 380 [Decree of the President of the Republic 7 June 2001, No 380] (Italy) (‘Building Code’), the Health and Safety Act, the Environmental Code, the Decreto Legislativo 22 Gennaio 2004, n 42 [Legislative Decree 22 January, No 42] (Italy) (‘Code of Cultural Heritage’) and landscape and other sector-specific pieces of legislation such as those on tax, insolvency proceedings, licensing of professionals, products quality, environmental certification, plant installation and technical specifications of products.

3.5. Implied Contract Terms 3.5.1.

3.5.2.

The doctrine of implied terms is well known and regulated under Italian law. It refers to the practice of setting down default rules for contracts, when terms that contracting parties expressly choose run out, or setting down mandatory rules which operate to override terms that the parties themselves may have chosen. The purpose of implied terms is to supplement a contractual agreement in the interest of making the deal effective for the purpose of business, to achieve fairness between the parties, or to relieve hardship. Terms may be implied into contracts by law or by the courts. The most relevant cases are the following.

32 For example, pursuant to CC Article 1418 a contract is null and void if it is contrary to imperative norms. 33 Corte di cassazione civile [Civil Court of Cassation] No 4319 of 4 March 2016.

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3.5.3.

3.5.4.

3.5.5.

3.5.6.

3.5.7.

3.5.8.

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Regarding terms implied into contract by law, CC Article 1339 provides that terms that are imposed by the law or other regulations, including the prices of goods or services, are automatically inserted into the contract, even in place of contrary clauses included by the parties. CC Article 1374, contained in book IV ch V on regulating the effects of the contract, provides that a contract binds the parties not only as to what it expressly provides, but also to all the consequences deriving from it by law or, in its absence, according to usage and equity. Regarding terms implied into contract by the courts, CC Article 1657 on independent contract provides that if the parties have not specified the amount of compensation and have not established the manner for determining it, such amount is computed with reference to existing schedules of rates or usage or, in the absence of both, is determined by the court. Pursuant to CC Article 1660 on necessary variations in plans, if, to carry out the work according to the standard of the trade, it is necessary to make variations in the plans, and the parties fail to agree in that respect, it is the duty of the court to establish what variations are to be made and the related variations in the price. CC Article 1384 on penalties provides that the penalty agreed by the parties to a contract may be equitably reduced by the court if the principal obligation has been partly performed or if the penalty is manifestly excessive, always taking into account the interest which the creditor had in the performance. In addition to the CC, complementary legislation provides for the relative invalidity of certain clauses which are deemed harsh on one party, for example, Article 33 of the Decreto Legislativo 6 settembre 2005 n 206 [Legislative Decree 6 September 2005 No. 206] bringing the Consumer Code, pursuant to which are considered unfair and not valid clauses that, despite good faith, determine a significant imbalance of rights and obligations for the consumer arising from the contract. Relative invalidity means that the aggrieved party only can invoke the invalidity of the clause and ask the court to replace said invalid clause with one compliant with the law.

3.6. Construction of Contract Terms 3.6.1.

Construction of contract terms is different between private contracts and public contracts.

Construction of Private Contract Terms 3.6.2. Pursuant to the CC there are certain general rules which apply to all contracts unless a more specific provision is set under the rules governing the specific regulated contract.

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3.6.3.

3.6.4.

3.6.5.

3.6.6.

3.6.7.

489

Given that there are no specific rules on the interpretation of independent contracts, independent labor contracts (CC Articles 2222–8) and independent intellectual works (CC Articles 2229–38), such contracts must be construed in accordance with the general principles and rules on contracts interpretation contained in CC Articles 1362–71. The basic rule when interpreting a contract is to seek the common intent of the parties. In order to do so there is subjective interpretation criteria, based on the will as expressed by the parties, which are provided for under CC Articles 1362–5. The first criterion to ascertain the common intent of the parties is the literal meaning of the wording of the relevant clause. Another criterion provided for under CC Article 1362 is the general course of the parties’ behavior, including that which was subsequent to the conclusion of the contract. CC Article 1363 provides for the comprehensive interpretation of clauses: every clause of the contract is interpreted with reference to the others, attributing to each the meaning resulting from the contract as a whole. CC Article 1364 sets the criterion of interpretation of general expression, providing that general expressions only include the objects to which the parties intended to refer. Finally, CC Article 1365 on illustrative examples provides that if a case is mentioned in a contract in order to explain a clause, unmentioned cases to which the same clause could reasonably be extended are not presumed to be excluded. If, even with recourse to the subjective interpretation criteria, it is still not possible to ascertain the common intent of the parties because this intention has not been manifested or is still vague, CC Articles 1366–71 provides that the interpreter can use other objective criteria to understand the intention of the parties. Such criteria are the interpretation of the contract according to good faith34 and in a manner that gives effect to the contract or a specific clause.35 CC Article 1368 provides that ambiguous clauses are interpreted according to the general practice in the place in which the contract was concluded. For contracts in which one of the parties is an entrepreneur, ambiguous clauses are interpreted according to the general practice of the place where the enterprise has its headquarters. Pursuant to CC Article 1369, expressions having several possible meanings must be understood, in case of doubt, in the sense most suitable to the nature and object of the contract. CC Article 1370 provides that provisions contained in the standard conditions of contract or in form or formularies prepared by one of the contracting parties are interpreted, in case of doubt, in favor of the other party. Finally, CC Article 1371 provides the default

34 CC Art 1366. 35 CC Art 1367.

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rule according to which when the contract remains obscure, notwithstanding the application of the rules on contract interpretation contained in CC Articles 1362–70, it must be interpreted in the sense less burdensome for the debtor if it is gratuitous, while for a non-gratuitous contract, in the sense which equitably reconciles the interests of the parties. 3.6.8. It is commonly accepted that a court called to construe the contractual terms may recourse to objective criteria only in case the subjective criteria are not sufficient to ascertain the common intent of the parties or such intent and the contractual provisions remain vague.36 3.6.9. A derogation from this rule is provided for in collective bargaining labor agreements, where the literal interpretation,37 the comprehensive interpretation of clauses,38 and the objective criteria of interpretation and integration39 are on equal footing, due to the normative nature of such agreements.40 3.6.10. The parties are however free to set specific criteria for interpretation of the contractual clauses contained in their contracts. Construction of Public Contract Terms 3.6.11. Pursuant to Public Contracts Code Article 30(8), the provisions of the CC apply to the conclusion of the contract and the execution phase, including interpretation of the contract. 3.6.12. Notwithstanding the foregoing, public contracts tend to be quite precise and detailed in their terms.

3.7. Private and Public Procurement Private Construction Projects 3.7.1. In private construction projects, contracts are governed by the CC. In particular, the CC governs ‘independent contracts’,41 independent labour contracts42 and independent intellectual work,43 and contains general provisions on contracts and obligations (to the extent they are not derogated by the specific reg36 Corte di cassazione civile [Civil Court of Cassation] No 18509, 02 July 2008; Corte di cassazione civile [Civil Court of Cassation] No 10218, 22 July 2008; Corte di cassazione civile [Civil Court of Cassation] No 11104, 15 May 2007. 37 CC Art 1362. 38 CC Art 1363. 39 CC Arts 1366–71. 40 Corte di cassazione civile [Civil Court of Cassation] No 24652, 6 October2008; Corte di cassazione civile [Civil Court of Cassation] No 12736, 20 May 2008. 41 CC Arts 1655–77. 42 CC Arts 2222–8. 43 CC Arts 2229–38.

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3.7.3.

491

ulation on independent contract). Contracts are also governed by the will of the parties (to the extent permitted under the law). However, several rules on public procurement are emulated in private construction projects. Therefore, even though in private construction contracts it is not necessary to proceed with a competitive bidding procedure, employers usually make reference to the competitive procedure provided for under the Public Contracts Code for the selection of the preferred bidder; several contractual clauses mirror the provisions contained in the Public Contracts Code and implement regulations; and financial, technical and moral requirements sometimes reflect those provided in the Public Contracts Code. There are no standard contracts. Some templates of construction contracts have been provided by business associations such as ANCE and some order of engineers have created some templates to be used in case of engineer consultancy services appointment, nevertheless, those templates are to be intended as mere supportive template, being not binding and not uniformly or widely spread. FIDIC forms are not used in Italy.

Public Procurement 3.7.4. As mentioned above, pursuant to Article 30(8) of the Public Contracts Code, the provisions of the CC apply to the conclusion of the contract and the execution phase, including interpretation of the contract. 3.7.5. Under Italian public procurement rules there are no standard forms of contract, such as FIDIC forms. in fact, in the tender phase each administration prepares (i) the template of the conditions of contract and (ii) the general conditions. 3.7.6. The conditions of contract usually contain the specific provisions regarding the relationship between the parties, such as (a) the term for completion of the work and delay penalties; (b) the program of the works; (c) conditions for suspension and resumption of work; (d) specific responsibilities and obligations of the contractor; (e) evaluation and accounting of the works; (f) terms and conditions of payments; (g) controls by the administration; (h) testing and commissioning of the work; (i) dispute resolution. 3.7.7. The contract is completed by the “capitolato speciale”, which contains the specifications of the work. 3.7.8. The general conditions contain the rules that apply to common issues such as: (i) knowledge of site conditions by the contractor; (ii) supply of equipment and materials; (iii) compliance with laws and regulations; (iv) subcontracting; (v) guarantees; (vi) insurances; (vii) variations; (viii) force majeure; (ix) claims; (x) intellectual property; and (xi) confidentiality. 3.7.9. Modifications to public contracts during their term is by law limited to certain circumstances.

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4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

In Italy there is no single piece of legislation governing the contracting practices of the construction industry.

4.2. Codes of Practice 4.2.1. 4.2.2.

4.2.3.

4.2.4.

In Italy there is no official mandatory code of practice for the construction industry. ANCE, as the business association of the building industry, has adopted a form of ‘organization model’ and a model code of ethics as a guideline for its members44. Under Italian law, organization models are adopted by businesses on a voluntary basis pursuant to Article 6 of Decreto Legislativo 8 Giugno 2001, No 231 [Legislative Decree 8 June, No 231] (Italy) on administrative (criminal) liability of legal entities, companies and associations. Codes of ethics are self-regulating codes that should guide each business in the conduct of its activities. These organization models and codes have no official or binding value, albeit abiding by them can avoid the administrative (criminal) liability of the relevant legal entity. As a matter of contractual dynamics, and in order to avoid administrative (criminal) liability, quite often businesses having an organization model and a code of ethics request their contractors either to have an organization model and a code of ethics with similar or analogous provisions, or to commit to abide by their own organization model and code of ethics.

4.3. Licensing of Professionals and Contractors 4.3.1.

Under CC Article 2229, the law lists the intellectual professions which cannot be exercised in the absence of registration in special rolls or registers. Professional associations (under the supervision of the State) are entrusted with the task of keeping the rolls and registers, verifying the requisites for registration in rolls or registers, and exercising disciplinary power over their registered members.

44 On 20 December 2013, the Minister of Justice approved the guidelines provided by ANCE regarding the organization model and the code of ethic. For further information, please refer to the following link: http://ance231.squadra.iltigliosrl.it/.

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4.3.2.

4.3.3.

4.3.4.

4.3.5. 4.3.6.

493

CC Articles 2230–8 regulate, in some detail, contracts for the performance of professional work. CC Article 2231 expressly provides that a person who renders professional services without being registered with the relevant roll or register is not entitled to any action for compensation. Decreto del Presidente della Repubblica 7 Agosto 2012, n 137 [Decree of the President of the Republic 7 August 2012, No 137] (Italy), a reform passed in 2012, provides for the unified discipline of regulated professions, with common rules applicable to all regulated professions (with the notable exclusion of lawyers). In particular, the new law regulates admission to the rolls or registers and the exercise of ‘intellectual’ professions, the keeping of such rolls or registers, the principle of free competition, the duty to subscribe to a professional insurance policy, the duty of continuing education, and disciplinary proceedings. Among the regulated professions are architects and engineers, who play a crucial role in the construction industry. For example, pursuant to Article 64 of the Building Code, both the design of concrete buildings and the execution of the works have to be carried out by and under the direction of a registered professional. Also, Public Contracts Code Articles 24 and 46 provide for the necessary registration of architects and engineers for the design of works. As for contractors, the old system based on the National Register of Building Contractors for public works [Albo Nazionale dei Costruttori], established by Legge 10 Febbraio 1962, n 57 [Law 10 February 1962, No 57] (Italy), expired on 31 December 1999. It is now replaced by the system based on the certification issued by the SOA.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

In Italy there are no standard contracts commonly used for construction contracts.

Private Construction Projects 5.1.2. Construction contracts are usually drafted on a case by case basis, taking into account the rules provided under the CC and other pieces of legislation, such as the Public Contracts Code, implementing regulations, and technical specifications. 5.1.3. Under the guidance of either local Chambers of Commerce or ANCE there have been some non-official attempts to provide standard forms of construction contracts. Lack of standardization is closely linked to the reliance on the

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5.1.4.

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provisions of the CC as the main settlement of interest and to the still relatively scarce impact of insurers on construction industry practice. Italian players in the construction industry are becoming increasingly aware of FIDIC contracts, as are lawyers, where they are mainly involved in international construction activity. This is because FIDIC contracts are still not used in Italy. Other internationally renowned standard contracts (e.g., Joint Contracts Tribunal, Institution Civil Engineer, American Institute of Architects, etc.) are also not used Italy. This is mainly due to the several transplant issues arising in relation to both their Anglo-Saxon common law structure and their compatibility with the detailed Italian regulations.  

Public Construction Projects 5.1.5. Public construction projects are regulated in some detail by A Public Contracts Code Articles 100–113-bis, but no standard contracts are available.

5.2. Amendment of Contracts and Bespoke Contracts 5.2.1.

In practice all construction contracts in Italy are bespoke contracts. It is possible for the contracting parties to amend them during their term of validity either by operation of law or by agreement of the parties.

Private Construction Projects 5.2.2. The law provides for several instances in which such amendments may be done. There are general rules applying to contracts in general and specific rules applying to independent contracts. Such instances are mainly linked to supervening impossibility, force majeure and change in circumstances (or excessive onerousness). 5.2.3. As for the general rules, CC Article 1464 on partial impossibility provides that when the performance of one party becomes possible only in part, the other party has a right to a corresponding reduction of the counter-performance due by it while also keeping the right to withdraw from the contract in the absence of an appreciable interest in partial performance. 5.2.4. CC Article 1467 on excessive onerousness provides that in contracts for continuous or periodic performance or for deferred performance, if extraordinary and unforeseeable events make the performance of one party excessively onerous, the party who owes such performance can demand dissolution of the contract, which can be avoided by the other party by offering to equitably amend the terms and conditions of the contract. 5.2.5. On the basis of the foregoing general principles, CC Article 1664 on supervening hardship or difficulty in performance of works (or services) in independent contracts provides that if, as a result of unforeseeable circumstances, in-

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creases or reductions in the costs of materials or labour cause an increase or reduction by more than 10 % of the total price, the independent contractor or the customer can request that the price be revised (for the part of the difference which exceeds 10 %). CC Articles 1660–1, specifically referring to independent contracts, provide specific rules to regulate the adaptation of compensation for variations that are necessary to comply with the standards of the trade or with instructions issued by the employer. It is also worthwhile to note that in practice, at least for major projects, amendments of contracts are made in writing, although this is not mandatory by law. Pursuant to the rules on evidence in court under CC Articles 2721–6, amendments need to be made in the same form as the original contract to which they refer; therefore, in the case of written contracts, subsequent amendments must be in writing, as witnesses are allowed only in limited circumstances.  

 

5.2.6.

5.2.7.

Public Procurement Projects 5.2.8. The Public Contracts Code provides for detailed rules on changes in prices and amendments to the contract conditions in cases of subsequent unforeseeable events and excessive onerousness. 5.2.9. Modification of public contracts during their term is limited by law to certain circumstances. Pursuant to Article 106 of the Public Contracts Code, which reflects EU Law, contracts may be modified without a new procurement procedure only in the following circumstances: (a) Where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses, which may include price revision clauses, or options. Such clauses must state the scope and nature of possible modifications or options as well as the conditions under which they may be used. They must not provide for modifications or options that would alter the overall nature of the contract or the framework agreement; (b) For additional works, services or supplies by the original contractor that have become necessary and that were not included in the initial procurement where a change of contractor: (i) cannot be made for economic or technical reasons, such as requirements of interchangeability or interoperability with existing equipment, services or installations procured under the initial procurement; and (ii) would cause significant inconvenience or substantial duplication of costs for the contracting authority. However, any increase in price must not exceed 50 % of the value of the original contract. Where several successive modifications are made, that limitation applies to the value of each modification, but such consecutive modifications must not be aimed at circumventing the law;  

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(c)

Where all of the following conditions are fulfilled: (i) the need for modification has been brought about by circumstances which a diligent contracting authority could not foresee; (ii) the modification does not alter the overall nature of the contract; and (iii) any increase in price is not higher than 50 % of the value of the original contract or framework agreement. Again, where several successive modifications are made, the limitation applies to the value of each modification, but such consecutive modifications must not be aimed at circumventing the law; (d) Where a new contractor replaces the one to which the contracting authority had initially awarded the contract as a consequence of either: (i) an unequivocal review clause or option in conformity with point (a); (ii) universal or partial succession into the position of the initial contractor following corporate restructuring, including takeover, merger, acquisition or insolvency, of another economic operator that fulfils the criteria for qualitative selection initially established, provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of the law; or (iii) in the event that the contracting authority itself assumes the main contractor’s obligations towards its subcontractors, where this possibility is provided for under the law.; and (e) Where the modifications, irrespective of their value, are not substantial. 5.2.10. Contracting authorities having modified a contract in the cases set out under points (b) and (c) above must publish a notice to that effect in the Official Journal of the European Union (Art. 106 (5) of the Public Contracts Code). 5.2.11. Furthermore, and without any need to verify whether the conditions set out under points (a) to (d) above are met, contracts may also be modified without a new procurement being necessary where the value of the modification is below both of the following values: (i) the thresholds set out in Article 4 of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC (i.e., from 1 January 2018, €5,548,000 for public works contracts);45 and (ii) 10 % of the initial contract value for service and supply contracts or 15 % of the initial contract value for works contracts (Art. 106 (2) let. A) and B) of the Public Contracts Code). 5.2.12. However, the modification may not alter the overall nature of the contract or framework agreement. Where several successive modifications are made, the  

 

 

 

45 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC [2014] OJ L 94/65 .

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497

value is assessed based on the net cumulative value of the successive modifications (Art. 106 (2), let. B) of the Public Contracts Code). 5.2.13. Termination of public contracts during their term is also regulated by the law, which provides that a contracting entity may terminate a public contract at least in the following circumstances: (a) where the contract has been subject to a substantial modification, which would have required a new procurement procedure (Art. 108 (1), let. A) of the Public Contracts Code); (b) where the contractor has, at the time of contract award, been in one of the situations qualified as ‘exclusion grounds’ and should therefore have been excluded from the procurement procedure (Art. 108 (1), let. C) of the Public Contracts Code); and (c) the contract should not have been awarded to the contractor in view of a serious infringement of the obligations under the Treaties and the Directive that has been declared by the Court of Justice of the European Union in a procedure pursuant to Article 258 TFEU (Art. 108 (1), let. D)). 5.2.14. Moreover, a contracting authority must terminate a public contract where: (i) the contractor has lost its SOA qualification for having submitted false documentation or declarations (Art. 108 (2), let. A)); or (ii) the contractor has been subjected to preventive measures under anti-organized crime legislation or has been finally convicted of any of the crimes which are qualified as ‘exclusion grounds’ under Article 80 of the Public Contracts Code (Art. 108 (2), let. B)). 5.2.15. Moreover, the contracting authority may terminate the contract for serious breach of contract by the contractor, certified by the clerk of the works [direttore lavori], which endangers the proper performance of the contract obligations (Art. 108 (3)). 5.2.16. Finally, pursuant to Article 109 of the Public Contracts Code, the contracting authority may terminate for convenience a contract at any time by giving the contractor a prior written notice of at least 20 days and by paying the contractor for the works performed so far, the useful materials and tools supplied and a penalty in the amount of 10 % of the works that will not be performed as a consequence of the termination for convenience.  

5.3. Most Commonly Used 5.3.1.

5.3.2.

In Italy there are no standard construction contracts. Some forms have been developed by business associations such as ANCE and certain professional rolls, such as the roll of engineers, but they are not uniformly or widely accepted. FIDIC forms are not used in Italy. In public procurement procedures, contracts are normally drafted by the relevant public administration on the basis of public procurement rules, but there is no standard form of contract.

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5.4. Example – The Form of Independent Contract for Private Works Drafted by ANCE 5.4.1.

5.4.2.

The form of construction contract for private works developed by ANCE is widely influenced by the relevant provisions of the CC and specific legislation on safety on site and management of racks and waste disposal. The ANCE template contract regulates the following issues: scope of work; subcontracting and recourse to third parties; specific obligations of the parties; disposal of resulting rocks and waste; price; terms of payments; adjustment of prices; term for completion and interim milestones; suspension of the works; variations; client’s controls; testing and commissioning; termination; dispute resolutions; and confidentiality and data protection.

6. Key Issues 6.1. Overview 6.1.1. 6.1.2.

Many of the key issues examined below are regulated by the CC or complementary legislation, or by the Public Contracts Code. Some of these issues are the subject of specific and detailed rules, while others, such as force majeure, are the result of further elaboration by case law and scholars.

6.2. Fit for Purpose 6.2.1.

Under the Italian law on independent contracts, there is no express rule on fit for purpose or reasonable skill and care as a duty imposed on the contractor. However, pursuant to scholars and case law, the independent contractor is under an obligation to achieve a result, i.e., to procure a work that satisfies the interests of the employer.46 Independent contractors must apply the professional standard of care pursuant to CC Article 1176(2), according to which the level of diligence in the performance has to be evaluated with respect to the nature of the activity carried out. This is a consequence of the entrepreneurial nature of the contractor’s activity.47  

46 Valentina Di Gregorio (ed), L’appalto Privato e Pubblico (Torino UTET Giuridica, 2013) 8–9. 47 Valentina Di Gregorio (ed), L’appalto Privato e Pubblico (Torino UTET Giuridica, 2013) 8–9.

Italy

6.2.2.

6.2.3.

6.2.4. 6.2.5. 6.2.6.

6.2.7.

499

Given that the contractor is under an obligation to achieve a result, the contractor is liable in case of defects in the works48 and will not be released from its liability pursuant to CC Article 1218, even if it provides evidence that it has performed all activities required using reasonable skill and care but nevertheless did not achieve the required result.49 The rules on contractors’ guarantees for defects under CC Articles 1667–8 are in the same terms. The contractor must also carry out the work in accordance with the ‘state of the art’ or ‘standards of the trade’.50 Such expression makes reference to all applicable provisions of law regulating the activities to be carried out under the contract, which are implied by the contract and are the basis for testing the diligence of the contractor.51 However, the parties are free to set different standards of diligence for the contractor, by imposing more stringent or more lenient standards. Many construction contracts provide for a ‘fit for purpose’ obligation on the contractor. As a general rule, professionals are under a duty of reasonable skill and care pursuant to CC Article 2236.52 Such level of skill and care has to be evaluated in light of the relevant professional standards, as well as the complexity of the services to be rendered by the professional. In the case of a violation of such standards, the professional is liable. The professional is also liable for simple negligence. In cases of particular complexity, however, the professional is liable only for gross negligence and willful misconduct. The distinction between the obligation to achieve a result and the duty of reasonable skill and care is less clear for architects and engineers. In a recent case, the Supreme Court of Cassation held that such professionals are under a duty to achieve a result, that is, to provide a design that is fit for the construction of a building complex, and any defect in the design that makes it impossible to construct the building, even if due to simple negligence, entitles the employer to refuse payment.53

48 Corte di cassazione civile [Civil Court of Cassation] No 10927, 18 May2011; Corte di cassazione civile [Civil Court of Cassation] No 7515, 12 April 2005. 49 Di Gregorio (n 1162) 8–9. 50 Di Gregorio (n 1162) 24. See also CC Article 1660 on necessary variations in plans, according to which if, in order to carry out the work according to the standard of the trade it is necessary to make variations in the plans, and the parties fail to agree in that respect, it is the duty of the court to establish what variations are to be made and the related variations in the price. 51 Di Gregorio (n 1162) 24–5. 52 Francesco Galgano, Diritto Commerciale (Zanichelli, 4th ed, 1991) 196. 53 Corte di cassazione civile [Civil Court of Cassation] No 11,728, 5 August 2002.

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6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

6.3.4.

6.3.5.

6.3.6.

According to the Italian law on obligations in general, if the time for performance of an obligation is not specified, the creditor can demand performance of it immediately. However, when by usage, nature, manner or place of performance, a time is necessary, in the absence of agreement between the parties a time is fixed by the court. When a time for performance is set and the debtor fails to comply with it, the creditor may place the debtor in default by means of a written notice, upon receipt of which the risk of supervening impossibility of performance remains on the debtor. Delay in performance amounts to a default or breach of contract, and the creditor can therefore apply for damages (losses sustained by the creditor and loss of profits which are direct and immediate consequence of the delay) and eventually, under certain circumstances, termination of the contract. As a general rule, and unless the contract provides otherwise, the contractor is free to establish the rate of progress of its activities, provided that work is completed within the agreed term for completion, as a consequence of its independence and entrepreneurial organization. However, construction contracts usually provide for specific construction program, which may include certain milestones whose meeting is fundamental. Delay in completion may constitute a breach of contract where failure to meet certain milestones is qualified as a breach entitling the other party to terminate the contract pursuant to CC Article 1456. Moreover, pursuant to CC Article 1662 the employer retains the right to verify the work progress status of the works, and where there is evidence that the contractor’s activities progress at a rate that endanger compliance with the completion deadline and not on a workman-like basis, the employer may give the contractor a reasonable term to recover, and in case of default by the contractor to remedy within this term, the employer may terminate the agreement and apply for damages. The parties are at liberty to agree on a delay penalty pursuant to CC Article 1382, and the contractor is usually subject to a penalty set for each day of delay up to an agreed cap, calculated as a maximum aggregate percentage of the contract sum. Careful drafting is required, as the law provides that if a delay penalty is stipulated, the employer cannot demand both the performance of the principal obligation and the payment of the penalty, unless the penalty has been stipulated for the sole delay. Pursuant to CC Article 1384 the court can reduce the penalty if the principal’s obligation has been partly performed or if the penalty is manifestly excessive, taking into account the interest that the creditor had in the performance. In general, penalties for delay are deducted from payments due by the employer, provided that should completion of the works be achieved by the con-

Italy

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tractor on the milestone dates — notwithstanding the delay previously accrued — any penalties withheld shall be paid back to the contractor or offset with other payments due by it to the employer. In public contracts the penalty is set at a rate between 0.3 % and 1 % of the net contract value per day of delay, plus interest, up to an aggregate amount of 10 % of the net contract value.54 Once the penalty amount reaches the cap, the employer is contractually entitled to terminate the contract, without prejudice to the collection of the penalties. Outside of the foregoing, in case the contractor negligently delays performance of the contract, the clerk of the work shall give him a term, which may not be shorter than 10 days, to remedy; in lack thereof, the employer shall terminate the contract and collect the penalties55. Extension of time for completion, along with payment of additional costs incurred, are commonly provided for in case the contractor’s delay has been authorized by the owner or is justified by hardship or force majeure. Items in the construction schedule, milestone dates and the general critical path of the project are clearly significant in this context.  

 

 

6.3.7.

6.3.8.

6.4. Latent Conditions 6.4.1.

6.4.2.

Latent conditions arise when the physical conditions of the site are materially different to the conditions which could have been reasonably expected by the contractor at the time of the contract execution. Common examples of latent conditions include underground utilities such as telecommunications, electricity lines and sewerage systems, as well as site contamination and underground conditions.

Private Construction Projects 6.4.3. In the absence of specific contractual prescriptions as to latent conditions, the contractor bears the risk associated with latent conditions which, using the skills and diligence expected from a contractor of its size and experience, could have been foreseen. This is because the contractor is obliged to carry out the work on a professional basis, deploying a level of skill and care proportionate to the nature of the work, and to ensure that the work is carried out according to the standards of the trade.56 However, pursuant to CC Article 1664(2), if in the course of the work difficulties are revealed deriving from 54 Public Contracts Code, Art 113-bis. 55 Public Contracts Code, Art 108. 56 Corte di cassazione civile [Civil Court of Cassation] No 11783, 7 September 2000; Corte di cassazione civile [Civil Court of Cassation] No 5820, 1 October 1986.

502

6.4.4.

6.4.5.

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geological conditions, water, or other similar causes not foreseen by the parties (and which could not have been foreseen using the relevant professional level of skill and care at the moment of entering into the contract)57 that make the performance of the contractor considerably more onerous, the contractor is entitled to just compensation. Such provision, which limits the scope of the risk vested in the contractor, can be derogated and the related risk allocated otherwise by agreement of the parties, without altering the non-aleatory nature of the independent contract.58 The parties may agree on a different repartition of the risks and liabilities relating to latent conditions. In this sense, it is common to see contract stipulations where the entire risk of latent conditions is taken on by the contractors. If certain subsoil conditions have been guaranteed by the employer (either directly or through technical consultants), the associated risks and liabilities will be on the employer, subject to certain exclusions and limitations. In this context, the contractor is still under a general duty of care regarding the site conditions that have been ‘guaranteed’ by the employer or technical consultants. In case of breach of this duty, the employer’s liability could be proportionally decreased.

Public Procurement Construction Projects 6.4.6. The public procurement regime in force before 1999, governed by Decreto del Presidente della Repubblica 16 Luglio 1962, n 1063 [Decree of the President of the Republic 16 July 1962, No 1063] (Italy),59 was similar to the private law regime, providing that the risks and liabilities deriving from latent conditions are vested in the contractor. Pursuant to Decreto del Presidente della Repubblica 16 Luglio 1962, n 1063 [Decree of the President of the Republic 16 July 1962, No 1063] (Italy) Article 1, upon submitting a bid for public works the contractors are requested to submit a statement confirming that they were fully aware of the site conditions, having carried out adequate verification of the soil and other relevant circumstances. Such statements have been challenged in courts by some contractors as being a mere ‘style clause’, but such arguments have been rejected and the clause considered as valid and binding.60 6.4.7. Current public contracts rules do not provide for a specific discipline on latent conditions. In this regard, Public Contracts Code Article 107 provides a speci-

57 Corte di cassazione civile [Civil Court of Cassation] No 12989, 23 November 1999. 58 Corte di cassazione civile [Civil Court of Cassation] No 1364, 1979. 59 Decreto del Presidente della Repubblica 16 Luglio 1962, n 1063 [Decree of the President of the Republic 16 July 1962, No 1063] (Italy) set the then applicable ‘general standard terms and conditions for the performance of public works’, and was repealed by Decreto del Presidente della Repubblica 21 Dicembre 1999, n 554 [Decree of the President of the Republic 21 December 1999, No 554] (Italy). 60 Corte di cassazione civile [Civil Court of Cassation] No 11469, 21 December 1996.

503

Italy

fic discipline regulating the suspension of the works, specifying three cases: (a) suspension declared by the Direttore dei Lavori (clerk of the works or engineer appointed by the public administration) due to special circumstances that were unforeseeable at the moment of the contract execution; (b) suspension ordered by the Responsabile Unico del Procedimento (or RUP) (i.e. the Sole Responsible of the Procedure) for public interest reasons, such as the lacking or interruption of public funds; and (c) partial suspension due to the occurrence of unforeseeable circumstances or force majeure causes that prevents performance of part only of the work. In addition to the foregoing, the contractor may request an extension of the term for completion when, for reasons not attributable to him, it is unable to complete the work within the time limit set. The request for extension must be filed with adequate advance notice with respect to the expiry of the contractual term. In any case, the granting of an extension does not affect the rights of the contractor in relation to indemnities if the delay is attributable to the contracting authority. The RUP shall decide on the request for extension within thirty days of receiving it after having heard the clerk of the works. The contractor shall complete the works within the term established by the contractual documents, starting from the date of the delivery report or, in case of partial delivery from the last of the delivery reports. The completion of the work, as soon as it occurs, is communicated by contractor in writing to the clerk of the works, who immediately proceeds to the necessary contradictory findings. The contractor is not entitled to terminate the contract nor to any indemnity if the works, for any reason not attributable to the contracting authority, are not completed within the contractual term and whichever is the longer term required. It is unclear whether latent conditions could qualify as an event giving rise to suspension. In a situation where there is a lack of specific contract provisions, rules contained in the CC – which govern the performance of the contractshall apply.  

6.4.8.

6.4.9.

6.5. Force Majeure 6.5.1.

6.5.2.

While the Italian Civil Code of 1865 did provide a definition of force majeure in respect of the general principles on the debtor’s liability, the current CC does not provide for a doctrine of force majeure. Rather, force majeure is used as an exclusion of liability in certain areas of civil law, such as deposit of things. In this context, case law continues to use force majeure as a synonymous of “fortuitous event” and as a case of exclusion of liability of the debtor61, and as

61 Civil Court of Cassation, Division I, 16 December 1986, n. 7532.

504

6.5.3.

6.5.4.

6.5.5.

6.5.6.

6.5.7.

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such is often described as an unforeseeable and unavoidable event. Outside of the foregoing, force majeure is associated with the issues of impossibility of performance and change of circumstances in synallagamatic contracts. In this regard, in the context of private procurement contracts, CC Article 1673 provides that if the works are destroyed or deteriorated as a result of causes not imputable to either party, before acceptance by the employer (or before the employer’s default in testing), the contractor is liable for loss or deterioration to the extent that it has furnished the materials for execution. While this rule integrates a specific case of force majeure set by the law as to its pre-requisites and effects, in broader terms a force majeure event capable of excluding liability for non-performance of contractual obligations under CC Article 1218 requires the following additional features with respect to the ‘nonimputability’: to be (i) unforeseeable prior to entering into the contractual covenant; (ii) unavoidable, being beyond the party’s control; (iii) not capable to be overcome; and (iv) not attributable to the affected party. The scope and the consequences of a force majeure event may be agreed by the parties; as a result, the performance of the affected obligation may be suspended, delayed, changed in scope, or terminated. While negotiating force majeure clauses, the parties de facto tend to: (a) Include or exclude certain types or categories of events (in particular, ‘human events’ such as strikes, riots, rebellion are often excluded); and (b) Provide requirements for evidence both of the occurrence and the common acknowledgement of the force majeure event, whereby the affected party is required to give prompt notice to the other party(ies), specifying any circumstances preventing the performance, and to mitigate or minimize the effects of the force majeure event. Public Contracts Code Article 30 expressly states that the provisions of the CC apply to the conclusion of the contract and the execution phase. Thus, for public procurement contracts, force majeure events and their consequences are expressly regulated by the CC. Notwithstanding the foregoing, Public Contracts Code Article 107 expressly mentions “force majeure” when it provides that after the handover of the site to the contractor, for causes which were unforeseeable or due to force majeure, if it is partially impossible to proceed with the works, the administration shall order the partial suspension of the works; in this case the contractor must continue with the non-suspended part of the works, but it is entitled to file a claim in respect thereof on the document ordering the partial suspension.

Italy

505

6.6. Limitation of Liability 6.6.1.

6.6.2.

6.6.3.

6.6.4.

6.6.5.

For private construction contracts, the CC does not provide a limitation of liability clause. Contractors are subject to CC Articles 1667 (diversity and vices of the work), 1668 (content of the warranty for defects of the work) and 1669 (ruin and defects of real property) with respect to warranties for defects. Clauses of limitation or exclusion of liability are however extensively used under Italian law in various forms (including caps, limitations regarding certain matters, etc.). A general limit for any such clause is set out in CC Article 1229. Any agreement which excludes or limits in advance the liability of the debtor for fraud or gross negligence is null and void; in addition, any agreement which excludes or limits in advance the liability of the debtor in all cases where they or their personnel violated obligations arising from public policy rules is also void. Contractors and designers involved in construction projects tend to negotiate caps on liability, particularly in commercial property development and erection and building of plants. These limitations of liability are generally accepted in the industry. The aggregate cap is often established as a percentage of the consideration provided, typically in case of delay by the contractor in the delivery or completion of the works, or by the designer in the delivery of the design documents within the agreed phases or milestone dates.

6.7. Duration of Exposure 6.7.1.

The law in Italy provides different time limitations in relation to construction projects. They vary according to the nature of the relevant claim.

Exposure of the Contractor 6.7.2. In private construction projects, claims for non-conformity or defects in the works may be brought by the employer under penalty of forfeiture only if it has notified the contractor of the non-conformity or defects within 60 days from the discovery thereof (CC Art- 1667 (2)). The notice is not necessary if the contractor acknowledged such non-conformity or defects, or concealed them. 6.7.3. The claim against the contractor is prescribed as two years from the date of delivery of the works. In case of repairs made under the warranty, a new two-year period runs with specific reference to the defective work that has been corrected. If the employer is sued for payment by the contractor, the employer can oppose the warranty, provided that they have notified the contractor of the non-conformity or defects within a 60-day term from discovery thereof and, in any case, within two years from delivery.

506

6.7.4.

6.7.5.

6.7.6.

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Pursuant to CC Article 1669, for buildings or other immovable structures intended by their nature to last for a long period of time, if within 10 years from completion the object is totally or partially destroyed by reason of defects in the soil or in construction, or if a danger of destruction or serious deficiencies is evident, the contractor (and the designer and clerk of works, according to their respective involvement in the event) is liable to the employer and their successors in interest, provided notice of said destruction or defects has been given within one year of their discovery. This liability has been qualified by case law as non-contractual liability62. The contractor may also be liable to third parties for non-contractual liabilities deriving from unlawful acts,63 damages caused by its employees in the exercise of the functions to which they are assigned,64 the exercise of dangerous activities,65 and damage caused by things that are under his custody.66 Pursuant to CC Article 2497, the time limit to bring actions to enforce such liabilities is five years from the date of the event that caused the damage.

Exposure of the Employer 6.7.7. The liability of the employer vis-à-vis the contractor (mainly for payment of compensation) is set at 10 years pursuant to CC Article 2946. 6.7.8. Moreover, the employer may also be liable to third parties, severally or jointly with the contractor and the designer, under CC Articles 2043, 2049–51 and 2053 (liability of the owner for damages caused to third parties by collapse of a building), under the same time limit.

6.8. Time Bars 6.8.1. 6.8.2.

6.8.3.

62 63 64 65 66

Book VI of the CC on protection of patrimonial rights contains specific provisions on time bars. In the area of contractual liability, the general rule is that rights are extinguished by prescription after ten years. This rule applies to all cases in which the law does not provide otherwise. There are many such cases, both in book IV and in book VI, on the regulated types of contracts. Relevant for construction law are the time bars provided by CC Article 1667, according to which the contractor is liable for non-conformity and defects in the works for a period of two years from the date of delivery of the works (pro-

Tribunale di Roma [Tribunal of Rome], Sez. VI, 18 March 2018. CC Art 2043. CC Art 2049. CC Art 2050. CC Art 2051.

Italy

6.8.4.

6.8.5. 6.8.6.

6.8.7. 6.8.8.

6.8.9.

507

vided that such non-conformity or defects have been notified by the employer within 60 days from discovery), and CC Article 1669 for destruction and defects in immovable, according to which the contractor is liable with respect to the employer and his successors in interest for ten years. Other time bars relevant for the construction industry are: (a) Those for (i) interest and, in general, all periodic payments (whether by annual or more frequent installments); and (ii) the rights arising from company relationships and the action of the company’s creditors for directors’ liability. These are barred after five years (CC Article 2948); (b) Those for the rights of professionals (including lawyers and notaries for actions performed in the discharge of their functions), are barred after three years (CC Article 2956); (c) Those for the rights arising from insurance contracts arebarred after two years (CC Article 2952 (2)); and (d) Those for rights arising from forwarding agency and transportation contracts; for the right of insurance companies to the installments of insurance premium; and for employees to remunerations payable monthly or on a more frequent basis. These are barred after one year (CC Article 2952, Article 2955). Save for specific cases, and outside of the defect liability periods mentioned above, independent contractors are generally liable for 10 years. Regarding non-contractual liability, the right for damage compensation for unlawful acts is generally time barred five years after the date on which the act occurred. The law also provides the criteria for the computation of the time limits, as claims are barred upon expiration of the last day of the relevant period. According to certain case law67, even where time bar provisions (“termini di prescrizione”) are indicated by the law, the parties could be at liberty to agree different periods to enforce their rights (“clausole di decadenza”), provided that these are not contrary to CC Article 2965 according to which clauses that have the effect of making the exercise of rights excessively difficult for one party are null and void. With specific reference to public works contracts, Art. 9 of the Decreto Ministeriale del Ministero Infrastrutture e Trasporti del 7 Marzo 2018, n. 49 [Ministerial Decree of the Ministry of Infrastructures and Transports dated 7 March 2018. No. 49] provides that the Clerk of the works, for the management of the claims regarding technical aspects, shall apply the discipline provided by the Public Administration and detailed in the tender documents. Furthermore, Art. 14 of the abovementioned Ministerial Decree provides that the contrac-

67 Civil Court of Cassation, 30 March 1955, n. 934.

508

6.8.10.

6.8.11. 6.8.12.

6.8.13.

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tor’s claims that have not been settled already shall be confirmed in the final works’ account. Therefore, pursuant to the mentioned article, there is no specific and single discipline for the contractor to file its claims. However general practice based on previous legislation is that the contractor shall report its claims in the first act fit for such purpose (eg an interim payment application) and in any case, under penalty of forfeiture, in the works’ accounting book (“registro di contabilità”) immediately upon occurrence of the relevant event. Reserves must be detailed and must indicate the grounds on which they are raised, as well as the amounts which the contractor deems itself entitled to receive, without any possibility for subsequent review or amendment thereof. The clerk of works must report its opinion in the project accounting book within the subsequent 15 days. In the case of failure to reach an amicable settlement pursuant to the procedures under Articles 205 and 208 of the Public Contracts Code, the contractor (or the employer) is entitled to submit the dispute for resolution pursuant to the ordinary methods of dispute resolution provided for under the contract. By way of comparison, it may be worth mentioning that claims under FIDIC contracts are subject to a 28-day prior notice period (as detailed in sub-cl 20.1) which is formally set out as a condition precedent for the contractor’s entitlement to an extension of time or additional payment. Consequently, failure to comply with this term will, at least in principle, invalidate the claim and prevent the contractor from exercising its right to claim. However, the legal effects of such a ‘condition precedent’ are most discussed and in practice the ‘deadline’ effect varies considerably between jurisdictions and depending on the circumstances of the specific case. Based on the time bar rules under Italian law, it is highly questionable whether an Italian court would give effect to FIDIC-style standard time-bar provisions. In any case, the issue does not seem to be particularly significant in Italy, as the lack of case law on this matter suggests.

6.9. Variations 6.9.1.

6.9.2.

The CC regulates in detail the different types of variations to the design and/ or the works: (i) agreed upon between the owner and the contractor; (ii) necessary for the execution of the project works; or (iii) ordered by the owner. In private construction contracts, the owner may impose variations to the works. Limits to such power may be agreed in advance. In the absence of contractual provisions relating thereto, CC Article 1661 provides a limit to the power of the employer to direct variations, which is equal to one sixth of the total price agreed upon, coupled with the right of the contractor to an adjust-

509

Italy

6.9.3.

6.9.4.

6.9.5.

6.9.6.

6.9.7.

ment of the price (even if determined as a lump sum). If the amount of the directed variations exceed one sixth, the contractor can refuse to carry out the related works, unless a new agreement is reached between the parties, or can continue the works in accordance with the original design, but is not entitled to withdraw from the contract.68 According to case law, the limit of one sixth can be derogated by agreement of the parties, provided that such agreement does not exclude in full and ex ante the right of the contractor to receive additional compensation for the variations.69 If subsequent and unforeseen variations not attributable to any of the parties become necessary to carry out the works according to the standard of the trade exceed one sixth of the total price agreed upon, the contractor may withdraw from the contract and can, according to the circumstances, be entitled to a just indemnity. However, if such necessary variations are of considerable importance, the employer can withdraw from the contract and is bound to pay a just indemnity to the contractor. The contractor is not entitled to impose variations without the consent of the employer. Under CC Article 1659 the contractor cannot vary from the agreed manner in which the work is to be done, unless such variations have been previously authorized in writing by the employer. Even when the proposed variations have been authorized, unless otherwise agreed, the contractor is not entitled to supplemental compensation for such variation if the price of the entire work has been determined in a lump sum. Regarding public construction contracts, variations are admitted when related to supervening facts and circumstances as per Article 106 of the Public Contracts Code (among the most important variations are changes in law and errors or omissions in the design). If the employer is required to increase or decrease its services by up to 20 % of the contract amount during the execution, it may require the contractor to perform under the same conditions as provided for in the original contract. In this case the contractor cannot assert the right to terminate the contract (Art. 106 of the Public Contracts Code). Moreover, in order to avoid or limit increases of public works prices, pursuant to Article 106 of the Public Contracts Code, contracting authorities must notify ANAC of variations agreed during performance of the works.

68 Corte di cassazione civile [Civil Court of Cassation] No 3267 of 1971. 69 Corte di cassazione civile [Civil Court of Cassation] No 1331, 27 April 1968.

 

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6.10. Anti-Bribery 6.10.1. Italy signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the ‘OECD Anti-Bribery Convention’)70 in 1997. After enactment of the relevant implementing legislation71, Italy ratified the OECD Anti-Bribery Convention and deposited the ratification instrument with the OECD on 15 December 2000. Italy implemented the obligation to introduce an offence of foreign bribery in September 2000 by enacting article 322(2) of the Italian Criminal Code, which extends the domestic active bribery offences in the Italian Criminal Code to foreign public officials. In addition Italy enacted Decreto Legislativo 8 Giugno 2001, No 231 [Legislative Decree 8 June 2001, No 231] (Italy) concerning the administrative liability of legal entities, companies and associations including those without legal status, has greatly contributed to raising awareness regarding the offence of bribery of foreign public officials. 6.10.2. Penalties applied for corruption offences are imprisonment, bars from entering into public contracts and holding public office, and confiscation. Moreover, under Decreto Legislativo 8 Giugno 2001, n 231 [Legislative Decree 8 June 2001, No 231] (Italy) administrative liability may be attributed to legal persons and to other types of enterprises and associations without legal personality for certain criminal offences (including bribery, false accounting and money laundering) committed by natural persons holding a position in these entities. The administrative liability may result in fines; suspension or revocation of authorizations, licenses or concessions (e.g. Legge 24 Novembre 1981, n 689 [Law 24 November 1981, No 689]; prohibition on contracting with the public administration; denial of facilitations, funding, contributions and subsidies; and prohibitions on advertising and conducting business activities. Finally, the ANAC has a role in preventing corruption in public procurement procedures, and any public administration may refuse to proceed with selection in any phase of procedure if it suspects corruption. 6.10.3. Pursuant to Legge 11 Agosto 2014, n 114 [Law 11 August 2014, No 114] (Italy), to ensure the expeditious implementation of public works, the Prefect72, upon proposal by the ANAC Chairman and in the presence of serious circumstances,  

70 Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed 17 December 1997, [1999] ATS 21 (entered into force 15 February 1999). 71 Italy adopted the implementing law on 29 September 2000 (Act N° 300), which was published in the Ordinary Supplement 176- L to the Official Journal of 25 October 2000 n° 250. The law entered into force on 26 October 2000. 72 The Prefect is a monocratic body, who represents the State Administration on a local basis and he depends from the Minister of Interior. It is in charge mainly with public security and safety matters and coordination of the central administration with local authorities.

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can place under receivership economic operators who have been awarded public contracts and are subsequently subjected to investigation for corruption or other crimes against public administration, to the extent necessary to ensure the full performance of the contract works. 6.10.4. This Legge also provides that, to comply with Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts73 and Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC,74 Italian public administrations cannot enter into financial or commercial agreements with companies having their registered offices in states whose legislation does not allow the identification of the ultimate beneficial owner. 6.10.5. Regarding administrative procedures adopted for the prevention of infiltration of criminal organizations such as the ‘mafia’ in public contracts, pursuant to Decreto Legislativo 6 Settembre 2011, No 159 (the ‘Anti-Mafia Code’), contracting authorities must acquire directly from the relevant prefectures an ‘anti-mafia certificate’ prior to entering into, approving or authorizing contracts and subcontracts, to verify that the legal representatives of the company with which they enter into a contract, and even family members living with those individuals, are not involved in organized crime (Articles 88–9 Anti-Mafia Code). 6.10.6. Moreover, for some business sectors, in each prefecture a register of contractors and suppliers not involved in organized crime will be kept; the registration replaces the ‘anti-mafia certificate’ and must be accessed directly by the relevant contracting authorities per Art. 29 of the Legge 11 Agosto 2014, n 114 [Law 11 August 2014, No 114] (Italy).

6.11. Assignment of the Contract and Subcontracting 6.11.1.

CC Articles 1406–10 regulate the assignment of a contract. Under Italian law the assignment of a contract implies the substitution of one of the parties to the contract with another party. As a consequence, the assignee takes the place of the assignor in its contractual position, inclusive of all its rights and obligations.75

73 Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the Award of Concession Contracts [2014] OJ L 94/1 . 74 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC [2014] OJ L 94/65 . 75 In case law there are different opinions with reference to the succession of the assignee also in an arbitral clause. According to Corte di cassazione civile [Civil Court of Cassation] No 28497, 22 December

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6.11.2.

6.11.3.

6.11.4.

6.11.5.

6.11.6.

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Assignment of a contract requires the consent of the other contracting party; without such consent the assignment is void and the assignor remains bound vis-à-vis the assigned party. A party may agree in advance to the assignment of the contract by the other party to a third party; in such cases the assignment becomes effective when the assignment is notified to the other party. Assignment of a contract can be onerous or gratuitous, and must take place before any of the parties have commenced performance of their obligations. As to the form of the assignment, it must respect the same requirements as the assigned contract, of which it is an amendment. Unless otherwise agreed, the assignor is released thereafter from its obligations vis-à-vis the assigned party, and the assigned party may raise against the assignee all the exceptions it could have raised against the assignor under the contract, but not those deriving from other relationships with the assignor, unless otherwise declared upon acceptance of the assignment. In the case of assignment of independent contracts, assignment can be in writing or even bespoke, as there are no ‘written form’ requirements, and can also be tacit, provided that there is an expression of will in favor of the mutation of one party.76 Subcontracting differs from assignment of the contract because subcontracting creates a binding relationship between contractor and subcontractor, in which the employer/client is not involved, and as such the latter does not acquire rights nor assumes obligations towards the subcontractor77. The subcontract is usually considered a derived contract, as it finds its economic reasons and main economic purpose (the so-called “causa”) in the main contract78. In fact, through the subcontract, the contractor assigns to a third party, the subcontractor, the task of carrying out the work or service assumed by him with the main contract. The subcontract is considered equal to a contract, and the subcontractor is under the same duties of diligence and entrepreneurship vis-à-vis the main contractor as the main contractor is visà-vis the client79. Notwithstanding its derivative nature, the subcontract may provide terms and conditions which are different from those of the main contract, as it maintains its autonomy from the main contract80. The derivative

2005 it has to be investigated on a case-by-case basis whether the assignee accepted to derogate from the ordinary jurisdiction of state courts in favor of arbitration, while according to Corte di cassazione civile [Civil Court of Cassation] No 5761, 21 June 1996 the assignee is bound by all contractual provisions, including the arbitration clause. 76 Corte di cassazione civile [Civil Court of Cassation] No 11381, 19 December 1996. 77 Corte di cassazione civile [Civil Court of Cassation] No 8202, 11 August 1990. 78 Corte di cassazione civile [Civil Court of Cassation] No 23903, 11 November 2009. 79 Corte di cassazione civile [Civil Court of Cassation] No 5690, 12 June 1990. 80 Corte di cassazione civile [Civil Court of Cassation] No 22344, 21 October 2009.

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nature of the subcontract has however certain consequences: unless otherwise specified, the acceptance without reservations by the main contractor of the work performed by the subcontractor is conditioned upon acceptance of the work by the main client without reservations81; moreover, the contractor cannot sue the subcontractor for defaulting performance if the client has not denounced defects or discrepancies in the works82. Finally, it has been specified by case law83 that the clause of a subcontract which makes the obligation to pay the subcontractor conditional upon payment by the main client to the contractor under the main contract, is not valid unless it refers only to the “time” of the payment and not to the “if” of the payment. The practice has therefore resulted in elaborate and complex clauses to regulate the matter. 6.11.8. CC Article 1656 states that the contractor cannot subcontract any work if the contractor has not been authorized by the client. If the client authorizes a subcontract, the contractor remains liable vis-à-vis the client for the entire scope of work, including the subcontracted work. 6.11.9. In public procurement contracts, the assignment of the contract by the contractor is forbidden pursuant to Article 105 of new Public Contracts Code.84 The general principle under Article 105 of the Public Contracts Code is that the contractor is bound to perform the works under the contract directly. However, Article 105 allows subcontracting within certain limits. Tender rules may provide for the possibility to subcontract one or more specific works, within certain percentages, if: (i) the bidder mentioned in its tender the portions of the works that it intends to subcontract; (ii) the subcontract agreement is filed with the contracting authority at least 20 days before the performance of the relevant subcontracted works; and (iii) together with the subcontract agreement, the bidder has filed evidence that the subcontractor possesses the necessary qualification requirements for the subcontracted works and meets the general requirements to take part in public procurement procedures. The main contractor must also notify the contracting authority

81 Corte di cassazione civile [Civil Court of Cassation] No 23903, 11 November 2009. 82 Corte di cassazione civile [Civil Court of Cassation] No 23903, 11 November 2009. 83 Corte di Appello civile di Milano [Civil Court of Appeal of Milan], 28 November 2000. 84 Except if a new contractor replaces the one to which the contracting authority had initially awarded the contract because of one of the following circumstances: 1) on the basis of clear, precise and unequivocal review clauses in the initial tender documents; 2) the initial bidder succeeds, due to death or following corporate restructuring, including surveys, mergers, demergers, acquisitions or insolvency, another economic operator that meets the qualitative selection criteria established initially, provided that this does not imply other substantial changes to the contract and is not intended to circumvent the application of this code; 3) where the contracting authority or the contracting entity assumes the obligations of the principal contractor against its subcontractors.

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about possible corporate control or coordination relationships pursuant to CC Article 2359 with the subcontractors. 6.11.10. Subcontractors must be mentioned in the worksite public notice. Pursuant to Public Contracts Code Article 105 (12), the contractor shall replace the subcontractors in relation to which, on the basis of appropriate verification, one or more of the grounds for exclusion referred to in Public Contracts Code Article 80 exist. 6.11.11. Payment of the subcontracted activities is usually made by the contractor in accordance with the terms and conditions of the subcontract. However, pursuant to Public Contracts Code Article 105 (13), the contracting authority may correspond directly to the subcontractor (as well as to the services provider and the supplier of goods or works) the amount due to them for the performance of their obligations in the following cases: (a) if the subcontractor is a micro-enterprise or small business; (b) in the event of default by the main contractor; or (c) at the request of the subcontractor, if the nature of the contract so allows. 6.11.12. Pursuant to Art. 105 of the Public Contracts Code, subcontracted activities may not be further subcontracted by the subcontractor.

7. Dispute Resolution 7.1.1. 7.1.2.

7.1.3.

7.1.4.

Under Italian law a wide variety of dispute resolution methods are available to the parties. Public contracts disputes are subject to a specific regime. As a general principle, the parties to a contract are free to choose which method should be used for resolving a dispute between themselves and, when choosing the ordinary jurisdiction, which court hears the case. The freedom of the parties is in any case subject to the mandatory rules on apportionment of competence per territory and per value of the subject matter of the dispute; in this regard, certain disputes, such as those relating to family law matters, cannot be resolved through arbitration. There are no specialised construction courts or tribunals (such as the Technology and Construction Court in the United Kingdom) operating in the private sector. Construction disputes are dealt with by territorial courts having jurisdiction over the matter in accordance with the provisions of the Codice di Procedura Civile [Code of Civil Procedure] (Italy) (‘Code of Civil Procedure’). Pursuant to the Decreto legge 24 Gennaio 2012, n 1 [Law Decree 24 January 2012, No 1] a specialized section of ordinary civil courts [tribunale delle imprese] has been recently set up within all major courts for the resolution of certain disputes over matters which are subject to ordinary jurisdiction and not to administrative jurisdiction in relation to public contracts for works, services or supplies above EU thresholds. Such specialized sections are com-

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7.1.5.

7.1.6.

7.1.7.

7.1.8.

7.1.9.

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posed by judges who are experts in these matters, and they have competence when one of the parties is an Italian company, a permanent establishment in Italy of a foreign company, or a consortium participated in by one of the above entities. Because of the length of ordinary jurisdiction proceedings, the parties often opt for alternative dispute resolution (‘ADR’). Under Italian law, there are no provisions entailing automatic domestic arbitration or other ADR methods for construction disputes. Pursuant to the CC and the Code of Civil Procedure, several types of ADR can be used to settle civil and commercial disputes in general. Conciliation, mediation and arbitration are well known institutes in the Italian experience. Among the available arbitration institutions, the parties most commonly use the International Court of Arbitration of the International Chamber of Commerce, as well as the Chamber of Arbitration of Milan [Camera Arbitrale di Milano]. In disputes arising out of, or in relation to, certain subject matters such as joint ownership of real estate, lease agreements, business lease agreements, and banking, finance and insurance contracts, the prior exhaustion of mediation and conciliation procedures is a precondition for the filing of an action in front of the competent courts (Art. 5 of the Decreto Legislativo 4 Marzo 2010, n 28 [Legislative Decree 4 March 2010, No 28]). Italy is a signatory of several international treaties and conventions on arbitration, including the Convention on the Recognition and Enforcement of Foreign Arbitral Awards85 and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.86 Regarding the enforcement of a foreign arbitral award in Italy, under Article 840 of the Code of Civil Procedure, the party intending to enforce the award must file an application with the President of the Court of Appeal where the award is intended to be enforced. The President must verify that (i) the subject matter of the dispute is not capable of settlement by arbitration according to Italian laws; and (ii) the recognition and enforcement of the award would not be contrary to Italian public policy. The order on the enforcement may be challenged by the interested party within 30 days from its service before the competent Court of Appeal. The decision of the Court of Appeal can be challenged before the Supreme Court of Cassation. The above procedures are without prejudice to the rules provided under international

85 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (‘New York Convention’). 86 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966) (‘ICSID Convention’).

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conventions to which Italy is a party: Article 840 of the Code of Civil Procedure explicitly provides that international conventions will prevail over domestic law. 7.1.10. Under Italian public contracts law, the provisions regarding settlement of disputes, including those set out by Directive 2007/66/EC of the European Parliament and of the Council of 11 December 2007 and Amending Council Directives 89/665/EEC and 92/13/EEC with Regard to Improving the Effectiveness of Review Procedures Concerning the Award of Public Contracts (usually referred to as the ‘Remedies Directive’),87 are split between two codes. These are the Code of Administrative Procedure, which regulates the procedural aspects of disputes arising out of, or related to, the management and award of the tender procedures, and the Public Contracts Code, which contains the rules on the settlement of disputes pertaining to the execution of the contract through amicable settlement and arbitration. Pursuant to Code of Administrative Procedure Article 133(e)(1), regional administrative courts (‘TAR’) and the Council of State (as an appellate body) have exclusive jurisdiction over disputes relating to the award of public contracts for works, services and supplies subject to European rules on public procurement procedures, including disputes over applications for damages and declarations of ineffectiveness of the contracts as a consequence of the annulment of the procedure and the application of alternative sanctions. 7.1.11. The proceedings are regulated by Articles 119–25 of the Code of Administrative Procedure, which provides for simplified procedures. 7.1.12. The deadline for filing an application for judicial review of acts by contracting authorities is reduced to 30 days (instead of the ordinary term of 60 days) from acquiring actual knowledge of said acts by the tenderers and candidates concerned by the decision challenged (Art. 120 of the Code of Administrative Procedure). 7.1.13. Moreover, the Public Contracts Code provides that a public contract may not be concluded before the expiry of a period of at least 35 days with effect from the day on which the contract award decision is sent to the tenderers and candidates concerned (Art. 32 of the Public Contracts Code). 7.1.14. If the contracting authority enters into a contract with a candidate or tenderer and that decision is later found to be in breach of the law, the contract may remain valid and effective in cases of prevailing public interest or in the other cases under Article 121(5) of the Code of Administrative Procedure, such as the 10-day standstill period between the publication of a notice of its intention to 87 Directive 2007/66/EC of the European Parliament and of the Council of 11 December 2007 Amending Council Directives 89/665/EEC and 92/13/EEC with Regard to Improving the Effectiveness of Review Procedures Concerning the Award of Public Contracts [2007] OJ L 335/31 .

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execute the contract and signature of the contract, but the contracting authority is subject to a pecuniary penalty of 0.5–5 % of the contract value or the reduction of the duration of the contract. If the contract is not declared ineffective, the unlawfully excluded tenderer or candidate is entitled to the reimbursement of any damages incurred and for which it can provide evidence. 7.1.15. Ordinary civil courts have jurisdiction over disputes relating to the performance of public contracts, such as late performance, damages, termination of the contract for non-performance, etc. 7.1.16. In order to expedite the settlement of disputes arising out of or in relation to the performance of the contract, the Public Contracts Code provides for several ‘pre-litigation’ alternative dispute resolution methods. These include the settlement agreement [transazione] as per Article 208 of the new Public Contracts Code, the amicable settlement [accordo bonario] as per Article 205 and arbitration pursuant to Article 209.  

Naoki Kanayama, Takashi Ogura, Naoki Iguchi and Kaori Sugimoto

Japan 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 7. 7.1. 7.2. 7.3. 7.4.

Context 520 The Country 520 The Legal System 521 The Economy 522 The Construction Industry 524 Size and Nature 524 Participants 524 Work, Health and Safety 525 Protection of the Environment 525 Quality Assurance (‘QA’) 526 Construction Contracting Dynamics 527 Legal Underpinnings of Contracts 527 Freedom of Contract 527 Legal Framework 528 Implied Contract Terms 533 Construction of Contract Terms 534 Private and Public Procurement 535 Government Involvement 536 Legislation and Regulation 536 Codes and Practices 538 Licensing of Professionals and Contractors Construction Contracts 539 Available Contracts 539 Most Commonly Used 541 Key Issues 541 Overview 541 Fitness for Purpose 541 Late Completion 542 Latent Conditions 543 Force Majeure 544 Limitation of Liability 545 Duration of Exposure 546 Time Bars 546 Dispute Resolution 547 Litigation 547 Court-Sponsored Mediation 548 ‘Kensetsu-Koji-Funso-Shinsa-Kai’ 548 Arbitration 549

https://doi.org/10.1515/9783110712728-017

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

1.1.5.

Japan is a country in East Asia, consisting of approximately 6,800 islands. The five main islands, from south to north, are Okinawa, Kyushu, Shikoku, Honsyu and Hokkaido. Historically, Japan maintained economic and cultural relationships with the empires and kingdoms of East Asia and Southeast Asia, namely, China, Korea, Mongolia, Siam and others. In particular, Japan imported from China the ‘Kanji’ (Chinese characters) which is now incorporated in the Japanese language system, just like many European countries imported Greek and Latin words and concepts. While English is the dominant language for international business players, Japanese is the single official language used in governments and courts in Japan. Although Japan met with Portugal, Spain, the Netherlands and England for the first time in the mid-16th century, Japan shut down trade and diplomatic relationships with Portugal and Spain in the mid-17th century, leaving the Netherlands as the only trade partner from the Western world. More than 200 years of strict trade restrictions separated Japan from the ‘Industrial Revolution’ in Europe. Recognising the significant disparity, Japan started Meiji Reform in 1868 to catch up to Europe. In the latter half of the 19th century, Japan rushed to adopt many aspects of modern systems from UK, France and Germany, through which Japan succeeded in its industrialisation, urbanisation and centralisation of government functions. Through this importation, Japan has chosen a civil law system, rather than one of common law (see 1.1.2). Under the Meiji Constitution (11 February 1889), a powerful central government consisting of bureaucratic ministerial departments led the modernisation process. The elected parliamentary cabinet once took a leading role in the early 20th century; however, due to the malfunction of the political system, Japan confronted a complete failure through World War II. Embracing defeat in 1945, Japan made fundamental changes to its social, economic and legal systems. The new Constitution (3 May 1947) engages a parliamentary system in which legislative authority vests in National Diet. Likewise, the Supreme Court is established and empowered as an ultimate judicial authority to interpret and apply the national and local laws as well as the Constitution. The Constitution also introduces the principle of municipal autonomy but does not adopt a federalist system. The Cabinet undertakes all general public administrative functions, unless otherwise set out in the Constitution. Concurrently, bureaucratic ministerial departments generally survived the post-war reforms. Econ-

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omists say that these departments made large contributions to the post-war economic miracle by instituting regulations and reconciling various interested parties.

1.2. The Legal System General 1.2.1. Japan adopted a civil law system in the latter half of the 19th century because it was easier to import than common law. At that time, few common law jurisdictions codified their basic laws and regulations. 1.2.2. The fundamental codes and statutes applicable to commercial transactions are the Civil Code (Act No 89 of 1896) and the Commercial Code (Act 48 of 1899).1 As a fundamental principle for private activities, Japan respects ‘freedom of contract’. The autonomy of parties is restricted by ‘public order and morals’,2 which may apply to extraordinarily unfair terms in the contract; however, in practice, it is quite rare that the court finds such a violation. Separate from this general restriction, policy-oriented protections of subcontractors are set out in the regulatory statutes in a context of construction business (see paragraph 1.4.1 below). 1.2.3. The Civil Code is systematically organised like those in other civil law jurisdictions. In fact, when it was first enacted in 1896, drafters mixed elements of the French Civil Code and the draft German Civil Code. Thereafter, Japan observed the developments in civil law jurisdictions and incorporated some of them as amendments. Recently, in light of developments in common law in international transactions, Japan introduced some common law perspectives in its Civil Code revision project, which was completed in 2017. The reformed Civil Code came into force in April 2020. Local Legislation 1.2.4. 47 prefectures and more than 1,800 municipalities may legislate their local laws (‘jorei’) in accordance with the national law framework. Local laws and regulations must not contradict the national laws and regulations. In the context of a construction business, most of the local laws concern environmental and city planning regulations. The courts apply local laws and regulations to each case, so long as they do not breach the national laws.

1 Since almost all codes and statutes have been amended from time to time, we usually use refer to codes and statutes by the year of enactment. The Civil Code was substantially amended in 2017. 2 Civil Code (Act No 89 of 1896) (Japan) art 90 (‘Civil Code’).

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Court System 1.2.5. The Supreme Court is the ultimate judicial organ. As to the subordinate courts, there are eight High Courts, 50 District Courts (with 100 branches) and over 430 Summary Courts. The Constitution does not allow any kind of court that is not included in the aforementioned hierarchy. 1.2.6. The Code of Civil Procedure (Act No 109 of 1996) (‘CCP’) applies to the procedures for civil or commercial disputes. Plaintiffs file claims at District Courts or Summary Courts, depending on the value of the dispute. Appeals are to be heard by High Courts or District Courts. Appellants may submit new facts and evidence at the appeal stage. Accordingly, parties are generally allowed to extend the scope of the claims and to submit new evidence at appeal procedures. Court filing fees are proportional to the value of the dispute, with a decreasing rate as the value increases. 1.2.7. While each court handles all types of claims, claims for judicial review or voidance of administrative determinations/dispositions, including but not limited to tax and regulatory sanctions by authorities, are assigned according to the courts’ administrative law divisions, which are dealt with separately from normal civil and commercial cases. 1.2.8. Japan does not have the doctrine of stare decisis; however, the Supreme Court’s judgment or decision is de facto binding on the subordinate courts, because any judgments of the subordinate courts’ which contradict the Supreme Court’s precedents will be denied by the Supreme Court, unless the Supreme Court intends to make changes to the preceding case law. If the Supreme Court deems it necessary to change its precedents, it will carefully review the case and make a declaration.

1.3. The Economy General 1.3.1. In 2018, Japan’s net GNP was JPY533 trillion (approximately USD4.9 trillion). The breakdown is as follows: Manufacturing – 20.7 %; wholesale and retail trade – 13.7 %; real estate – 11.3 %; construction – 5.7 %; and transport and communication – 5.2 %. 1.3.2. Japan’s population is 126 million. Approximately 30 % live in Greater Tokyo, and this region also produces approximately 30 % of Japan’s net GNP. Demographical and economical centralisation in Tokyo and some other urban areas has resulted in highly developed infrastructure, including railways, highways, commercial and residential properties. On the other hand, many local areas now suffer from population decline, which raises difficulties in sustaining local infrastructures. Japan has yet to find an effective solution to these challenges.  

 

 

 

 

 

 

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1.3.3.

1.3.4.

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Japan is a free-market economy. Japan benefits from free trade, being a proactive member of the World Trade Organization since its foundation. China and the US have been Japan’s largest trade partners over the past 20 years. Japan’s exports and imports respectively amounted to USD81 trillion and USD83 trillion in 2018, which have been consistent in recent decades. Japan generally opens its market to foreign investors. The Japanese economy is often significantly influenced by the global economy, or, more specifically, those of the US and China. Japan’s economy dwindled for more than 20 years from the late 1990s, with continuously low GDP growth rates. Since 2000, the highest growth rate was 4.2 %, in 2010. The Bank of Japan used quantitative easing to raise expectations of inflation and stimulate economic growth. In the late 2010s, this eventually began to increase inflationary expectations. From 2013 to 2018, the total amount of profit of listed companies has continuously increased, thanks to the seamless expansion of the global economy. Robust domestic demand, particularly capital investment, also supported firm growth. COVID-19 is now resulting in slow signs of decline but its full impact is yet to be seen.  

1.3.5.

Public Work Projects 1.3.6. The government has used public work projects for mainly two purposes — for building social infrastructure and stimulating the economy. The number of projects began to decrease after 2002 because the government planned to reduce the government deficit. However, it returned to a high proportion once again after the 2011 Tohoku Earthquake and Tsunami. Labour 1.3.7. As of 2019, Japan’s unemployment rate was the lowest in the G7 countries. Its employment rate for the working age population (15–64) was the highest in the G7 countries. 1.3.8. Historically, Japan has taken a restrictive position on labour immigration; however, due to the high demand of labour in the domestic market, the government has gradually taken expansive measures for introducing immigrant labour. In particular, the government and contractors enhanced the Technical Intern Training System for the construction industry by allowing the entry of foreigners from specific countries such as Vietnam.

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2. The Construction Industry 2.1. Size and Nature 2.1.1.

The Japanese construction industry has an important role in the Japanese economy. In 2019, investment in construction in Japan was valued at JPY 62.1 trillion, consisting of approximately 11.2 % of the whole GDP (expenditure approach).3 The industry employs about 4,730,000 employees,4 working in 468,311 licensed companies. There are about 40 general contractors listed in the Tokyo Exchange Market. In 1988, the Japanese construction market was worth JPY80 trillion, which was almost equal to that of the EU and US. However, the US construction market grew to around USD1,200 billion in 2018.5  

2.1.2.

2.2. Participants 2.2.1.

2.2.2.

2.2.3.

The participants in the Japanese construction industry are generally categorised as below: (a) Project owners; (b) General contractors; (c) Subcontractors or trade contractors; (d) Architects in building construction projects; (e) Consulting engineers in civil engineering; (f) Suppliers; and (g) Workers. Below the first tier of subcontractors, there are several tiers of sub-subcontractors, which are usually smaller in the size or scale of their businesses compared to subcontractors. Some of the widely accepted norms between the participants in the construction industry in Japan are ‘mutual trust’, ‘good faith’ and ‘cooperation’ for the successful completion of projects. Participants in a construction project cooperate with each other to resolve problems and address risks before raising claims. This may or may not have some similarities with the ‘partnering’ approach developed in the UK construction industry in 1990. Regardless, this Japanese tradition is likely based upon Japanese culture beginning from the

3 Research Institute of Construction and Economy “RICE Report N0.72, April 2020” pp. 2–3. 4 https://built.itmedia.co.jp/bt/articles/1904/01/news026.htmlvisited as of 21 June 2020. 5 https://ccorpinsights.com/summaryvisited as of 16 June 2020.

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6th century or even earlier, and has been fostered in continuation of the nation’s long-standing imperial system. Large projects require the following arrangements for commercial consideration and/or risk allocation: (a) Joint ventures; or (b) Separation of the whole project sections into sub-sections, typically used for large-scale civil engineering projects (i.e. long tunnels, expressways, etc.).  

2.3. Work, Health and Safety 2.3.1.

2.3.2.

The Industrial Safety and Health Act (Act No 57 of 1972) is the fundamental body of law governing work, health and safety applicable to construction workers as well as workers in other industries. Under the Industrial Safety and Health Act, detailed safety regulations (ordinances) have been enacted by the Ministry of Health, Labour and Welfare, specifically relating to the machinery, equipment, materials and hazards used or produced in works and operations: boilers and pressure vessels, cranes, gondola, organic solvent poisoning, lead poisoning, tetraalkyl lead poisoning, ionizing radiation hazards, and asbestos. The Industrial Safety and Health Act also requires licenses and skill training to handle certain machinery and equipment (Articles 37, 76 and 77). Labour unions can have some role in determining the work conditions of employers and workers. One of the unique aspects of the Japanese industry is that ‘company unions’ are much more popular than industry unions. Like other industries, large construction companies usually have ‘company unions’, which often enters into a ‘unionship’ agreement with employers. Workers belonging to small companies often do not have labour unions.

2.4. Protection of the Environment 2.4.1.

2.4.2.

The Basic Act on Environment (Act No 91 of 1993) (‘BAE’) is the fundamental body of law for environmental protection. Practically, the legal framework for the protection of the environment consists of the BAE as well as other statutes and local laws. The level of protection varies widely depending on the area. Following the enactment of the BAE, the Environment Impact Assessment Act (Act No 81 of 1997) also came into force. Under the Environment Impact Assessment Act, environment impact assessments (kankyo-eikyo-hyoka) need to be conducted on a project-by-project basis (Article 2). Adhering to the very detailed procedures provided by the Environment Impact Assessment Act can be time-consuming.

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The BAE also empowers prefectural governors to have large powers in environmental protection, including establishing a standard for protection (Articles 7 and 36). Furthermore, under other statutes, prefectural governors are given a wide range of powers to approve or refuse works which may impact the environment of surrounding areas. One example is the ‘Henoko’ US Marine Corps Base construction project, of which the owner is the Japanese central government, in the northern Okinawa prefecture. The Okinawa prefectural governor cancelled an approval once given to a scheduled reclamation work. While the governor’s motive may have been based on his political considerations, the Act on Reclamation Works of Public Water Surface (Act No 57 of 1921) gives prefectural governors the power to approve or refuse petitions of reclamation works. Upon the cancellation of the approval, the Japanese central government sued the Okinawa prefectural government in the courts. Some of the claims are still pending in the lower courts. Another example is the deadlock situation of ‘Chuo Shinkansen’, a high-speed maglev train system project between Tokyo (Shinagawa) and Nagoya, of which the process of Government’s approval for construction started in 2014. The line will pass the Southern Japan Alps area of the Shizuoka prefecture, where one of the important water sources for the Shizuoka area exists. The Shizuoka prefectural governor requested the Japan Central Railway Company’s protective measures for a possible loss of water that may or may not have been caused by extensive tunnelling works in the relevant mountain area. The River Act (Act No 167 of 1964) mandates that prefectural governors maintain and manage certain rivers and entitles them to approve or refuse works conducted in or around the rivers. The Shizuoka prefectural governor has asserted that he is entitled to refuse the tunnelling works unless the owner or contractor takes protective measures. Some contractors obtain and maintain ISO 14001 certification showing their commitment to sustainable environmental protection.

2.5. Quality Assurance (‘QA’) 2.5.1.

2.5.2.

The Housing Quality Assurance Act (Act No 81 of 1999) is a statute that secures the quality of housing. Although the Housing Quality Assurance Act is applicable only to the quality of housing construction, the Housing Quality Assurance Act nonetheless has an impact and leads the entire construction industry in setting QA standards for all kinds of construction works, including commercial properties. In practice, QA programmes are normally prepared by general contractors. Accordingly, many of the top-tier general contractors have obtained and are maintaining ISO 9000 qualifications.

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As for public works, the Act on Promoting Quality Assurance in Public Works (Act No 18 of 2005) (‘Public Works QA Act’) was enacted in connection with the public work bidding procedures. In detail, the Public Works QA Act requires central and local governments to observe 11 ‘basic principles’, under which governments shall, for example: … appropriately specify the conditions of construction works in design drawings and documents (meaning specifications, design documents, and drawings). If the conditions of construction works specified in the design drawings and documents are different from the actual situation in the work site or if an unforeseeable exceptional situation with regard to the conditions of construction works not specified in the design drawings and documents occurs or is found necessary in other cases, governments shall appropriately change the design drawings and documents and change the contract fee or the construction period as required in connection with such changes (Article 7, Para (1)(v)).

2.5.4.

What is stipulated in the Public Works QA Act is generally reasonable; however, it would be surprising that these basic principles have to be expressly proclaimed in the statutes for securing QA at this stage in the 21st century.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

2.6.3. 2.6.4.

The tendering system for public works is provided in the Public Accounting Act (Act No 35 of 1947). The Public Accounting Act sets out, in Chapter IV ‘Contract’, ‘Open Competitive Tender’ (kokai-kyoso-nyusatsu) as a basic procurement method. ‘Selective Tender’ (shimei-kyoso-nyusatsu) is, however, popular, although it was originally designated as an exception to an open competitive tender. Public project owners sometimes preferred selective tender, which selection process may be faster than that of open competitive tender. In private works, the bargaining power of top-tier developers is substantial compared to that of general contractors. Public-Private Partnerships are currently being improved and developed in Japan (see paragraph 3.5.4 below for details).

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

‘Freedom of contract’ is proclaimed by Article 521 of the Civil Code: Parties to a contract may freely decide the terms of the contract, subject to the restrictions prescribed by laws and regulations.

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Therefore, parties are free to agree, or not to agree, to any terms of the contract. However, a contract is void if it is contra bonos mores or inconsistent with the provisions of laws and regulations relating to public policy.6 There are no formal requirements on how to enter into a construction contract, as this is categorised as a consensual contract which requires only the agreement of the parties to enter into force. However, in practice, it is commonly understood that a construction contract will become effective only after it has been signed in writing by both parties. Although the Construction Business Act (Act No 199 of 1949) often requires a written contract in particular cases (see paragraphs 4.1.1 and 4.1.2 below), non-observance of this requirement will not normally entail the invalidity of the construction contract.

3.2. Legal Framework 3.2.1.

The Civil Code provides the basic framework for construction contracts. Section 9, titled ‘Contract for Work’, deals with any kind of work where ‘one of the parties promises to complete work and the other party promises to pay remuneration for the outcome of the work’.7 This Section sets out the default rules applicable to construction contracts. The Civil Code thus provides, along with its provisions on non-performance in general, basic principles regarding: (1) remuneration, (2) non-compliance of the work, (3) termination, and (4) damages, as will be explained below. It is to be noted that many provisions of the Civil Code regarding obligations and contracts were modified in 2017 and have become applicable in April 2020. A fifth principle relating to a judgment of the Supreme Court which admits the tort liability of the contractor vis-à-vis the non-contracting parties will be explained as well.

Remuneration 3.2.2. A basic principle underlying the contract for works is that remuneration is paid for the outcome of the work, so the contractor needs to complete the work in order to claim the remuneration.8 The consequence attached to this principle is that: ‘Remuneration must be paid simultaneously with delivery of the subject matter of work performed’.9 As long as the work is not delivered, the employer may refuse to pay any remuneration. All the expenses for the work must be undertaken by the contractor until the delivery, unless other6 7 8 9

Civil Code (n 2) arts 90–1. Civil Code (n 2) art 632. Civil Code (n 2) art 632. Civil Code (n 2) art 633.

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wise provided in the contract. However, it would be unreasonable for the contractor to have no entitlement to any remuneration at all in spite of the progress of the works or the circumstances in which the work has not been completed. For this reason, the 2017 reformed Civil Code provides that ‘if the party ordering work receives any benefit from the performance of any divisible portion of the outcome of the work that the contractor has already completed, that portion is deemed to be the completed work’. In such a case, ‘the contractor may demand remuneration in proportion to the benefit to be received by the party ordering work’.10 Non-Compliance of the Work 3.2.3. If work done by the contractor does not satisfy the terms of the contract, this is considered to be non-performance by the contractor regarding his or her obligations under the contract. The employer then may seek special remedies, though their extent is limited, provided as a kind of ‘warranty’ in a section on ‘Sales Contracts’, applicable mutatis mutandis to the construction contract.11 The key provisions are as follows. 3.2.4. First, the employer can instruct the contractor to remedy the non-compliance of the construction work by repairing it.12 For example, a contractor who has used a thinner steel frame than what was specified by the contract is held liable to repair the frame, even if the construction satisfies technical safety standards.13 The contractor may remedy the non-compliance with a method that is different from the method demanded by the employer if it does not impose any undue burden on the employer.14 3.2.5. Second, the employer may claim a reduction of the price in proportion to the degree of non-compliance, if the contractor fails to remedy the non-compliance of the work within the specified period of time.15 Termination 3.2.6. A special rule for a Contract for Work is that the employer can terminate the construction contract ‘at any time whilst the contractor has not completed the work by paying compensation for loss or damage’.16 This right is given to the employer to ensure that he or she is not obliged to accept completed work that he or she no longer requires. Likewise, the contractor can terminate the

10 11 12 13 14 15 16

Civil Code (n 2) art 634. Civil Code (n 2) art 559. Civil Code (n 2) art 562(I) [1]. Supreme Court of Japan, 2003(Ju)377, 10 October 2003, reported in 1840 Hanreijiho 18. Civil Code (n 2) art 562(I) [2]. Civil Code (n 2) art 563. Civil Code (n 2) art 641.

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contract if the employer receives an order of commencement of bankruptcy proceedings before the contractor completes the work.17 The contractor can thus avoid the risk of not being paid before completing the work. In addition, according to the provisions of the Civil Code which govern nonperformance in general, termination of the construction contract is possible if: … one of the parties does not perform that party’s obligation, and the other party demands performance of that obligation, specifying a reasonable period of time, but performance is not completed during that period.18

3.2.8.

3.2.9.

17 18 19 20

However, the employer may terminate the contract without giving a prior notice: (a) if the performance of the whole of the obligation is impossible; (b) if the obligor unequivocally manifests the intention to refuse to perform the obligation in whole; (c) if either the performance of part of the obligation is impossible, or if the obligor clearly manifests the intention to refuse to perform part of the obligation and the purpose of the contract cannot be achieved by the performance of the remaining part of the obligation; (d) if, due to the nature of the contract or a manifestation of intention by the parties, the purpose of the contract cannot be achieved unless the obligation is performed at a specific time on a specific date or within a certain period of time provided in the contract, and the obligor fails to perform the obligation at that time or before that period of time expires; or (e) if the obligor does not perform the obligation and it is obvious that the obligor is unlikely to perform the obligation to the extent necessary to achieve the purpose of the contract.19 However, if non-performance of an obligation is due to grounds attributable to the obligee (the employer), the obligee may not terminate the contract.20 This means that termination is possible, irrespective of whether non-performance is due to grounds not attributable to the obligor (the contractor). Even in a case where the non-performance is due to force majeure, the employer can terminate the construction contract, which differentiates the question of termination from that of damages, where the question of ‘grounds’ is critical, as explained below.

Civil Code (n 2) art 642. Civil Code (n 2) art 541. Civil Code (n 2) art 542. Civil Code (n 2) art 543.

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Damages 3.2.10. In the event of the contractor’s non-performance of the construction contract, the employer is entitled to seek cumulatively,21 in addition to the remedies described in sections (2) and (3) above, compensation for loss or damage, according to the general principles of compensation of loss and damage for non-performance of obligations. The conditions as well as the scope of damages are as follows. Requirements 3.2.11. The general principle is that ‘[i]f an obligor (the contractor) fails to perform consistently with the purpose of the obligation or if the performance of an obligation is impossible, the obligee (the employer) may claim compensation for loss or damage arising from the failure’. But the obligor is exempt from liability if it can prove that ‘the failure to perform the obligation is due to grounds not attributable to the obligor in light of the contract or other sources of obligation and the common sense/the received wisdom/the idea commonly accepted/socially accepted idea in the transaction’.22 These ‘grounds’ can be contractual (‘in light of the contract or other sources of obligation’) and extra-contractual (‘the common sense in the transaction’). 3.2.12. The key extra-contractual ground is typically force majeure. The exemption based on force majeure is admitted in civil law systems as a default rule, contrary to the common law system where the parties must spell out what constitutes force majeure in the contract itself. 3.2.13. Since Japan is located in an area of high natural disasters, with typhoons, tsunamis and earthquakes, the notion of force majeure, a ground not attributable to the contractor, is of critical importance. But what constitutes force majeure is to be determined on a case-by-case basis by the judge, taking into account contractual terms, the concrete circumstances and the conduct of the parties, which, in short, consist of ‘the common sense in the transaction’. 3.2.14. If there are no grounds for an exemption, the employer may claim compensation for loss or damage in lieu of the performance, if: (a) the performance of the obligation is impossible; (b) the obligor manifests the intention to refuse to perform the obligation; or (c) the obligation has arisen from a contract, and the contract is cancelled or the obligee acquires the right to cancel the contract on the ground of the obligor’s failure to perform the obligation.23

21 Civil Code (n 2) arts 559, 564. 22 Civil Code (n 2) art 415 [1]. 23 Civil Code (n 2) art 415(II).

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3.2.15. In these cases, the value of the performance can also be compensated, contrary to delays in performance where only the loss due to delay will be compensated. Scope of Damages 3.2.16. Article 416 of the Civil Code provides that the scope of damages is determined according to the criterion of ‘ordinary loss’ and ‘special loss’. For the latter, of which the amount can be larger than the former, the employer must prove foreseeability in order to be compensated.24 3.2.17. Ordinary loss is loss that is normally incurred as a result of non-performance of an obligation. For example, if the employer loses the benefit of using the construction work due to delay in the construction and delivery, that lost benefit can be categorised as ordinary loss. Ordinary loss is to be automatically compensated, irrespective of its foreseeability by the parties.25 For example, an employer’s loss of rent at market price arising from a lease contract with a third party, which was concluded before the completion of the construction work, would qualify as ordinary loss. 3.2.18. Special loss is loss that will not normally be incurred as a result of non-performance of an obligation but has nonetheless been incurred due to special circumstances. Special loss is recoverable only when the special circumstances, and not necessarily the special loss itself, were foreseeable in the position of the parties.26 An example of this is an employer’s loss of rent fixed higher than the market price. Such rent will be compensated as special loss, if the contractor did foresee or should have foreseen the special circumstances, i.e. the existence of the favourable lease contract (and not necessarily the special loss itself). 3.2.19. The specificity of Japanese law rests on the relevant time at which foreseeability is to be assessed. Article 416 of the Civil Code provides no clear answer. Against major contemporary trends in legislation around the world, Japanese courts have consistently interpreted that the relevant time is the time of nonperformance, and not the time of contract formation. The reformed Civil Code maintains the formulation of the original Article 416, meaning that the courts’ interpretation has been approved. The justification for relying on the time of non-performance as the relevant criteria is that the contractor should not omit to act when the employer will incur loss that is perhaps not foreseeable at the conclusion of contract but is foreseeable by the contractor at the time of non-performance. Under such a rule, however, the employer who anticipates  

24 Civil Code (n 2) art 416(II). 25 Civil Code (n 2) art 416(I). 26 Civil Code (n 2) art 416(II).

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non-performance should notify the contractor of all special circumstances which would involve special loss to itself. 3.2.20. In order to avoid a dispute concerning the exact amount of damages to be paid in the case of non-performance, the parties may agree in advance in a construction contract that a contractor will pay liquidated damages. Regardless of the actual damages, it is necessary and sufficient for the contractor to pay the amount agreed upon.27 However, the payment of such an amount does not preclude the employer from exercising his or her right to performance or to termination.28 In addition to liquidated damages, parties may agree to a penalty clause, according to which the contractor must pay a penalty in case of the non-performance. Its validity is recognised, but ‘[a] penalty is presumed to constitute liquidated damages’.29 If the agreed sum is seen to be contra bonos mores or against public policy, such a clause, either stipulating liquidated damages or a penalty, will be deemed partially or wholly void by courts. Tort Liability 3.2.21. According to a rule established by the Supreme Court, the designer, contractor and construction supervisor involved in the construction of buildings shall owe a duty of care to ensure the fundamental safety of the building with respect to the other parties to the contract, as well as the building users, including residents, neighbours and passers-by who are not in a contractual relationship with the designer, contractor or construction supervisor. If a breach of this duty has resulted in defects in the building that undermine its fundamental safety and thereby risking the lives, health or property of residents and other building users, the designer, contractor or construction supervisor shall be liable in tort under the Civil Code to pay damages caused by such defects.30

3.3. Implied Contract Terms 3.3.1.

Implied terms are the terms that are not expressly included in a contract but are assumed to be incorporated in the contract. Terms may be implied (1) by law, (2) by custom, or (3) by fact.

27 Civil Code (n 2) art 420(I). 28 Civil Code (n 2) art 420(II). 29 Civil Code (n 2) art 420(III). 30 Civil Code (n 2) art 709; Supreme Court of Japan, 2005(Ju)702, 6 July 2007, reported in 61 Minshu 5, 1769.

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By Law 3.3.2. The Civil Code provides default rules governing contracts and obligations. Unless otherwise agreed upon by the parties, these rules will be incorporated to the contract, thus becoming implied terms of the contract. For example, if parties to a sale contract agree upon what to sell/buy and the price only, then the terms relating to other legal issues (ex. where to deliver the good, nonperformance) are regulated by the Civil Code. What is more important is that the default rules consist of a fair set of rules for both contracting parties, thus ensuring that they are treated in an equitable way. Moreover, the default rules often allow the intervention of a judge in a construction contract under the authority of the interpretation of default rules, which can sometimes override clear, express words in the contract. See paragraph 3.4.1 below. By Custom 3.3.3. Contract terms may be implied by custom, regardless of whether there is an applicable default rule in the Civil Code, where the parties intended to abide by custom rather than the default rules.31 Such an intention is presumed to exist unless a contrary intention is expressed. If there is a trade custom of delivery place, the sellor is permitted to deliver that place. By Fact 3.3.4. Contract terms may also be implied by fact. If, for example, a construction contract provides for very low remuneration that is disproportionate to the work necessary for the construction, it may be against the purpose and nature of the construction contract to impose on the contractor the default rules of liability. Here, any terms implied by fact can override the default rules of the Civil Code.

3.4. Construction of Contract Terms 3.4.1.

What is written in the contract constitutes the main subject of the construction of contract terms. But, as has been demonstrated, the terms of the contract can be implied by law, custom and fact, and as such there is much room for the intervention of a judge in the construction of the contract. In circumstances where a contract contains a clause which the judge deems to be unjust or unreasonable, the court will not hesitate to rely on normative considerations external to the contract. The contract will be viewed holistically,

31 Civil Code (n 2) art 91.

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taking into account all relevant circumstances. Thus, even a clearly written clause can be ignored by courts, especially by the Supreme Court. This way of constructing contracts differs fundamentally from the approach of the common law, which relies on the parol evidence rule, according to which extrinsic evidence is inadmissible to vary a written contract that is intended to be a complete and final expression of the parties’ agreement. At common law, what is written in a contract is, in principle, decisive.

3.5. Private and Public Procurement Public Procurement 3.5.1. The Public Account Act (Act No 35 of 1947) (in relation to procurement by central government) and the Local Autonomy Act (Act No 67 of 1947) (in relation to procurement by local government) refer to the permitted forms and procedures for public procurement, i.e. open competitive tenders (kokai-kyoso-nyusatsu), selective tenders (shimei-kyoso-nyusatsu) and negotiated contracts (zuii-keiyaku). 3.5.2. Criminal sanctions are applicable to persons or entities who commit serious violations of procurement procedures (e.g. bribery/graft, cartel, unfair methods of competition, etc.). Under the Criminal Code (Act No 45 of 1907) or the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Act No 54 of 1947), there is no specific cause of action available to losing bidders that can stop the procurement procedure or the conclusion of the contract. 3.5.3. In addition to the above statutes, the Act for Promoting Proper Tendering and Contracting for Public Works (Act No 127 of 2000) (‘Proper Tendering Act’) was enacted to ensure (i) information disclosure, (ii) sanctions on unfair conducts, (iii) the bidder’s obligation to prepare details or breakdowns of the bid and (iv) the government’s obligation to prepare guidelines. Under the Proper Tendering Act, the central government encourages public project owners to prepare claim procedures for losing bidders if they identified any problems in the bidding process. However, it should be noted that this claims procedure is yet to be legally guaranteed by national legislation.  

 

Public-Private Partnership (‘PPP’) and Private Finance Initiative (‘PFI’) 3.5.4. The Japanese government enacted the Act on Promotion of Private Finance Initiative Funds (Act No 117 of 1999) (‘PFI Act’), which ignited the boom of PFI projects. Since PFI projects have contemplated project finance schemes, the project finance market has developed as the PFI market has expanded. Furthermore, since the PFI Act was amended in 2011 to introduce a ‘concession’ arrangement, project finance has been used for a wider class of infrastructure assets.

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Before the concession was introduced in 2011, most PFI projects were availability-based accommodation projects (e.g. schools, government offices, public housing, hospitals, school catering service facilities and libraries etc.), while projects in the transportation sector, such as Haneda International Airport, were exceptions.32 The amendment of the PFI Act in 2011 aimed to change this situation and develop the PFI regime into a broader PPP model where PPPs will be used in various types of infrastructure projects. Under the concession, a concessionaire is allowed to collect from the general public a commission, toll, fee or other consideration for use of the infrastructure that it operates. As such, the concession scheme is considered as appropriate form for a project where the private sector assumes all or part of the revenue/demand risk.  

3.5.6.

4. Government Involvement 4.1. Legislation and Regulation The Construction Business Act 4.1.1. The fundamental law that regulates the construction industry in Japan is the Construction Business Act (Act No 100 of May 24, 1949) (‘CBA’). Securing payments to labourers is one of the most important issues addressed in the CBA. Accordingly, the CBA empowers the Minister of Land, Infrastructure, Transport and Tourism (‘MLIT’) or the prefectural governors who granted the construction license, to order such payments.33 The CBA also requires the parties to agree to a construction contract in written form.34 4.1.2. Furthermore, the CBA lists the issues to be contained in a construction contract, whether it is in the main construction contract or in a subcontract.35 Although the CBA does not directly invalidate contract terms that violate the CBA, the MLIT or the prefectural governors will provide the parties, particularly certain large general contractors, with an notification or instruction to observe the CBA.36 4.1.3. The CBA applies to construction contracts and payments to be made in accordance with construction contracts. When a main contractor enters into a contract in which a supplier or manufacturer undertakes to complete and deliver a requested product other than construction works, the Act against Delay in

32 33 34 35 36

Note however that PFI is flexible and can be employed for various types of infrastructure. Construction Business Act (Act No 100 of May 24, 1949) (Japan) art 41 [2]. Construction Business Act (Act No 100 of May 24, 1949) (Japan) art 19. Construction Business Act (Act No 100 of May 24, 1949) (Japan) art 19. Construction Business Act (Act No 100 of May 24, 1949) (Japan) art 24 [5].

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Payment of Subcontract Remuneration, Etc. to Subcontractors (Act No 120 of 1956) (‘Subcontractor Payment Act’) will apply. The Subcontractor Payment Act also provides protections for subcontractors. Insolvency 4.1.4. The CBA provides special protection for the interests of sub-subcontractors. The relevant authority may instruct main contractors, who retain special construction business licenses, to make payments directly to the sub-subcontractors, in the event that the first-tier subcontractors cause damage to others, including the sub-subcontractors.37 This will apply in cases where the first-tier subcontractor becomes insolvent. Standard for Building Works 4.1.5. The Building Standard Act (Act No 201 of 1950) (‘BSA’) is an important statute which sets out standards for building works. The BSA provides minimum technical and legal standards for the use of land, structures of buildings, facilities and categories of buildings38 from the viewpoints of safety, amenity, city-planning and land development. A brief summary of the framework of these regulations is provided on the website of the Institute of International Harmonization for Building and Housing (‘IIBH’).39 4.1.6. Among the standards provided in the BSA, fire resistance or non-flammability is one of the important requirements for certain types of commercial buildings at the construction and delivery stage.40 The BSA requires that consent from local fire chiefs is obtained in order to proceed to the design, construction and delivery of such buildings (Article 93). 4.1.7. In addition to the BSA, there are several statutes that regulate some aspects of the design and construction of buildings and other structures. This includes, but is not limited to, the Fire Service Act (Act No 186 of 1948), the City Planning Act (Act No 100 of 1968), the Act on Regulation of Residential Land Development (Act No 191 of 1961), the Water Act (Act No 177 of 1957), the Sewerage Act (Act No 79 of 1958), the Purification Tank Act (Act No 43 of 1983), the Act for Promoting Easily Accessible Public Transportation and Facilities for the Aged and the Disabled (Act No 91 of 2006), the Housing Quality Assurance Act (Act No 81 of 1999), the Act on Promotion of Seismic Retrofitting of Buildings (Act No 123 of 1995), the Act on Protection of Cultural Properties (At No 214 of 1950) and the Landscape Act (Act No 110 of 2004).

37 Construction Business Act (Act No 100 of May 24, 1949) (Japan) art 41(III). 38 Annexed Table 1 set forth theatres, hospitals, schools etc. 39 See ‘Building Control in Japan’, Institute of International Harmonization for Building and Housing (Online) . 40 Building Standard Act (Act No 201 of 1950) (Japan) arts 2, 27.

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4.2. Codes and Practices 4.2.1.

The Japan Industrial Standards (‘JIS’) are the most well-known and popular industrial standard in Japan, being comparable to the British Standard (‘BS’) in UK and the standards published by the American Society of Testing and Materials (now ASTM International).

4.3. Licensing of Professionals and Contractors Architect 4.3.1. Under the Act on Architects and Building Engineers (Act No 202 of 1950) (‘AABE’), there are three grades of licenses in Japan (Article 2). Among others, a first-class architect is the highest ranked architect and is qualified to design all size buildings. A second-class architect is only qualified to design smaller buildings such as residential wooden houses. Managing Engineer (sekou-kanri-gishi) 4.3.2. In addition to architects, the CBA empowers the MLIT to stipulate technical qualifications for the role of the ‘managing engineer’ (sekou-kanri-gishi) in construction works. The CBA requires certain licensed contractors to retain ‘supervising engineers’ (kanri-gijiutsu-sha) for particular kinds of works conducted at a construction site where the value of construction work exceeds a certain amount. Employees who are qualified as managing engineers are appointed as supervising engineers. The qualification of managing engineer is only admitted to experienced engineers with certain areas of expertise who have passed national examinations proving such expertise. The relevant areas of expertise include: (i) construction machinery and equipment, (ii) civil engineering work, (iii) electric construction work and others. Managing engineers are ranked as first-class and second-class, depending on their experience and the examinations they passed (Article 27). These rankings are also used as a requirement for undertaking a large-scale public works project. For example, a contractor who makes a bid for a public civil engineering project, of which the value exceeds JPY 40 million, must retain a first-class civil engineering managing engineer. Construction Business Licenses for Contractors 4.3.3. Under the CBA, a person or company who conducts a construction business in Japan has to obtain construction business licenses.41 Construction busi-

41 Construction Business Act (Act No 100 of May 24, 1949) art 3.

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ness licenses are classified as (i) general construction business licenses and (ii) specialised construction business licenses. General construction business licenses (for civil engineering works and for building works) are for general contractors. As for specialised construction business licenses, there are 27 specialised categories. Mega-sized general contractor companies usually obtain and maintain all general and specialised licenses (namely 29 licenses), while medium-sized or small-sized contractor companies selectively pick up specific type of works in which they have expertise (detailed in Chapter II of CBA). The requirements for each licence vary and the CBA provides further details. Construction business licenses are valid for 5 years in Japan.

5. Construction Contracts 5.1. Available Contracts Public Works Construction Works 5.1.1. For public construction works, the central government published the ‘Public Work Standard Contract’ (‘PWSC’) (last amended in December 2019) as a set of general conditions that apply to public construction works. Under the PWSC, a contractor must perform the construction works in accordance with the design provided by the employer. Design-Build Works 5.1.2. There are no general conditions for public design-build works published by the central government. 5.1.3. There are some standard forms for specific public design-build works published by private industry associations. For example, the Japan Society of Civil Engineers (‘JSCE’) published the ‘General Conditions for Design-Build for Public Civil Works’ (last amended in 2017) as a set of general conditions for the public design and construction civil works. Under these conditions, a contractor is obliged to prepare a ‘design deliverable’ (sekkei seikabutsu) in accordance with the specifications provided by an employer and execute the construction in accordance with the design deliverable at a fixed lump-sum price.

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Private Works Construction Works 5.1.4. For private construction works, a committee of architects and contractors (called ‘minkan (nanakai) rengo kyotei koji ukeoi keiyaku yakkan iinkai’) (‘the Committee’) published the ‘General Conditions for Construction Contracts’ (‘GCCC’) (amended in April 2020). Under these conditions, a contractor must perform the construction works in accordance with the design provided by the employer. The English translation of the GCCC has been published by the Committee. 5.1.5. The Committee has also published general conditions for specific construction works, including the ‘General Conditions for Renovating Works’ (last amended in April 2020) and the ‘General Conditions for Renovation Works of Condos’ (last amended in April 2020). Design-Build Works 5.1.6. For private design-build works, the Japan Federation of Construction Contractors (‘JFCC’) published the ‘General Conditions for Design-Build Contracts’ (‘GCDB’) (last amended in April 2020). There are two types of the GDCB: Types A and B. According to Type A, an employer and a contractor must (i) first execute a contract for basic design works, and (ii) after completion of a basic design, the employer and the contractor must enter into a main contract for detailed design construction. Under Type B, an employer and a contractor must (i) first execute a main design-build contract, and (ii) after completing the design for execution, the employer and the contractor must enter into a ‘confirmation’ agreement to start the construction. Both types of the GDCB require the parties to enter into another contract after the completion of the design, which means that the employer and the contractor may renegotiate a price for construction works. This is a unique mechanism compared to international practice in relation to design-build contracts. 5.1.7. The ‘General Conditions for Design-Build for Small Building Works’ (last amended in April 2020) published by the Committee also adopted a designbuild scheme. Design and Supervision Services 5.1.8. For design and supervision services, the Committee has published the ‘General Conditions for Design Work and Supervision’ (amended in 2015). Engineering, Procurement and Construction Works 5.1.9. For domestic engineering, procurement and construction works, the Engineering Advancement Association (‘ENAA’) has published the ‘ENAA General Conditions for Domestic Plant Construction Works’ (‘ENAA-Domestic’) (last

Japan

541

amended in 2011). ENAA-Domestic is a turnkey contract under which a contractor undertakes design, procurement, construction and commissioning. The price under the ENAA-Domestic is a fixed lump-sum.

5.2. Most Commonly Used 5.2.1.

5.2.2.

The GCCC is the most widely used standard form for a domestic construction project between Japanese parties. Since the GCCC contains some unfamiliar provisions,42 foreign companies tends to be reluctant to use the GCCC in their investment in construction projects in Japan. For an international project involving a Japanese company, an international standard form is often used, notably FIDIC contracts and international standard forms published by ENAA.43 FIDIC contracts are often used in Official Development Assistance projects funded by the Japan International Cooperation Agency (‘JICA’), since the JICA adopts FIDIC contracts as general conditions of standard bidding documents for JICA-funded projects.

6. Key Issues 6.1. Overview 6.1.1.

The Japanese legal framework for construction contracts has some unique aspects, particularly when compared to a common law framework.

6.2. Fitness for Purpose 6.2.1.

In an international construction project, there are two concepts relating to the degree of a contractor’s performance of obligations: ‘fitness for purpose’ and ‘due care and diligence’. However, the Civil Code does not specifically stipulate the required degree of performance by an obligor except for a few con-

42 Article 33(I) of the ‘General Conditions for Construction Contracts’ (‘GCCC’) provides that upon termination of the contract, the parties shall discuss and settle the account based on the assumption that the employer takes over the completed portions and the inspected materials. This provision is relatively ambiguous compared to international standard form contracts such as the FIDIC contracts (arts 15.3, 15.4, 16.4). 43 See, eg, ‘ENAA Model Form: International Contract for Process Plant Construction’, ‘ENAA Model Form: International Contract for Power Plant Construction’ and ‘ENAA Model Form: International Contract for Engineering, Procurement and Supply for Plant Construction’.

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tracts. For example, the Civil Code provides for a mandate contract (inin keiyaku) under which a mandatary shall assume a duty to administer the mandated business in accordance with the duty of care of a good manager and in compliance with the main purpose of the mandate.44 The principle of ‘kekka saimu’ provides that if an obligor commits to achieve certain results, for example, under a sales contract or a construction contract, but fails to achieve these results, the obligor should be liable for non-performance. Conversely, the principle of ‘syudan saimu’ provides that if an obligor is obliged to fulfil the duty of care of a good manager, for instance, under a mandate contract, the obligor is not liable for non-performance even if the obligor fails to achieve the results. However, from a practical perspective, determining which standard applies depends on the wording of the contract. For example, even if the text of the contract provides that the works by a contractor must be ‘fit for purpose’, if no documents stipulate the details of the ‘purpose’ (e.g. specifications or technical requirements) that is to be attached to the contract, an employer may not be able to hold a contractor liable for a breach of fitness for purpose. In addition, the reformed Civil Code introduced the term ‘non-compliance’ in place of ‘defect’, providing that a contractor must re-perform the works if the works do not conform with the contract in terms of type, quality and quantity.45 If an employer wishes for a contractor to complete the works in conformance to any specifications or requirements, the employer is required to specifically stipulate the ‘fitness for purpose’ obligation in the contract to amend the said default rule under the Civil Code.  

6.2.4.

6.3. Late Completion 6.3.1.

6.3.2.

If a contractor fails to complete the works by the time for completion specified in the construction contract, such a delay constitutes non-performance of an obligation (saimu furikou). When a contractor’s delay is caused by reasons attributable to a contractor, the contractor is obliged to compensate the damages incurred by the employer as a result of the delay.46 Also, even if a contractor’s delay is caused by reasons not attributable to a contractor, if the delay is material from a “commer-

44 Civil Code (n 2) art 644. 45 Civil Code (n 2) art 562(I). 46 Civil Code (n 2) art 415(I).

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6.3.3.

6.3.4.

6.3.5.

6.3.6.

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cial social norm“ perspective (torihikijo no syakai tsunen), then the employer is entitled to terminate the contract with notice.47 As described above in paragraphs 3.2.16–3.2.20, under the Civil Code, in principle, the scope of damages is determined according to the criteria of ‘ordinary loss’ and ‘special loss’.48 For the latter type of loss, the amount of which can exceed that of the former, an employer must prove foreseeability in order to be compensated.49 Regardless of this general rule, the parties may agree that the contractor will pay liquidated damages in the case of delay.50 There is no specific threshold under Japanese law as to the amount and proportion of liquidated damages. However, an excessive amount or proportion of liquidated damages will be invalid and unenforceable due to a breach of public policy. Unlike at common law, in Japan, a penalty provision does not become invalid and unenforceable by the mere reason that it is a penalty provision. A penalty provision is deemed to be a liquidated damages provision and thus is valid unless it is contrary to public policy.51 Even when a contractor is obliged to pay liquidated damages, the contractor can claim a reduction of the amount if the employer is contributorily negligent.52

6.4. Latent Conditions 6.4.1.

6.4.2.

47 48 49 50 51 52

Under the old Civil Code, if a ‘latent defect’ is found in the work completed by a contractor, and it becomes difficult to achieve the objectives of the contract due to such a latent defect, the employer may terminate the contract and claim compensation for damages. Under the old Civil Code, it was necessary for the employer to be unaware of the existence of the defect at the time of delivery in order to terminate the contract and claim compensation for damages from the contractor (Article 570 of the old Civil Code). Under the reformed Civil Code, the concept of latent defects was eliminated. Instead, the new concept of ‘non-compliance’ was introduced (Articles 562564 of the reformed Civil Code). As described above in paragraphs 3.2.3– 3.2.5, if work done by the contractor does not conform to the terms of the contract, there is non-performance by the contractor regarding his or her obliga-

Civil Code (n 2) art 541. Civil Code (n 2) art 416(I). Civil Code (n 2) art 416(II). Civil Code (n 2) 420(I). Civil Code (n 2) art 420(III). Supreme Court of Japan, 1990(O)1456, 21 April 1994, reported in 172 Minshu, 379.

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tions under the contract. Regardless of whether the employer was aware of the existence of the defect, if there is non-compliance in the works at the time of delivery, the employer may seek special remedies, such as remedial work, replacement and a reduction in the contract price.

6.5. Force Majeure Definition 6.5.1. Although the term ‘force majeure’ is used in the Civil Code,53 the Civil Code does not provide a definition for ‘force majeure’. In order to avoid future disputes, the parties should agree to and specify a definition for ‘force majeure’ in the construction contract (including whether mere prevention suffices to trigger force majeure or whether impossibility of performance is required). 6.5.2. Most of the construction contracts used in Japan provide a definition for the term ‘force majeure’. For example, the GCCC defines ‘force majeure’ as a natural or man-made event which is not attributable to either the employer or the contractor. Depending on the size, place or period of the project, the parties should consider including a more detailed definition of force majeure, including a non-exhaustive list of force majeure events. 6.5.3. Even if the parties include a detailed definition of force majeure in the contract, whether a specific event qualifies as force majeure depends on the circumstances or location in which such an event occurs. For example, since earthquakes with a seismic intensity of around 5 often occurs in Japan, a contractor should execute the works to ensure it can withstand such a seismic intensity, and if the works are damaged due to the earthquake of magnitude 5, Japanese courts will likely interpret the term such that the contractor cannot raise the defence of force majeure. Consequences 6.5.4. In an international construction project, force majeure is one of the independent avenues for a contractor to be released from its obligation to perform the works, to claim for an extension of time and/or additional costs and to terminate the contract (clause 19 of the FIDIC (1999) contracts). Whereas, under Japanese law, like most other civil law jurisdictions, the legal consequence of force majeure is considered in the context of a non-performance or a breach of contract by an obligor. While only few court cases have dealt with the issue of force majeure, some of the cases deemed force majeure to be a matter of the fault of an obligor while others deemed force majeure to be a matter of causa-

53 See, eg, Civil Code (n 2) art 419(III).

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tion between non-performance by an obligor and the damage.54 Those cases do not deem force majeure to be an independent source of remedies. Most major standard form contracts provide that parties have to consult with each other first, and if the parties agree that the contractor’s losses on the uncompleted works, materials and equipment were substantial, and good care was not taken to prevent this, the employer shall indemnify the contractor for such losses.55 As such, solutions given by the major standard forms are still ambiguous and limited. If a contractor wishes to obtain a specific remedy in the case of force majeure, the parties should specifically agree on the consequences in the event of force majeure, whether it be a release from performing an obligation, claim for an extension of time or additional costs or right to termination.

6.6. Limitation of Liability 6.6.1.

6.6.2.

6.6.3.

6.6.4.

As a default rule, the scope of damages to be compensated by a breaching party includes ordinary damages as well as special damages to the extent that the parties foresee or should have foreseen such special damages.56 However, under the principle of ‘freedom of contract’, the parties may agree to a different term in the contract as to the parties’ liability. In a construction contract, an employer and a contractor sometimes limit the scope of damages to be compensated by a breaching party to direct damages, while excluding indirect damages, consequential damages, incidental damages and loss of profit. For example, in the ENAA-Domestic lost profit, loss of business, loss of time, loss of raw materials or production materials, indirect damages or any other comparable damages are excluded from the scope of damages. The parties also sometimes set a cap on the damage to be compensated by a breaching party (including liquidated damages). The cap amount depends on factors including the project, the parties, the works and the contract price. In some projects, the parties may agree to set a contract price as a cap on the damages to be compensated by a breaching party. The parties may agree not to enforce a limitation of liability clause in a case where the damage is caused by wilful conduct or gross negligence of a breaching party. This is provided for in the ENAA-Domestic.

54 Judgment of Tokyo District Court dated 22 June 1999, Judgment of Kobe District Court dated 26 January 2000, Judgment of Tokyo District Court dated 8 October 2014, Judgment of Tokyo District Court dated 20 September 2016, etc. 55 See, eg, GCCC (n 41) art 21. 56 Civil Code (n 2) art 416.

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Under Japanese law, a defaulting party may be liable in tort as well as for breach of contract. For example, if there is a defect in the works, an employer may demand compensation for damages incurred due to such a defect by arguing that the contractor has not only breached the contract but has also committed a tort. In order for a contractor to avoid tortious liability, the contractor should make sure that a limitation of liability clause excludes liability for not only breach of contract but also tort.

6.7. Duration of Exposure 6.7.1.

6.7.2.

Under Japanese law, substantive time limitations are provided but procedural time limitations are not. More specifically, the Civil Code provides for a statute of limitations for a substantive right — for example, 5 years after an obligee becomes aware that it is entitled to exercise a right, and 10 years after an obligee becomes entitled to exercise a right — which means that if a statute of limitations lapses, the substantive right is extinguished (Article 166 of the Civil Code). However, Japanese law does not provide a procedural time limitation on the period by which a disputing party must file a claim. Theoretically, it is possible for the parties to agree to a time limitation on possible claims. However, since the Civil Code prohibits the parties from agreeing to extend the statute of limitations,57 such an agreement would only be valid to the extent that the agreed limitation is shorter than the period prescribed in the statute of limitations.

6.8. Time Bars 6.8.1.

At common law, a time bar under a contract is interpreted strictly. More specifically, if a contractor fails to submit a claim within the period specified in the contract, the contractor loses its entitlement to make a claim (e.g. Clause 20.1 of the FIDIC (1999/2017) Contracts). However, under Japanese law, time bars are not interpreted so strictly. In Japan, some construction contracts do not provide a time period during which a contractor is required to make a claim. For example, the GCCC and the ENAA-Domestic do not stipulated a specific time period within which the contractor must make a claim. Instead, a notice period is often provided for in construction contracts in Japan. However, even if a contractor fails to provide a notification within such  

6.8.2.

6.8.3.

57 Civil Code (n 2) art 146.

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period, there are no cases in which Japanese courts have held that the contractor consequently loses its right to make a claim. The Civil Code provides a one-year notice period during which an employer is required to provide notice after it becomes aware of non-compliance.58 After this period, the employer may not demand further performance, reduction of remuneration, compensation for damages and termination.59 Japanese courts have yet to determine whether an employer loses the right to make such demands when it fails to provide a notice within one year.

7. Dispute Resolution 7.1. Litigation 7.1.1.

7.1.2.

7.1.3.

58 59 60 61 62

In Japan, the courts hear construction contractual disputes. No specialist construction court exists. Excepting small claims, the District Courts are the first instance courts for commercial construction disputes. Parties are free to designate a specific court to exclusively hear any arising contractual disputes.60 Parties can even agree to a foreign court’s jurisdiction.61 The judgment of a foreign court will be recognised and enforced in Japanese courts, as long as the judgment meets specific requirements under the CCP.62 In commercial construction contracts, many business parties agree to designate the Tokyo/Osaka District Courts to hear their disputes. Japanese courts generally prefer written submissions. Following the complaint and answer, parties submit memorials (jumbi-shomen) together with exhibits (shosho). Unless the parties amicably settle the dispute at an early stage, there will be a witness hearing within one and a half to two years. Witnesses are examined by direct and cross-examination. Parties usually submit witness statements (Chinjutsu-sho) prior to the hearing. Usually, for each witness, two hours is the maximum duration for direct and cross-examination (saving time for interpretation).

Civil Code (n 2) art 637(I). Civil Code (n 2) art 637(l). Code of Civil Procedure (Act No 109 of 1996) (Japan) art 11. Code of Civil Procedure (Act No 109 of 1996) (Japan) arts 3–7. Code of Civil Procedure (Act No 109 of 1996) (Japan) art 119.

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7.2. Court-Sponsored Mediation 7.2.1.

The Tokyo/Osaka District Courts have a Building Dispute Department (kenchiku-shuchu-bu). Since housing complex ‘defect’ disputes are common in urbanised areas, these courts have established a special department to handle such disputes. Once filed, the court designates mediation panel members (chotei-iin) from its private list, encouraging the parties to settle the dispute amicably. The judges in charge of the case are the sole members of the panel. Parties are not entitled to designate its own panel members. Usually, listed members are retired architects, retired employees of construction/manufacturing companies and private practitioners. Since the majority of the claims are defect-related matters, the list does not include programme experts or quantum surveyors. In reality, programme experts and quantum surveyors are not chartered professions in Japan.

7.3. ‘Kensetsu-Koji-Funso-Shinsa-Kai’ 7.3.1.

The CBA establishes the construction dispute adjudication board (KensetsuFunso-Shinsa-Kai) (‘KFSK’) as a government-sponsored alternative dispute resolution body.63 There are 47 local KFSKs and a single central (national) KFSK in Tokyo. The relevant jurisdiction in each case is determined by the registered office of the claimant or the construction site in question. Central and local governments appoint a panel of mediator-arbitrators. The KFSK is formulated mainly for domestic disputes and around 40 cases were registered at the central KFSK in 2019. However, it should be noted that the KFSK strongly recommends amicable settlement rather than an issuance of an award based on adversarial procedures. That being said, the central KFSK issued only three awards based on adversarial procedures in 2019, while the KFSK settled 16 cases with ‘Assen (expedited Chotei)’ and ‘Chotei (quasi-mediation)’ during the same period of time. The KFSK’s procedure is significantly different from international arbitration — notably, there is no party-appointed arbitrator/ mediator, no document disclosure and almost no witness examinations. There are no reports that any of the cases before the KFSK were conducted in English.

63 CBA (n 33) art 25.

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7.4. Arbitration 7.4.1.

Japan is a member state of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.64 Furthermore, Japan enacted the Arbitration Act (Act No 138 of 2003), which is modelled on the 1985 UNCITRAL Model Law on International Commercial Arbitration, but has not adopted its amendments in 2006. Although arbitration is not a popular method of dispute resolution for domestic disputes, Japanese courts have sought to take an arbitration-friendly position. The Japan Commercial Arbitration Association is the most reliable national arbitration institution for construction disputes in Japan. However, parties are free to choose any other foreign arbitration institution instead. Non-KFSK arbitration allows parties to agree to use English as the official language of the arbitration procedures.

64 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959).

Ivars Pommers and Ineta Kanepe

Latvia 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8.

Context 552 The Country 552 The Legal System 552 The Economy 553 The Construction Industry 554 Size and Nature 554 Participants 555 Work, Health and Safety 556 Protection of the Environment 557 Quality Assurance and Supervision 558 Construction Contracting Dynamics 560 Legal Underpinnings of Contracts 561 Freedom of Contract 561 Legal Framework 561 Public Policy 563 Statute Law 563 Case Law 567 Implied Contract Terms 567 Construction of Contract Terms 568 Private and Public Procurement 568 Government Involvement 569 Legislation and Regulation 569 Codes of Practice 570 Licensing of Professionals and Contractors Construction Contracts 572 Available Contracts 572 Most Commonly Used 574 Key Issues 574 Overview 574 Fit for Purpose 575 Late Completion 575 Latent Conditions 576 Force Majeure 577 Limitation of Liability 579 Duration of Exposure 580 Time Bars 581

https://doi.org/10.1515/9783110712728-018

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Dispute Resolution 582 Individual Contracts 582 FIDIC 583

1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

Latvia is a country in the Baltic region of Northern Europe. It is bordered by Estonia, Lithuania, Russia and Belarus, and shares a sea border to the West with Sweden. Latvia has approximately 1.9 million residents and a territory of 64,589 km2. Latvia is a democratic parliamentary republic established in 1918 however, its de facto independence was interrupted at the outset of World War II. In 1940 the country was forcibly incorporated into the Soviet Union and remained a part of it for the next 50 years. It ended with the dissolution of the Soviet Union in 1991, with Latvia declaring the restoration of its de facto independence on 21 August 1991. The capital city of Latvia is Riga. Latvian is the official language. Latvia is a unitary state, divided into 119 administrative divisions, of which 110 are municipalities and 9 are cities. There are five planning regions: Kurzeme, Latgale, Riga, Vidzeme and Zemgale.1 Latvia is a member of the EU, NATO, United Nations, Council of Europe, WTO and OECD. On 1 January 2014, the euro became the national currency, replacing the local lats.

1.2. The Legal System 1.2.1.

1.2.2.

Latvia’s legal system is based on the Romano-Germanic legal system and is similar to the legal systems of Germany and the Czech Republic. As Latvia is a member of the EU, its legal system is also highly governed by EU law. There is a three-level court system in Latvia comprised of district or city courts, regional courts, and the Supreme Court. Civil cases are heard before the first instance courts. Each party has a right to appeal the judgment under an appellate procedure, in which the appellate court reviews these cases anew. The first-instance cases are heard by the district or city courts. Admin-

1 Richard Hacken, ‘History of Latvia’, EuroDocs (Website, 28 January 2019) .

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1.2.3.

istrative courts basically have the same three-level hearing systems but their task, in comparison with civil courts, is to control the legitimacy and grounds of an administrative act or actual conduct of a public authority after receiving an appropriate application, as well as to establish public legal obligations or rights. Arbitration can be used as an alternative dispute resolution mechanism. Latvia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.2 Arbitration is substantially faster than dispute resolution in regular courts. However, the popularity of arbitration as an alternative dispute resolution option has recently diminished, mainly due to reputational reasons.

1.3. The Economy 1.3.1.

1.3.2.

1.3.3.

In addition to Latvia’s membership in the EU, Latvia has been a member of the World Trade Organization since 1999. In 2016 Latvia became a member of the Organisation for Economic Co-operation and Development (‘OECD’). Since 2000, Latvia has had one of the highest GDP growth rates in Europe. However, the chiefly consumption-driven growth in Latvia resulted in the collapse of the Latvian GDP in late 2008 and early 2009, exacerbated by the global economic crisis. By 2010, commentators noted signs of stabilization in the Latvian economy. Rating agency Standard & Poor’s raised its outlook on Latvia’s debt from negative to stable.3 Latvia’s current budget, which had been in deficit by 27 % in late 2006, was in surplus in February 2010. The International Monetary Fund concluded the first post-program monitoring discussions with Latvia in July 2012, announcing that Latvia’s economy has been recovering strongly since 2010, following the deep downturn in 2008–09. Real GDP growth of 5.5 % in 2011 was underpinned by export growth and a recovery in domestic demand.4 The growth momentum has continued into 2012–17 despite deteriorating external conditions. Following an exceptionally strong 2017, it slowed down in 2018 and 2019 to around 3 %, as investment decelerated due to the slower pace of disbursements of EU funds.5  

1.3.4.

 

 

2 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (‘New York Convention’). 3 https://tradingeconomics.com/latvia/rating. 4 https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Republic-of-Latvia-First-Post-ProgramMonitoring-Discussions-26063. 5 http://www.oecd.org/economy/latvia-economic-snapshot/.

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Unemployment decreased to a single-digit number by summer 2014, and in 2018 was 7.4 % and in 2019 -6.3 %.6 All banks in Latvia passed the stress tests conducted by the European Central Bank in 20147. In 2018, following the money laundering scandals involving Latvian banks, the government took steps to clean up the Latvian banking sector from money laundering. On 23 February 2018, the Financial and Capital Market Commission decided on unavailability of deposits at ABLV Bank, following the statement of the Financial Crimes Enforcement Network of the United States Department of the Treasury. In order to ensure maximum protection of clients’ and creditors’ interests, on 26 February 2018 at their extraordinary meeting, shareholders of ABLV Bank, were forced to make a decision on voluntary liquidation, which was subsequently approved by the Financial and Capital Market Commision on 12 June 20188. The third largest bank in Latvia, AB.LV Bank, is currently undergoing liquidation. State property privatization in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been privatized, leaving only a small number of politically sensitive major state-owned companies still operating.  

1.3.5.

1.3.6.

1.3.7.

 

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction sector in Latvia, like the rest of the EU and global construction industry, is undergoing significant changes. In 2012–15 the construction sector represented more than 6 % of Latvian GDP. In 2014, it represented 6.7 %, before falling to 6.5 % in 2015 and 5.4 % in 2016, followed by an increase back to 6 % in 2017.9 In general, Latvian construction companies have proven their competitiveness in foreign markets and work well on different scales, ranging from general construction to specific installation work. Latvian manufacturers are also  

 

 

 

 

2.1.2.

6 Ekonomiskās aktivitātes, nodarbinātības un bezdarba līmenis Latvijas reģionos (%), Centrālās Statistikas Pārvaldes Datubāzes (Website) . 7 https://eba.europa.eu/risk-analysis-and-data/eu-wide-stress-testing/2014. 8 https://www.ablv.com/en/legal-latest-news/ablv-bank-self-liquidation. 9 ‘Rūpniecība, Būvniecība, Tirdzniecība un Pakalpojumi’, Centrālās Statistikas Pārvaldes Datubāzes (Website) .

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2.1.3. 2.1.4.

555

well known for the high quality and price competitiveness of their construction materials. Data of the Central Statistical Bureau shows that in 2017 construction output was €1’736.0 million, including in the 4th quarter — €548.8 million.10 In comparison with 2016, the construction output in 2017 increased by 19.5 %. Construction of buildings went up by 11.8 %, of which construction of non-residential buildings rose by 20.2 % while that of residential buildings fell by 11 %. Compared to 2016, construction of civil engineering structures increased by 30.6 %. Increase in production was observed in almost all civil engineering areas. Construction of highways, streets, roads, airport runways and railways increased by 28.2 %; ports, waterways, dams and construction of hydropower structures by 51.4 %; main pipelines and main electronic communications networks by 49.5 %; construction of local level pipelines and cables lines by 41 %; and other civil engineering by 81.7 %.11 Compared to 2016, construction costs in 2017 increased by 1.9 %. Maintenance and operational costs of machinery and equipment increased by 1 % and prices of construction materials increased by 1.4 %, whereas remuneration of the labour increased by 4.5 %.12 The data regarding the year 2018 has, at the time of writing, not yet been released. However, some comparisons may be already made analysing data of the first two quarters of the year. Compared to the 1st quarter of 2018, construction costs in the 2nd quarter of 2018 increased by 1.7 %. Maintenance and operational costs of machinery and equipment decreased by 1 %, prices of construction materials increased by 1.7 %, and labour remuneration increased by 2.9 %. In July, construction costs increased by 0.6 % compared to June, and in August dropped by 0.2 % compared to July.13  

 

 

 

 

 

 

 

 

2.1.5.

 

 

 

 

 

2.1.6.

 

 

 

 

 

 

2.2. Participants 2.2.1.

In 2018 there were 5,270 active building contractors specializing in construction work registered in Latvia.14 Upon analysing the number of building con-

10 Ibid. 11 ‘2017. gadā būvniecības apjoms pieauga par 19,5 %’, LV Portālu (Website, 12 February 2018) . 12 ‘Rūpniecība, Būvniecība, Tirdzniecība un Pakalpojumi’, Centrālās Statistikas Pārvaldes Datubāzes (Website) . 13 Centrālā Statistikas Pārvalde (Website, 2019) . 14 ‘Aktīvo Būvkomersantu Skaits’, BūvniecĪbas Informācijas Sistēma (Website, 2 November 2018) .  

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tractors by their size, it is clear that the majority of building contractors in all construction sectors are small companies (97 %). However, in the field of construction of buildings, mainly middle-sized companies operate, while in civil engineering, mainly large companies operate. This may be explained by the specifics of the latter field, which involve implementation of major industrial facilities where higher numbers of employees are required.  

2.3. Work, Health and Safety 2.3.1.

2.3.2. 2.3.3.

2.3.4.

The labour and health protections in the construction field have been precisely outlined by laws and regulations. One example is the Cabinet of Ministers Regulation Darba aizsardzības prasības, veicot būvdarbus [Labour Protection Requirements in Performing Construction Work].15 The actual control of labour protection in construction is performed by the State Labour Inspectorate and State Revenue Service. Each person working at a construction site needs to be appropriately equipped with all labour safety equipment required by the laws and regulations. This must be suitable for the work performed. They must also carry an employee’s certificate issued by the responsible construction business operator (or the actual contractor). There must be a list of the employees and their general personal details (name, ID number, agreement number, name of contractor, etc.) available at the construction site, as well as an electronic working time recording system16. In addition to the above, in projects exceeding a certain scale, i.e., if the planned volume of construction work exceeds 500 person-days (total working days worked by one or more employees), the construction business operator or contractor has to appoint a coordinator of labour safety or engage a professional service provider. The coordinator of labour safety must be appropriately educated.  

15 Darba aizsardzības prasības, veicot būvdarbus [Labour Protection Requirements in Performing Construction Work] (Latvia) 28 February 2003, Latvijas Vēstnesis No 33 (2798), Ministru kabineta noteikumi No   92 [Cabinet of Ministers Regulation]. . 16 Likums “Par nodokļiem un nodevām” [Act on Taxes and Duties] (Latvia) 2 February 1995, Latvijas Vēstnesis No. 26 Article 110.

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2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

2.4.4.

2.4.5.

Latvia is considered to be one of the ‘greenest’ countries in Europe. There are many environmental protection rules that must be followed during the development of construction design and construction works. The Construction Act stipulates environmental protection as one of essential requirements. A structure shall be designed, constructed and maintained in accordance with its type of use; it shall be done in such a way as to ensure its conformity with the environmental protection requirements.17 The environmental protection section of the Ēku būvnoteikumi [Building Construction Regulation]18 is only a small part of the total number of environmental protection rules to observe whilst the construction work of building is performed. Similar sections are included in the other Special Regulations, for example, Autoceļu un ielu būvnoteikumi [Road and street construction regulation]. In general terms, construction work must be organized and performed in a manner that minimises damage to the environment as far as possible. The use of natural resources must be economically and socially justified. Construction waste must be appropriately managed, with records kept. Construction waste is considered to be hazardous and must be managed in accordance with the procedure set by the laws and regulations19. There are also special requirements to preserve as many trees located on the construction site as possible20. A tree protection plan must primarily be included in the work performance design. The topsoil must be removed before starting the construction work and preserved for later use21. Strict requirements are set out in respect of wastewater treatment and the prevention of groundwater pollution22.

17 Būvniecības likums [Construction Act] 9 July 2013, Latvijas Vēstnesis 146 Article 9. 18 Ēku būvnoteikumi [Building Construction Regulation] (Latvia) 2 September 2014, Latvijas Vēstnesis 194, Ministru kabineta noteikumi No 529 [Cabinet of Ministers Regulation], Sections 135–143. 19 Būvniecībā radušos atkritumu un to pārvadājumu uzskaites kārtība [Procedures for Ensuring Record-keeping of Construction Waste Produced and Transportation Thereof] (Latvia) 15 April 2014, Latvijas Vēstnesis 77, Ministru Kabineta noteikumi No 199 [Cabinet of Ministers Regulation] . 20 Noteikumi par koku ciršanu ārpus meža [Rules for Felling Trees Outside the Forest] 2 May 2012, Latvijas Vēstnesis 70, Ministru kabineta noteikumi No 309 [Cabinet of Ministers Regulation]. 21 Ēku būvnoteikumi [Building’Construction Regulation] (Latvia) 2 September 2014, Latvijas Vēstnesis 194, Ministru kabineta noteikumi No 529 [Cabinet of Minister Regulation], Section 137. 22 Ēku būvnoteikumi [Building’Construction Regulation] (Latvia) 2 September 2014, Latvijas Vēstnesis 194, Ministru kabineta noteikumi No 529 [Cabinet of Minister Regulation], Sections 138, 139.

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2.5. Quality Assurance and Supervision 2.5.1.

2.5.2.

2.5.3.

2.5.4.

2.5.5.

2.5.6.

In accordance with the General Construction Regulation, a structure is commisioned for operation in accordance with a procedure prescribed by laws and regulations. In the taking-over certificate of the construction site and completed works, the contractor and the customer (employer) agree on a period by which the contractor must remedy, at its own expense, any construction work defects discovered after the putting into operation. The mandatory minimum warranty period of construction works depends on the classification of structures or buildings into groups and varies from 2 years up to 5 years. The contractor is liable for the quality of construction work. The quality of work may not be lower than the construction quality parameters determined in the Latvijas būvnormatīvi [Latvian Construction Standards], national standards and other laws and regulations. A construction work quality control system is developed by each business operator in line with its field of construction, type and volume of the work to be performed. Quality control of construction work includes initial control of the construction performance documentation, supplied materials, articles, constructions, devices, machinery and similar equipment; technological control of separate work operations or work processes; and final control of the finished (deliverable) work or construction work cycle (construction element). The quality of the finished major construction elements and covered work, as well as assembled engineering systems significant for fire protection, are confirmed by a special taking over certificate. The agencies for supervision of construction (construction boards) at the local governments are responsible both for approval of construction designs and control of construction work quality. Accordingly, as this is a delegated task, the municipalities themselves are directly liable for performance of the building authorities and for any other authority established by them23. All structures and buildings are classified into three groups depending on the level of complexity of construction and the potential impact on human life, health and the environment24. For the construction of buildings and structures of the third group (the highest complexity level), there are mandatory requirements aimed at quality assurance, to have expert examination of the construction design, author’s supervision (control carried out by a developer of the construction design after completion of the designing works, to ensure

23 Būvniecības likums [Construction Act] 9 July 2013, Latvijas Vēstnesis 146 Articles 7, 12. 24 Vispārīgie būvnoteikumi [General Construction Regulation] (Latvia) 26 September 2014, Latvijas Vēstnesis 191, Ministru kabineta noteikumi No 500 [Cabinet of Ministers Regulation} Section 4.

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implementation of the structure in conformity with the construction design) during construction work, and supervision of construction work to be performed by independent construction business operators. 2.5.7. For the construction of buildings of the third group, the construction authority, upon deciding on the construction design, must ensure that the mandatory expert examination of the construction design has been performed. This obligation is established to provide evaluation regarding conformity of the technical solutions of the construction design with the requirements of the laws and regulations and technical specifications and to ensure that the documents are executed in a legally correct manner and do not contain mistakes25. 2.5.8. The inspectors of construction boards and the State Construction Control Bureau of Latvia have an obligation to perform control at the construction sites. They have a right to review and examine the buildings, visit and inspect them, request explanations and documents, and, if necessary, request that the premises are cleared at the contractor’s expense so that they become accessible. If derogations from the approved construction design are discovered or if there is an endangerment to people’s lives during the construction work, the inspector may suspend the construction work26. 2.5.9. Upon commissioning of the building, the construction board or the State Construction Control Bureau (in the case of a public facility) must ascertain whether the construction has been performed in accordance with the approved construction design and applicable laws and regulations. Before commisioning of building inspectors ascertain of the presence and content of mandatory as-built documentation, being a construction log book and certificates of the major structures and covered work, certificates and protocols of the engineering devices, special systems and equipment as well as the conformity certificates of construction products, author’s supervision journal (if such supervision has been performed voluntarily and in the mandatory cases foreseen by the laws and regulations)27. 2.5.10. Construction work which is performed without a building permit or before a note has been made in the building permit regarding relevant conditions to be met is qualified as unauthorised construstruction. The landowner or building owner is responsible for unauthorised construction. In case of unauthorised

25 Vispārīgie būvnoteikumi [General Construction Regulation] (Latvia) 26 September 2014, Latvijas Vēstnesis 191, Ministru kabineta noteikumi No 500 [Cabinet of Ministers Regulation} , Section 43. 26 Būvniecības likums [Construction Act] 9 July 2013, Latvijas Vēstnesis 146 Article 18. 27 Ēku būvnoteikumi [Building Construction Regulation] (Latvia) 2 September 2014, Latvijas Vēstnesis 194, Ministru kabineta noteikumi No 529 [Cabinet of Ministers Regulation], Sections 157–190.

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construction detected, the construction work is to be stopped and the authority takes a decision to restore the facility to the previous condition or to perform construction after requirements of the laws and regulations are met, as well as the authority imposes an administrative penalty28. Additionally, (1) the person who draws up the construction design is responsible for the conformity of the extent and content of the construction design with requirements of the initiator of the construction; (2) the contractor is responsible for the conformity with the requirements of laws and regulations at the construction site and for conformity of the structure or its part created as a result of the construction work to the construction design, for choosing construction materials conforming to the requirements of design, laws and regulations, and integration technologies thereof; (3) a building supervisor is responsible for supervision of the whole construction work at large and control of every stage specified in the plan of construction supervision at the construction site as well as for conformity of the structure or its part with the construction design; and (4) a person who performs expert examination is responsible for the content of an expert-examination opinion and the validity of conclusions contained therein29.

2.6. Construction Contracting Dynamics 2.6.1. 2.6.2.

The party who usually selects the form of contract in Latvia varies depending on the circumstances. The main difference in construction contract negotiations and contracting is whether the construction project is private or public (i.e., financed by the Government or a municipality, or EU funds). If the construction facility is a private investment, the customer (employer) usually may freely select a desirable manner of hiring a contractor (builder), i.e., offer its own form of contract or accept the one provided by the contractor. However, in cases of public projects a draft contract is prepared and provided by the customer (employer) and is included in the procurement documentation in accordance with the provisions of Publisko iepirkumu likums [Public Procurement Act].30 The typically used practice in drafting or selecting the contract is the following:  

 

2.6.3.

28 Būvniecības likums [Construction Act] 9 July 2013, Latvijas Vēstnesis 146 Articles 18, 19. 29 Būvniecības likums [Construction Act] 9 July 2013, Latvijas Vēstnesis 146 , Article 19. 30 Publisko iepirkumu likums [Public Procurement Act] (Latvia) 29 December 2016, Latvijas Vēstnesis No 254 (5826) Articles 60, 61.

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(a)

2.6.4.

Private facility’s customer (employer) and general contractor: the customer drafts or selects the contract; (b) Contracting authority under the Public Procurement Act and general contractor: the tendering contracting authority drafts or selects the contract; (c) General contractor and sub‐contractor: the general contractor drafts or selects the contract; (d) Equipment supplier and purchaser (the customer or the general contractor): the equipment supplier selects the contract; and (e) Consultant (architect or engineer) and the customer or head contractor: the contract will be selected by either party depending on negotiations. A project financier will not usually draft or select a contract itself. However, a project financier commonly requires an option to review the contract and suggest modifications to secure its specific interests in relation to provided finances.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

3.1.3.

The parties are free to enter into contracts and to determine their contents (principle of party autonomy) however, this freedom is subject to the requirements of good faith, fair dealing and the mandatory rules established. The freedom to choose with whom to contract is limited by the Construction Act, which stipulates that to perform commercial activity in one or several fields of construction, as well as in the field of architecture or electric energy, a contractor shall register with the Register of Building Contractors, submitting information about all building specialists employed.31 The Construction Act requires written employment contracts or contracts for work performance to be entered into between participants of construction32.

3.2. Legal Framework 3.2.1.

The legal framework of construction, taking into account its historical background, is currently strewn across many and varied laws and regulations.

31 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Article 22. 32 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Articles 13, 19.

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First, the legal framework of construction is included in the Satversme [Constitution of the Republic of Latvia] (‘Constitution’) which is the supreme law in Latvia. Secondly, the legal framework of construction is incorporated in the provisions and principles of international and EU law governing construction and is binding on the Republic of Latvia, which also stipulate quality requirements for construction products. One of the most important instruments for reaching national strategic goals in the construction industry is an arranged and understandable database of laws and regulations governing the industry, which have been harmonized with the EU directives. The statutory database of construction currently consists of the Būvniecības likums [Construction Act] adopted in 2013,33 and regulations and standards issued by the Cabinet of Ministers in accordance with the Construction Act. Since 1 March 2013, the Ministry of Economics of the Republic of Latvia has performed general supervision and coordination of construction in Latvia. The Ministry is responsible for the development of a unitary government policy in the construction sphere, as well as the actual implementation of policy. The competence of the Ministry within the construction sector is provided by the Construction Act, and it includes preparation of the construction development strategy and programs, preparation of proposals for improving the system of draft laws and regulations regulating construction, reviewing of complaints on the actions of municipal authorities and their officials, and other obligations in the construction industry foreseen by law34. The main aim of the construction policy is to promote the development of a sustainable construction sector by ensuring a favourable and competitive business environment, decreasing administrative barriers, improving the system of public procurement in the construction industry, ensuring circulation of construction information and increasing productivity of companies rendering construction services, as well as promoting the introduction of energy efficient and environmentally friendly construction35.

33 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Articles 13, 19. 34 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 , Article 6. 35 Latvijas būvniecības nozares attīstības stratēģija 2017.-2024.gadam [Latvian construction industry development strategy for 2017-2024] .

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3.3. Public Policy 3.3.1.

3.3.2.

In 2016 the Cabinet of Minister approved proposals for amending of the Construction Act36. In order to facilitate the receipt of a quality construction service, it was proposed to develop standard contracts that combine best practices and balance the mutual rights of the parties. Such agreements would reduce disputes between participants in the construction process and enhance the predictability of the construction process. It was planned that such standard contracts would be mandatory for public procurement in construction. At present, no such contracts have been developed and each local government or government agency that announces public procurement in construction is developing a new draft contract based on previous experience. This creates a situation where a contractor is offered different contractual terms when participating in public procurement, which later creates confusion about the contractual terms and their application. However, standard contracts have not yet been approved.

3.4. Statute Law Legislative Acts 3.4.1. All sources of construction law are in written form. Laws and regulations governing construction have varying degrees of legal effect due to the principle of hierarchy, which is one of the structural principles of the legal system. Constitution of the Republic of Latvia 3.4.2. The legal provisions contained in the Constitution, which is the supreme law in terms of legal effect, do not directly regulate relations in the construction sector. Some authors are of an opinion that the Constitution establishes fundamental rights and principles governing the construction and stipulates the crucial aspects to be followed in implementing construction37. Rules of the Constitution are directly invoked mostly in territory planning and building permit disputes in the context of public environmental interests. Laws 3.4.3.

A crucial source of law is the laws passed by the Saeima [Parliament] of the Republic of Latvia under the procedure established by the Constitution.

36 https://www.em.gov.lv/lv/jaunumi/11546-izstradas-tipveida-ligumus-buvnieciba. 37 Ilma Čepane, Silvija Meiere Patvaļīgā būvniecība, Satversme un vispārīgie tiesību prncipi. Jurista Vārds 7 October 2003 No 36 (294).

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The currently effective Construction Act is deemed to be the fundamental law of construction in Latvia. It was adopted on 9 July 2013 and is applicable from 1 October 2014. The Construction Act creates a contemporary legal framework for the construction process which harmonizes the national law with EU law and facilitates development of the construction industry. It also provides coordination of interests between a construction initiator and the general public based on the spatial planning. There are several special laws regulating specific issues associated with construction, for example, the Ēku energoefektivitātes likums [Act on the Energy Performance of Buildings],38 Likums par hidroelektrostaciju hidrotehnisko būvju drošumu [Act on Safety of Buildings of Hydroelectric Power Plants],39 Par kultūras pieminekļu aizsardzību [Act on Cultural Heritage Protection],40 Par atbilstības novērtēšanu [Act on Conformity Assessment],41 Preču un pakalpojumu drošuma likums [Act on the Safety of Goods and Services],42 Teritorijas attīstības plānošanas likums [Act on Spatial Development Planning],43 Aizsargjoslu likums [Protection Zone Act],44 Reģionālās attīstības likums [Regional Development Act],45 and other laws. The above laws contain provisions stipulating compliance with and enforcement of the basic regulations for construction established in the Construction Act. Conclusion of contracts and their main preconditions, including dispute resolution in the construction industry, is regulated by the Civillikums [Civil

38 Ēku energoefektivitātes likums [Act on the Energy Performance of Buildings] (Latvia) 21 December 2012, Latvijas Vēstnesis No   201 . 39 Par hidroelektrostaciju hidrotehnisko būvju drošumu [Act on Safety of Buildings of Hydroelectric Power Plants] (Latvia) 20 December 2000, Latvijas Vēstnesis No 460/464. 40 Par kultūras pieminekļu aizsardzību [Act on Cultural Heritage Protection] (Latvia) 5 March 1992, Latvijas Republikas Augstākās Padomes un Valdības Ziņotājs No 1992/10. . 41 Par atbilstības novērtēšanu [Act on Conformity Assessment] (Latvia) 20 August 1996, Latvijas Vēstnesis No 139. . 42 Preču un pakalpojumu drošuma likums [Act on the Safety of Goods and Services] (Latvia) 28 April 2004, Latvijas Vēstnesis No 66. . 43 Teritorijas attīstības plānošanas likums [Act on Spatial Development Planning] (Latvia) 2 November 2011, Latvijas Vēstnesis No 173. . 44 Aizsargjoslu likums [Protection Zone Act] (Latvia) 25 February 1997, Latvijas Vēstnesis No 56/57. . 45 Reģionālās attīstības likums [Regional Development Act] (Latvia) 9 April 2002, Latvijas Vēstnesis No 53. .

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Act].46 In addition, in construction related to public procurement, the special provisions of the Public Procurement Act must be complied with. Quality control of construction materials and their conformity with the applicable EU and local regulatory enactments, construction materials market surveillance, related product and service safety control is performed by the Consumer Rights Protection Centre in accordance with the rights and obligations provided by the Patērētāju tiesību aizsardzības likums [Consumer Rights Protection Act],47 Preču un pakalpojumu drošuma likums [Act on the Safety of Goods and Services]48 and the Regulations of Cabinet of Ministers Būvizstrādājumu tirgus uzraudzības kārtība [Regulation on Construction Products Market Surveillance].49

Cabinet of Ministers Regulations 3.4.9. Detailed regulation of the construction process, common for all types of buildings and structures is set out in the Regulations of Cabinet of Ministers Vispārīgie būvnoteikumi [General Construction Regulation],50 which prescribes the division of structures into groups depending on the level of complexity; cases where performance of engineering research work is necessary; cases where expert-examination of a structure or construction design is necessary, and also the composition, procedures for performance and amount of expert-examination of a construction design; cases where author’s supervision and supervision of the construction work is necessary, the procedures and conditions for building control, the rights and duties of building inspectors; and the liability of construction specialists. 3.4.10. Detailed regulation for each type of building is specified in special construction regulations, which prescribes the construction process procedures; the institutions involved in the construction process and the responsible building specialists; the documents necessary for the construction process and their

46 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41. . 47 Patērētāju tiesību aizsardzības likums [Consumer Rights Protection Act] (Latvia) 1 April 1999, Latvijas Vēstnesis No 104/105. . 48 Preču un pakalpojumu drošuma likums [Law on the Safety of Goods and Services] (Latvia) 28 April 2004, Latvijas Vēstnesis No 66. . 49 Būvizstrādājumu tirgus uzraudzības kārtība [Regulation on Construction Products Market Surveillance] (Latvia) 27 March 2014, Latvijas Vēstnesis 62, Ministru kabineta noteikumi No 156 [Cabinet of Minister Regulation. . 50 Vispārīgie būvnoteikumi [General Construction Regulations] (Latvia) 26 September 2014, Latvijas Vēstnesis 191 (5251), Ministru kabineta noteikumi No 500 [Cabinet of Minister Regulation]. .

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content; the conditions to be included in the building permit; the cases when the public must be informed about the construction intention and the procedures for such informing; the procedures for co-ordinating deviations; the scope of expert-examination of a construction design; the procedures for the preservation of a structure; the procedures for conducting a survey of the layout of a structure and the procedures by which a structure shall be accepted for service; and the time periods of guarantees for construction work after a structure has been accepted for service. 3.4.11. Latvia has the following special building regulations in relation to: (1) buildings, (2) motorways and streets, (3) railway structures, (4) electronic communication structures, (5) energy production, storage, transmission and distribution structures, (6) hydrotechnical and land amelioration structures, (7) port hydrotechnical structures, (8) structures related to radiation safety, (9) structures in the territorial waters and exclusive economic zone of the Republic of Latvia, and (10) non-classified engineering structures. 3.4.12. On the basis of the current Construction Act, in addition to the General Construction Regulation and the Special Construction Regulations, the Cabinet of Ministers issues: (a) Latvian Construction Standards (‘LBN’), in which technical requirements in relation to structures and their elements and the requirements for environmental accessibility in relation to structures are determined; and (b) Other regulations related to the construction process, such as regulations regarding competence evaluation of building specialists and supervision of independent practice; Construction Information System; insurance of professional third party liability of building specialists and third party liability of building contractors; and the minimum limit of liability, etc. Standard 3.4.13. There are National Standards published by the State Standards Agency of Latvia. However, these mainly regulate the quality of construction materials, rather than the construction process51. 3.4.14. The Eurocode standards which set technical parameters for construction products, structures and materials throughout Europe, and concurrently allow the countries an opportunity to establish their national features, are under adaptation as National Standards52.

51 https://www.lvs.lv/page?slug=about-lvs. 52 https://www.em.gov.lv/en/sectoral_policy/construction/policy_planning_documents/.

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European Union Law 3.4.15. EU law is an integral part of the legal system of Latvia. EU law and its interpretation consolidated in the case law of the Court of Justice of the EU are to be considered when applying national laws and regulations. However, direct application of EU case law is relevant mainly to territory zoning and building permit disputes in the context of public environmental rights. Binding Regulations of Local Governmnets 3.4.16. Individual requirements may be also set by the binding regulations of local municipalities upon the general public’s involvement in the construction process. In its binding regulations, the local government is entitled to establish broader authority for the general public than is guaranteed by the Laws or the Cabinet Regulations, insofar as the binding regulations do not contravene the said Laws or Regulations. The competence of the local municipalities mainly covers land use and building, including functional zoning, public infrastructure as well as other conditions for land use and restrictions.

3.5. Case Law 3.5.1.

Case law in Latvia is a secondary source of law. Case law is mainly used by courts upon reviewing disputes where laws and regulations alone are not sufficient to resolve the dispute. Case law is defined as a body of conclusions contained in judicial rulings (precedents) regarding legal issues, based on which the court has adjudicated issues regarding interpretation, application of a legal provision in certain circumstances, or to fill gaps in the law. The role of case law in construction law, to settle legal relationships and correctly resolve disputes, is significant, because it may be deemed that the court not only ‘finds’ the construction law, but also ‘creates’ it.

3.6. Implied Contract Terms 3.6.1.

In Latvia it is recognized that every contract includes an implied covenant of good faith. The Civil Law states that rights shall be exercised, and duties performed in good faith53. This means, in general, that the parties agree to act in accordance with reasonable commercial expectations and to treat one another fairly in carrying out their obligations under the contract.

53 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Article 1.

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Other indirect provisions of construction contracts can be found in the Construction Act and related regulations. For example, the requirement in the Construction Act that construction work shall be organised and carried out according to a construction design and conditions of a building permit, is in conformity with the restrictions and requirements laid down in laws and regulations in order to prevent causing harm to the environment54.Regarding construction materials, it shall be permitted to build construction products permanently in structures, if they are valid for the intended use, to ensure the fulfilment of the essential requirements set for the structure and conform to the requirements of the laws and regulations governing construction55.

3.7. Construction of Contract Terms 3.7.1.

3.7.2.

Latvian law takes a purposive and commercial approach to the construction of contracts. The parties may agree on the governing law according to which their contractual relationship is to be ascertained, but such an agreement is valid unless it contradicts the mandatory or prohibitive norms of Latvian law56. Taking into account the complex nature of construction process, often contract clauses do not cover all issues that may arise in relation of contract. To prevent it, parties usually agree that such issues shall be governed by Latvian law.

3.8. Private and Public Procurement 3.8.1.

3.8.2.

In Latvia, private sector procurement is governed by the Civil Act. With respect to the formation of these contracts, it is also governed by company policy. A private sector company can enter into a contract with another private company or an individual and their procurement method can be governed entirely by company policies. The public sector procurement process is governed by public procurement legal and institutional frameworks. In Latvia, there are laws which govern the public sector procurement of goods and services, such as Publisko iepirkumu

54 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Article 17. 55 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Article 10. 56 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Article 19.

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likums57 [Public Procurement Act] and Aizsardzības un drošības jomas iepirkumu likums [Act on Procurements in the Field of Defence and Security]58. These laws contains norms arising from EU Directives, for example DIRECTIVE 2014/24/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 February 2014 on public procurement and repealing Directive 2004/18/ EC59, DIRECTIVE 2009/81/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC (Text with EEA relevance)60. Draft of the public procurement contract is one of the public procurements’ documents. Amendments to the procurement contract shall be permissible, if they do not alter the overall nature of the procurement contract (being the type and purpose specified in the procurement procedure documents). Substantial amendments to a procurement contract are not permissible61.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1. 4.1.2.

The Construction Act determines the competence of the Cabinet of Ministers (the Government) in the field of construction. For the purpose of enforcement of the Construction Act, the Cabinet of Minister shall issue the general construction regulation, special construction regulation and construction standards, as well as other regulations.

57 Publisko iepirkumu likums [Public Procurement Act] (Latvia) 29 December 2016, Latvijas Vēstnesis No 254 . 58 Aizsardzības un drošības jomas iepirkumu likums [Act on Procurements in the Field of Defence and Security] 16 November 2011 Latvijas Vēstnesis No 173 . 59 DIRECTIVE 2014/24/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 February 2014 on public procurement and repealing Directive 2004/18/EC . 60 DIRECTIVE 2009/81/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC . 61 Publisko iepirkumu likums [Public Procurement Act] (Latvia) 29 December 2016, Latvijas Vēstnesis No 254 Article 61.

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4.2. Codes of Practice 4.2.1.

4.2.2.

4.2.3.

Negodīgas komercprakses aizlieguma likums [Unfair Commercial Practices Prohibition Act]62 states that the performers of economic or professional activity or professional associations established thereof may draw up a good practice code. A good practice code shall be a voluntary agreement of the performers of an economic or professional activity or an aggregate of provisions, which is not governed in the laws and regulations, and shall regulate the behaviour of such performers of commercial practices, who have undertaken to fulfil the commitments specified in the good practice code in one or several types of commercial practices, as well as in one or several fields of economic or professional activity. Guidelines of fair commercial practice and professional diligence criteria may be included in the good practice code, which conform to generally recognised fair market practice and the principle of good faith in the relevant field of economic or professional activity. Construction professionals are not active developers of codes of practice. Latvijas arhitektu savienība (The Latvian Union of Architects) has approved the Competition Good Practice Guidelines63, Latvijas būvkonstrukciju projektētāju asociācija (the Latvian Association of Designers of Building Structures) has approved two professional standard requirements for the content and design of building structures64 and requirements for construction design expertise65.

4.3. Licensing of Professionals and Contractors 4.3.1.

The Construction Act66 defines ’construction professionals’ as persons who have acquired the right to practice professionally in the field of architecture, construction, or electric energy in regulated professions — engineering research, design, construction work management, construction supervision, or construction expert-examination.

62 Negodīgas komercprakses aizlieguma likums [Unfair Commercial Practices Prohibition Act] (Latvia) 22 November 2007, Latvijas Vēstnesis 199 . 63 https://www.latarh.lv/f/konkursu%20labas%20prakses%20vadl%C4 %ABnijas.pdf. 64 https://lbpa.lv/biblioteka/standarti/. 65 https://lbpa.lv/biblioteka/standarti/. 66 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Article 13.  

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4.3.2.

4.3.3.

4.3.4.

4.3.5.

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The Būvspeciālistu kompetences novērtēšanas un patstāvīgās prakses uzraudzības noteikumi67 [Regulations for Assessment of Competence of Construction Specialists and Supervision of Independent Practice] prescribes the procedure for the assessment of the competency of construction professionals, establishing criteria for initial assessment of qualifications and the use of data from the register of construction professionals to supervise the improvement of the competency of construction professionals. The Construction Act68 stipulates the degree of education required for architects and civil engineers to obtain certificates. A person who has acquired the second-level higher vocational education in an architecture study programme will have the right to independently practice in architecture. Certificates to construction professionals are granted mainly by professional organizations without a limitation of validity term. A repeated assessment of the construction professional’s competence will be necessary only in individual cases, for example, if there has been an interruption in the practice, or violations are discovered in the activities of the construction professional. However, the authorities examining the competence must, at least once every five years, examine the professional practice and the information submitted by the construction professional regarding education and acquired vocational in-service training programmes or other measures improving competence, within the scope of the professional practice and in accordance with the procedures stipulated by the Cabinet69. According to the provisions of the Construction Act, a construction company must be registered in the Register of Building Contractors to perform commercial activity in construction, as well as in the field of architecture or electric energy. The Construction Contractors Registry70 contains information about all duly registered construction companies71. Construction companies are en-

67 Būvspeciālistu kompetences novērtēšanas un patstāvīgās prakses uzraudzības noteikumi [Regulation for Assessment of Competence of Construction Specialists and Supervision of Independent Practice] (Latvia) 20 March 2018, Latvijas Vēstnesis No 68, Ministru kabiineta noteikumi No 169 [Cabinet of Ministers Regulation]. 68 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Article 13. 69 Būvspeciālistu kompetences novērtēšanas un patstāvīgās prakses uzraudzības noteikumi [Regulation for Assessment of Competence of Construction Specialists and Supervision of Independent Practice] (Latvia) 20 March 2018, Latvijas Vēstnesis 68, Ministru Kabineta noteikumi No 169 [Cabinet of Minister Regulation]. 70 https://bis.gov.lv/bisp/lv/construction_companies. 71 Būvkomersantu reģistrācijas noteikumi [Regulation Regarding the Registration of Construction Merchants] (Latvia) 25 February 2014 Latvijas Vēstnesis 48, Ministru Kabineta noteikumi No116 [Cabinet of Ministers Regulation].

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titled to operate in the fields of construction in which they have the relevant certified construction professionals.

5. Construction Contracts 5.1. Available Contracts Service Agreement 5.1.1. The construction contracts used in Latvia are prepared in line with Subsection ‘Service Agreement’ of the Section “Contract Law” of the Civil Act72. It outlines general provisions on the conclusion and fulfilment of a service agreement; however, there is no formal standard or specific form of the respective contract set by law. 5.1.2. The types of service agreements used in construction are usually categorized as follows, depending on their anticipated use: (a) Design contract (on development of design or services provided by architects, designers etc.); (b) General contractor’s contract; (c) Subcontractors contract; (d) Supply contract (for supply of materials, equipment, etc.); (e) Construction supervision contract; and (f) Author’s supervision contract. 5.1.3. The only slight difference in the use of service agreements for construction is related to its use in public procurement construction projects. Therefore, service agreements may be further categorised into contracts for private construction and contracts for construction under public procurement. Contracts for Private Construction 5.1.4. A private construction contract is a kind of service agreement generally regulated by the Civil Act. However, there are no strict standards set for contracting negotiations or the content of the contract when it applies to private construction projects. 5.1.5. Contracting parties are free to decide who will select, prepare and provide the initial draft contract, mutually negotiate its terms and include any terms, provided they are not in conflict with the mandatory regulations. The contract itself states the governing private law between the parties.

72 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Articles 2212–2229.

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Contracts for Construction under Public Procurement 5.1.6. A contract for construction under public procurement is basically the same as a service agreement regulated by the Civil Act however, there are specific requirements with respect to its content set out by the Public Procurement Act. 5.1.7. For the contract to be executed in line with the provisions of the Public Procurement Act, it must include general information such as: (a) The name of the customer (the contracting authority); (b) The name of the contractor; (c) The subject of the agreement, its capacity, quality requirements and other information required; (d) The contract price and terms of payment; (e) The contract completion date, place and provisions; (f) The liability of the parties for non-fulfilment of the contract; and (g) The procedure for amending the contract and procedure for resignation from the contract73. 5.1.8. However, even though the Public Procurement Act establishes specific details to be included in the contract, there is still no standard agreement form provided. This means that the contract form and exact content will depend on the agreement between the contracting parties (as long as it includes the imperative details required by law). FIDIC Contracts 5.1.9. FIDIC standard contracts are usually used in construction projects of public significance. The Ministry of Economy proposed to municipalities and public authorities in construction projects financed by EU funds, which the contract price of the construction work exceeds EUR 5 186 000, to use an International Engineering Consultant model contract forms developed by FIDIC74. One recent example of the use of a FIDIC contract in Latvia is the construction of the new building of the Latvian National Library. At the same time, FIDIC is not very popular on the market, both due to its complexity, on the one hand, and generality, on the other. Also, the independent status of the engineer is not common to local practice, whereas bilateral contracts are more understandable. Amendments to Contracts 5.1.10. It is very common for construction contracts to be amended in the course of their fulfilment. The amendments may range from minor to significant. Most

73 Publisko iepirkumu likums [Public Procurement Act] (Latvia) 29 December 2016, Latvijas Vēstnesis No 254 Article 60. 74 Informatīvais ziņojums “Par ES fondu 2007–2013.gada plānošanas perioda projektos konstatētajiem pārkāpumiem būvniecības procesā” .

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commonly, amendments are made due to changes in construction timing and certain work deadlines. Furthermore, amendments are often made due to certain additional work to be performed which could not have been foreseen whilst negotiating the initial agreement. Thus, the latter amendments most likely will also include a change in both construction timing and the initially planned construction costs. Automatic recalculation of the price and deadlines due to changes is usually not provided.

5.2. Most Commonly Used Tailormade Contracts 5.2.1. As most construction facilities in Latvia are private, the majority of construction contracts are negotiated and prepared individually. There are no standard contracts adopted by any professional associations in Latvia. Each construction company has its own traditional form of contract, as do many developers. Public Procurement Contracts 5.2.2. There is no standard form of contract applicable to public procurement tenders. FIDIC Contracts 5.2.3. Although used from time to time in larger projects for the reasons mentioned above, FIDIC has not gained general popularity in the industry. At the same time, there are attempts to lobby for FIDIC as the mandatory contract form for public procurement projects.

6. Key Issues 6.1. Overview Individual Contracts 6.1.1. In accordance with the set legal framework, if performance of construction work pursuant to the General Construction Regulation and other laws and regulations requires an approved construction design and a building permit, then the parties to the construction, save for family members and relatives, must enter into a written employment agreement or service agreement75.

75 Būvniecības likums [Construction Act] (Latvia) 30 July 2013, Latvijas Vēstnesis No 146 Article 19.

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The FIDIC Red Book contains the Conditions of Contract for Construction for Building and Engineering Work Designed by the Employer, and it is the most commonly used form of the FIDIC contract. It has been suggested for general use in construction contracts, especially where construction work is assigned based on the results of international tenders.

6.2. Fit for Purpose Individual Contracts 6.2.1. In accordance with the Civil Act, under a service agreement one party undertakes to perform some order, manufacture some item or organize some event for another party, with its own tools and equipment, in exchange for a certain consideration76. In the case of construction, a service agreement involves one party undertaking to construct the ordered site. The contractor must fulfil the order in accordance with the contract with the contracting authority, customer or employer. FIDIC 6.2.2.

The principles of the FIDIC Red Book are recommended for building or engineering works designed by the employer or by their representative, the engineer. Pursuant to the usual arrangements for this type of contract, the contractor constructs the works in accordance with a design provided by the employer. However, the work may include some elements of the contractordesigned civil, mechanical, electrical or construction work.

6.3. Late Completion Individual Contracts 6.3.1. Individual contracts always contain a delay penalty clause where the contractor is liable to pay a predetermined daily or monthly amount as compensation for late completion. Penalty for delay is limited by law to 10 % of the contract price77. 6.3.2. In accordance with the Civil Act, a delay obligates the contractor to indemnify the employer for all losses. Losses can be charged in the amount that they ex 

76 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Article 2204. 77 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Article 1716.

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ceed the penalty, but very often the liability is limited to the amount of the penalty78. Parties may agree on application of reasonable additional penalty in case of termination79.

The FIDIC Red Book contains the following clause relating to standard liquidated damages: 8.7.

6.3.5.

If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer’s Claims] pay delay damages to the Employer for this default. These delay damages shall be the sum stated in the Appendix to Tender, which shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking-Over Certificate. However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Appendix to Tender. These delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Work. These damages shall not relieve the Contractor from his obligation to complete the Work, or from any other duties, obligations or responsibilities which he may have under the Contract.

The concept of liquidated damages is not well-known under Latvian law, although it is not prohibited either. However, should liquidated damages be provided for in the contract, they would most likely be interpreted as contractual penalties.

6.4. Latent Conditions 6.4.1.

6.4.2.

The parties usually agree who bears the risks associated with the latent conditions. The contractor often provides representations and warranties regarding acknowledgement with site and design documentation, including investigations in relation to the site. The FIDIC Red Book contains the following Unforeseeable Physical Conditions clause: 4.12. In this sub-clause, “physical conditions” mean natural physical conditions and manmade and other physical obstructions and pollutants, which the Contractor en-

78 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Article 1722. 79 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Articles 1716, 1717.

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counters at the Site when executing the Works, including sub-surface and hydrological conditions but excluding climatic conditions. If the Contractor encounters adverse physical conditions which he considers to have been Unforeseeable, the Contractor shall give notice to the Engineer as soon as practicable. This notice shall describe the physical conditions, so that they can be inspected by the Engineeer, and shall set out the reasons why the Contractor considers them to be Unforeseeable. The contractor shall continue executing the Works, using such proper and reasonable measures as are appropriate for the physical conditions, and shall comply with any instructions which the Engineer may give.

6.4.3.

Allocation of the risk of physical conditions is an aspect which should be considered. Sub-clause 4.12. is usually amended by Particular Conditions. Even in the case of major sub-surface works, the risk is usually allocated to the contractor because geotechnical inspection is mandatory during the design process and the contractor has an opportunity to study inspection results and evaluate risks.

6.5. Force Majeure Individual Contracts 6.5.1. The laws and regulations of Latvia do not specifically define ‘force majeure’. Nevertheless, it is widely used in contracting practice, and its basic definition in the Latvian law is borrowed from definitions given in the Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts issued by the International Institute for the Unification of Private Law (‘UNIDROIT’) in 1994.80 They state that: Default on contractual obligations by a party is justified if such party proves that the cause of default has been some impediment beyond its control, and it could not be reasonably expected from this party to foresee occurrence of the impediment at the time the contract was concluded or avoid the impediment at the time, or overcome its effect. If the impediment is temporary, default on the commitments is justified only for a reasonable period of time established by taking into account impact of the impediment on performance of the contract81.

80 See International Institute for the Unification of Private Law, Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts (UNIDROIT, 2013) . 81 UNIDROIT Principles of International Commercial Contracts 2010. Article 7.1.7.(Force Majeure)

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In practice this definition is extended by listing possible examples of force majeure events. FIDIC 6.5.2.

The FIDIC Red Book contains a force majeure clause. It is as follows: “Force Majeure” means an exceptional event or circumstance: (a) which is beyond a Party’s control, (b) which such Party could not reasonably have provided against before entering into the Contract, (c) which, having arisen, such Party could not reasonably have avoided or overcome, and (d) which is not substantially attributable to the other Party. Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied: (i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies, (ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war, (iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors, (iv) munitions of war, explosive materials, ionising radiation or contamination by radioactivity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radioactivity, and (v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity 19.2. If a Party is or will be prevented from performing any of its obligations under the Contract by Force Majeure, then it shall give notice to the other Party of the event or circumstances constituting the Force Majeure and shall specify the obligations, the performance of which is or will be prevented. The notice shall be given within 14 days after the Party became aware, or should have become aware, of the relevant event or circumstance constituting Force Majeure. The Party shall, having given notice, be excused performance of such obligations for so long as such Force Majeure prevents it from performing them. Notwithstanding any other provision of this Clause, Force Majeure shall not apply to obligations of either Party to make payments to the other Party under the Contract. 19.3. Each Party shall at all times use all reasonable endeavours to minimise any delay in the performance of the Contract as a result of Force Majeure. A Party shall give notice to the other Party when it ceases to be affected by the Force Majeure. 19.4. If the Contractor is prevented from performing any of his obligations under the Contract by Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice of Force Majeure], and suffers delay and/or incurs Cost by reason of such Force Majeure, the Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and

19.1.

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(b) if the event or circumstance is of the kind described in sub-paragraphs (i) to (iv) of Sub-Clause 19.1 [Definition of Force Majeure] and, in the case of subparagraphs (ii) to (iv), occurs in the Country, payment of any such Cost. After receiving this notice, the Engineer shall proceed in accordance with SubClause 3.5 [Determinations] to agree or determine these matters. 19.5. If any Subcontractor is entitled under any contract or agreement relating to the Work to relief from force majeure on terms additional to or broader than those specified in this Clause, such additional or broader force majeure events or circumstances shall not excuse the Contractor’s non-performance or entitle him to relief under this Clause.

6.6. Limitation of Liability Individual Contracts 6.6.1. Generally, parties are liable for all damages caused to the other party for nonperformance or poor performance of a contract. In a contract, however, the liability for delay is usually limited to 10 % of the contract price. An extra charge of up to 10 % can be applied in case of termination. 6.6.2. For delayed payment, a delay interest applies. By default, it is 6 percent per annum82. In contracts, however, the more commonly used delay interest rates are from 18 % to 72 % per annum. Delay interest is capped at 100 % of the principal, while in contracts a 10 % cap is sometimes applied.  

 

 

 

 

 

FIDIC 6.6.3.

The FIDIC Red Book contains the following limitation of liability clause: 17.6. Neither Party shall be liable to the other Party for loss of use of any Work, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 16.4 [Payment on Termination] and Sub-Clause 17.1 [Indemnities]. The total liability of the Contractor to the Employer, under or in connection with the Contract other than under Sub-Clause 4.19 [Electricity, Water and Gas], SubClause 4.20 [Employer’s Equipment and Free-Issue Material], Sub-Clause 17.1 [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights], shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount. This Sub-Clause shall not limit liability in any case of fraud, deliberate default or reckless misconduct by the defaulting Party.

82 Civillikums [Civil Act] (Latvia) 20 February 1937, Valdības Vēstnesis No 41 Article 1765.

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This clause usually remains unchanged by the Particular Conditions; the liability is limited to the contract amount.

6.7. Duration of Exposure Individual Contracts 6.7.1. By default, quality guarantees are applicable from two to five years after completion, depending on the classification of structures into groups. For example, Ēku būvnoteikumi [Building Construction Regulation] provided that the minimum term for the first group of buildings is 2 years, for the second group – 3 years, for the third group – 5 years.83 Similar provisions contain other special regulations. It is not common for contracts to provide for longer guarantees. However, for specific parts of buildings (eg, load-bearing structures or roofs), the guarantee can be longer. 6.7.2. The statute of limitation applicable to commercial contracts is three years from emergence of a claim84. In private contracts, it is 10 years85. FIDIC 6.7.3.

The FIDIC Red Book does contain clause limiting the time within which a claim can be made. It is as follows: 20.1. Within 42 days after the Contractor became aware (or should have become aware) of the event or circumstance giving rise to the claim, or within such other period as may be proposed by the Contractor and approved by the Engineer, the Contractor shall send to the Engineer a fully detailed claim which includes full supporting particulars of the basis of the claim and of the extension of time and/or additional payment claimed. If the event or circumstance giving rise to the claim has a continuing effect: (a) this fully detailed claim shall be considered as interim; (b) the Contractor shall send further interim claims at monthly intervals, giving the accumulated delay and/or amount claimed, and such further particulars as the Engineer may reasonably require; and (c) the Contractor shall send a final claim within 28 days after the end of the effects resulting from the event or circumstance, or within such other period as may be proposed by the Contractor and approved by the Engineer.

83 Ēku būvnoteikumi [Building Construction Regulation] (Latvia) 2 September 2014, Latvijas Vēstnesis 194, Ministru kabineta noteikumi No 529 [Cabinet of Ministers Regulation] Section 176. 84 Komerclikums [The Commercial Act] (Latvia) 13 April 2000, Latvijas Vēstnesis No 158 Article 406. 85 Civillikums [Civil Act] 20 February 1937, Valdības Vēstnesis No 41 Article 1895.

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Within 42 days after receiving a claim or any further particulars supporting a previous claim, or within such other period as may be proposed by the Engineer and approved by the Contractor, the Engineer shall respond with approval, or with disapproval and detailed comments. He may also request any necessary further particulars but shall, nevertheless, give his response on the principles of the claim within such time.

6.8. Time Bars Individual Contracts 6.8.1. The notice period in cases where it may be necessary to extend the time for fulfilment of the work are freely determined by the parties to the construction contract. There is no specific notice period prescribed by law. Generally, timelines are subject to extension for any reason provided that the reason is not attributable to the actions or omisions of the contractor. However, quite often the extension of ultimate deadline for completion is subject to an agreement between the parties. FIDIC 6.8.2.

The FIDIC Red Book speaks on the time bars to be set in the agreement as follows: 20.1. If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply.

6.8.3.

In Latvia, the notification term is usually changed by the Particular Conditions to make it shorter; it varies from 5 to 10 business days. Individual Contracts contain a similar clause; in the case of failing to give notice regarding a claim within the stated term, the rights on extension of completion term and additional payment is lost.

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7. Dispute Resolution 7.1. Individual Contracts 7.1.1.

7.1.2.

7.1.3.

7.1.4.

7.1.5.

7.1.6.

Upon entering into a contract, the parties usually agree on a procedure for the resolution of potential disputes. Although the Civil Act does not establish a direct obligation for the parties to initially seek to settle a dispute out of court, such principle has historically found a stable place in contracts, including in construction contracts. The parties to the contract usually also include a condition that any disagreements between the parties will be initially resolved by the parties reaching a mutual voluntary agreement. If such an agreement cannot be reached, the dispute will be referred to the court for adjudication. Every person, whether an individual or a legal entity, has a right to seek the court’s protection of his or her infringed or challenged rights under the Civil Act or interests protected by the law. A person who has brought an action in court has a right to his or her case being reviewed in the court under procedures established by law. The court adjudicates civil cases under the procedure set by the Civilprocesa likums [Civil Procedure Act].86 In Latvia, the courts frequently offer a possibility for disputing parties to hold settlement negotiations before the case is reviewed in court. If the parties reach an agreement in settlement negotiations, this agreement must be approved by the court. To alleviate the workload of the courts, a mediation process was recently introduced in Latvia for disputing parties to resolve their conflicts in a pre-trial negotiation process87. Nevertheless, use of a mediator’s services before lodging a claim in court is not mandatory. In must be noted that regular courts have low expert knowledge in the construction industry. Therefore, arbitration is recommended however, the reputation of the chosen arbitration court must be carefully assessed. Upon entering into an arbitration agreement, the parties may also agree that the dispute must be resolved in a court of arbitration. The arbitration agreement is an agreement between the parties entered under procedure established by the Arbitration Act88 regarding surrendering a dispute for adjudication in a court of arbitration. The arbitration agreement usually is not a separate con-

86 Civilprocesa likums [Civil Procedure Act] (Latvia) 3 November 1998, Latvijas Vēstnesis No 326/330 . 87 Mediācijas likums [ Mediation Act] (Latvia) 22 May 2014 Latvijas Vēstnesis No 108 . 88 Šķīrējtiesu likums [Arbitration Act] (Latvia) 11 September 2014 Latvijas Vēstnesis N0 194 Articles 10–13.

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tract but a contractual clause in a contract providing that the dispute will be referred to a court of arbitration. Both parties need to voluntarily agree on referral of a dispute for resolution under the arbitration procedure; one party cannot unilaterally resolve to surrender the dispute to the court of arbitration. The parties may agree to refer to the court of arbitration a dispute which has already occurred or may occur in future.

7.2. FIDIC 7.2.1.

The FIDIC Red Book is aimed at solving disputes amicably. However, if that fails, parties resolve disputes by arbitration as described below: 20.5. Where notice of dissatisfaction has been given under Sub-Clause 20.4 above, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been made. 20.6. Unless settled amicably, any dispute in respect of which the DAB’s decision (if any) has not become final and binding shall be finally settled by international arbitration. Unless otherwise agreed by both Parties: (a) the dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce, (b) the dispute shall be settled by three arbitrators appointed in accordance with these Rules, and (c) the arbitration shall be conducted in the language for communications defined in Sub-Clause 1.4 [Law and Language]. The arbitrator(s) shall have full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer, and any decision of the DAB, relevant to the dispute. Nothing shall disqualify the Engineer from being called as a witness and giving evidence before the arbitrator(s) on any matter whatsoever relevant to the dispute. Neither Party shall be limited in the proceedings before the arbitrator(s) to the evidence or arguments previously put before the DAB to obtain its decision, or to the reasons for dissatisfaction given in its notice of dissatisfaction. Any decision of the DAB shall be admissible in evidence in the arbitration. Arbitration may be commenced prior to or after completion of the Works. The obligations of the Parties, the Engineer and the DAB shall not be altered by reason of any arbitration being conducted during the progress of the Works.

Evaldas Klimas

Lithuania 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 5.5. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7.

Context 586 The Country 586 The Legal System 587 The Economy 590 The Construction Industry 591 Size and Nature 591 Participants 591 Types of Construction Works 593 Work, Health and Safety 594 Protection of the Environment 595 Quality Assurance 596 Construction Contracting Dynamics 596 Legal Underpinnings of Contracts 597 Freedom of Contract 597 Legal Framework 597 Public Policy 598 Statute Law 599 Implied Contract Terms 599 Construction of Contract Terms 600 Private and Public Procurement 601 Government Involvement 602 Legislation and Regulation 602 Codes of Practice 603 Licensing of Professionals and Contractors 604 Construction Contracts 604 Available Contracts 604 Most Commonly Used 605 Example 1 – Design and Construct Contract – AS4300 605 Example 2 – FIDIC 605 Amendment of Contracts and Bespoke Contracts 605 Key Issues 606 Overview 606 Fit for Purpose 606 Late Completion 606 The Contract 607 Definitions 607 Completion of the Construction 607 Permits, Licenses or Approvals 608

https://doi.org/10.1515/9783110712728-019

586

6.8. 6.9. 6.10. 6.11. 6.12. 6.13. 6.14. 6.15. 7. 7.2. 7.3. 7.4.

Evaldas Klimas

Employer’s Right to Control and Supervise Construction Works Defects Notification Period 609 Performance Certificate 609 Force Majeure 609 Limitation of Liability 610 Duration of Exposure 610 Time Bars 610 Purchase of Additional Services 611 Dispute Resolution 611 Dispute Resolution by DAB 611 Dispute Resolution in Courts 612 Arbitration of Disputes 613

608

1. Context 1.1. The Country 1.1.1. 1.1.2.

1.1.3.

1.1.4.

1.1.5.

The Republic of Lithuania is in Eastern Europe and borders the Baltic Sea. It neighbours Belarus, Latvia, Russian Federation and Poland. Lithuania is a unitary state and parliamentary republic with a multi-party system. On 11 March 1990 Lithuania became the first Soviet republic to declare independence from the Soviet Union—a year before the formal dissolution of the Soviet Union. The Constitution of the Republic of Lithuania (the ‘Constitution’) came into force on 2 November 1992 and is considered the supreme legal act. On 18 September 1991, Lithuania became a member of the United Nations as well as a signatory to other international agreements. It is also a member of the European Union, the Council of Europe, Organisation for Security and Cooperation in Europe (OSCE), North Atlantic Treaty Organization (NATO) and its adjunct North Atlantic Coordinating Council. Lithuania gained membership to the World Trade Organization on 31 May 2001. On 5 July it also became a full member of the Organisation for Economic Cooperation and Development (OECD). Lithuania has a three-tier administrative division; the country is divided into 10 counties that are further sub-divided into 60 municipalities which consist of over 546 elderships. Administrative divisions have limited powers; all their acts must comply with the Constitution. The State government issues laws and regulations governing territorial planning, environmental impact assessments, mandatory requirements for construction parties, construction processes and structures, as well as the civil law rules applicable to the construction industry, e.g. the rules of contract law and  

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law of obligations. Each municipality has authority over its territorial planning, establishment of architectural requirements for buildings, and issuance of building permits.

1.2. The Legal System 1.2.1.

The legal system of Lithuania is a civil law system. Laws passed by the Lithuanian Parliament (the Seimas) are the principal source of law.

Legislative Hierarchy 1.2.2. The following legislative hierarchy has been established: (a) The Constitution; (b) Constitutional laws: these regulate significant legal relations, are adopted under special procedures, and are a constituent part of the Constitution; (c) International treaties: these are international treaties concluded on behalf of Lithuania, which do not contradict the Constitution and are ratified by Parliament; (d) Codified acts (codes): these are cohesive acts that are internally harmonised on the basis of a uniform concept and defined by their high degree of regulatory summation. These codified acts provide for the comprehensive regulation of a specific area of social relations, e.g. the Civil Code, Civil Process Code, Labour Code, and Criminal Code, etc.; (e) Ordinary laws: these are laws adopted pursuant to the Constitution, constitutional laws, and ratified international treaties. They take into account the regulatory requirements that arise on a public level; and (f) Secondary legal acts: these are legal regulations adopted by State government bodies to implement law. In addition, the following are also classified as secondary sources of law: (i) General principles of law: these are considered integral to the Lithuanian legal system and are used to interpret statute and fill legislative gaps, e.g. the principles of good faith, justice, individual responsibility, moderation, etc.; and (ii) Legal conventions: these are rules of conduct authorised by the State and developed through their repeated and enduring application. 1.2.3. Legal precedent and legal doctrine are recognised as derivative sources of law in Lithuania.  

 

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The Constitution 1.2.4. The Constitution1 establishes the following key imperatives of relevance to the construction industry: (a) Lithuania’s economy shall be based on the right to private ownership, freedom of individual economic activity and initiative (Art. 46, par 1); (b) Property shall be inviolable. The rights of ownership shall be protected by law. Property may only be seized for the needs of society according to procedures established by law and must be adequately compensated for (Art. 23); (c) The State shall support economic efforts and initiatives which are useful to the community (Art. 46, par 2); (d) The State shall regulate economic activity so that it serves the general welfare of the people (Art. 46, par 3); (e) The law shall prohibit the monopolisation of production and the market, and shall protect freedom of fair competition (Art. 46, par 4); and (f) The State shall defend the interests of consumers (Art. 46, par 5). International Treaties 1.2.5. Lithuania is a monist State, such that where it is a party to an international treaty, the treaty provisions apply directly in domestic law. Pursuant to the Law on International Treaties of Lithuania2 and certain other national laws, primacy is accorded to the ratified international treaty where there is a conflict between Lithuanian domestic law and a ratified international treaty (Art. 11, par 2). 1.2.6. Lithuania became a member of the European Union (‘EU’) in 2004. Therefore, EU treaties as well as EU regulations are directly applicable in Lithuania, i.e. no acts or other legislation is needed to ensure their full implementation in Lithuania. However, EU directives are not directly effective in Lithuania (or indeed, in any other EU Member State). EU directives establish goals that EU Member States are obliged to achieve, but provide flexibility regarding the domestic means and measures for their implementation. Therefore, EU treaty provisions as well as EU regulations pertaining to the construction industry apply directly in Lithuania, and relevant directives are implemented by law or secondary legal regulations enacted by the State. 1.2.7. The following codes are important to the construction industry: (a) The Civil Code; (b) The Labour Law Code; (c) The Code of Administrative Law Violations; and (d) The Criminal Code.  

1 Zin., 1992, No. 33-1014. 2 Zin., 1999, No. 60-1948.

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1.2.8.

The main laws relevant to the construction industry are: (a) The Law on Land; (b) The Law on Territorial Planning; (c) The Construction Law; and (d) The Law on Architecture. 1.2.9. Many laws have been translated into English and can be found on the Seimas website.3 1.2.10. Most secondary legal regulations relevant to the construction industry are issued by the Ministry of Environment (particularly technical regulations) and the Ministry of Agriculture. The Court System 1.2.11. The Lithuanian court system consists of four levels of civil courts which deal with both civil and criminal matters: the Supreme Court, the Court of Appeal, district courts and local courts. 1.2.12. A case can be heard in three court instances: first instance, appellate instance and cassation instance. The Supreme Court is the only cassation court in Lithuania. It does not re-examine the facts of a case, but verifies interpretation of the law. 1.2.13. Private disputes regarding design, construction, and similar contracts are heard by general jurisdiction courts. State and municipal institutions do not have legal immunity in private disputes, meaning that construction claims involving such institutions will fall to the competence of general jurisdiction courts. 1.2.14. Regarding public law disputes, in 1999 a system of specialised administrative courts was established to hear administrative cases. The system consists of a Supreme Administrative Court and district administrative courts. Disputes regarding administrative acts are heard by these administrative courts, e.g. disputes regarding territorial planning documents or building permits. 1.2.15. Complex disputes involving issues of both private and public law must be heard by the court with the most appropriate jurisdiction. For example, a dispute regarding invalid building permits should be addressed to an administrative court. However, if construction works have commenced in accordance with a building permit, and the validity of that building permit is questioned, a claim of illegal construction works would be brought before a general jurisdiction court. 1.2.16. There are no specialised courts or court panels for construction-related disputes in Lithuania.  

3 Seimas of the Republic of Lithuania, Document Search . Note that there is usually some delay in translations being uploaded to the website.

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1.2.17. 1.2.18.

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While arbitration is available for construction disputes, it is rarely used. Alternative dispute resolution (‘ADR’) has yet to gain popularity in Lithuania. ADR applies most frequently where disputing parties have used the FIDIC standard form contractual arrangements.4

1.3. The Economy 1.3.1.

In 2017 Lithuania’s gross domestic product (‘GDP’) amounted to €48.3 billion.5 It has the largest economy in the Pan-Baltic region (Lithuania, Latvia and Estonia), which is a comparator typically used by investors. In 2019 Lithuania’s GDP grew by 3.6 % the following year in 2019.6 In 2019, the inflation rate in Lithuania was 2.2 %, compared to the EU average of 1.5 %.7 Lithuania’s long term macro-economic criteria ultimately meets the euro economic convergence conditions (also known as the Maastricht Criteria) which include: annual inflation rate, government budget deficit, government debt-to-GDP ratio, exchange rate, and long-term interest rates (average yields for 10-year government bonds in the past year).8 Meeting these criteria allowed Lithuania to enter the third stage of the Economic and Monetary Union of the EU (EMU) to adopt the Euro as its state currency from 1 January 2015. In 2019 the average unemployment rate in Lithuania was 6.3 %9, and was lower the EU average by 0.3 %,10 but has otherwise steadily decreased since 2010. Trade and industry are the main economic activities driving Lithuania’s GDP, while the construction sector makes a significant contribution to Lithuania’s economy. Education is an important feature contributing to Lithuania’s economy. A report of the Lithuanian Department of Statistics indicates that more than 90 % of Lithuanians aged 25–64 received a secondary or higher education.11 Such levels of education are the highest seen in Lithuania in a decade and constitute one of the highest in the EU (the average being around 70 % in the EU 27). Notably, 60.4 % of Lithuanians completed secondary education (com 

1.3.2.

 

 

1.3.3.

 

 

1.3.4.

1.3.5.

 

 

 

4 See Section 5.4. 5 https://osp.stat.gov.lt/informaciniai-pranesimai?articleId=7155336. 6 https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_10_gdp&lang=en. 7 https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00118&plug in=1. 8 https://ec.europa.eu/info/node/4679. 9 https://ec.europa.eu/eurostat/databrowser/view/tipsun20/default/table?lang=en. 10 https://ec.europa.eu/eurostat/statistics-explained/index.php/Unemployment_statistics. 11 https://osp.stat.gov.lt/documents/10180/259432/Lietuvos_jaunimo_statistinis_portretas.pdf.

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pared to the EU average of 46.7 %) whereas 31 % completed higher education (compared to the EU average of 25.1 %).12 The number of graduates increased almost 50 % during the last decade13, and Lithuania continues to provide a pool of well-educated professionals for local and international businesses. According to the World Bank’s Doing Business 2020 index (which rates 190 countries on their business environment) Lithuania is now the 11th most business-friendly country in the world. It rises in annual ranking and now sits ahead of Germany (20nd) and other Baltic states Latvia (19th) and Estonia (18th).14 Under the Doing Business 2020 Dealing with Construction Permits indicator, Lithuania is ranked in 10th position. In the 2018 Index of Economic Freedom Lithuania received an economic freedom score of 76.7, making it the 16th ‘freest economy’ in the world.15  

 

 

 

1.3.6.

1.3.7.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction sector in Lithuania demonstrates continuous growth. During the year 2019 the value of the sector amounted to €3.4 billion; an increase of 8.3 % compared to 2018.16 In 2018, 7,625 permits were issued to construct residential and non-residential buildings, whereas 87.6 % were residential buildings.17  

2.1.2.

 

2.2. Participants 2.2.1.

12 13 14 15 16 17 18

According to the Law on Construction18, participants of the construction industry include the following parties: (a) Builder (Client): a natural or legal person of any nationality who invests funds into construction to become the owner of the structure and otherwise performs the functions of the Builder. This person must possess the right to use a parcel of land for construction and a building permit to implement the new construction or reconstruction (Art. 2, par 99);

https://investlithuania.com/news/lithuania-eu-s-most-educated-country/. https://osp.stat.gov.lt/documents/10180/259432/Lietuvos_jaunimo_statistinis_portretas.pdf. https://www.doingbusiness.org/en/rankings. https://www.heritage.org/index/ranking. https://osp.stat.gov.lt/informaciniai-pranesimai?articleId=7214987. https://osp.stat.gov.lt/lietuvos-statistikos-metrastis/lsm-2019/verslas/statyba. Zin., 1996, No. 32-788.

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(b)

Investigator: any natural or legal person, including foreign organisations, to whom the laws regulating an appropriate field of investigations grant the right to exercise investigations (Art. 2, par 108), e.g. construction engineering geodetic investigations, construction engineering geological /geotechnical research, investigating existing building structures (including engineering and utility networks of the structures), measuring buildings and structures, as well as environmental, landscape, hygiene, archaeological, and immovable cultural property investigations (Art. 2, par 89); (c) Designer: a natural or legal person, including foreign organisations, that possesses the right to carry out construction design work. The following persons possess the right to be a Designer: legal entities established in Lithuania, scientific and research-based construction institutions, legal entities established abroad enjoying the right to design in their country (upon presentation of the documents confirming this right), as well as architects or building engineers (Art. 2, par 71); (d) Contractor: a legal entity of any nationality that possesses the right to engage in construction in its country, and building engineers (Art. 2, par 75); (e) Technical Supervisor of Construction Works: an architect or building engineer that represents the Builder, heads engineering supervision of the construction works, and is responsible for the quality standards of the structure within their competence. Technical Supervisors must be appointed for any construction works, except for simple structures as listed by the regulations (Art. 2, par 76); (f) Design Expert: a natural or legal person, including foreign organisations, that possesses the right to carry out construction design work (Art. 2, par 9); (g) Manager of Design Works: appointed when a Builder selects design management as a way of organising design (Art. 2, par 64); and (h) Manager of Construction Works: hired when a Builder chooses management of construction works as a way of organising construction (Art. 2, par 81). The following persons enjoy the right to be a Manager of Design Works or a Manager of Construction Works: (a) Legal entities established in any State, or any other foreign organisations, that enjoy the right to engage in managing the design of construction works in their country (upon presentation of documents confirming this right); (b) Architects; or (c) Building engineers.  

2.2.2.

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2.3. Types of Construction Works 2.3.1.

2.3.2. 2.3.3.

Construction works of ‘exceptional significance’ (‘ES’) include the following (Art. 2, par 20): (a) Where dangerous substances are used or stored; (b) Where potentially dangerous equipment is located; (c) Works of complex structure and complex technologies (according to the regulations); (d) A building used for public need for more than 100 people; (e) A high-rise (more than five-storey) apartment house; and (f) A structure of cultural heritage. ‘Simple buildings’ are listed in the Order of the Minister of Environment, e.g. all buildings of less than 80m2 area and 8m height (Art. 2, par 30). Construction works of ‘not exceptional significance’ (‘NES’) are those buildings which do not fall within the category of ES or ‘simple buildings’ (Art. 2, par 28).  

Additional Qualification Requirements 2.3.4. Additional qualification requirements apply to certain individuals including Head Designers, Head Employees of Contractors, Head Technical Supervisors of Construction Works of ES and NES, as well as for legal entities and other foreign organisations that want to engage in design and/or construction works of structures classified as ES and NES. 2.3.5. These additional qualification requirements include relevant education and experience evidenced by certificates for design, construction, or technical supervision of construction works of buildings classified as ES and NES. Technical and legal exams must be completed to receive such certificates. 2.3.6. Citizens of an EU Member State, the Swiss Confederation, or a State party to the EEA Agreement, as well as other natural persons benefitting from the rights of movement within EU Member States, can either receive Lithuanian qualification certificates or have their respective right (enjoyed in their home State) recognised in Lithuania. In the latter case, legal exams must be completed in Lithuania. Individuals must attend a minimum number of classes and provide confirming documents to maintain certificates or documents proving a right to design, perform construction works or technical supervision. 2.3.7. Legal entities and other foreign organisations must employ (or contract) qualified individuals holding relevant certificates (or documents evidencing recognition of a relevant right) to design structures of ES and NES.

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2.4. Work, Health and Safety 2.4.1.

2.4.2.

2.4.3.

2.4.4.

2.4.5.

Annex I of Regulation (EU) No 305/201119 regulates the basic requirements for construction works related to work, health and safety. According to this regulation, construction works must be designed and built such that throughout their life cycle they do not threat the hygiene or health and safety of workers, occupants or neighbours. Furthermore, construction works must not have an exceedingly high impact (over their entire life cycle) on environmental quality or the climate during their construction, use and demolition, specifically as a result of any of the following: (a) Emitting toxic gas; (b) Emitting dangerous substances, volatile organic compounds (VOC), greenhouse gases or dangerous particles into indoor or outdoor air; (c) Emitting dangerous radiation; (d) Releasing dangerous substances into ground water, marine waters, surface waters or soil; (e) Releasing dangerous substances into drinking water or substances which otherwise have a negative impact on drinking water; (f) Faulty discharge of waste water, emission of flue gases or faulty disposal of solid or liquid waste; or (g) Dampness in parts of the construction works or on surfaces within the construction works. Official institutions control how entities implement these requirements, e.g. the State Labour Inspectorate, Public Hygiene Centre, Territorial Planning and Construction Inspectorate, etc.) Buildings and other structures must be designed and built in such a way that the loadings that might apply during construction and use will not lead to: (a) Collapse of the whole or part of the work; (b) Major deformations to an inadmissible degree; (c) Damage to other parts of the construction works, fittings, or installed equipment, due to a major deformation of the load-bearing construction; or (d) Cause damage in case of some event, includingdisproportionate events, like force majeure. Additionally, there are specific safety requirements for construction works relating to the risk of fire, i.e. the load-bearing capacity of the construction should  

 

19 Regulation (EU) No 305/2011 of the European Parliament and the Council of 9 March 2011 (laying down harmonised conditions for the marketing of construction products and repealing Council Directive 89/106/EEC) [2011] OJ L 88/5.

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bear its functions for a specific period of time in case of fire; the spread of fire to neighbouring construction works is limited; and occupants have evacuation routes from the construction works or can be rescued by other means, etc.

2.5. Protection of the Environment 2.5.1.

2.5.2.

2.5.3.

Construction works must be designed and built in compliance with certain environmental requirements. The Contractor must protect the environment on the construction site, as well as the object under construction. The Law on Environmental Protection sets out general rules and principles for environmental protection. This law stipulates that legal and natural persons must protect the environment, use natural resources sparingly, and comply with requirements regarding waste management and hazardous chemicals use, etc. It also prescribes strict liability for any damage caused to the environment. Persons guilty of causing damage to the environment must restore the state of the environment and pay compensation for all losses. Environmental impact assessments or screening for environmental impacts must be carried out before construction work in specific cases outlined in the Law on Environmental Impact Assessment of the Proposed Economic Activity, e.g. construction of main or national roads, main public railways, shopping or entertainment centres, bus or trolleybus parks, car parks or garage complexes, and sports/fitness complexes with an area of more than 0.5 hectares, etc. According to this law, the organiser (developer) of the proposed economic activity is responsible for conducting the environmental impact assessment and every person who organises the mentioned activity falls in the definition of an ‘organiser’. The Contractor is responsible for the proper management of construction/demolition waste generated on the construction site. The Law on Waste Management provides general requirements for waste management, whereas detailed requirements for managing construction waste are set out in the Rules on Construction Waste Management. These rules require that: (a) Records of generated construction waste are kept on the construction site; (b) Construction waste is sorted and reused as much as possible; and (c) Inert (non-hazardous) waste may be pulverized on the construction site by authorized construction waste management companies only, etc. According to the Law on Ambient Air Protection20 the Contractor must also implement measures to minimise ambient air pollution during construction works (Art. 11, par 2).  

2.5.4.

2.5.5.

20 Zin., 1999, Nr. 98-2813.

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2.6. Quality Assurance 2.6.1.

2.6.2.

Every construction process must conform to appropriate quality standards. This means that the quality of design documentation, construction operations, and the built structure must meet technical construction requirements and standards related to the safety and purpose of the building or structure. The Contractor’s Head Construction Engineer (in charge of the construction works), as well as the Head Technical Supervisor, are responsible for meeting the quality standards of a structure, within the limits of their competence. The quality of work fulfilled by the Contractor must meet the standards defined in the construction works contract. In the absence of any express reference to quality standards in the contract, the standards ordinarily applicable for work of the respective nature would apply. As certain warranty periods apply to buildings and other structures, the relevant quality requirements must be met throughout the entire warranty period.

2.7. Construction Contracting Dynamics 2.7.1.

2.7.2. 2.7.3.

There is no standard pattern that governs which contractual party selects the contract form. Generally: (a) The Builder selects the contract between the Builder and Contractor; (b) The Contractor selects the contract form for relations between the Contractor and Sub‐Contractors; (c) The Supplier of Construction Products selects the contract it uses with the Builder (Client) or Contractor; and (d) The Builder or Contractor selects the contract form used with the architect or engineer. In any case, situations can vary and there may be deviations from the abovementioned practice. The financier of a project does not typically select a contract, but possesses a right to review a contract and initiate amendments. When the financier is a commercial bank, clauses regarding progress reporting requirements, forms of statements on completion of works, etc. are usually required.

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3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

3.1.3.

3.1.4.

3.1.5.

The Lithuanian Civil Code21 determines basic principles of contract law, namely the principle of freedom of contract. This principle encompasses the following: (a) Parties are free to enter into contracts; (b) Contractual terms are established by the parties at their own discretion (except for some terms determined by mandatory rules of law); (c) It is prohibited to compel another person to conclude a contract, except when the duty to enter into a contract is established by law or a free-will engagement; and (d) The parties may form a contract containing elements of several classes of contract. Where contractual conditions are established by non-mandatory rules of law, the parties may agree to omit such conditions, or use other conditions. If the parties do not enter into such an agreement, the conditions of contract are determined according to the non-mandatory norm. This rule means that where parties do not expressly address specific issues in their contract, the rules of law governing those issues will be deemed to apply. The parties must however comply with the mandatory rules of law and public policy. The parties cannot agree to modify, restrict, or avoid the effect or application of such mandatory rules, irrespective of whether those rules are sourced from national or international norms. Where contractual conditions are disputed and they are regulated neither by law nor by the agreement of the parties, the court will consider the basis of usage, principles of justice, reasonableness, good faith, and the application of analogous statutes and law to make a determination. The Lithuanian legal system applies the pacta sunt servanda principle—a contract, validly formed in accordance with the law, shall have the force of law between its parties. This principle is generally supported by the courts.

3.2. Legal Framework 3.2.1.

The Lithuanian legal system consists of public and private law. In general, public law regulates legal relationships between the State and private persons, while private law regulates legal relationships between private persons. Public law provisions are mandatory, whereas private law provisions are mainly dis-

21 Zin., 2000, Nr. 74-2262; 200.

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positive, i.e. the parties may agree to not apply these rules, or they may agree different rules. Regarding the construction industry, public law regulates issues such as territorial planning, the architecture and design of construction works, the issuance of building permits, and the performance of construction works and commissioning, etc. The main law establishing mandatory rules for the construction industry is the Law on Construction. This law is implemented through a number of technical construction regulations that are mainly issued by the Ministry of Environment. They establish the technical requirements for structures and their construction, use and maintenance—either directly or by reference to specific standards or other regulations. Contracts are regulated by private law. The main private law source is the Lithuanian Civil Code. For the construction industry, the law of obligations and contract law are the most relevant. The Civil Code provides general conditions for contracts and also has separate sections dedicated to a works contract (Art. 6.644–6.671), a contract for fulfilment of design and survey work (Art. 6.700–6.704), as well as a construction works contract (Art. 6.681– 6.699). The latter regulates the general conditions for a construction works contract, and addresses the concept of a construction works contract, distribution of risk, insurance requirements, obligations of the parties, guarantees, etc. The abovementioned provisions of the Civil Code establish a link between private and public law for construction works. They oblige the Contractor to perform construction works in accordance with the (i) requirements established in the technical construction regulations, and (ii) contract determining the price of work and quality requirements applicable to the structure/construction works. In general, the provisions of the Civil Code are automatically implied into a contract, i.e. without expressly referencing them in the contract text, unless the parties have agreed otherwise.  

3.2.2.

3.2.3.

3.2.4.

3.2.5.

3.2.6.

 

3.3. Public Policy 3.3.1.

3.3.2.

Contractual terms that are contrary to public policy or morality are considered null and void. However, the concept of public policy is not detailed in the abovementioned laws and includes the main principles upon which the State legal system is based. These principles are regulated by the Constitution and other laws. In the field of international arbitration, public policy is interpreted as international public policy—which includes the fundamental principles of fair process and the rule of law.

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599

In assessing whether a contract is contrary to public policy, the impact to the public, State, and individuals is considered. For example, where a contract is constituted in violation of a court decision, it will be deemed null and void due to being contrary to public policy.

3.4. Statute Law 3.4.1.

3.4.2.

3.4.3.

3.4.4.

As mentioned above, the Civil Code is the main source of rules and regulations relevant to the construction industry. The Civil Code contains six books, as follows: (a) Book One: general provisions (on the application of civil laws, private international law rules, transactions and their voidability, objects of civil rights, limitation periods, prescription, exercise and protection of civil rights); (b) Book Two: persons (natural and legal persons, agency and commercial agency); (c) Book Three: family law; (d) Book Four: material law (property law); (e) Book Five: Law on Succession; and (f) Book Six: Law on Obligations (general provisions on obligations, general provisions on contracts, certain kinds of obligations, civil liability, and different kinds of contracts). The Law on the Prevention of Late Payment in Commercial Transactions establishes maximum terms of settlement for goods, services and works under commercial contracts as well as interest on late payments (if not regulated by a contract). The Law on Consumer Protection applies when one of the parties to a contract is a natural person entering contractual arrangements for personal, household and family needs, with a legal entity or businessman. The Civil Code also provides special consumer protection rules. The Law on the Prevention of Corruption establishes general measures to prevent corruption in the public service and private sector. Many corruption-related offences are subject to criminal liability.

3.5. Implied Contract Terms 3.5.1.

Pursuant to the Civil Code, contractual terms may be express or implied. Implied conditions must flow from the purpose and essence of the contract and the nature of the relationship established between the parties, as well as the criteria of good faith, reasonableness and justice.

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3.5.2.

Evaldas Klimas

Quality is an implied contract term. Where the quality of performance is determined neither by the contract nor by the law, the quality of performance must be reasonable and not lower than average. The quality standard is determined according to the specific circumstances, i.e. the place of contract performance, purpose, requirements in the market, qualification of the party, etc. Another implied term is the contract price. Where a contract fails to fix the price or establish any means for determining it, the parties are considered to have referred to the relevant market price as at the date of contract conclusion. Alternatively, if such price does not exist, it is considered to be a reasonable price. Where the price is to be fixed by reference to criteria which do not exist, have ceased to exist, or cannot be ascertained, it must be fixed every year and by reference to the criteria which are the nearest equivalent.  

3.5.3.

3.6. Construction of Contract Terms 3.6.1. 3.6.2.

3.6.3.

3.6.4.

Construction contracts are bilateral and consensual contracts for remuneration, and are regulated by Articles 6.681–6.699 of the Civil Code. Pursuant to Article 6.681, the Contractor is obliged to construct the building or structure as instructed by the Builder (Client), or fulfil other construction works, within the period established by the contract. The Builder (Client) is obliged to create the necessary conditions for the Contractor to fulfil its work, to accept the result of the work performed, and to pay the price stipulated in the contract. Consequently, the main terms of a construction contract are the subject matter of the contract and identification of the parties. Other key terms relate to obligations of the parties and contract price. The subject matter and key purpose of a construction contract relates to the intended outcome of the construction work. This can be work relating to construction, reconstruction, or major repairs to a building or structure. The Contractor’s obligation is not fully executed until the works are achieved in accordance with the contract terms. Other features of a construction contract include that a Contractor works independently and at its own risk. The parties of a construction contract are the Contractor and a Builder (Client). The general rule is that parties may be natural persons or legal entities, including public legal entities (State and municipal institutions or similar). Particular contracts may be subject to specific regulations, e.g. in a consumer construction contract, the Contractor must be a legal entity or businessman, and the Builder (Client) must be a natural person entering into the contract for their personal, household and family needs.  

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3.7. Private and Public Procurement 3.7.1.

3.7.2.

In some cases construction contracts must be awarded in accordance with public tender procedures. Such cases and award procedures are regulated by the Law on Public Procurement and secondary legal regulations. The Lithuanian Law on Public Procurement transposes Directive 2014/24/EU22 and Directive 2014/25/EU23 (the ‘Public Procurement Directives’). Under the Law on Public Procurement, the obligation to award construction contracts via tender procedures is imposed on the following contracting authorities: (a) Any State or local authorities; (b) Entities engaged in specific water, energy or telecommunications activities referred to in Articles 8–147 of Directive 2014/25/Eu; and (c) Entities whose entire or partial activities are intended to meet general interest needs, are not of an industrial or commercial character, and meet at least one of the following conditions: (i) Their activities are financed by the State or municipal budget, other State or municipal funds or funds of other contracting entities by more than 50 %; (ii) They are subject to control/management by State authorities, local authorities or other contracting authorities; or (iii) They have an administrative, managerial, or supervisory body that has more than half of its members appointed by State authorities, local authorities or other contracting authorities. The abovementioned contracting authorities may award a contract by way of (i) open or restricted tender, (ii) competitive dialogue, or (iii) negotiated procedure with or (in very exceptional circumstances) without prior contract notice. These procedures are all transposed from the Public Procurement Directives. When a construction contract is awarded via public tender procedures, it is considered a ‘Public Works Contract’ within the meaning of the Public Procurement Directives and must include the following details pursuant to the Law on Public Procurement: (a) Terms for fulfilment of the Contractor’s obligations; (b) Scope of the works (exact scope and/or possible variations);  

3.7.3.

3.7.4.

22 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC. https://eur-lex.europa.eu/legal-content/EN/TXT/? uri=celex%3A32014L0024. 23 Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0025.

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(c)

3.7.5.

3.7.6.

Pricing rules, including any rules for changes (e.g. due to a fluctuation in VAT, other taxes, general prices, specific indexes, etc.), in accordance with rules approved by the Public Procurement Office; and (d) Any Sub-Contractors involved and the manner for changing them, etc. Provisions of awarded Public Works Contracts cannot be changed during the contractual term except where: (a) They are non-essential and do not infringe the principles of non-discrimination, equality, transparency, proportionality and the aim of rational use of funds intended for the procurement or where the Public Procurement Office has issued prior consent for such a change (consent is unnecessary in some procurements of minor value); or (b) The terms and conditions for the amendment were clearly stipulated in the Public Works Contract. Similar rules apply to other contracts in the construction industry.  

4. Government Involvement 4.1. Legislation and Regulation 4.1.1. 4.1.2.

4.1.3.

4.1.4.

The main law regulating construction activities in Lithuania is the Law on Construction. This law is harmonised with legal acts of the European Union. The law establishes: (a) Essential requirements for all construction works which are built, reconstructed and repaired; (b) The procedure for a number of construction activities, including the technical regulation of construction, construction investigation, design of construction works, construction, reconstruction, repairs, acceptance of works as fit for use, use and maintenance, demolition and supervision procedures over the aforementioned activities; and (c) The principles underpinning the activities construction participants, public administration entities, owners/users of engineering and utility networks and traffic routes, and other legal and natural persons in this sector. The Law on Construction determines that the essential feature of buildings and structures is that they should be created by performing works on site and are firmly connected to the land. Mandatory legal norms establish the laws and regulations on construction, and cannot be modified through agreement between the parties. For instance, minimum warranty periods for buildings and structures are established in law. While warranty periods for a building or structure can be fixed in contract, the period must not be less than five years (commencing from the date

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of takeover of the construction works); no less than ten years for hidden elements of a building or structure (structural elements, pipelines, etc.); and no less than twenty years in respect of deliberately hidden defects. Moreover, it is mandatory for the civil liability of the Designer, Design Expert, Technical Supervisor, and Contractor of construction works to be insured—regardless of the source of design and construction financing, type of ownership ultimately involved or the legal status of the aforementioned construction participants. One of the latest developments in construction legislation is the introduction of mandatory energy performance certification for buildings. The construction process is also regulated by technical construction acts, technical construction regulations, construction rules, technical certificates and methodological recommendations.

4.2. Codes of Practice 4.2.1.

4.2.2.

4.2.3.

Although there are no codes of practice in Lithuania, a wide variety of normative documents exist. Normative technical construction documents include technical construction regulations, rules, standards, technical approvals, methodological instructions and recommendations for the construction, use and supervision of a building or structure. These documents set out the requirements, rules, general principles and characteristics pertaining to design, construction, completion (commissioning), use, supervision and demolition of a building and structure. Technical construction regulations are released on the basis of the Law on Construction and in accordance with the relevant governmental authority, primarily by the Ministry of Environment. There are 60 technical construction regulations varying from building permits to the construction of roads. The standard procedure of construction regulated by the Law on Construction and the technical construction regulations is as follows.: (a) Firstly, the Builder must acquire special architectural permissions for construction works as well as other special requirements and conditions to connect to the engineering infrastructure; and (b) Secondly, the design documentation and building permit must be approved. At completion of the construction works, cadastral measurements of the completed building/structure must be carried out and a certificate of completion obtained. These documents constitute the legal basis for registering the Builder’s ownership rights to the building/ structure in the Lithuanian Real Estate Register.

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4.3. Licensing of Professionals and Contractors 4.3.1.

4.3.2.

4.3.3.

4.3.4.

4.3.5.

Under the Law on Construction, the main head participants of technical construction activity are: (i) the head of design documentation (Art. 2, par 69), (ii) the head of a subdivision of design documentation (Art. 2, par 65), (iii) the head supervisor of design documentation implementation (Art. 2, par 70) and (iv) the head supervisor of implementing a subdivision of design documentation (Art. 2, par 70), etc. These roles may only be conducted by an architect or building engineer. The qualification requirements for these roles are determined by an institution authorised by the Government. The same institution will also govern the qualification requirements (for education/work experience) for the abovementioned roles, as well as the procedure for issuing, changing, suspending, reinstating and withdrawing qualification certificates. It should be noted that citizens of an EU Member State, the Swiss Confederation, State parties to the EEA Agreement, as well as natural persons benefiting from the rights of movement within EU Member States, can conduct these senior roles as heads of the main areas of technical construction activities. However, persons without appropriate certification can only head the design and/or construction, supervision of the design documentation implementation or technical supervision of the construction where the construction concerns a simple or ordinary building/structure (that is, buildings/structures other than those of ES). Their qualification requirements are established by an institution authorised by the Government. Additionally, pursuant to the Law on Construction, a natural person wishing to obtain a qualification certificate as the head of one or several main areas of technical construction activities must meet the requisite educational and work experience criteria, pass examinations as approved by the institution authorised by the Government, and submit the appropriate forms and documentary evidence for certification by the appropriate authorities.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

There are no Lithuanian standard forms of construction contract. On 29 February 2005, the Lithuania’s Builders Association issued an example standard form contract. In some cases, Engineering and Construction Contract (‘ECC’) conditions, as developed by European International Contractors (‘ICE’ or ‘EIC’), are used.

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5.2. Most Commonly Used 5.2.1.

Despite the above, the main industry players typically use their own standard form construction contracts. FIDIC contracts (see Section 5.4 below) are most commonly used in relation to public procurement contracts.

5.3. Example 1 – Design and Construct Contract – AS4300 5.3.1.

Unfortunately, this Australian standard agreement is not used in contractual relations in Lithuania.

5.4. Example 2 – FIDIC 5.4.1.

5.4.2.

FIDIC conditions of contract, as issued by the International Federation of Consulting Engineers, are widely used for public procurements. The obvious advantage is that FIDIC contracts are well-known, predictable and their provisions have been interpreted by courts, which provides added guidance to users. While FIDIC forms are popular, they definitely do not constitute common practice. Despite the huge proliferation of contract forms, the standard documentation issued by the International Federation of Consulting Engineers is dominant in most common construction areas. Usually, State regulations recommend FIDIC forms for public procurements because all contractors and employers demand that projects finish on time and within budget. Moreover, FIDIC standard forms incorporate a manual of optimal project management techniques and are written in good English that can be easily understood by construction professionals.

5.5. Amendment of Contracts and Bespoke Contracts 5.5.1.

5.5.2.

It is general practice that amendments to a standard contract are made between the Builder (Client) and the Head Contractor, typically at the Builder’s (Client’s) initiative. For example, Builders (Clients) usually make material amendments to the general conditions of FIDIC contracts, thus altering the balance of rights and obligations between the parties, as established by standard contractual conditions. Additionally, the wording of the contract might be interpreted by using the general principles of contract and construction law in case of a dispute. The parties can’t change imperatives foreseen in statutory law, including manda-

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tory requirements which rise from EU Law, e.g. regulation 305/2011 for building materials etc.  

6. Key Issues 6.1. Overview 6.1.1.

A construction contract is presumed to be executed upon agreeing one main condition–the object of the contract, i.e. the parties should agree the scope of works. All other clauses are not considered essential to contract completion and can be inferred from legal regulation (even the price–which may be interpreted by the court as analogous). Therefore, parties must pay close attention to their negotiating process. Notably, the courts strictly observe the rule that a preliminary agreement cannot be considered a final agreement if parties did not agree upon essential conditions. Since the Lithuanian legal system is related to the Roman-Germanic legal system, there are similarities between what constitutes contractual regulations in Lithuania to other Roman-Germanic law system jurisdictions. In addition, the general FIDIC contractual terms are perfectly implementable with minor amendments, as discussed below.  

6.1.2.

6.2. Fit for Purpose 6.2.1.

The Contractor should perform the works under the presented design documentation. While the Builder (Client) is responsible for implementing procedures to ensure that the building is fit for use, the Builder (Client)will typically assign this undertaking to the general Contractor. There is no requirement to perform all finishing (fit-out) works to provide the building for use, but all engineering systems should be tested before the acceptance of the building to use and the Contractor should receive of Statement of Construction Completion.

6.3. Late Completion 6.3.1.

6.3.2.

If the Contractor fails to perform works on time and breaches final or interim terms, the employer may terminate the construction contract under the Civil Code. It is common practice for damages for delayed works to be awarded at the rate of 0.02 % of the accepted contract amount.  

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6.4. The Contract 6.4.1.

6.4.2. 6.4.3.

6.4.4.

Although the FIDIC forms represent a starting point for the preparation of a construction contract, they are routinely amended to reflect both the particular characteristics of each project and the requirements of the parties. The general conditions (‘General Conditions’) are intended to be used in unmodified form for every project. The particular conditions (‘Particular Conditions’) are prepared for the particular project in question and include any amendments, which will typically reflect Lithuanian laws and project requirements. Sometimes General Conditions are printed with the incorporated changes to suit the requirements of public procurement. However, it is recommended that any amendments and additions are contained in a separate document. Usually the amendments in the Particular Conditions reflect requirements of the Civil Code and the Law on Public Procurement. Pursuant to the Law on Public Procurement, the following provisions may not be altered when awarding public contracts: (a) The price stated in the successful tender; (b) The final negotiated price recorded in the negotiation minutes; (c) The final tender submitted after negotiations; and (d) The contract terms and conditions specified in the contract documents and in the tender. Moreover, the terms and conditions of a public contract cannot be changed during the contracted period, with the exception of terms that do not prejudice the principles and aims of public procurement and are approved by the Public Procurement Office.

6.5. Definitions 6.5.1.

In Lithuania, FIDIC standard form contracts are usually supplemented by two new definitions: ‘Technical Design’ and ‘Work Design’. Technical Design is a construction works design with all necessary architectural and technical documentation. Work Design is a detailed work design developed by the Designer or Contractor on the basis of the technical design and in accordance with requisite legal provisions.

6.6. Completion of the Construction 6.6.1.

FIDIC conditions are always supplemented with a new sub-clause relating to the completion of construction works. Under Lithuanian law, completion of the construction works requires inspection and confirmation by a State com-

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mission that all of the solutions of the design documentation have been implemented, rendering the structure fully compliant with essential requirements. By law, it is the Builder’s (Client’s) obligation to arrange commissioning procedures. However, it is common to include a provision in the contract that the Contractor assumes responsibility for arranging these procedures on the Builder’s (Client’s) behalf. Pursuant to the Law on Public Procurement, the term for contract completion must be specified in the contract. In practice, the term for contract completion is normally understood as the time for completion of the construction works, and does not include the defects notification period.

6.7. Permits, Licenses or Approvals 6.7.1.

6.7.2.

Pursuant to Lithuanian law, FIDIC conditions should be supplemented by a provision that allows the Builder (Client) to request reimbursement for the expenses of obtaining copies of Lithuanian laws. Moreover, the contracts provide that the Contractor obtains all necessary permits from local institutions at its own expense, e.g. building permits, permits for land works, environmental permits, etc. Receipt of building and environmental permits is the Builder’s (Client’s) obligation. However, it is common to include provisions in the contract that allows the Builder (Client) to transfer this obligation to the Contractor that prepared the design documentation.  

6.8. Employer’s Right to Control and Supervise Construction Works 6.8.1.

Given the significant matter of public procurement, the FIDIC General Conditions are usually supplemented by a provision stating the Builder’s (Client’s) right to control and supervise construction works. The Builder (Client) has the right to control and supervise the execution of the works in progress, whether timing is respected, the quality of materials supplied by the Contractor, and the use of materials. Sometimes, State and municipal institution representatives assist the Builder (Client) in approving the result of design and construction works.

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6.9. Defects Notification Period 6.9.1.

6.9.2.

Under FIDIC conditions, a defects notification period is the period for notifying defects, as stated in the agreement. It is calculated from the date on which works are completed (normally two years). This provision cannot be used to substitute the warranty period stated in the Civil Code, which must be no less than five years, or ten years for hidden elements of a building or structure, and twenty years where defects have been deliberately hidden. The warranty period is counted from the date of handover of the completed construction works to the Builder (Client). During the warranty period, the Contractor must ensure that a structure complies with the parameters set out in the technical construction documents and is fit for use according to its intended purpose, as defined in the contract.

6.10. Performance Certificate 6.10.1. A Performance Certificate document does not exist in Lithuanian law or practice. However, a Statement of Construction Completion is drawn up upon the completion of construction, reconstruction works, or renovation (modernisation) of an apartment house or non-residential building, through commissioning procedures. The Statement of Construction Completion is drawn up in accordance with the procedure laid down by the Ministry of Environment. Any further certificates normally only certify the elimination of defects found upon using the building/structure.

6.11. Force Majeure 6.11.1.

6.11.2.

The Civil Code considers force majeure as a ground for exemption from liability (Art. 6.212, par 1). A party is exempt from liability for non-performance of a contract if it proves that non-performance was due to circumstances that were beyond its control, were not reasonably foreseeable at the time of contract conclusion and could not be prevented. Therefore, this contractual condition is amended in construction contracts in accordance with Lithuanian laws, to ensure that no party is liable for non-performance of a contract when a result of force majeure circumstances. There are four conditions to recognise circumstances as force majeure: (a) The circumstances were beyond the party’s control; (b) The circumstances were not reasonably foreseeable; (c) The circumstances or consequences thereof could not be prevented; and (d) The party had not assumed the risk.

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6.11.3. A superior force (force majeure) does not include circumstances such as an absence in the market of goods needed to perform the obligation or lack of the necessary financial resources. Furthermore, the courts have ruled that the economic crisis cannot be considered force majeure per se—which would generally exempt the performance of contractual obligations and legal consequences of non-compliance. The party must prove all of the abovementioned conditions to have the economic crisis recognised as a force majeure circumstance. 6.11.4. Generally, the courts prioritise the pacta sunt servanda principle. Consequently, circumstances such as fire, meteorological conditions, interference by wild animals, and theft have not been considered as force majeure circumstances, since the abovementioned conditions were missing. 6.11.5. The Lithuanian Government, by its 15 July 1996 Act No 840, confirmed the Rules on Exemption from Liability in Case of Superior Force (force majeure) Circumstances. These rules provide a general list of force majeure circumstances, e.g. war, natural disasters, fires, boycotts, strikes, lockouts, etc.  

6.12. Limitation of Liability 6.12.1.

Under the Civil Code, contractual parties should address compensation for direct and indirect losses. To avoid unreasonable claims the parties usually agree to limit their liability to the compensation of direct losses only. Additionally, general judicial practice only recognises reasonable penalties, such that parties typically limit their liability to 10 % of the contract price and damages for delay to 0.02 % per day of delay.  

 

6.13. Duration of Exposure 6.13.1. Contractual parties are free to agree upon the duration of exposure. Six months is considered to be a long stop date.

6.14. Time Bars 6.14.1. Parties are free to agree interim and final terms of contract execution. A party in breach of contract should compensate the loss of the other party where it fails to keep to the agreed terms. The Contractor may avoid penalties if the Contractor proves that delay occurred due to the fault of the Builder (Client), third party/parties, or force majeure circumstances.

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6.15. Purchase of Additional Services 6.15.1. Under the Law on Public Procurement, the Builder (Client) cannot purchase additional services or works from the same contractor in relation to public service contracts and public works contracts. For this purpose, a new contract must be concluded to comply with all public procurement regulations and requirements. 6.15.2. However, it is possible to purchase additional services and works by a negotiated procedure without public notice. The negotiated procedure (without publication of a contract notice) may be applied where additional works or services: (a) Become necessary due to unforeseen circumstances; (b) Have not been included in the original public contract and cannot be technically or economically separated from the main public contract without major inconvenience to the contracting authority; or (c) Are necessary for the performance of the principal contract at its later stages (provided that the additional public contract is concluded with the contractor or service provider performing the original public contract).

7. Dispute Resolution 7.1.1. 7.1.2.

Generally, in the Lithuanian legal system, disputes arising from construction contracts can be resolved through the courts or via arbitration. However, there is a third dispute resolution option which is not part of the Lithuanian legal system but arises under FIDIC contractual provisions. Disputes arising from such construction contracts allow resolution by the Dispute Adjudication Board (‘DAB’). As mentioned, the DAB should not be considered part of the Lithuanian dispute resolution system. However, Lithuanian courts and arbitral tribunals can recognise and enforce decisions made by the DAB.

7.2. Dispute Resolution by DAB 7.2.1.

If contracting parties incorporate the FIDIC provisions (clauses 20.2–20.4) on the DAB in their construction contract, any disputes arising under that contract can be resolved by the DAB. Under FIDIC contractual provisions, the decision of the DAB is binding on both parties, who must promptly give effect to it unless and until it is revised by amicable settlement or arbitral award. If either party is dissatisfied with the DAB’s decision, they may give notice to the other party of their dissatisfaction and intention to commence arbitration within 28 days of receiving the decision.

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Generally in Lithuania, the DAB dispute resolution procedure reflects the procedure outlined in the FIDIC contractual provisions, unless the parties have agreed otherwise. However, it is questionable whether the FIDIC contractual provisions on dispute resolution by the DAB fully comply with Lithuanian law, since the DAB theoretically does not conclusively resolve disputes and there is no right of appeal. Despite the possibility of reviewing the DAB’s decisions through arbitral procedures, the tribunal only has the power to review the decision, rather than resolving the dispute in essence—which can be viewed as a violation of the right to dispute resolution by trial.

7.3. Dispute Resolution in Courts 7.3.1.

7.3.2.

7.3.3.

7.3.4.

7.3.5.

7.3.6.

Unlike jurisdictions such as in England and Wales, there are no specialised courts dealing with construction disputes in Lithuania. However, Lithuania has adopted a legal system that differentiates between public and private law. Therefore administrative courts exist, and are charged with resolving construction disputes between public and private persons. Disputes between private persons may be brought before general jurisdiction courts. There are four levels of general jurisdiction courts: (a) The Supreme Court of Lithuania; (b) The Court of Appeal of Lithuania; (c) District courts; and (d) Local courts. The general rule is that all claims are brought in local courts, unless specified by law. For example, claims for more than €40,000 are brought in district courts. District courts are also the appeal instance for judgements, decisions, rulings and orders of local courts. The Court of Appeal is the appeal instance court for cases heard by district courts as courts of first instance. The Supreme Court of Lithuania is the only court of cassation instance for reviewing effective judgements, decisions, rulings and orders of the courts of general jurisdiction. It should be noted that there is a ten year general limitation period for bringing civil claims to court. A shorter limitation period of one year is set for claims arising in connection with construction works defects. Limitation periods commence on the date the party became aware, or ought to have become aware, of the violation of their right. Resolution of construction disputes in general jurisdiction courts will usually take two – three years.

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7.4. Arbitration of Disputes 7.4.1.

7.4.2.

7.4.3.

7.4.4.

Lithuania is a member of the New York Convention,24 but arbitration is still a relatively unpopular means of resolving disputes in Lithuania. The majority of construction disputes are currently pending in the courts. However, the importance of arbitration is increasing due to international influences on the Lithuanian construction industry. In Lithuania, the Construction Arbitral Tribunal is a specialised court of referees administered by the public institution Vilnius International and National Commercial Arbitration, which has jurisdiction over disputes arising in the construction business sector. The hearing and settlement of disputes must comply with the applicable law indicated in the construction contract. In the absence of any express reference to the applicable law, the hearing and settlement of disputes must comply with the applicable provisions of Lithuanian, EU, and international law that governs legal relationships between economic entities operating in the construction business. Arbitral awards in Lithuania are deemed to be binding and enforceable. It should be noted that arbitration proceedings are significantly shorter than court proceedings, although the outcomes are more unpredictable. Additionally, there is generally no right of appeal against an arbitral award, and courts will only overturn arbitral awards on very limited grounds. Lastly, arbitral awards delivered in other jurisdictions can only be denied recognition in Lithuania on the grounds specified in Article V of the New York Convention.

24 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959).

Daniel Antonio del Río Loaiza, Jesus Colunga and Monica Paulina Mora Avila

Mexico 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 7.

Context 616 The Country 616 The Legal System 616 The Economy 617 The Construction Industry 620 Size and Nature 620 Participants 621 Work, Health and Safety 621 Protection of the Environment 622 Quality Assurance 623 Construction Contracting Dynamics 624 Legal Underpinnings of Contracts 624 Freedom of Contract 624 Legal Framework 625 Public Policy 625 Statute Law 626 Contract Terms 626 Private and Public Procurement 635 Government Involvement 636 Legislation and Regulation 636 Codes of Practice 636 Licensing of Professionals and Contractors Construction Contracts 637 Available Contracts 637 Most Commonly Used 638 Example 1 – Design and Construct Contract – Lump-Sum Construction Contract 638 Example 2 – Services Agreement 638 Key Issues 639 Overview 639 Dispute Resolution 639

https://doi.org/10.1515/9783110712728-020

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1. Context 1.1. The Country 1.1.1. 1.1.2. 1.1.3.

Mexico is located in North America, with an area of 1,964,375 km2 and a population of approximately 127,575,529 people. The official Language is Spanish, but there are 95 indigenous languages and a population of 7,382,785 indigenous languages speakers in Mexico. Mexico became independent from Spain in 1821 after an 11-year war.

1.2. The Legal System 1.2.1. 1.2.2.

1.2.3.

1.2.4.

1.2.5. 1.2.6.

1.2.7.

Mexico’s legal system is a Roman, Germanic, and Canon Law system (Civil Law). As referred in its Section 133, Mexican supreme legislation is the Constitución Política de los Estados Unidos Mexicanos, [Political Constitution of the United Mexican States] (‘Federal Constitution’). In addition to the foregoing and pursuant to the Federal Constitution, all international treaties that Mexico signs and is a party to will be considered as fully applicable and under a “supreme rule” concept in all the Mexican territory. Hierarchy of laws in Mexico is further allocated as follows: (a) Federal Constitution; (b) International Treaties; (c) General Laws; (d) Local laws and constitutions; and (e) Local regulations. Powers in Mexico are divided into the executive, legislative and judicial, which provides a system of checks and balances. In turn, these powers are at the same time divided in Federal and Local competences. Even though each Mexican state has its own autonomy and sovereignty, there are certain areas in which the federal laws prevails over local laws. The President of Mexico holds executive power, while legislative power is vested in the Mexican Federal Congress. The highest court in Mexico is the Suprema Corte de Justicia de la Nación [Supreme Court]. The existence of the Supreme Court has its basis in the Federal Constitution as per Section 94 of Chapter IV thereof. The Supreme Court is composed of eleven Ministers, each one of them appointed by the Senate. Sources of Mexican law are divided in two blocks, real sources and formal sources. Real or material sources are the ones related to the historical, political, religious, economic and social facts that influence the law. Formal sources of law are the legislation, customs, jurisprudence (5 judicial resolutions in the same sense), doctrines and general principles of law.

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Mexican law includes arbitration as an alternative dispute resolution method for commercial and civil matters. Domestic arbitrations are governed by the provisions of the Federal Constitution and the Código de Comercio [Commercial Code] (Mexico). Further, there are certain highly prestige local Arbitration Chambers in Mexico that are commonly used for the resolution of controversies, such as the Centro de Arbitraje de México (Arbitration Centre of Mexico) and the National Chamber of Commerce (CANACO for its Spanish acronym) and specifically for construction matters the Center of Arbitration of Construction Industry (CAIC for its Spanish acronym). In addition to the foregoing, as an alternative dispute resolution method for international matters, International Arbitrations are a customary alternative, being subject to the regulations of the specific International Arbitral Chamber, such as the International Chamber of Commerce (ICC) or the American Arbitration Association (AAA).

1.3. The Economy 1.3.1.

1.3.2.

1.3.3.

Mexico is a highly open economy with strong financial links to the rest of the world. It has close linkages to the USA through trade and remittances, and thus is particularly sensitive to US developments. In turn, Mexico’s open capital account, good macroeconomic fundamentals and liquid foreign exchange markets have led to a close integration with global financial markets. According to information from the International Monetary Fund (‘IMF’), Mexico is the 15th most important economy in the world and the second one in Latin America. Further, Mexico holds the 10th most populous country in the world with 127,575,529 million inhabitants as established by the World Bank. In 2016, the GDP per capita stood at USD$ 9,863.1, as reviewed and referenced by such World Bank. According the World Trade Organization (‘WTO’), Mexico plays an important role in international trade. Mexico is the 13th largest exporter and 12th largest importer, with 2.3 % and 2.5 % of total world exports and imports, respectively. During 2017, exports from Mexico reached a record amount equivalent to USD$409,494 million, while imports reached USD$420,369.20 million. Of course, considering the COVID-19 Pandemic, these figures have decreased, however, we will be able to confirm in years 2021 and 2022 the commercial balance and exports and imports value and their potential affectation by this pandemic. Pursuant to the Mexican Ministry of Economy, in 2019 direct foreign investment in Mexico was USD$32,921 million. It is important to note that Mexico has a very solid macroeconomic basis, as there are no external or fiscal imbalances, the financial system has significant  

1.3.4.

 

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1.3.5.

1.3.6.

1.3.7.

1.3.8.

1.3.9.

Daniel Antonio del Río Loaiza, Jesus Colunga and Monica Paulina Mora Avila

capital levels, credit to the private sector continues to grow at a healthy economic rate, and the country remains an attractive market for foreign direct investment. As evidenced by the Mexican Ministry of Economy, during the last few years, direct foreign investment has had an evident increase and Mexico has been ranked as an excellent destination for manufacture. The automotive industry has obtained great importance in a short period of time, as has non-automotive manufacturing exports. Domestic economy has responded well in the past few years and now seems to have better prospects, especially as a result of the Energy and Telecommunications reforms which have been received well by foreign investors, among others. As per information of the Mexican Foreign Relations Department, Mexico has entered into 13 free trade agreements including with the US and Canada as per the new free trade agreement identified as “USMCA”; Colombia and Venezuela (TLC-G3); Costa Rica; Bolivia; Nicaragua; Chile; European Union; Israel; Northern Triangle (El Salvador, Honduras and Guatemala); Iceland, Norway, Liechtenstein and Switzerland (European Free Trade Association (‘EFTA’)); Uruguay; and Japan, which are among the largest and most attractive markets worldwide. On 24 April 2019, United States notified Mexico and Canada that its domestic procedures to implement the USMCA had been completed. With this, the United States became the third country to perform such diligence, completing the final step for the USMCA to enter into force. In accordance with paragraph 2 of the Protocol Replacing the North American Free Trade Agreement with the USMCA, the Agreement shall enter into force on the first day of the third month following the last notification, which means that the Agreement will enter into force on 1 July 2020. The USMCA’s entry into force marks the beginning of a new chapter for North American trade, leading to fairer trade and economic growth for the three countries, therefore hereinafter it is important to anticipate and fulfill the new requirements and formalities to have access to the benefits established in the new incorporated Chapters. On the other hand, it is important to take into consideration that Mexico has three key direct external linkages: (a) Substantial trade with the US, particularly in manufacturing; (b) Large remittance flows from the US; and (c) Highly open and liquid financial markets. Mexican manufacturing firms are highly integrated into the US supply chain. Mexico also receives significant remittance flows from the US, which represents a significant instrument for strengthening the Mexican Peso compared to the US Dollar. Further, this flow remittance from the US has been increasing within the following years.

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1.3.10. Regarding foreign trade, the US is Mexico’s largest trading partner. Exports to the US account for about a quarter of GDP, and account for 80 % of Mexico’s total exports according to the World Trade Organization. Approximately 89 % of total exports are in manufactured goods (95 % of total non-oil exports). 1.3.11. Trade openness has risen significantly over the last 30 years, particularly after Mexico joined NAFTA in 1994 and now with the new UMSCA it is expected to continue to rise. Mexico’s share in the US manufacturing market temporarily declined after China joined the WTO, but it has recovered since 2005. 1.3.12. In the past few years, some diversification in terms of Mexico’s export markets has occurred, showing important growth in Europe and emerging and developing countries such as Australia, Singapore and New Zealand. Mexico’s export market is also diversifying through new commercial partners other than the US, as a result of exhaustive negotiations regarding NAFTA. Notwithstanding the foregoing, exports to these countries represent a small share of total exports. Mexico is thus seeking new commercial opportunities independently of the results of the NAFTA agreement. Mexico has been looking towards Asian opportunities, such as the Chinese market, particularly considering the commercial war between the United States and China, which may indirectly represent a benefit to Mexican commercial trade if Mexico takes this opportunity to increase its import and export market. 1.3.13. Mexico’s export sector is expected to remain an important engine for growth. This is supported by continued foreign direct investment into the manufacturing sector, improved relative labor costs (particularly with respect to China), and relatively high oil prices over the medium term. 1.3.14. On the other hand, remittances from the US, particularly from workers in the construction sector, represent an important source of income for Mexico as described above. As indicated by the World Bank, at about 3.1 % percent of GDP in 2019, remittances have been highly correlated with US construction activity, particularly since 2006, following the downfall of the US construction sector. Further, they represent a part of the maintenance, services and production industry, as reported by the U. S. Census Data. 1.3.15. Another main source of economic growth is the oil business, controlled by the Mexican wholly owned company identified as Petroleos Mexicanos, or its d/b/ a “Pemex”. Pemex is the fourth biggest crude oil producer in the world. In addition, since 2016 several gasolines dispenser brands entered into Mexico, opening for the first time in 78 years, giving a new opportunity for foreign investment in Mexico. 1.3.16. Mexico is well-positioned to respond to a global slowdown, particularly regarding external and monetary aspects. The need for external financing is currently manageable due to a moderate current account deficit. Further, Mexico has a healthy level of international reserves, a flexible credit line with the International Monetary Fund, and prudent management of public debt.  

 

 

 

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2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

2.1.3.

2.1.4.

2.1.5.

2.1.6.

The current value of the construction industry in Mexico is approximately MXN$1.8 billion of Mexican Pesos, as declared by the Construction Industry Mexican Chamber. The construction industry in Mexico may be divided into the following areas: (a) Private sector areas: (i) Housing; (ii) Buildings; and (iii) Hospitality and Leisure, (b) Public Sector areas: (i) Communications and Transports; (ii) Energy; (iii) Mining; and (iv) Urban Development. One of the main infrastructure projects that Mr. Andres Manuel Lopez Obrador, president of Mexico, has given high importance as the main infrastructure projects of his governmental presidency, is the construction of the “Tren Maya”. This project is an infrastructure development located mainly within the Yucatan Peninsula. With this project Mexican President seeks to promote and strengthen the development of the southeast Mexican region since such project would include the Mexican States of Tabasco, Chiapas, Campeche, Yucatán and Quintana Roo. The second project is the construction of an international airport identified as the “New Santa Lucía Airport”, located in Mexico City, which will replace the construction made in connection with a new airport project developed by the former administration. The President of Mexico has announced the cancellation of the construction of the New Airport for México City (NAICM), located in Texcoco, from December of last year, once his administration has commenced. Instead of this aerial terminal, which was expected to become a hub, an “airport system” will be createdthat will include the current military base of Santa Lucía, complimented with two additional runways, the current airport of México City, which will be rehabilitated, and the airport of Toluca, in the state of México. Pursuant to the Construction Industry Mexican Chamber, 61 % of the construction projects are private sector versus 39 % corresponding to the public sector.  

 

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2.2. Participants 2.2.1.

2.2.2. 2.2.3.

2.2.4.

2.2.5.

Owners: Owners in the construction industry represent a significant piece of the construction formula, considering that they are the parties that inject the monetary resources that are required to fulfill with the construction works. Contractors: Constructors are the main body that will develop the projects, supervise and plan the works within a specific chronogram. Subcontractors: Constructors may hire certain subcontractors in order to assist in a specific task such as hiring masons, among others. Further, in many events sub-contractors may represent specialized parties that can assist with certain technical services within a specific construction project. Consultants: Are parties that provide external advisory in connection with the corresponding construction project which may include attorneys, accountants, architects, designers and engineers. These types of consultants provide advisory services in diverse aspects of the construction works, such as advisory services related to obtaining all permits and authorizations, to manage the project finances and to design the constructions. Distributors: Are in charge of providing all raw materials and/or any kind of construction material required for the Construction works.

2.3. Work, Health and Safety 2.3.1.

2.3.2.

2.3.3.

2.3.4.

2.3.5.

2.3.6.

On 24 February 2017, several sections of Articles 107 and 123 of the Federal Constitution, in connection to the labor justice system, were amended by a Decree published in the Official Federal Gazette. The main purpose of these amendments is to transform the labor justice system and its procedures. The disputes or conflicts arising between employees and employers will be resolved by Labor Courts, which will be part of the Federal or State Government’s Judicial Branch. The above means that the Labor Boards will no longer operate, and the Labor Courts are created instead. Thus, the labor resolutions formerly called “laudos” from now on will be referred to as resolutions or sentences. This amendment requires employees and employers to attend a conciliatory mediation hearing prior to the initiation of judiciary proceedings before the Labor Court. At the local and State levels, such settlement mediation hearing must take place before the Conciliation and Mediation Centre, and at the Federal level, before a decentralized government entity. The conciliatory stage will consist of one settlement hearing set on a specific date, and therefrom any additional hearing will take place upon a party’s re-

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quest. The Federal Labor Law will determine the procedure that must be followed in the conciliatory stage. 2.3.7. The decentralized entity, the Conciliation and Mediation Centre, will also be responsible for the deposit and registry of all Collective Bargaining Agreements, Internal Work Policies and Union Organizations. 2.3.8. Based on the second transitory article of this Decree, the Federal Congress and the State Legislatures are starting to make the necessary legal adjustments for the implementation of the Constitutional amendments; in some states they are commencing the first procedures before these new Labor entities. 2.3.9. In the meantime, the Labor Boards and the Labor and Social Affairs Ministry will continue to look after the disputes or conflicts arising between employees and employers. 2.3.10. In addition to the labor law recently amended that will be applicable to all Construction workers, the provisions of the Federal Regulations of Health and Safety will be applicable. 2.3.11. Federal Labor Law, in its article 132, section XVI, sets forth the obligation of the employer to install and operate factories, workshops, offices, premises and other places where the work must be carried out in accordance with the provisions established in the regulations and the official Mexican standards on safety, health and work environment, in order to prevent accidents and occupational diseases, as well as to adopt preventive and corrective measures determined by the labor authority, and to have the necessary medicines and healing materials at all times to provide timely and effective first aid. 2.3.12. Finally, Official Mexican Standard NOM-031-STPS-2011 sets the ConstructionSafety and Health Conditions at Work.

2.4. Protection of the Environment 2.4.1.

2.4.2.

The Mexican government has an environmental impact assessment (‘EIA’) system. Before executing any construction or activity the Ministry of Environment and Natural Resources evaluates the possible impact on the environment that the construction may cause in order to prevent certain damages. Based on the assessment, the Ministry decides whether or not to grant the Environmental Impact Authorization, which is an approval required to proceed with the construction or activity. Please be advised that there are certain activities that fall under local jurisdiction and hence are to be evaluated by the State Environmental Ministry or, in some cases, the Municipalities. Applicable environmental legislation over the construction industry include the following: (a) General Law of Ecological Balance and Environmental Protection (LGEEPA for its Spanish acronym): This law tries to guarantee the legal

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right of any human being to have a healthy environment and sets forth the dispositions governing over the prevention and control of adverse effects and pollution of the environment (i.e. air, soil, water); (b) Regulations of the LGEEPA in Matters of Environmental Impact Assessment: through these regulations, the dispositions governing over the environmental impact assessment procedure for public or private activities under federal jurisdiction that may affect the environment are ruled; (c) Regulation of the LGEEPA on the Prevention and Control of Atmospheric Pollution: This regulation sets forth the dispositions governing over the fixed and mobile sources of air emissions under federal jurisdiction; (d) General Law for the Prevention and Comprehensive Management of Wastes and its Regulation: The purpose of the Law and its regulations is to manage and reduce the generation of wastes and to achieve the recovery and the integral management of all types of wastes, under the principles of shared responsibility and comprehensive management; (e) National Water Law and its Regulation: This Law and its regulations set forth the dispositions that govern over the extraction and use of the bodies of water that is the property of the nation, water pollution and wastewater discharges; and (f) Federal Law of Environmental Responsibility: Regulates the responsibility arising from the damage to the environment. The environmental matter is a concurrent matter which means that the Federation, the States and the Municipalities are empowered to rule over it. To this regard, it is important to revise the local dispositions applicable in the State or Municipality where a construction or activity will be developed in order to determine which ones apply to a respective project.  

2.4.3.

2.5. Quality Assurance 2.5.1. 2.5.2. 2.5.3.

The Mexican Ministry of Economy is the governmental entity in charge of issuing Mexican Official Standards for construction quality. Once these Mexican Official Standards are issued, they must be complied with. Further, Section 40 of the Federal Law on Metrology and Standardization, provides the general scope of this Mexican Official Standards, including the following: (a) Features and/or specifications to be met by the products and processes where they may to pose a risk to the safety of people or to harm human health, animal, vegetable, general and working environment, or for the preservation of natural resources;

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(b)

(c) (d)

(e) (f)

(g)

The characteristics and/or specifications to be met by the services when they may pose a risk to the safety of people or harm the safety of people, human health, animal, vegetation or the general and working environment; Features and/or specifications related to the instruments to measure, the patterns of measurement, calibration, and traceability; Specifications and/or packaging and packaging procedures for products which may constitute a risk to people’s safety or damage to their health or the safety of people environment; The conditions health, safety and hygiene to be observed in workplaces and other public meeting centers; The nomenclature, expressions, abbreviations, symbols, diagrams or drawings to be used in the technical industrial, commercial, service or communication language; and The characteristics and/or specifications related to equipment, materials, industrial premises.

2.6. Construction Contracting Dynamics 2.6.1.

In Mexico, the Construction Contracting Dynamics may vary generally depending on the following scenarios: (a) Contract between owner and head contractor: Usually, the owner hires a Head Constructor to manage and act as the main person responsible of the construction, through a construction services agreement that may rule the general matters and terms of conditions for the construction; (b) Head contractor and sub‐contractor: The Head constructor usually hires sub-contractors in order to perform specific matters, such as the labour; (c) Equipment supplier: This type of agreement is related to the supply and delivery of raw materials and equipment for the construction; and (d) Consultant (architect or engineer) and the owner or head contractor: Contracting of consultants (architects, engineers, etc.) to develop the design, structure and/or particularities of the construction.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

As defined by the Second Circuit Tribunal Courts of the Third Circuit in Civil Matters in the Thesis 168310, Freedom of Contract is usually identified with “autonomy of will” and finds its limit in the laws of public order or good manners.

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3.1.3.

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Contracting parties are free to include in their construction contracts any terms they jointly and by mutual understanding agree, provided, however, that they do not contravene Mexican Laws. This includes, without limitation, the Código Civil Federal [Federal Civil Code] (Mexico) (‘Federal Civil Code’), as well as the corresponding local construction regulations of each State of the Mexican Republic. Courts generally uphold the principle of pacta sunt servanda, which implies that all of the covenants made among the parties must be fulfilled.

3.2. Legal Framework 3.2.1.

3.2.2.

3.2.3. 3.2.4.

Under Mexican law, contractual relationships in a construction agreement are regulated by the Federal Civil Code, particularly established within its Tenth Chapter. Further, it shall take into consideration the provisions set forth in the Local Civil Codes of the States of the Mexican Republic as applicable to the location of the construction or the parties. It is noteworthy to mention that each state of the Mexican Republic has its own local and administrative regulations that will be required to be complied with by the parties involved in a construction project. For instance, the requirement may vary from state to state regarding the requirement of a construction permit. In Mexico City, there is a specific Works and Services Secretary that controls the permits that shall be granted and the requirements for such a purpose. In case of any dispute between the parties, Mexican courts will have the authority to resolve the controversy at hand and to create mandatory measures to force the parties to comply with their corresponding obligations under the contract.

3.3. Public Policy 3.3.1.

3.3.2.

3.3.3.

As pointed out by the President of Mexico in his daily meetings, and as reflected in his official page, the Mexican Government has developed the National Infrastructure Program 2020, which comprises an investment of USD $42,000,000.00 for the first stage of 147 projects, from the overall of 1,600 projects identified. Within the term of 2021-2022, an investment of 255 thousand 993 million pesos is envisioned to be carried out. Conversely, within the term of 2022 to 2024, the investment will be around 171 thousand 711 million pesos. The infrastructure plan includes the granting of subsidies for purposes of assisting the general population in acquiring a real estate. In other words, the

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plan includes subsidies to make housing affordable for a majority of the population and the improvement and expansion of urban development, ensuring a better and more equitable distribution between urban and rural areas, expanding coverage and generating mechanisms to integrate the low-income population.

3.4. Statute Law 3.4.1.

3.4.2.

3.4.3.

3.4.4. 3.4.5.

3.4.6.

Federal Civil Code: As explained above, as construction projects are ruled generally under services and construction agreement, the Federal Civil Code in its tenth section will provide the principal provisions of those agreements. Local Civil Codes: In addition to the Federal Civil Code, it is important to review the local law that may be applicable to the parties and/or to the location of the construction works, as each state of the Mexican Republic has its own regulations, which may vary and have an impact in the corresponding construction project. Local Construction Laws: Administrative laws must be reviewed in order to obtain all required permits and authorizations for the construction works to be fully developed. Federal Consumer Protection Law, which within its eighth chapter regulates the provision of services, including construction agreements. Construction contracts: In addition to the legal provisions, and as Mexico is ruled by the Pacta Sunt Servanda principle as explained above, the agreement between the parties must rule the contractual relationship provided it does not contain provisions that are contrary to Mexican law and public policy. Federal Law on the Prevention and Operations Identification with Illicit Resources, or more commonly known as the Mexican “Anti-Money Laundry Law”: This is important to comply with due to the nature of the business, that is to say it is important to identify the source of the income that may be used for the construction which must come from a duly justified and legitimate manner.

3.5. Contract Terms Subject 3.5.1. In order for a Contract to existents, and pursuant to article 1794 of the Federal Civil Code, it must have the following existence requirements: (a) Consent; and (b) Subject matter of the Contract, which can be: (i) The good/asset that the obligor must give; and (ii) The thing the obligor must do or not to do.

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3.5.2.

When the subject matter of the contract is a good/asset, it must exist in nature, be determined or determinable as to its kind, and be in commerce. 3.5.3. Future things can be the subject of a contract. However, the inheritance of a living person cannot be the object of a contract, even if the person gives his/ her consent. 3.5.4. A positive or negative fact, which is the object of the contract, must be possible and lawful. 3.5.5. Moreover, a fact that cannot exist is impossible because it is incompatible with a law of nature or with a legal norm that must necessarily govern it, and which constitutes an insurmountable obstacle to its realization. 3.5.6. Additionally, an act that cannot be executed by the obligor but can be executed by another person in his/her place shall not be considered impossible. 3.5.7. It is important to mention that an act that is contrary to the laws of public order or good customs is unlawful, and the purpose or motive determining the will of those contracting must not be contrary to the laws of public order or good customs. 3.5.8. In addition to the above, please take into consideration that all contracts should mention the main scope of the legal relationships it creates. In the construction industry the subject matter is the construction of the works, the terms and conditions for its development as well as the level of service and quality that shall govern the applicable construction project. 3.5.9. Furthermore, it is important to clarify the terms, conditions, and characteristics in which the construction works will be performed. Under Mexican Law and practice, it is standard for an agreement to include exhibits that contain a detail description of each and all of the technical aspects of the construction works, for instance, the quality of the materials, the manner in which such materials should be used and the equipment and labor force necessary for the specific construction, among others. 3.5.10. Finally, please note that in order to avoid controversies in the execution of an Agreement, it is important that the subject of an agreement be duly defined and delimited. Bond 3.5.11.

Most construction contracts implement advance payments and procurement bonds to guarantee compliance with the obligations of either party, usually the contractor. These bonds are commonly obtained by the contractor or constructor and imply a series of administrative steps to obtain same, such as guaranteeing compliance by means of real estate or bank account. 3.5.12. The most used bonds for Construction are the following: (a) Performance Bond: This ensures that the provisions of a construction contract are met in full or in part (as appropriate), guaranteeing the benefi-

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(b)

(c)

ciary that the company providing a service will perform the work as agreed. Advance Deposit: Its function is to guarantee the proper use of the money given to the trust as an antidote to carry out the work established in the work contract. In case of default, the money will be returned partially or totally (depending on the case). Good Quality and/or Hidden Defects Bonds: Through them, the good quality of the construction work is assured, as well as the material and equipment installed. In addition, it guarantees the repair of the damage in case that after the delivery of the work, preventing loss from flaws or hidden defects.

Licenses and Permits. 3.5.13. Each specific Municipality has internal regulations that must be complied with. Please be advised that the following licenses and permits must been obtained for construction to take place: (a) Land use license; (b) Urban feasibility (not all States); (c) Feasibility of water and water services (housing); (d) Construction License; and (e) Approval/authorizations in the field of civil protection for construction. 3.5.14. Once the construction of the occupation authorization is completed, a Completion of Construction shall be issued. 3.5.15. Please be advised that it is important to review the local legislation where the construction will take place, as the license and permits required varies from State to State. 3.5.16. The parties must agree which of them will be responsible for obtaining the licenses and permits in connection with the construction works and who will absorb expenses of the rights thereof. Please note that under Mexican practice, obtaining this type of permits may represent a time-sensitive issue considering that they are proceedings that are very buerocratic, require a significant amount of information and documentation and the corresponding administrative governmental agencies have a significant workload. Insurance 3.5.17. Most contracts contain a clause dealing with insurance, outlining the type of which shall be obtained and its characteristics. 3.5.18. It is customary to include that the contactor or subcontractor shall maintain at all times beginning with the execution of the construction agreement, policies of insurance, written by an insurance company authorized to write insurance in the jurisdiction where the Project is located, with an A.M. Best’s rating

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of A-VII or better, with the following minimum limits and including the following specified coverage requirements: (a) WORKERS. COMPENSATION: Workers’ Compensation coverage for all employees and uninsured employees including occupational disease insurance, meeting all legal requirements of the jurisdiction where the Project is located including Employers Liability insurance, with a waiver of subrogation in favor of the Contractor. (b) COMPREHENSIVE AUTO LIABILITY: Comprehensive Auto Liability covering all Non-Owned and Hired Vehicles. If the works involve hazardous materials, the contractor shall carry appropriate auto and cargo pollution coverage. (c) COMPREHENSIVE GENERAL LIABILITY: Comprehensive General Liability Insurance on an occurrence basis providing coverage (i) Per Project Aggregate, (ii) Products/Completed Operations, and (iii) Personal Injury. 3.5.19. It is commonly established that insurance policies must provide Premises-Operations coverage, Independent Contractors coverage, Contractual Liability coverage, Broad Form Property Damage coverage, and Products & Completed Operations coverage (which shall be maintained for a period after completion of the Project). 3.5.20. In addition, a Certificate of Insurance shall be provided to the Contractor evidencing complete compliance with all of the provisions of this Agreement. Further, Certificates shall be submitted to the Contractor prior to the commencement of any Work on the Project. Labor 3.5.21. Contracts between owners and contractors typically specify there is no employment relationship between the parties and commonly contain indemnities and provisions derived from any labor claims. 3.5.22. The Mexican Federal Labor Law (Ley Federal del Trabajo) (“FLL”) defines an employment relationship as the rendering of a subordinated personal service by one person to another in exchange for the payment of a wage. The main element of any labor relationship is subordination, which the Fourth Chamber of the Supreme Court of Justice of Mexico has defined as the employer’s legal right to control and direct the employee and the employee’s corresponding duty to obey the employer. Once an employment relationship exists, all the rights and obligations under the FLL automatically apply, regardless of how the agreement is characterized by the parties and regardless of the nationality of the employee. Employees may be categorized as follows: Management Employees vs. Union Employees 3.5.23. Pursuant to the FLL, management employees (i.e., those in positions of trust) are those who exercise the functions of management, supervision, inspec 

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tion, and auditing when these functions are of a general nature. These employees are generally known as “white collar employees”. 3.5.24. The main provisions that relate to management employees are that the employer is not required to reinstate them in their jobs in case of dismissal and that they are not entitled to belong to a union. 3.5.25. Union employees are those rendering services to the company under a collective bargaining agreement. These employees are generally known as “blue collar employees”. Permanent vs. Temporary employees 3.5.26. Permanent employees are those rendering services for an indefinite period of time, and temporary employees are those rendering services for a definite period of time, or for a specific task or job. 3.5.27. Any individual employment relationship is subject to the principle of “job stability”. This concept refers to the idea that once an employee enters into an employment agreement, such agreement is subject to the employee’s right to keep his or her job as long as the employment relationship requires. If the employment relationship is for an indefinite term, the employee cannot be laid off without cause. If the relationship is for a specific job or term, the employee may keep his or her job until the specific job or task is completed. 3.5.28. The FLL assumes, as a general principle, that an employment agreement has been executed for an indefinite term, unless the particular type of service to be rendered calls for an employment agreement for a specific job or term. An employment agreement for a specific term may be executed only if the work to be performed so requires or if the employee is hired to temporarily substitute for another employee. 3.5.29. The foregoing may result in an employee hired for a definite period of time and who is later dismissed or not given an extension of the agreement having sufficient arguments to claim wrongful dismissal and therefore, be eligible to receive a constitutional severance package. Employees vs. Contractors/Consultants 3.5.30. As provided in the FLL, employees are those rendering a subordinated personal service in exchange for the payment of a wage. 3.5.31. On the other hand, even though contractors/consultants perform services in exchange for a fee, they are not subordinated to the employer and thus are not considered to be its employees. Contractors/consultants are persons hired via services agreements who offer their services to the public in general, that have their own establishment and their own personnel, and most importantly, their income derives from different sources. 3.5.32. To this regard, it is important to mention that there are cases where contractors/consultants can be deemed as employees regardless of the fact that the

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agreement establishes that it is of a commercial nature and that there is no labor relationship between the parties. Therefore, we recommend entering into services agreements only with persons who meet all the characteristics mentioned in the preceding paragraph. 3.5.33. Employers contemplating operations in Mexico should be aware that labor relations in this jurisdiction are highly regulated and that Mexican employees generally have greater rights than foreign counterparts in other countries. 3.5.34. The following are key issues to be taken into consideration regarding labor law: (a) Termination rights. Unlike some other countries where employment-atwill is the general rule, an employer in Mexico may dismiss an employee without liability only if there is a justified ground for the dismissal. If the employee is laid off without just-cause, then he/she would be entitled to receive a hefty severance package. (b) Temporary employment. An employment agreement for a specific period of time may be made only if the work to be performed so requires or if the employee is hired to temporarily substitute for another employee; however, employment agreements for an indefinite period of time may be subject to a probation or initial training period. (c) Non-Compete Obligations. Non-competition agreements/clauses are, as a general rule, not enforceable in Mexico as the Mexican Constitution provides that no one may be construed from performing any legal activity or to provide any kind of services as long as they are legal. However, according to the most recent criteria sustained by the Supreme Court of Justice, such agreements/clauses may be enforceable as long as they are subject to a determined period of time and territory, and a consideration is paid in exchange. Delivery Dates or Schedules 3.5.35. Construction works usually are measured by phases, each phase must be fulfilled during a certain period of time in order to deliver the Construction Works on time, therefore Construction Contracts usually provide diverse, detailed and specific Schedules for the contractor to comply with, including delivery of certain parts of the works and a final delivery date for the complete work. 3.5.36. Construction Contracts may include certain clauses that determine the consequences of a late delivery of each phase, which goes from a notice within a certain period of time or a reduction in the consideration of the constructor and its sub-constructors. Certain penalties are also applicable for late delivery. 3.5.37. It is important to take into consideration that sometimes the late delivery or breach with certain delivery dates and schedules are out of the hands of the

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parties, for example during a Force Majeure or Acts of God event. In such cases the “rebus sic stantibus” principle applies, that is to say that the provisions established in the contracts take into account the concurrent circumstances at the time of their conclusion, that is to say; any substantial alteration of these circumstances may lead to the modification of those provisions. This Latin principle is included in most of the local and federal laws that rule Construction business (Theory of the Unforeseen Events). That is to say, that if a Force Majeure or Acts of God event occur and delay the fulfillment of the parties’ liabilities, such as the fulfillment with schedules and delivery dates, such as it occurred due the current COVID-19 pandemic and its corresponding lockout, penalties would not be longer applicable. Administration of the Work 3.5.38. Administration of the work is defined as an integrated system of methods applicable to the management of all phases of construction projects, covering the necessary technical procedures from the beginning or conception at the level of ideas and/or plans until their construction and subsequent completion. 3.5.39. It is very common that the owner hires a third party to administrate and supervise the work of the contractor; a situation similar to the supervisory board in corporations. Fit for Purpose 3.5.40. When a construction is planned, a specific purpose is intended to be reached. Even though there are countries with a specific Fit for Purpose regulation, in Mexico it will be directed by the subject matter of the Construction Contract and the Consumer Protection Laws. 3.5.41. As stated above, when the subject matter of the Construction Contract is properly defined, the purpose of the Construction must be complied with. 3.5.42. Some examples of the Fit for Purpose could be the following: (a) For a housing development: to permit the habitability of the individuals in a safe place to live; (b) For an industrial development: to permit the manufacture of the intended products; and (c) For a tourist development: to permit the safe and comfortable visit of the tourists. 3.5.43. All Construction Contracts have a certain purpose, which is to comply with the Works on a timely basis, therefore all provisions in the agreement must fit with such purpose. Late Completion 3.5.44. As described by section 3.4.6, a delay in the Date Delivery and Constructions Schedules may result in Late Completion of the Works.

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3.5.45. It is important to review the reason of the late completion, that is to say if it is due to a miscalculation or negligence of the Constructor or by any unforeseen event in order to determine if there is a penalty or reduction of the consideration to the Constructor and its Subcontractors or if the Construction Agreement must be amended due to the new circumstances. 3.5.46. That is to say, that it is recommended to include certain clauses in the Construction Agreement for a Late Completion, which unfortunately is very common in Mexico. 3.5.47. If the late completion is caused by an unforeseen event, Acts of God and Force Majeure provisions must apply as described in section 3.5.3 above. Force Majeure 3.5.48. Acts of God or Force Majeure must be included in the terms of the Construction Agreement, as it is understood that in one of those events the parties would not be liable for being limited to fulfill their obligations, as Mexican law lacks a complete definition of what is considered as Force Majeure of Acts of God it is suggested to include a clause that define such events. 3.5.49. In Mexico, as a general rule, the parties must comply with the obligations acquired through the agreements they have executed, in accordance with the terms and conditions expressly established therein. That is, in Mexico the general principle of law “pacta sunt servanda” (what has been agreed must be complied with) applies, except in some exceptional circumstances that may exempt the parties from complying with such obligations. 3.5.50. In this order of ideas, as a general principle of law, no one is obligated to the impossible. On the other hand, according to the Federal Civil Code, which supplements the Code of Commerce and other commercial laws, no one is obligated to comply its obligations under Acts of God or force majeure except when it has given cause or contributed to it, when it has expressly accepted that responsibility or when the law imposes it on. 3.5.51. Even though the Mexican civil code does not describe what an Act of God is and even gives it the same treatment as an event of force majeure, both scenarios constitute events beyond the control of the parties producing the same effects insofar as they prevent the fulfillment of obligations and, consequently, cannot be a source of liability (even in cases that can be foreseen, but cannot be avoided). 3.5.52. The absence of a legal distinction between the two concepts gave rise to judicial criteria that differentiate them, giving the concept of an Act of God the meaning of events of nature and those of force majeure as behaviors (facts and/or omissions) of man and authority. 3.5.53. In addition, the parties to an agreement may agree on the consequences arising from Acts of God and force majeure; they are even free to indicate what type of events may be considered as such, which allows for the possi-

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bility of reducing, to some extent, the adverse effects of these types of events. By example, the parties may agree to suspend any obligation(s) or modify it, implement wait periods, among others, or even allow agreement termination without liability for the parties in the event of Acts of God or force majeure. 3.5.54. In general terms, it is common for agreements executed in this country to include one or more clauses that allow for the suspension or termination of the agreement (acts of God and force majeure clauses), which, as mentioned above, are subject to interpretation by the parties. In this sense, it is necessary to review the definition of such terms in each agreement in order to determine their applicability in each case, since in the absence of a legal definition, their scope and effects may be very variable based on the wording of each agreement and consequently the solutions may differ from case to case. Limitation of Liability 3.5.55. Contractual liability occurs when civil liability arises from a fault due to lack of diligence and foresight in the act, which results in a breach of its obligations and generates the obligation to compensate. 3.5.56. Notwithstanding the foregoing, parties may waive to certain compensations due to specific events, such as unforeseen events, being applicable Acts of God or Force Majeure regulations as described above. 3.5.57. In addition, if a delay is caused by the negligent actions of the other party, compensation for such delay may also be waived. 3.5.58. Finally, parties may agree to include limitation of liability clauses, that is to say, if there is a litigation against any of the parties, or if the construction is lost, parties may determine the events where liability will be limited to one party or another. Time Bars 3.5.59. In Mexico, Time Bars can be positive or negative, and we will refer to “prescription” instead of Time Bars. Positive prescription occurs when a person acquires certain goods or assets and negative prescription occurs when you are relived of the fulfillment of an obligation. 3.5.60. Article 1142 of Federal Civil Codes implies that prescription can be waived tacit or explicitly, meaning the the latest one that occurs will abandon the acquired right. 3.5.61. For Construction Contracts, negative prescription will be applicable, giving a 5-year term for the accountability of any action.

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3.6. Private and Public Procurement 3.6.1.

3.6.2.

3.6.3.

3.6.4.

3.6.5.

3.6.6.

Government procurement is subject to the Law of Public Work and Related Services. In regard to the construction of public works, the government hires the constructor by means of a public bid, and such law may provide the budget guidelines, as well as the procedure for a public bid that, as ruled by article 27 which states that the governmental agencies and entities will select from among the procedures indicated below, the one that, according to the nature of the contract, ensures the State the best available conditions in terms of price, quality, financing, opportunity and other pertinent circumstances: (a) Public tender; that can be either national or international; (b) Invitation to at least three people; or (c) Direct award: Dependencies and entities may carry out work by direct administration, provided that they have the technical capacity and the necessary elements for that purpose, consisting of machinery and construction equipment and technical personnel, as the case may be, that are required for the development of the respective works. and they will: (i) Use the required local labor, which invariably must be carried out for a specific work; (ii) Rent the complementary construction equipment and machinery; (iii) Preferably use materials from the region; and (iv) Use the complementary freight and transport services that are required. Public works contracts and the services related to them will be awarded, as a general rule, through public bids, by public call, so that solvent proposals are freely submitted in a sealed envelope, which will be publicly opened. In the contracting procedures, the same requirements and conditions must be established for all participants, and the agencies and entities must provide all interested parties with equal access to information related to said procedures, in order to avoid favoring any participant. The conditions contained in the call to tender, theinvitation to at least three people and in the proposals presented by the bidders may not be negotiated, without prejudice to the fact that the convener may request that the bidders provide clarification or additional information. The public bidding begins with the publication of the call and, in the case of invitation to at least three people, with the delivery of the first invitation. Both procedures conclude with the issuance of the ruling and the signing of the contract or, where appropriate, with the cancellation of the respective procedure. Bidders may only present one proposal in each contracting procedure; once the act of presentation and opening of proposals has begun, those already presented may not be withdrawn or rendered ineffective by the bidders.

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Any person in the capacity of an observer may attend the acts of the public tender procedure and invitation to at least three people, under the condition of registering their attendance and refraining from intervening in any way. The Ministry of Economy, through general rules and considering the opinion of the Ministry of Public Function, will determine the criteria for the application of reservations, transition mechanisms or other assumptions established in the treaties. In the other hand, private bids may establish its own tender procedure, as required by the company in question.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

As stated above there are many laws applicable to the construction industry, such as the Federal Civil Code, the Law of Public Work and Related Services, each Local Civil code, and local regulations such as the Public Works Law of Mexico City, the Public Works Law of Jalisco and its municipalities, the Public Works Law of Nuevo León and its municipalities. Such laws will indicate the binding procedures for public works. In addition to that, local administrative regulations may set certain permits to be obtained for the construction to take place.

4.2. Codes of Practice 4.2.1.

4.2.2. 4.2.3.

4.2.4.

The Ministry of Economy has published a series of Mexican Official Standards regarding mandatory regulations for the construction industry, as well as Mexican Standards for suggestions regarding construction practices. Such Mexican Official Standards are constantly the subject of updates. One example will be the Mexican Standard NMX-C-527-1-ONNCCE-2017. This Mexican Standard establishes the content of an execution plan (structure of the models, deliverables, IT infrastructure, flow diagrams, among others), for the implementation of the digital modeling of information on construction projects. The execution, review of progress, documentation and communication of changes, among others) and the responsibilities of those who participate in its planning, modeling and execution. Other example of a Mexican Standard will be NMX-C-506-ONNCCE-2015 which sets the process that confirms that the building systems have been installed, started correctly and consistently, and are operating in strict accordance with the Project Requirements such as:

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Acoustic; Water (Hydraulic, sanitary and river); Civil architecture and engineering; Automation and control; Air conditioning; Waste; Energy; Lighting; Security; and Transport of technology.

4.3. Licensing of Professionals and Contractors 4.3.1.

As evidenced in the Second Transitory Article the Regulations applicable to Article 5° of the Federal Constitution, which regulates the right of every Mexican citizen to practice a job or a profession, architects and civil engineers must have university degrees to practice and they required to have a “Cedula Profesional” (professional license) to practice in México.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

The construction industry in Mexico uses several types of contracts for construction matters, such as the following: (a) Unitary Prices Construction Contract: Where payments for work are based on recorded quantities of work performed as specific units of work and materials delivered and used by the contractor on the project, each quantity will be multiplied by a price calculated for each specific unit of work. Therefore, significant engineering progress is required for project cost certainty. There are at least two types: (i) Unitary Prices to round numbers – A ratio per unit remains constant, regardless of changes in quantity estimates given; and (ii) Unitary Prices with proportional sliding (scalable) – If the estimated quantities decrease or increase due to a stipulated percentage, then the unit prices are adjusted accordingly. The adjustment can also be made depending on the time when the specific unit of work has been carried out. (b) Lump-Sum Construction Contract: This kind of agreement is regulated by the Federal Civil Code and executed between the owner and the con-

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tractor. The contractor usually carries out the construction works with their own materials and sells it to the owner. The parties must fix the price, and if not the tariffs or the opinion of specialists must apply and will be paid at the end of the works. (c) Services Agreement: This kind of agreement is regulated by the Federal Civil Code and executed between the owner and the contractor. The owner usually provides the contractor with the material and the assets in order to carry out the works. The price will be agreed by the parties. (d) Government Construction Contract: This kind of agreement is regulated by the Law of Public Work and Related Services and is executed between the Government and the Contractor. The Contractor is selected by means of a public bid, with the invitation establishing the type of contract that will be executed with the winning contractor, either a LumpSum Construction Contract or Services Agreement. If after executing one of the agreements aforementioned the parties intended to amend any provision, they may do so provided the new provisions and agreement are reflected in writing. That is to say, one party is not able to modify on its own the terms of an agreement, but rather, it requires the written agreement and consent of both parties.

5.2. Most Commonly Used 5.2.1.

As defined in section 5.1 above, the most commonly used contracts are as follows: (a) Lump-Sum Construction Contracts; and (b) Services Agreements.

5.3. Example 1 – Design and Construct Contract – Lump-Sum Construction Contract 5.3.1.

As stated above, in a Lump Sum Construction Agreement contractor usually carries out the construction works with their own materials and sells it to the owner. The parties must fix the price, and if not, the tariffs or the opinion of specialists must apply and will be paid at the end of the works.

5.4. Example 2 – Services Agreement 5.4.1.

This kind of agreement is regulated by the Federal Civil Code and executed between the owner and the contractor. The owner usually provides the con-

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tractor with the material and the assets in order to carry out the works. The price will be agreed by the parties.

6. Key Issues 6.1. Overview 6.1.1.

It is important to highlight that the Chamber of the Industry of Construction noted that in 2019 the Construction Industry crashed on by 5 %, however at the end of such year it had recovered in by 1–1.5 %. Moreover, due to the Coronavirus pandemic, the construction industry may crash by 10 %, as many of the construction projects were stopped. In June 2020, the construction industry reactivated after the pandemic lockout and nowadays the industry is currently working in a 60 % of its capacity.  

 

 

6.1.2.

 

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

The parties are free to choose the jurisdiction to which must be submitted in case of conflict. However, it is common that the jurisdiction set forth in the contract is the same of the place where the construction works will be conducted, or the domicile of one of the parties. If parties choose to submit to local courts, the competent courts of such municipality will solve the dispute, however the parties may set a jurisdiction abroad or an arbitration. As stated above, Mexican law includes arbitration as an alternative dispute resolution method for commercial and civil matters. Domestic arbitrations are governed by the provisions of the Federal Constitution and the Código de Comercio [Commercial Code] (Mexico), in addition to that, please be advised that there are certain highly prestige local Arbitration Chambers that are commonly used for resolution of controversies, such as the Centro de Arbitrage de México (Arbitration Centre of Mexico) and the National Chamber of Commerce (CANACO for its Spanish acronym) for construction matters the Center of Arbitration of Construction Industry (CAIC for its Spanish acronym) and for international Arbitration the American Arbitration Association (AAA) and the International Chamber of Commerce (ICC) are the most commonly used.

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New Zealand 1. 1.1. 1.2. 1.3. 1.4. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 4.4. 5. 5.1. 5.2. 5.3. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6.

Context 642 Introduction 642 The Country 642 The Legal System 643 The Economy 644 The Construction Industry 645 Size and Nature 645 Participants 645 Work, Health and Safety 646 Protection of the Environment 647 Quality Assurance 649 Construction Contracting Dynamics 650 Legal Underpinnings of Contracts 651 Freedom of Contract 651 Legal Framework 651 Public Policy 652 Statute Law 653 Implied Contract Terms 653 Construction of Contract Terms 654 Private and Public Procurement 656 Government Involvement 657 Introduction 657 Legislation and Regulation 657 Codes of Practice 660 Licensing of Professionals and Contractors Construction Contracts 662 Available Contracts 662 Most Commonly Used 664 Example 1 — NZS 3910 664 Key Issues 668 Overview 668 Fit for Purpose 668 Late Completion 669 Latent Conditions 670 Force Majeure 671 Limitation of Liability 672

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Duration of Exposure 672 Time Bars 673 Dispute Resolution 674

1. Context 1.1. Introduction 1.1.1. 1.1.2.

The purpose of this chapter is to provide an overview of the construction industry in New Zealand from a practical and legal perspective. This chapter sets out the framework of the New Zealand legal and legislative system within which the construction industry operates. In relation to the construction industry in particular, it examines the legislation governing the construction sector, the New Zealand standard form of contract, and the position at law in New Zealand relating to key considerations in construction law.

1.2. The Country 1.2.1. 1.2.2.

1.2.3.

1.2.4.

New Zealand’s culture, history, economy and legal framework all contribute to the context surrounding the construction industry. New Zealand is an island nation situated in the south western Pacific Ocean, some 1,900 km east of Australia. It comprises two main land masses — the North Island and the South Island. New Zealand’s population is approximately 5 million people, over three quarters of whom live in the North Island, with around 1.5 million based in Auckland. Wellington is New Zealand’s capital city, with a population of around 200,000. New Zealand is a sovereign state with a democratically-elected parliament based on the Westminster system of government. New Zealand operates as a unitary state rather than a federal system. Law is derived from and applied by a central government with delegation to 11 regional councils, 61 territorial authorities, and six unitary councils (territorial authorities with regional council responsibility), which make up local government in New Zealand. The realm of New Zealand also includes Tokelau (a non-self-governing territory of New Zealand), the Cook Islands and Niue (self-governing states in free association with New Zealand), and the Ross Dependency (the Antarctic territorial claim of New Zealand).

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1.3. The Legal System 1.3.1.

1.3.2.

1.3.3.

1.3.4.

1.3.5.

As in the United Kingdom, constitutional practice in New Zealand is an accumulation of convention, precedent and tradition and there is no single document that can be termed the New Zealand ‘constitution’. Instead, New Zealand’s constitutional framework is derived from several sources, including legislation and other legal documents, common law and established practice. Increasingly, New Zealand’s constitution reflects the Treaty of Waitangi as a founding document of government in New Zealand.1 The Constitution Act 1986 (NZ) is the principal formal statement of New Zealand’s constitutional arrangements. In particular, it establishes the three branches of government: the executive, the legislature and the judiciary. The Act recognises the reigning British monarch (the Sovereign) as the Head of State of New Zealand, and the Governor-General as her representative.2 The three branches of government all have different roles in New Zealand’s legal system and operate independently of each other (although the functions and membership of the executive and legislature overlap): (a) Parliament (the legislature) comprises the Sovereign (or Governor-General) and the elected House of Representatives. Parliament’s principal function is to enact legislation; (b) The executive branch is made up of the Governor-General, the Executive Council, Ministers (both inside and outside Cabinet), government departments and the public service. The role of the executive is to decide policy, propose laws (which must be approved by the legislature) and administer the law; and (c) The judicial branch of government consists of judges and judicial officers. The judiciary is separate and independent from the other branches of government. The judiciary’s role is to interpret and apply the law through the court system. The New Zealand legal system is derived from two main sources: (a) Statute law, which is made by Parliament (and is therefore supreme); and (b) The common law, which is a body of case law developed by judges over the centuries, and may be amended and developed by the courts to meet changing circumstances. New Zealand has a range of different courts that deal with both civil and criminal justice matters. New Zealand’s courts of general jurisdiction are arranged in a hierarchy. At the top is the Supreme Court. Below it, in descending order,

1 See Treaty of Waitangi Act 1975 (NZ). 2 Constitution Act 1986 (NZ), s 2.

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are the Court of Appeal, the High Court and the District Courts. The general courts are supported by over 100 tribunals, authorities, boards and committees that help resolve legal disputes. There are no specialist construction courts in New Zealand. Construction disputes are treated like any other civil claim. The decisions of a lower court can be tested (appealed) in a higher court. A decision by a higher court is binding on lower courts and decisions of the Supreme Court, as the final court of appeal, are binding on all other courts. The rule of precedent applies, so that cases that are legally similar are generally decided the same way, conforming with decisions of a higher court.

1.4. The Economy 1.4.1.

1.4.2.

New Zealand has a modern and developed free-market economy that is heavily dependent on international trade, with exports accounting for approximately one third of GDP.3 New Zealand’s principal trading partners include Australia, the European Union, the United States, China, South Korea and Japan.4 The agricultural, horticultural, forestry, mining and fishing industries play a fundamentally important role in New Zealand’s economy, particularly in the export sector and in employment.5 Various primary commodities account for around half of all goods exported and New Zealand is one of the top five dairy exporters in the world.6 Complementing primary production are sizeable manufacturing and service sectors and growing high-tech capabilities.7 New Zealand is also a popular overseas visitor destination, and tourism is an important source of export income.

3 See New Zealand Immigration “Economic Overview” . 4 See New Zealand Immigration “Economic Overview” . n 1382. 5 See Treasury NZ “New Zealand: Economic and Financial Overview 2016” . 6 See New Zealand Immigration “Economic Overview” n 1382. 7 See New Zealand Immigration “Economic Overview” . n 1382.

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2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

The construction industry is a major contributor to New Zealand’s economy and GDP. Key factors influencing the New Zealand construction industry have been the rebuild of Christchurch following the February 2011 Canterbury earthquakes, seismic strengthening work across parts of the country, ‘leaky building’ remedial work,8 residential demand arising from a well-publicised housing shortage in the Auckland region, and the development of infrastructure. Major challenges facing the construction industry in New Zealand include the skills shortage to meet these market demands and the relatively small number of large-scale construction contractors. In turn, this has an impact on productivity.

2.2. Participants 2.2.1.

2.2.2.

2.2.3.

The main participants in any construction project are the employer (the term ‘principal’ has been used through this commentary to denote the ‘employer’) and the contractor engaged by the employer to carry out building or construction work. The central government, together with local and regional councils, are the major procurers of construction and infrastructure works in New Zealand. Some of the larger players include the New Zealand Transport Agency (responsible for land transport and state highway systems), the Housing New Zealand Corporation, and various council-controlled organisations responsible for areas such as transport, water and property development in the regions. Under a traditional contractual matrix, an engineer (in the case of the New Zealand standard form of civil works construction contract known as NZS 3910),9 architect or other professional advisor is appointed as the principal’s agent to administer the contract.10 Larger projects include contracts with professional advisors, such as architects and engineers to provide design services, and quantity surveyors to calculate the quantities of work and materials required.

8 See Sections 4.2.10–4.2.12 for further detail. 9 Standards New Zealand, New Zealand Standard: Conditions of Contract for Building and Civil Engineering Construction (NZS 3910:2013) (‘NZS 3910’). 10 See Section 5.3.6 for more on the dual role of the engineer.

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In New Zealand, the industry is characterised by many small- to mediumsized companies with only a handful of large ‘top-tier’ players in operation able to take on a head contracting role in sizeable projects. As a consequence, it is common for contractors to partner with overseas entities with specialist expertise to deliver large-scale projects. On these larger ventures the main contractor often undertakes little building work itself, with the majority performed by specialist subcontractors and suppliers. Other participants who may have a vested interest in the completion of a construction project include the principal’s financiers, sureties and insurers.

2.3. Work, Health and Safety 2.3.1.

2.3.2.

New Zealand’s health and safety system recently underwent a significant overhaul, resulting in the enactment of the Health and Safety at Work Act 2015 (NZ) (‘HSWA’). The HSWA is aimed at providing a balanced framework to secure the health and safety of workers and workplaces. It is largely based on the Australian Model Work Health and Safety Act,11 but with changes to reflect the differences between the New Zealand and Australian working environments. The HSWA applies to nearly all work in New Zealand and its coverage extends to all types of modern businesses and relationships. It prescribes a range of duties that must be met by employers (referred to as persons conducting a business or undertaking (‘PCBUs’))12, workers, officers and other persons at workplaces (e.g. visitors). The HSWA imposes an overarching duty of care (referred to as the ‘primary duty of care’) on a PCBU to ensure, so far as is reasonably practicable, the health and safety of its workers, and that other people are not put at risk by its work.13 The HSWA sets out a number of examples of what the primary duty of care entails, as well as prescribing additional duties which apply to PCBUs in specific situations.14 WorkSafe New Zealand and other designated government agencies operate as health and safety regulators. There are a range of tools available to the regulator to monitor and enforce compliance with the HSWA, ranging from issuing improvement notices (in respect of a breach or likely breach)15 and prohi 

2.3.3.

2.3.4.

11 See Model Work Health and Safety Act 2019 (AU) (Cth), Model Work Health and Safety Regulations and Model Codes of Practice . 12 Health and Safety at Work Act 2015 (NZ), s 17. 13 Health and Safety at Work Act 2015 (NZ), s 36. 14 See sections 37-43 for examples of additional duties of care. 15 See Health and Safety at Work Act 2015 (NZ), s 101.

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bition notices (where a workplace activity is likely to lead to serious risk to health and safety)16 to prosecution for breaches of the HSWA or its regulations. A range of offences and penalties are prescribed by the HSWA and its regulations. The offence and level of penalty is dependent on the type of duty imposed on the offender. The most serious penalties are for failures to comply with health and safety duties of PCBUs, officers, workers and other persons at workplaces. For example, the maximum penalty a PCBU organisation may face (for reckless conduct) is a NZD3 million fine.17 Prison sentences may also be imposed on individuals.18

2.4. Protection of the Environment 2.4.1.

2.4.2.

16 17 18 19 20 21 22 23

The most significant Act of Parliament concerning environmental law in New Zealand is the Resource Management Act 1991 (NZ) (‘RMA’), which seeks to promote the sustainable management of natural and physical resources. There are many other pieces of environmental legislation which may impact on the construction industry, but they are too numerous to list here. The RMA sets out how the environment and environmental effects of activities should be managed. It regulates the ‘use’ of land, which is defined to include altering, demolishing, erecting, extending, placing, reconstructing, removing, or using a structure or part of a structure in, on, under, or over land.19 Accordingly, the provisions of the RMA apply to most construction work and, depending on the zoning of the land in question, require resource consent.20 Furthermore, once construction begins, the person(s) responsible for the construction site may also have ongoing compliance obligations in relation to reasonable noise levels,21 preventing the discharge of contaminants,22 and a general duty to mitigate any adverse effects on the environment.23

See Health and Safety at Work Act 2015 (NZ), s 105. HSWA s 47. HSWA s 47. Resource Management Act 1991 (NZ), s 2. See section 2.4.5. Resource Management Act 1991 (NZ), s 16. RMA s 15. RMA s 17.

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Role of Local Authorities 2.4.3. The RMA places primary day-to-day responsibility for looking after the environment on regional and local councils, who are tasked with developing district and regional plans to manage the environment in their area.24 2.4.4. Regional plans focus on the management of resources such as air, water, land and soil, with the overall aim of preventing their degradation and pollution.25 District plans concern the use and development of land and set out policies and rules that a council uses to manage the use of land in its area.26 For example, a district plan may include regulations concerning the height, appearance, building location, signs, noise, glare and odour associated with subdivision and land use activities.27 2.4.5. Such plans set out whether a resource consent is required for an activity. If the activity is not expressly allowed for under the district plan, a resource consent is required; in the case of a regional plan, it specifies when a resource consent is needed.28 2.4.6. Every application for a resource consent must include an assessment of the environmental effects associated with the activity, amongst other things. Conditions are normally attached to a resource consent, which the relevant council monitors for compliance. Enforcement 2.4.7. A range of enforcement measures are available under the RMA to deter a person from acting in contravention of its provisions, a resource consent, or district or regional plans. For example, council officers may issue excessive noise directions,29 infringement notices for minor infractions of the RMA,30 abatement notices requiring a person to cease acting, or prohibiting the person from commencing an activity which does or could contravene the RMA.31

24 See Ministry for the Environment “About the Resource Management Act” . 25 Resource Management Act 1991 (NZ), s 63. 26 RMA s 72. 27 See Ministry of Business, Innovation and Employment “Resource Consent” . 28 For more information on applying for resource consent, see Ministry for the Environment “Applying for a resource consent” . 29 Resource Management Act 1991 (NZ), s 327. 30 RMA s 343D. 31 RMA ss 322-325B.

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Further, any member of the public can apply to the Environment Court for an enforcement order to get somebody to stop an activity that they consider is adversely affecting the environment.32 There are three levels of offences provided for under the RMA with appropriate penalties, the most serious of which is carrying out an activity in breach of plan rules or resource consents, or for breaching an enforcement order or an abatement notice (excluding a notice applying to unreasonable noise).33 A person committing such an offence may be imprisoned for up to two years, or receive a fine not exceeding NZD300,000 (for a natural person) or NZD600,000 (for any parties other than a natural person), with an additional daily fine of NZD10,000 per day for every day that the offence continues.34

2.5. Quality Assurance 2.5.1.

2.5.2.

2.5.3.

The Building Act 2004 (NZ) (‘Building Act’) is the primary legislation governing the building industry in New Zealand. It sets out the rules for the construction, alteration, demolition and maintenance of new and existing buildings in New Zealand. It aims to improve control, encourage better design and construction and provide greater assurance for consumers. Under the Building Act, all building work in New Zealand must comply with the Building Code (NZ).35 In addition, many projects need a building consent for the work to proceed. The Building Code (NZ) is performance-based and prescribes minimum performance standards that all building work must meet and how a building must perform in its intended use. It also contains functional requirements and performance criteria that cover matters such as fire safety, structural stability, moisture control, durability services and facilities.36 The Building Act outlines the roles and responsibilities of key participants in the construction industry. Territorial, regional, and building consent authorities are responsible for enforcing various aspects of the Act to ensure builders, designers, building owners, etc meet their obligations. Their role includes issuing building consents, inspecting building work for which a building consent has been granted, and issuing code compliance certificates (amongst other responsibilities).37

32 RMA s 316. 33 Resource Management Act 1991 (NZ), s 339. 34 RMA s 339. 35 Building Act s 17. 36 See Ministry of Business, Innovation and Employment “How the Building Code works” . 37 Building Act 2004 (NZ), ss 12–14.

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Control Mechanisms 2.5.4. A code compliance certificate (‘CCC’) is a formal statement issued by a building consent authority under the Building Act certifying that finished building work carried out meets the requirements of the Building Code. It is an offence to use or permit the use of public premises affected by building work without a CCC.38 2.5.5. In certain circumstances, the Council may issue a certificate of acceptance for work done without a building consent, or when a code compliance certificate can’t be issued. Further, a certificate of public use (‘CPU’) may be issued to enable the public to use the premises until a CCC is granted.39 2.5.6. Under the Building Act, an owner is responsible for obtaining any necessary consents, approvals and certificates,40 and a builder bears responsibility for ensuring building work complies with the building code and any applicable building consent.41 However, the Building Act makes it clear that parties have the freedom to redistribute these responsibilities.42 2.5.7. Owners of buildings containing certain safety and essential systems (called ‘specified systems’) require a compliance schedule (usually issued at the same time as their code compliance schedule).43 The compliance schedule lists the building’s specified systems, the performance standards, and the inspection, maintenance and reporting procedures needed to keep them in good order.44 To verify that these responsibilities have been met, a building owner must sign, issue and display an annual building warrant of fitness.45

2.6. Construction Contracting Dynamics 2.6.1.

Traditional contracting models prevail in the marketplace. Typically, a principal will contract directly with a ‘main contractor’ to construct the works in accordance with a specified design. In turn, the main contractor will engage specialist subcontractors. Design and build arrangements, in which the con-

38 See Ministry of Business, Innovation and Employment “Code compliance certificates (CCC)” . 39 Building Act 2004 (NZ), ss 363–363A. 40 Building Act s14B. 41 Building Act s 14E. 42 Building Act s 14A. 43 See Ministry of Business, Innovation and Employment “Buildings with compliance schedules for specified systems” . 44 Building Act 2004 (NZ), s 103. 45 Building Act 2004 (NZ), ss 108–111.

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tractor accepts responsibility for both design and construction, are also commonly used. A tender process is often used by principals (and head contractors) to create a competitive bid environment (particularly for works procured by public agencies). In recent years, a number of large-scale infrastructure projects in New Zealand have been procured as public private partnerships or on the basis of other alliance contracting models. Tenderers for such projects are often local providers in partnership with foreign companies with specialist expertise. Typically, the party that selects the contracting form is the party with the upper hand in negotiations. Often this will be the ‘payer’, ie, in a traditional head contract arrangement, the employer or principal. However, if the contractor is in a strong negotiating position, its form may prevail.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

Under New Zealand law, parties are generally free to agree to the terms of their own bargain so long as that agreement was entered into freely and does not conflict with statutory law or public policy.46 For the most part, New Zealand courts look to preserve the sanctity of contract and hold parties to the bargains that they have reached (particularly between commercial parties with perceived equal bargaining power). However, the courts have stepped in to rectify mistakes in a contract where these are obvious to both parties, and will set aside a contract which has been entered into under duress. In the construction context, the Construction Contracts Act 2002 (NZ) (‘CCA’) and the Building Act contain provisions prohibiting parties from contracting out of certain statutory obligations. These Acts also impose rights and obligations on the parties such as default payment provisions under the CCA, and the implied warranties to protect residential building work contained in the Building Act.

3.2. Legal Framework 3.2.1.

New Zealand’s ‘law of contract’ was largely inherited from English law. In the early colonial period, English precedent was applied in New Zealand with

46 See Sections 3.3–3.4.

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very little alteration and only minor adaptation to suit local conditions. It was only as the twentieth century progressed that the New Zealand government started to intervene in parties’ contractual arrangements by enacting legislation replacing much of the existing common law.47 As a result, the law of contract in New Zealand has been much more influenced by statutory reform than judicial precedent. Despite this, judicial decisions are the main source of law for the law of contract in New Zealand. In simplistic terms, under the common law as it applies in New Zealand, a legally binding contract is formed when an agreement has been reached (ie, an offer has been made which is accepted), the terms of which are sufficiently certain and which the parties intend to have legal effect. Whilst NZ law recognises the common law doctrine of privity of contract, a number of exceptions exist under statute and at common law.48 Of most relevance to the construction sector is how the tort of negligence has evolved in New Zealand, which represents a distinct departure from the approach of other common law countries. As a result of the enactment of a universal no-fault compensation scheme for personal injury (through the Accident Compensation Corporation), the tort of negligence has been largely confined to damage to property and associated economic interests.49 In addition, New Zealand law recognises that builders or engineers owe a duty of care to owners and subsequent purchasers of properties in the performance of their work. Further, liability may extend beyond liability for physical damage to matters of economic loss. Similar duties are imposed on local authorities in respect of their inspection and approvals processes. Whilst initially this duty was confined to the residential context, it has now been extended to include commercial buildings.

3.3. Public Policy 3.3.1.

In appropriate cases the courts will invalidate a contract, or a term of a contract, which contravenes public policy interests or is in breach of the law. The courts’ approach to the interpretation of construction contracts has also been influenced by policy considerations: in particular, the significant problem New Zealand has experienced with leaky buildings.50

47 See Section 3.4. 48 See for example, Contract and Commercial Law Act 2017 (NZ), s 13; and Body Corporate No 207715 v McNish [2015] NZHC 2848 at [17]. 49 See Accident Compensation Act 2001 (NZ). 50 See Section 4.2.10.

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In determining the content of public policy, the courts look to Parliament, previous precedents, and general principles, but generally do not accept evidence adduced by the parties in this regard. Historically, the common law has tended to class as contrary to public policy any contracts that ousted the jurisdiction of the courts or which were in restraint of trade. By its very nature, what constitutes public policy will change and adapt to reflect the development of social mores.

3.4. Statute Law 3.4.1.

3.4.2.

3.4.3.

3.4.4.

During the latter half of the twentieth century, a series of statutes were enacted which reformed and replaced much of the general law of contract. These included the Frustrated Contracts Act 1944 (NZ), the Illegal Contracts Act 1970 (NZ), the Contractual Mistakes Act 1977 (NZ), the Contractual Remedies Act 1979 (NZ) and the Contracts (Privity) Act 1982 (NZ). Other statutes which codified, and in certain cases impinged on, the law of contract included the Contracts Enforcement Act 1956 (NZ), the Minors’ Contracts Act 1969 (NZ) and the Fair Trading Act 1986 (NZ). A common feature of these statutes has been to replace large parts of the common law with (usually) more brief and clearly-stated principles. Under much of this legislation, the courts are given wide-ranging discretionary powers to grant relief where contracts are defective or have broken down in some way, such as in the case of a wrongly repudiated contract or contract entered under undue influence. Most of these statutes were repealed and consolidated by the Contract and Commercial Law Act 2017 (NZ). The purpose of this revision was not to change the effect of earlier laws but to modernise some of the archaic language used and clarify or reconcile inconsistencies. Provisions supporting the courts’ intervention on the basis of illegality have now been incorporated into the Contract and Commercial Law Act 2017 (NZ).51 These include agreements to commit or aid and abet a serious crime, or to commit an act of bribery.

3.5. Implied Contract Terms 3.5.1.

Generally, terms may be implied into a contract by custom, by law (either by statute or common law), or by fact.

51 See Section 70 and following.

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The test for whether a custom can be implied into a contract is laid down in judicial authority. In essence, the courts need to be satisfied that the custom or practice is so prevalent within a particular industry, trade or place as to form the basis of contracts made within that area (unless expressly excluded otherwise).52 There are a number of statutes which provide for terms to be implied into particular types of contract. Some examples of statutorily implied terms in the construction context are given in Section 3.1.1. In many cases, such as in the case of the Construction Contracts Act 2002 (NZ), restriction is placed on parties varying or ‘contracting out’ of terms implied by statute. On occasion, the courts may imply a term into a particular class of contract to give efficacy to that type of contract. For example, a contract to sell land contains an implied term that a reasonable time will be allowed for settlement (where an express settlement date is not included).53 Finally, terms may be implied to remedy an omission in the drafting of a particular contract. Historically, the courts have been reluctant to imply terms in all but the clearest of cases, and parties seeking the implication of contractual terms were required to meet a stringent test laid out in the English case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings, which drew from the ‘business efficacy’ and ‘officious bystander’ tests of earlier authority.54 More recent authority has formulated the approach for whether a term should be implied as being part of the process of considering the implicit meaning of the contract as a whole.55 Whilst thus far this approach has been embraced by the New Zealand courts, it has been applied in light of the familiar criteria set out the BP Refinery (Westernport) Pty Ltd v Shire of Hastings case.56

3.6. Construction of Contract Terms 3.6.1.

Until recently, the New Zealand courts would rarely look beyond the ‘four corners’ of a contractual document to determine the meaning of its express terms. Provided the words of the contract were plain and unambiguous, the courts

52 See Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand, (LexisNexis, 6th edition, 2018) at [6.4.1]. 53 See Barrett v IBC International Ltd [1995] 3 NZLR 170 (CA). 54 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283–6 (Lord Simon of Glaisdale, Viscount Dilhorne, Lord Keith of Kinkel). 55 A-G (Belize) v Belize Telecom Ltd [2009] 1 WLR 1988. 56 At [40].

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would apply the ‘plain meaning’ rule and preclude the admission of extrinsic evidence to find a different meaning.57 However, in recent years the courts have become more willing to accept evidence of surrounding circumstances to aid with the interpretation of a written contract. The approach to determining meaning remains an objective standard; the actual subjective understanding of the contractual parties is irrelevant.58 On this basis, pre-contractual communications have traditionally been regarded as inadmissible for the purposes of contractual interpretation, although more recent developments suggest that such evidence may sometimes be considered (although the law in this area remains unsettled).59 In interpreting contractual terms, the courts are guided by certain common law rules of construction, such as the ‘whole contract’ principle, which involves reading a clause in the context of the whole document, and the rule of contra proferentem, which holds that, where there is any doubt as to the meaning of a term, the term should be construed against the party who proposed or drafted it and who is now relying on it.60 The obligations of contracting parties to act in good faith vis-à-vis one another has not traditionally been regarded as part of the common law of New Zealand. Nevertheless, certain common law rules of contract interpretation, such as the rule which invalidates a penalty provision and the contra proferentem rule, do bear a resemblance to good faith principles.61 Whilst private parties are free to set their own rules of procurement, it should be noted that the courts have held that, in certain circumstances, a tender process may give rise to a preliminary process contract creating a contractual relationship between the parties.62

57 See Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand, (LexisNexis, 6th edition, 2018) at [6.3.1]. A case example of application of the plain meaning rule is Benjamin Developments Ltd v Robt Jones (Pacific) Ltd [1994] 3 NZLR 189 (CA). 58 See Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand, (LexisNexis, 6th edition, 2018) at [6.3.2]. 59 The foundational case for the modern approach to interpretation is Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] (HL) 1 WLR 896 at 912-913. 60 See Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand, (LexisNexis, 6th edition, 2018) at [7.3.1]. 61 See Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand, (LexisNexis, 6th edition, 2018) at [6.4.3]. 62 See for example, Pratt Contractors Ltd v Transit New Zealand [2003] UKPC 83.

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3.7. Private and Public Procurement 3.7.1. 3.7.2.

3.7.3.

3.7.4.

3.7.5.

There is no specific legislative or regulatory framework for procurement of private construction projects in New Zealand. The primary pieces of legislation impacting government procurement in New Zealand are the Public Finance Act 1989 (NZ) and the Crown Entities Act 2004 (NZ). The Public Finance Act 1989 (NZ) sets out a framework for the management, reporting and scrutiny of the use of public financial resources by Ministers and government departments. The Crown Entities Act 2004 (NZ) provides a similar framework for crown entities, boards of trustees and educational institutions. In addition, government agencies are subject to the Government Procurement Rules (NZ) (‘Rules’) which are issued by the Ministry of Business, Innovation and Employment.63 Compliance with the Rules is compulsory for public service departments, the New Zealand Police, New Zealand Defence Force and certain State Services agencies.64 Other agencies in the wider public sector, including local government organisations, are encouraged to apply the Rules as good practice. The Rules capture any contract for the supply of goods or services or refurbishment works where the maximum total estimated value meets or exceeds NZD100,000;65 or for new construction works where the maximum estimated value meets or exceeds NZD9 million.66 The Rules are shaped by the following five principles of procurement: plan and manage for great results; be fair to all suppliers; get the right supplier; get the best deal for everyone; and play by the rules.67 In short, the Rules emphasise procurement planning, procurement decisions based on what offers best public value taking a ‘whole-of-life’ approach and, subject to certain exceptions, requires tenders to be openly advertised. Foreign suppliers cannot be excluded or treated differently to New Zealand suppliers.68

63 Ministry of Business, Innovation and Employment (NZ), Government Procurement Rules (4th ed, 2019). 64 Government Procurement Rules (NZ), Rule 5. 65 Government Procurement Rules (NZ), Rule 6. 66 Government Procurement Rules (NZ), Rule 7. 67 These procurement principles are set out at page 12. 68 Government Procurement Rules (NZ), Rule 3.

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4. Government Involvement 4.1. Introduction 4.1.1.

In New Zealand, both central and local governments have roles in the oversight, regulation and support of the construction industry. This extends from the enactment of legislation, regulations and codes, through to the monitoring of regulatory compliance and licensing of practitioners. These functions are explained in detail below.

4.2. Legislation and Regulation 4.2.1.

As discussed above, key legislation affecting the construction process and industry include the Building Act and Building Code (NZ),69 the Resource Management Act 1994 (NZ)70 and the Health and Safety at Work Act 2015 (NZ).71 Other relevant statutes include the Construction Contract Acts 2002 (NZ) and the Weathertight Homes Resolution Services Act 2016 (NZ).

Construction Contracts Act 2002 (‘CCA’) 4.2.2. The CCA applies to all construction contracts in New Zealand except as specifically provided in the Act. Its purpose is to facilitate regular and timely payments, provide for the speedy resolution of disputes and provide remedies for the recovery of payments.72 4.2.3. It seeks to achieve these aims through the enactment of a mandatory security for payment mechanism and a fast-track adjudication process for the resolution of payment and other contractual disputes.73 The CCA also renders unenforceable all conditional payment and ‘pay-when-paid’ or ‘pay-if-paid’ provisions.74 4.2.4. Under the CCA, failure to respond to a valid payment claim with a valid payment schedule on time (in the absence of a contractually agreed timeframe, the statutory default period applies) renders the payer liable for all amounts specified in the payment claim.75 Such amounts can be recovered by the payee as a debt due or be referred to adjudication for determination.76

69 70 71 72 73 74 75 76

See Section 2.5. See Section 2.4. See Section 2.3. Construction Contracts Act (NZ), s 3. Construction Contracts Act (NZ), s 4. Defined as a “Conditional payment provision” at s 13. Construction Contracts Act (NZ), s 22. Construction Contracts Act (NZ), s 24.

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4.2.6. 4.2.7.

4.2.8.

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77 78 79 80 81 82 83 84 85 86 87

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The adjudicator’s determination is binding (pending the outcome of any other proceedings relating to that dispute) and can be enforced by entry as a judgment of the Court.77 If either party does choose to submit their dispute to another form of resolution whilst an adjudication is still on foot, such as the courts, arbitration or mediation, the adjudication must continue.78 However, if the dispute is determined under another dispute resolution procedure before the adjudicator issues his or her decision, the adjudication must be terminated (given the standard timeframe for an adjudication process, this is an unlikely occurrence).79 Contractors also have rights of suspension under the CCA, provided that the provisions in the CCA relating to non-payment are satisfied.80 ‘Charging orders’ (or liens) may be sought by adjudication claimants against a respondent who is the owner of a construction site unless the premises are residential property constructed for an owner (or beneficiary of a trust) intending to live in the property.81 The charging order is lodged once the adjudication decision is entered as a court judgment.82 In 2015, significant amendments were made to the CCA resulting in a number of changes to construction contracting.83 The distinction between ‘residential’ and ‘commercial’ construction contracts was removed and, as a result, parties to residential construction contracts now have the majority of rights previously only held by parties to commercial contracts. Exceptions include charging orders and the new retention regime introduced as part of the 2015 amendments.84 The 2015 amendments also expanded the scope of the CCA so that the Act now also applies to design, engineering work and quantity surveying carried out in respect of construction work in New Zealand.85 The new retention regime requires a principal to hold all retention money under a commercial construction contract on trust unless there is an alternative instrument (such as a performance bond) in place in respect of that money.86 The withholding party must not appropriate any retention money held on trust to a use other than to remedy defects in the performance of the other party’s contractual obligations.87 This retention regime was brought in to pro-

CCA, s 60. CCA, s 60. CCA, s 26. CCA, s 24A. CCA, s 29. CCA, s 75. Construction Contracts Amendment Act 2015 (NZ). See Section 4.2.9. CCA, s 6(1A). CCA, s 18C. CCA, s 18E.

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vide additional protection to contractors and subcontractors in the face of the party holding retention monies becoming insolvent. Weathertight Homes Resolution Services Act 2016 (NZ) 4.2.10. The Weathertight Homes Resolution Services Act 2006 (NZ) was enacted to provide owners of ‘leaky buildings’ a fast and cost-effective mechanism for the resolution of claims and financial assistance (to qualifying claimants) to facilitate the repair of those buildings.88 4.2.11. By way of background, from the late 1990s it emerged that a significant number of New Zealand (mainly) residential buildings, largely built in the decade from 1994 to 2004, were constructed using methods and materials, including modern cladding systems, which proved to be unsuited to New Zealand’s wet climate. These buildings subsequently suffered from severe weathertightness issues, causing decay to timber framing necessitating extensive remedial work. 4.2.12. The economic ramifications of the ‘leaky building crisis’ have been significant and are ongoing. Many homeowners have been compelled to commence litigation to seek redress against those responsible for the defects, which more often than not involves several parties including builders, designers and local authorities, amongst others. 4.2.13. The Weathertight Homes Resolution Services Act 2006 (NZ) is intended to provide a comprehensive regime for investigating, evaluating and resolving claims in relation to leaky buildings. This included the establishment of the Weathertight Homes Tribunal, which provides for independent mediation and adjudication services as an alternative to the judicial system. Determinations of the Tribunal may be appealed to the High Court or District Court on matters of law.89 Other legislation 4.2.14. The building industry is also subject to various consumer protection statutes in respect of the quality of goods and services provided. The Fair Trading Act 1986 (NZ) protects consumers against misleading and deceptive conduct while in trade,90 and the Consumer Guarantees Act 1993 (NZ) imposes guarantees as to reasonable care and skill when performing services and the fitness for purpose of products supplied.91

88 Weathertight Homes Resolution Services Act 2006, s 3. 89 See Ministry of Justice Introduction to Weathertight Homes Tribunal . 90 Fair Trading Act 1986 (NZ), s 1A. 91 Consumer Guarantees Act 1993 (NZ), s 1A.

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4.3. Codes of Practice 4.3.1.

4.3.2.

4.3.3.

The Building Act (NZ) requires that all building work must meet the performance standards of the Building Code (NZ). Rather than prescribing how a building must be designed and constructed, the Code describes how a building must perform its intended use. It covers aspects such as structural stability, fire safety, access, moisture control, durability, services and facilities, and energy efficiency. Compliance with the building code may be established by an ‘acceptable solution’ or a ‘verification method’, which are publicised methods of construction and testing which when followed are deemed to comply with the Building Code (NZ). In other cases, particularly on more complex projects, reliance is placed on alternative solutions to demonstrate compliance. Many acceptable solutions and verification methods refer to ‘Standards’, created by the organisation Standards New Zealand92 and developed by technical committees, or other publications such as Standards Australia93 and the British Standards Institution.94 These provide practical information and guidelines on building solutions.

4.4. Licensing of Professionals and Contractors 4.4.1.

There are different regulatory and licensing requirements for the various professions commonly engaged in construction projects. Provision for regulations is made through the relevant legislation. Requirements for licencing may be contained in either primary legislation or within regulations and structures that may be established to give effective oversight of areas of professional practice.

Architects 4.4.2. Architects must be registered to practice as such. The register is maintained by the New Zealand Registered Architects’ Board, a statutory body established under the Registered Architects Act 2005 (NZ). To be registered, an architect must satisfy the Board that he or she has met the minimum standards for registration as set by the Board, and that any disciplinary action taken against him or her does not preclude registration.95 Unless registered under the Act, no person may use the terms ‘architect’ or ‘registered architect’.96 92 93 94 95 96

See . See . See . Registered Architects Act 2005 (NZ), s 12. Registered Architects Act 2005 (NZ), s 7.

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Engineers 4.4.3. An engineer may register as a ‘professional engineer’ with Engineering New Zealand. Engineering New Zealand is a self-regulated, membership-based professional body for engineers.97 It is responsible for setting and maintaining standards of professional competence and ethical practice, investigating complaints against registered members, and imposing penalties on its members, including removal from the register or suspension. 4.4.4. Engineering New Zealand also acts in a statutory capacity as a registration authority under the Chartered Professional Engineers of New Zealand Act 2002 (NZ). The purpose of that Act is to create a quality-mark for competent engineers (‘CPEng’) and place their names on a public register.98 Although it appears that any person may use the title ‘engineer’, whether or not that person is registered under the Act, a person commits an offence if they mislead anyone else into believing that person is registered under the Act.99 4.4.5. Certain construction-related work, for example the certification of the integrity of structures under the Building Act, may only be carried out by a chartered professional engineer.100 Licensed Building Practitioners 4.4.6. Under the Building Act, all ‘restricted building work’ (residential building work requiring a building consent that affects its structural integrity or weathertightness) is to be carried out or supervised by a licensed building practitioner (‘LBP’).101 4.4.7. The names of LBPs are listed on a register maintained by the registrar of LBPs, whose job it is to oversee the licensing regime. To become an LPB, the registrar must be satisfied that the applicant meets the applicable minimum standards and is not precluded from being licensed because of any prior disciplinary action.102 LPBs are licensed for the type of work they will carry out; e.g., carpentry is one of nine classes of licence.103 4.4.8. LBPs are also regulated by the Licensed Building Practitioners Board, a statutory body established under the Building Act.104 This Board is charged with hearing appeals against licensing decisions made by the registrar, investigating and hearing complaints about the conduct of LBPs, approving rules about  

97 See . 98 Chartered Professional Engineers of New Zealand Act 2002 (NZ), s 3. 99 Chartered Professional Engineers of New Zealand Act 2002 (NZ), s 7. 100 See Building Act 2004 (NZ), Part 3. 101 Building Act 2004 (NZ), s 84. 102 See . 103 See . 104 See Building Act 2004 (NZ), Subpart 3.

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LBPs, and reporting annually to the Minister for Building and Construction on its activities.105 It is an offence carrying a penalty of up to NZD20,000 for a person other than an LBP to carry out or supervise restricted building work, or to knowingly engage another person who is not an LBP to carry out or supervise restricted building work.106

Quantity Surveyors 4.4.10. Quantity surveyors are no longer regulated by statute in New Zealand but may voluntarily register with the New Zealand Institute of Quantity Surveyors (‘NZIQS’), the industry’s professional body.107 The registration scheme is similar to the licensing and registration processes that the New Zealand government requires of other professional groups. 4.4.11. In addition, plumbers, gas fitters, drain layers and electrical workers must be registered in their profession in accordance with the relevant legislation to be able to work in New Zealand.108

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

As explained in Section 3.1, subject to certain exceptions, parties are free to agree upon the terms of their construction contract. In most instances, parties opt to use a standard form contract as a starting point for negotiations, which may be amended to reflect the specific requirements of a project or the bargaining positions of the respective parties. The use of bespoke contracts is relatively rare. The New Zealand Standard (‘NZS’) suite of contracts are the most widely recognised in New Zealand. Of these, the following are the most commonly used: (a) NZS 3910:2013: Conditions of Contract for Building and Civil Engineering Construction (‘NZS 3910’): This is intended for traditional ‘build only’ procurement;109

105 Building Act 2004 (NZ), s 343. 106 Building Act 2004 (NZ), s 85. 107 See . 108 Relevant legislation is the Plumbers, Gasfitters, and Drainlayers Act 2006 (NZ) and the Electricity (Safety) Regulations 2010 (NZ). 109 Standards New Zealand, New Zealand Standard: Conditions of Contract for Building and Civil Engineering Construction (NZS 3910:2013) (‘NZS 3910’).

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(b)

5.1.3.

5.1.4.

5.1.5.

NZS 3916:2013: Conditions of Contract for Building and Civil Engineering — Design and Construct (‘NZS 3916’): This is similar to NZS 3910 but tailored for a design and build context;110 and (c) NZS 3917:2013: Conditions of Contract for Building and Civil Engineering — Fixed Term (‘NZS 3917’): This can be used where contracts are let for maintenance, or where the contract is intended to run for a fixed amount of time (rather than for a fixed scope of works).111 In addition to NZS, other professional bodies have produced standard-form contracts for use in the New Zealand construction market: (a) The New Zealand Institute of Architects (‘NZIA’) has produced their own suite of standard-form construction contracts, some for use when an architect is administering the contract and others for when an architect has no contractual involvement;112 (b) Engineering New Zealand and the Association of Consulting Engineers New Zealand has developed the Conditions of Contract for Consultancy Services (‘CCCS’) for application to a wide range of consultancy services;113 and (c) The Registered Master Building Federation has produced standard forms of contract for use in residential building as well as a standard form of subcontract.114 In large-scale engineering plant and energy-sector projects, the FIDIC standard forms of contract tend to be preferred over the New Zealand standard conditions, in particular the FIDIC Yellow Book, with particular conditions drafted to reflect local law and the New Zealand construction industry. Other international forms used in New Zealand, albeit rarely, include the New Engineering Contract (‘NEC’) forms.

110 Standards New Zealand, New Zealand Standard: Conditions of Contract for Building and Civil Engineering — Design and Construct (NZS 3916:2013) (‘NZS 3916’). 111 Standards New Zealand, New Zealand Standard: Conditions of Contract for Building and Civil Engineering — Fixed Term (NZS 3917:2013) (‘NZS 3917’). 112 For example, the Standard Construction Contract – NZIA SCC 2018; National Building Contract – General – NBC General 2018; and Agreement for Architects Services 2018. 113 Association of Consulting Engineers New Zealand et al, Conditions of Contract for Consultancy Services (4th ed, 2017). 114 For example, RBC1:2016 (NEW BUILD). For more information, see .

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5.2. Most Commonly Used 5.2.1.

5.2.2.

The NZS 3910 is by far the most widely-used and accepted form of contract in the New Zealand construction industry. This is due to its familiarity, and the perception that it provides a fair balance between the respective rights of the contractor and the principal and is designed to achieve the best allocation of economic risk between the parties. The NZS suite of contracts follow the same broad structure: a ‘contract agreement’ incorporating by reference the documents comprising the contract; the ‘general conditions of contract’; and the ‘special conditions of contract’, which allow the general conditions to be tailored for a particular project.

5.3. Example 1 — NZS 3910 Contractor’s Obligations 5.3.1. A primary obligation of the contractor is to complete the works by the specified due date for completion, free from defects.115 In carrying out the contract works, the contractor is responsible for the adequacy, stability and safety of the site operations and methods of construction and the care of works until completion.116 In the event of any loss or damage to the contract works, the contractor is required to attend urgently to matters with safety or environmental impacts.117 The cost of repair of loss or damage is borne by the contractor, unless it is caused by the principal or others for whom the principal is responsible or by an excepted risk (ie, a risk which is allocated to the principal).118 5.3.2. The contractor is also required to prepare a programme for the works,119 and no payment is due until the programme is provided to the engineer.120 In addition, the contractor may be required to provide a safety plan,121 quality plan122 or traffic management plan.123The contractor also prepares as-built drawings and operation and maintenance manuals.124

115 116 117 118 119 120 121 122 123 124

NZS 3910, cl 5.1.1. NZS 3910, cl 5.1.5. NZS 3910, cl 5.6.5. NZS 3910, cl 5.6.5. NZS 3910, cl 5.10. NZS 3910, cl 5.10.3. NZS 3910, cl 5.17. NZS 3910, cl 5.18. NZS 3910, cl 5.19. NZS 3910, cl 5.20.

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Principal’s Obligations 5.3.3. The principal’s primary obligation is to make payment for work performed by the contractor under the contract. NZS 3910 provides for progress payments to be paid upon the presentation of a payment schedule by the engineer.125 5.3.4. The principal is under a duty to appoint the engineer to the contract (and arrange for his or her replacement if that person becomes unavailable).126 The principal is required to ensure the engineer exercises their dual role appropriately.127 5.3.5. In addition, the principal is obliged to give the contractor possession of the site on the date provided in the contract along with authority to have the reasonable right of entry to the site.128 Unless otherwise agreed, the principal is responsible for obtaining all licences required in relation to the contract works, including building consents, approvals and compliance certificates.129 Engineer’s Powers and Responsibilities 5.3.6. NZS 3910 (and NZS 3916) provide for the contract to be administered by an engineer to the contract. The engineer undertakes two separate roles: as agent for and on behalf of the principal, and as an independent certifier.130 The engineer is generally a senior representative of a consultant firm (usually the project manager) engaged by the principal. Variations 5.3.7. Variations to the scope of works are permitted under NZS 3910 prior to practical completion.131 Variations generally take one of three forms: (i) a change ordered by the engineer within the scope of the contractual variation provision; (ii) instructions by the engineer, which the contractor considers to constitute a variation; and (iii) what are referred to as ‘deemed variations’, which are circumstances described in the contract entitling the contractor to additional time or cost.132 5.3.8. At common law, a principal is prohibited from issuing a variation to omit works from a contractor’s scope of works and allocating it to a third party un-

125 126 127 128 129 130 131 132

NZS 3910, cl 12.2. NZS 3910, cl 38. See Section 5.3.6. NZS 3910, cl 10.1. NZS 3910, cl 5.11. See cl 6.2 in both NZS 3910 and NZS 3916. NZS 3910, cl 9.1. See NZS 3910, Section 9 for the types of Variations available.

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less permitted by clear and express wording. Further, an instruction to vary the works cannot fundamentally change the nature of the work originally contracted for.133 Where possible, variations are to be valued by agreement between the parties. If no agreement can be reached, NZS 3910 provides that the value is to be determined using applicable prices (or rates) included or, where none exist, derived from the Schedule of Prices.134 In the absence of applicable prices or rates, variations are to be valued based on their net cost together with an allowance for overheads and profit.135

Time for Completion 5.3.10. Under NZS 3910, the contract period commences when the contractor takes possession of the site,136 subject to compliance with its stipulated pre-commencement obligations, which include obligations as to insurance,137 the programme,138 a safety plan,139 a quality plan,140 and a traffic management plan.141 NZS 3910 provides for the time for completion of the works to be stated, but recognises that this may change where ‘extensions of time’ are awarded.142 NZS 3910 allows for separable portions that are each subject to a separate completion regime.143 Practical Completion and Final Completion 5.3.11. Under NZS 3910, when the contract works are complete but for minor omissions and defects (referred to as ‘practical completion’), the works are handed over to the principal.144 If the engineer is satisfied that the contract works have achieved practical completion, he or she must issue a certificate to this effect.145 Practical completion is followed by a defects notification period.146

133 See Kennedy-Grant, Tómas and Michael Weatherall, Construction Law (LexisNexis, 2nd ed, 2012) at 11.17(b). 134 NZS 3910, cl 9.3. 135 NZS 3910, cl 9.3.6. 136 NZS 3910, cl 10.1.1. 137 NZS 3910, cl 8. 138 NZS 3910, cl 5.10. 139 NZS 3910, cl 5.17. 140 NZS 3910, cl 5.18. 141 NZS 3910, cl 5.19. 142 NZS 3910, cl 10.2.1. 143 NZS 3910, cl 10.2.2. 144 NZS 3910, cl 10.4.1. 145 NZS 3910, cl 10.4.2. 146 NZS 3910, cl 11.1.

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Practical completion also marks the point in time that any liquidated damages for late completion are applied.147 5.3.12. Notwithstanding that the work may be incomplete, where the principal wishes to take possession and treat practical completion as being achieved, the contract may be varied to treat the outstanding work as separable portions. In this scenario, any liquidated damages that would otherwise be payable are proportionally reduced to reflect the principal’s partial occupation of the contract works.148 5.3.13. Upon the expiry of the defects notification period, if all minor omissions and defects have been remediated, the engineer must issue a final completion certificate for the contract works.149 Extension of Time 5.3.14. Under NZS 3910, the engineer has the power to grant the contractor extensions of time for variations or other qualifying events, including, by way of example, weather sufficiently inclement to interfere with the progress of the works; any strike, lockout, loss or damage to the contract works; flood; volcanic; or seismic events.150 5.3.15. Time for completion can also be extended for the principal’s default, or default of a third party for whom the principal is responsible, to avoid the ‘prevention principle’ taking effect and time being set ‘at large’.151 5.3.16. Under NZS 3910, an extension of time only entitles the contractor to time-related costs if the extension is granted due to the net effect of a variation or a default of the principal.152 5.3.17. Subject to the parties’ agreement, the engineer may direct the contractor to accelerate the works rather than extending the due date for completion (or extend it for a lesser period of time), at the principal’s expense.153 Defects Notification Period 5.3.18. Under NZS 3910, the defects notification period for the contract works commences on the date of practical completion and continues for a default period of three months unless otherwise agreed by the parties.154 During that period the contractor is required to (and has a right to) remedy any defects or da-

147 148 149 150 151 152 153 154

NZS 3910, cl 14.2.5. NZS 3910, cl 10.5.1. NZS 3910, cl 11.3. NZS 3910, cl 10.3. NZS 3910, cl 10.3.1(g). NZS 3910, cl 10.3.7. NZS 3910, cl 10.3.6. NZS 3910, cl 11.1.

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mage to the contract works notified to it by the employer, as well as complete any outstanding minor works.155 5.3.19. If the contractor fails to carry out the work within the time required, the principal may direct another contractor to undertake the work and recover the costs of doing so from the original contractor.156

6. Key Issues 6.1. Overview 6.1.1.

Issues that are frequently addressed in New Zealand construction contracts include the concept of ‘fit for purpose’, late completion, latent conditions, the treatment of force majeure events, limitation of liability, duration of exposure to liability, and the effect of time bars.

6.2. Fit for Purpose 6.2.1.

6.2.2.

A warranty that building works or materials are ‘fit for purpose’ can be incorporated into a contract through express agreement or can otherwise be implied by statute or common law. For the warranty to have effect, the principal must have made known to the contractor or consultant (expressly or impliedly) the purpose for which the construction works or materials are required, and there must be reliance by the principal on the other party’s skill and judgment to meet that purpose.157 Fitness for purpose warranties are most commonly implied where a party has assumed design obligations, or supplied or specified materials, such that the principal relies on that party’s technical expertise.158 Warranties are only implied at common law if it is equitable in the circumstances, necessary to give the contract business efficacy, so obvious that it goes without saying, capable of clear expression, and does not conflict with other contract terms.159 Residential building owners also benefit from implied fitness for purpose war-

155 NZS 3910, cl 11.2.1. 156 NZS 3910, cl 11.2.2. 157 See Janine Stewart and Helena Hallagan “Fitness for purpose – what does it mean?” (March 2015) Auckland District Law Society . 158 See Janine Stewart and Helena Hallagan “Fitness for purpose – what does it mean?” (March 2015) Auckland District Law Society . 159 See BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] 180 CLR 266.

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ranties contained in the Building Act160 and the Consumer Guarantees Act 1993 (NZ)161. By contrast, in a build-only contract, where the contractor’s role is limited to complying with the plans and specifications prepared by the principal or its consultants, an implied fitness for purpose warranty is unlikely. The courts interpret express fitness for purpose warranties with reference to what is reasonable in the circumstances.162 For example, in a construction context this is likely to include performance standards set out in contractual documents such as the principal’s requirements; project specifications; tender documents setting out the project’s objectives; and even industry standards, if the warrantor is under an obligation to comply with such standards. New Zealand’s standard form design and construct contract, NZS 3916, does not contain a fitness for purpose clause.

6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

At common law, the time for completion of a construction contract is as expressly stated or, if no time is stated, a reasonable time.163 In addition, the contract may contain express or implied terms requiring the contractor to commence the works within a certain period. Parties usually agree a mechanism for extending the time for completion due to acts beyond the contractor’s control, including actions (or inactions) of the principal. This is to avoid what is referred to in common law jurisdictions as the ‘prevention principle’ taking effect, and time being set ‘at large’. Time ‘at large’ refers to a situation where an expressly stipulated due date for completion is replaced with an implied obligation to complete within a reasonable time. In such circumstances, the principal cannot recover liquidated damages, since there is no agreed date from which liquidated damages can run. However, an extension of time clause re-fixes the original completion date, thereby preserving the principal’s right to liquidated damages beyond that revised date. At the same time, the contractor is relieved from the liability for liquidated damages.164

160 Sections 362H-362K. 161 Section 8. 162 See Janine Stewart and Helena Hallagan “Fitness for purpose – what does it mean?” (March 2015) Auckland District Law Society . 163 Hick v Raymond & Reid [1893] AC 22 (HL). 164 See Janine Stewart and Amelie Fillion “The prevention principle – pitfalls for principals” (November 2014) Auckland District Law Society .

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6.3.4.

6.3.5.

In the event of the contractor’s late completion, parties commonly agree the principal has the right to seek payment of, or deduct from monies otherwise payable to the contractor, liquidated damages to avoid proving their actual losses in court. Historically, such provisions were generally enforced by the courts if the sum stipulated represented a genuine and reasonable pre-estimate of the employer’s likely losses and did not constitute a penalty. Recent New Zealand case law on penalty provisions indicates that the courts may be less willing to open up such clauses which, while outwardly punitive, protect legitimate commercial interests and were negotiated between commercial parties of equal standing.165

6.4. Latent Conditions 6.4.1.

6.4.2.

6.4.3.

6.4.4.

165 166 167 168

Generally, latent conditions are those that cannot be identified during inspection, or following reasonable investigations, of a construction site. Latent conditions cover not only those things that are not obvious on the surface of the land and the soil itself, but may also include utility services, mine shafts, contamination, and other subsurface features. The NZS forms of contract use the term ‘unforeseen physical conditions’, which are defined as including artificial obstructions but do not include weather conditions.166 The common law position is that, unless expressly stated otherwise, ground condition risk rests with the contractor,167 like any other physical condition or buildability issue. Under NZS 3910, the contractor is entitled to an extension of time and additional cost where site physical conditions could not reasonably have been foreseen by an experienced contractor when tendering.168 Determining whether something was unforeseen by the contractor requires consideration of the actual knowledge of the contractor (and what an experienced contractor would know); what information was publically available at the time of tender; the information provided by the principal, typically in the form of the results of geotechnical investigations; and the results of the contractor’s own pre-tender investigations. Under NZS 3910, the principal warrants that it has made available to the contractor all information that it is aware of concerning the nature of the physical conditions, but makes no warranty as to the sufficiency or accuracy of that

See 127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53. See NZS 3910, cl 10.3.1(a). See Bottoms v York Corporation (1892) HBC (4th ed) Vol 2, pg 208. NZS 3910, cl 9.5.

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information.169 In these circumstances, the contractor must make arrangements to fully inform themselves about the site conditions, something which is likely to be difficult during the tender stage.

6.5. Force Majeure 6.5.1.

6.5.2.

6.5.3.

6.5.4.

New Zealand’s Supreme Court in Planet Kids Ltd v Auckland Council has recently affirmed the common law principle of frustration (which applies to force majeure scenarios),170 citing the classic exposition of the modern doctrine in Davis Contractors Ltd v Fareham Urban District Council: “whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”.171 In such a scenario the courts have the power under the Contracts and Commercial Act 2017 (NZ) to make compensatory orders.172 Where the parties have turned their minds to an event that could give rise to frustration of the contract and they have contractually allowed for it, by a force majeure or other clause, reliance on the common law doctrine of frustration is generally precluded.173 Force majeure clauses are reasonably commonplace in the construction industry in New Zealand. However, unlike in other standard form contracts, ‘force majeure’ is not used as a term of art in NZS 3910. NZS 3910 does however address unforeseen events outside the parties’ control and their consequences.174 Under the extension of time provision in NZS 3910, flood, volcanic or seismic events qualify as grounds for extending the due date for completion.175 Further, ‘excepted risks’, for which the principal bears responsibility, include ‘any such operation of the forces of nature as an experienced contractor could not foresee or reasonably make provision for, or insure against.’176

169 NZS 3910, cl 5.1.6. 170 Planet Kids Ltd v Auckland Council [2014] 1 NZLR 149. 171 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729 (Lord Radcliffe). 172 Contracts and Commercial Act 2017 (NZ), s 95. 173 Nicholas Dennys, Mark Raeside and Robert Clay (eds) Hudson’s Building and Engineering Contracts (14th ed, Sweet & Maxwell, 2010) at 1-081. 174 For example, NZS 3910 provides for Variations to the contract in circumstances outside the parties’ control; see cl 9. 175 NZS 3910, cl 10.3.1. 176 NZS 3910, cl 5.6.6.

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In addition, NZS 3910 provides that if the performance of the contract has become impossible or has otherwise been frustrated, one party may notify the other that it considers the contract to be terminated.177

6.6. Limitation of Liability 6.6.1.

6.6.2.

6.6.3. 6.6.4.

It is common for contracts, particularly standard form contracts, to include clauses excluding or limiting the liability of one of the parties to the contract. Generally, the courts will uphold an exclusion clause if the party seeking to rely on it can demonstrate that:178 (a) the clause is part of the contract (in the absence of a signed contract, this requires proof that steps were taken to bring the exclusion clause to the attention of the party against whom it is sought to be used before he or she entered into it); and (b) that, on a proper construction, the clause applies to the situation which has arisen. However, a party is not allowed to rely on an exclusion or limitation clause to protect it from the consequences of its own fraud. In the case of negligence, clear and unambiguous language must be used to exclude liability.179 Generally, the courts construe an exclusion clause strictly against the party who introduced it and seeks to rely on it (the contra proferentem rule).180 NZS 3910 does not contain a standard limitation of liability clause, although it is reasonably common for parties to agree to the inclusion of a cap on the contractor’s liability, often at a sum not exceeding the agreed contract price.

6.7. Duration of Exposure 6.7.1.

Construction contracts in New Zealand will usually provide for a defects notification period during which the contractor is required to complete any minor outstanding works existing at the time of practical completion and return to the site to remedy any defects or damage to the contract works.181

177 NZS 3910, cl 14.1.1. 178 Rodney Gallen, Jeremy Finn and Christine French Laws of New Zealand Contract (online ed) at [130]. 179 See Kennedy-Grant, Tómas and Michael Weatherall, Construction Law (LexisNexis, 2nd ed, 2012) at 7.2.5. 180 See Kennedy-Grant, Tómas and Michael Weatherall, Construction Law (LexisNexis, 2nd ed, 2012) at 7.3.1. 181 See Sections 5.3.18–5.3.18 regarding the position under NZS 3910.

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6.7.3.

6.7.4.

6.7.5.

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The end of the defects notification period is not to be confused with bringing to an end the contractor’s liability to their client for defects. It is merely the end of the period during which the contractor is contractually obliged to return to the site and make good its defects. Owners have a right to bring proceedings against a contractor for breaches of contract within the relevant statutory limitation period (unless the parties agree to a shorter period). The law on limitation periods in New Zealand is primarily governed by the Limitation Act 1950 (NZ), which applies to any act or omission occurring prior to 1 January 2011,182 and its successor, the Limitation Act 2010 (NZ),183 which applies to any act or omission occurring from 1 January 2011 onwards. To summarise these Acts, contractual or tortious claims must be brought within six years from the date of the act or omission in question.184 The date of accrual will depend upon the applicable Act and cause of action. Under the Limitation Act 2010 (NZ), a defendant may be liable for a longer period of time if the claimant can satisfy the court that they had ‘late knowledge’ of the facts giving rise to the claim.185 In other words, where damage is discovered more than six years after the act or omission in question, the claim can be brought within three years of the date the claimant knew or reasonably ought to have known the relevant facts (subject to a 15-year long stop period).186 In the construction context, these limitation periods are subject to an overarching 10-year long stop period. Under the Building Act, all claims for building work (which includes design work) must be brought within 10 years of the date of the act or omission on which the proceedings are based.187

6.8. Time Bars 6.8.1.

6.8.2.

182 183 184 185 186 187 188

A time bar is a clause or condition stipulated in a contract which limits the time within which certain contractual rights can be enforced. Time bars are often found in clauses relating to latent conditions, extensions of time, progress payments and disputes. The New Zealand appellate courts have consistently applied contractual time bars and condition precedent clauses to commercial parties who have freely entered into them.188

Limitation Act 1950 (NZ), s 2A. Limitation Act 2010 (NZ), s 59. See for example, Limitation Act 1950 (NZ), s 4 and Limitation Act 2010 (NZ), s 11. Limitation Act 2010 (NZ), s 14. Limitation Act 2010 (NZ), s 11. Building Act 2004 (NZ), s 393. Michael Weatherall Laws of New Zealand Building and Construction (online ed) at [240].

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6.8.3.

6.8.4.

NZS 3910 includes notification requirements regarding claims for variations and extensions of time (‘EOT’). Under the variation provisions, the contractor must advise the engineer within one month, or as soon as practicable thereafter, of becoming aware of a matter that it considers involves a variation.189 The EOT provision states that the engineer is not bound to grant an extension to the due date for completion unless notice is given within 20 working days after the circumstances arise, or as soon as practicable thereafter.190 The guidelines to NZS 3910 make it clear that the engineer retains a discretion to grant an EOT notwithstanding late notification.191 Although there is little case law on these provisions, it is generally accepted that non-compliance will not preclude the contractor from making a claim and, instead, the failure to raise that claim promptly will be treated as a breach of contract.

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3.

7.1.4.

189 190 191 192 193

It is common for parties to a construction contract to make provision for a dispute resolution mechanism. For example, NZS 3910 provides for an ‘engineer’s review’ as the first step in the dispute resolution process, followed by mediation or arbitration where either party is dissatisfied with the engineer’s decision.192 Mediation is widely adopted in the construction industry as a method for resolving disputes, often as a precursor to formal litigation or arbitration. The process of mediation is not governed by statute law, although the Evidence Act 2006 (NZ) provides protection for confidential documents and communications made in respect of and during the course of a mediation.193 A settlement agreement reached via mediation will be enforceable if it forms a valid contract. Because it is a confidential process, and one which the parties have more control over (for example, the ability to appoint an arbiter with specialist expertise), arbitration is generally favoured in the construction industry over the courts. It is therefore common for parties to include an arbitration clause in building and construction contracts in New Zealand. Arbitrations are subject to the Arbitration Act 1996 (NZ), which is based on the United Nations Commission on International Trade Law (UNCITRAL) Model

NZS 3910, cl 9.2.3. NZS 3910, cl 10.3.2. NZS 3910, G10.3. NZS 3910, cl 13. Evidence Act 2006 (NZ), s 57.

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Law.194 Subject to narrow grounds set out in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (which largely concern principles of natural justice),195 the courts are bound to enforce an arbitral award as a judgment of the High Court. Domestic arbitral awards may only be appealed on questions of law and New Zealand law does not provide for appeal from an award of a foreign tribunal. However, the court does retain a discretion to refuse to enforce an award if it conflicts with New Zealand’s public policy, though this is rarely invoked. Although not common in New Zealand, dispute resolution boards are sometimes put in place in respect of larger infrastructure or development projects. In addition to a contractually agreed dispute resolution process, parties may have recourse to litigation in the courts (where arbitration is not specifically provided for in a parties’ contract), adjudication under the Construction Contracts Act 2002 (NZ),196 or adjudication or mediation under the Weathertight Homes Resolution Services Act 2006 (NZ).197

194 UNCITRAL Model Law on International Commercial Arbitration 1985 . 195 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959). 196 Construction Contracts Act 2002 (NZ), s 25; See Sections 4.2.2–4.2.8. 197 Construction Contracts Act 2002 (NZ), Subparts 5 and 6; See Sections 4.2.10–0.

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Nigeria 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7.

Context 678 The Country 678 The Legal System 679 The Economy 680 The Construction Industry 684 Size and Nature 684 Participants 686 Work, Health and Safety 689 Protection of the Environment 691 Quality Assurance 692 Construction Contracting Dynamics 694 Legal Underpinnings of Contracts 694 Freedom of Contract 694 Legal Framework 698 Public Policy 701 Statute Law 701 Implied Contract Terms 703 Construction of Contract Terms 704 Private and Public Procurement 704 Government Involvement 707 Legislation and Regulation 707 Codes of Practice 709 Licensing of Professionals and Contractors 709 Construction Contracts 710 Available Contracts 710 Most Commonly Used 711 Example 1: The JCT standard form contract 711 Example 2 – BPE’s standard bidding and contract documents Example 3: FIDIC template contracts 713 Construction Contract Models 714 Key Issues 714 Duration and Project Completion Period 714 Scope of Work 714 Performance Guarantees or Bonds 715 Risk Allocation 715 Payment Provisions 715 Defects Liability Period and Payment of Retention Sum 716 Insurance 717

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6.8. 6.9. 6.10. 6.11. 6.12. 6.13. 7.

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Fit for Purpose 717 Late Completion 718 Force Majeure 718 Limitation of Liability 719 Project Variation 719 Time Bars 720 Dispute Resolution 720

1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

1.1.5.

Nigeria is geographically located in West Africa on the Gulf of Guinea and shares borders with the Republic of Niger and Chad to the north, the Republic of Benin to the west, the Republic of Cameroon to the east and the Atlantic Ocean to the south. It has an estimated population of over 200 million.1 The official language is English and the official currency is the Naira (‘NGN’) and Kobo (‘k’). The capital of Nigeria is the Federal Capital Territory (‘FCT’), Abuja. Nigeria is a federal republic and operates a three-tier structure of government — the federal government, state governments (36 in total) and local governments (774 in total). The 36 States are, as a matter of convenience and political expediency, grouped into six geo-political zones: North-East, North-West, North-Central, South-East, South-West, and South-South. Under the Nigerian political system, the powers of the government are divided among the three branches of government — the executive, legislature and judiciary. The executive powers of the Federation are vested in the President, and these powers may be exercised through the Vice-President, government ministers or public officers/servants. The executive powers of a State are vested in the Governor of the State, and may also be exercised through the Deputy Governor, State commissioners or public officers/servants. The President is elected by popular vote to a maximum of two four-year terms. The State Governors are also elected by popular vote in each State to a maximum of two four-year terms. The Constitution of the Federal Republic of Nigeria 1999 [as amended] (‘Nigerian Constitution’)2 vests federal legislative powers in the National Assem-

1 The World Bank, “Population, total- Nigeria”, https://data.worldbank.org/indicator/SP.POP.TOTL? locations=NG, accessed on 14 September 2020. 2 Law Nigeria, “Constitution of the Federal Republic of Nigeria 1999 (with amendments)”, https:// constitution.lawnigeria.com/2018/03/26/1999-constitution-with-amendments-nigerian-constitutionhub/, accessed on 14 September 2020.

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bly, a bicameral body which consists of the Senate (which has 109 elected Senators) and the House of Representatives (which has 360 elected members), while the legislative powers of the State governments are vested in the respective Houses of Assembly of the States. The judicial power of the federation and states are vested in the federal courts and state courts, respectively.

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

1.2.4.

1.2.5.

The Nigerian legal system is based on English common law. The sources of law in Nigeria include the Nigerian Constitution, which is the apex legislation in Nigeria; the Acts of the National Assembly and the Laws of the various States’ Houses of Assembly; English Law (ie, received English law such as the doctrine of equity, statutes of general application in force as at 1 January 1900, statutes and subsidiary legislation on specified matters, and English statutes made before 1 October 1960 extending to Nigeria that have not yet been repealed); Customary and Islamic Law; and judicial precedent. The Nigerian Constitution establishes the Supreme Court of Nigeria (ie, the apex court in Nigeria), the Court of Appeal, the Federal High Court, FCT High Court, State High Courts, National Industrial Court, FCT Sharia Court of Appeal, FCT Customary Court of Appeal, State Customary Courts of Appeal and State Sharia Courts of Appeal. These are known as the superior courts of record in Nigeria. Whilst there are other courts (such as Magistrate Courts and District Courts), those courts are known as inferior courts of record and are of subordinate jurisdiction to the superior courts. Alternative dispute resolution (‘ADR’) mechanisms are available in the Nigerian legal system. The Arbitration and Conciliation Act (1988) (Nigeria), Chapter A18, Laws of the Federation of Nigeria [‘LFN’], 2004 (‘ACA’) constitutes the legal framework for the settlement of commercial disputes through arbitration and conciliation. For arbitration, parties must agree to submit their dispute to arbitration, and the agreement must be in writing or must be contained in a written document signed by both the parties. The ACA provides that arbitral awards may be recognised and enforced in the courts, subject to certain conditions. The recognition of an arbitral award is not dependent on the country in which it is made, and the award is enforceable by the court, upon a written application. The courts have jurisdiction to enforce foreign arbitral awards delivered outside Nigeria under the Convention on the Recognition and En-

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1.2.6.

1.2.7.

1.2.8.

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forcement of Foreign Arbitral Awards (‘New York Convention’);3 however, enforcement under the New York Convention applies only to arbitral awards made in States that subscribe to the New York Convention with reciprocal legislation that allows the enforcement of arbitral awards made in Nigeria. Not every dispute is arbitrable in Nigeria. Various statutes and case law have established that matters that are not arbitrable include the dissolution of marriage, election petitions, criminal matters and tax-related matters. There are no federal statutes that provide for negotiations or mediations in Nigeria, but parties to a dispute have the autonomy to choose to settle their dispute through these mechanisms. However, some State Houses of Assembly have passed laws on mediation. For example, Lagos State passed the Lagos State Multi-Door Court Law, 2007 (Lagos), pursuant to which the Chief Judge of the Lagos High Court issued the Lagos State Multi-Door Practice Directions on mediation. Lagos also established the Lagos Multi-Door Courthouse (‘LMDC’) an independent, non-profit, alternative dispute resolution centre. The FCT has also established the Abuja Multi-Door Courthouse (‘AMDC’). The courts may refer cases that are suitable for alternative dispute resolution to the LMDC or AMDC, or parties to a dispute may apply to the LMDC or AMDC for mediation services.4

1.3. The Economy 1.3.1.

Nigeria is a key economic power in West Africa. With its large population of more than 200 million people, it accounts for 47 % of West Africa’s population and has a significantly large population of young people — one of the largest in the world. Nigeria is a multi-ethnic and culturally diverse society. It is Africa’s biggest oil exporter and has the largest natural gas reserves on the continent. According to the report by the African Development Bank Group (‘AfDB’) on Nigeria’s economic outlook for 2020,5 Nigeria’s Real GDP growth was estimated at 2.3 % in 2019, marginally higher than 1.9 % in 2018. Growth was mainly in transport, an improved oil sector, and information and communications technology. The agricultural sector suffered from sporadic flooding and conflicts between herdsmen and local farmers, while manufacturing con 

1.3.2.

 

 

3 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959). 4 Lagos State has also passed the Citizens Mediation Centre Law, 2015 (Lagos) and the Mediation Guidelines of the Lagos Court of Arbitration, 2011 (Lagos). 5 African Development Bank Group, “Nigeria Economic Outlook”, https://www.afdb.org/en/count ries-west-africa-nigeria/nigeria-economic-outlook, accessed on 14 September 2020.

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tinues to suffer from a lack of financing. Final household consumption was the key driver of growth in 2019, reinforcing its 1.1 % contribution to real GDP growth in 2018. The effort to lower inflation to the 6 %–9 % range faced structural and macroeconomic constraints, including rising food prices and arrears payments, resulting in a rate estimated at 11.3 % for 2019. The AfDB report also stated that with fiscal revenues below 7 % of GDP, increased public spending widened the deficit, financed mainly by borrowing. At the end of June 2019, total public debt was $83.9 billion—14.6 % higher than the year before. That debt represented 20.1 % of GDP, up from 17.5 % in 2018. Domestic public debt amounted to $56.7 billion, and external public debt $27.2 billion. The share of bilateral debt in total debt was estimated at 12.1 %, and that of eurobonds at 40.8 %. High debt service payments, estimated at more than half of federally collected revenues, created fiscal risks. The report also stated that current account surplus sharply declined due to increased imports, lower oil revenues, and a smaller than expected improvement in capital flows. Poverty remains widespread. The poverty rate in over half of Nigeria’s 36 states is above the national average of 69 %. High poverty reflects rising unemployment, estimated at 23.1 % in 2018, up from 14.2 % in 2016. Low skills limit opportunities for employment in the formal economy. Government social programs and other youth empowerment schemes are meant to address unemployment. In the report, the AfDB projected that Real GDP growth would rise to 2.9 % in 2020 and 3.3 % in 2021. It depends on implementing the Economic Recovery and Growth Plan (2017–20), which emphasizes economic diversification. The Central Bank of Nigeria’s (‘CBN’) recent decree that banks hold loan–deposit ratios of 60 % would help increase lending to the real sector. Simultaneously, the retrenchment of government borrowing and easing of the risks of lending to small business could lower interest rates and unlock bank lending to the private sector. However, the outbreak of the COVID-19 pandemic has forced analysts to revise economic projections for 2020. The report, “Nigeria In Times of COVID19: Laying Foundations for a Strong Recovery” published in the World Bank Nigeria Development Update (NDU) released in June 2020,6 states that Nigeria’s economy would likely contract by 3.2 % in 2020.7  

 

 

 

1.3.3.

 

 

 

 

1.3.4.

1.3.5.

 

 

 

 

1.3.6.

 

 

 

 

1.3.7.

 

6 The World Bank, http://documents1.worldbank.org/curated/en/695491593024516552/pdf/Nigeriain-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf, accessed on 14 September 2020. 7 The World Bank, http://documents1.worldbank.org/curated/en/695491593024516552/pdf/Nigeriain-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf, accessed on 14 September 2020, p. 2.

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The report8 projects that the macroeconomic impact of the COVID-19 pandemic will likely be significant, even if Nigeria manages to contain the spread of the coronavirus. Oil represents more than 80 % of Nigeria’s exports, 30 % of its banking-sector credit, and 50 % of the overall government revenue. With the drop in oil prices, government revenues are expected to fall from an already low 8 % of GDP in 2019 to a projected 5 % in 2020. This comes at a time when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy. Meanwhile, the pandemic has also led to a fall in private investment due to greater uncertainty, and is expected to reduce remittances to Nigerian households, which in recent years have been larger than the combined amount of foreign direct investment and overseas development assistance.9 1.3.9. The World Bank report also estimates that the human cost of COVID-19 could be high. Beyond the loss of life, the COVID-19 shock alone is projected to push about 5 million more Nigerians into poverty in 2020. While before the pandemic, the number of poor Nigerians was expected to increase by about 2 million largely due to population growth, the number would now increase by 7 million – with a poverty rate projected to rise from 40.1 % in 2019 to 42.5 % in 2020.10 1.3.10. The report notes that the pandemic is likely to disproportionately affect the poorest and most vulnerable, in particular women. School closures have reduced the food intake of almost 7 million children who are enrolled in the national school feeding program. Economic activities have been disrupted and women’s livelihoods have been particularly impacted. Over 40 % of Nigerians employed in non-farm enterprises reported a loss of income in April-May 2020. In addition, the fall in remittances is likely to affect household consumption because half of Nigerians live in remittance-receiving households, of which about a third are poor.11 1.3.11. The Nigerian government has already taken important fiscal and monetary measures to mitigate the impact of the COVID-19 pandemic on the economy.12 1.3.8.

 

 

 

 

 

 

 

 

8 A summary is published by The World Bank at https://www.worldbank.org/en/news/press-release/ 2020/06/25/nigerias-economy-faces-worst-recession-in-four-decades-says-new-world-bank-report. 9 The World Bank, http://documents1.worldbank.org/curated/en/695491593024516552/pdf/Nigeriain-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf, p. 1. 10 The World Bank, http://documents1.worldbank.org/curated/en/695491593024516552/pdf/Nigeriain-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf, p. 2. 11 The World Bank, p2 http://documents1.worldbank.org/curated/en/695491593024516552/pdf/ Nigeria-in-Times-of-COVID-19-Laying-Foundations-for-a-Strong-Recovery.pdf, 12 The Central Bank of Nigeria, “CBN Policy Measures in response to COVID-19 Outbreak and Spillovers”, https://www.cbn.gov.ng/Out/2020/FPRD/CBN%20POLICY%20MEASURES%20IN%20RES PONSE%20TO%20COVID-19 %20OUTBREAK%20AND%20SPILLOVERS.pdf, accessed on 14 September 2020.  

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Some of the policies that were introduced by the Federal Governnment are set out below: (a) One-year extension of a moratorium on principal repayments for CBN intervention facilities; (b) The reduction of the interest rate on intervention loans from 9 percent to 5 percent; (c) Strengthening of the loan to deposit ratio policy (i.e. stepped up enforcement of directive to extend more credit to the private sector); (d) Creation of NGN50 billion target credit facility for affected households and small and medium-scale enterprises; (e) Allowing banks to restructure terms of facilities in sectors that were affected by the pandemic; (f) Additional NGN100 billion intervention fund in healthcare loans to pharmaceutical companies and healthcare practitioners intending to expand/build capacity; (g) Identification of few key local pharmaceutical companies that will be granted funding facilities to support the procurement of raw materials and equipment required to boost local drug production; (h) NGN1 trillion in loans to boost local manufacturing and production across critical sectors; (i) The CBN has adopted a unified exchange rate system for Inter-Bank and parallel market rates to ease pressure on FOREX earnings as oil prices continues to plummet; (j) The CBN’s adoption of the official rate of NGN360 to a dollar for International Money Transfer Operators rate to banks; (k) The directive for on-lending facilities financial institutions to engage International development partners and negotiate concessions to ease the pains of the borrowers; (l) Provision of credit assistance for the health industry to meet the potential increase in demand for health services and products “by facilitating borrowing conditions for pharmaceutical companies, hospitals and practitioners”; (m) The crude oil benchmark price was also reduced from US$ 57 to US$ 30; (n) The Central Bank pledged to pump NGN 1.1 trillion (US$ 3 billion) into critical sectors of the economy; (o) Commencement of a three-month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans; and (p) A similar moratorium to be given to all Federal Government funded loans issued by the Bank of Industry, Bank of Agriculture and the Nigeria Export-Import Bank.13  

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2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

Nigeria’s construction industry suffered in 2016 due to an economic recession. The recession was as a result of low oil prices, reduced oil production, high inflation rates,interest rate hikes,increasesinunemployment andcurrencydevaluation. The recession stalled the progress of public and private sector investment in construction projects.14 However, the construction industry rebounded in 2017. This was largely in part to the government’s efforts to accelerate the pace of economic growth through increased investment in infrastructure projects.15 As a result of the recovery in the sector in 2017 and the federal government’s efforts to drive infrastructure development, researchers concluded that the construction industry would grow between 2018 to 2022. It was anticipated that the government’s aim to increase energy production capacity would support investments in energy infrastructure projects, and the industry’s output value in real terms was expected to record a CAGR of 5.45 % over the forecast period.16 It was anticipated that growth in the construction industry would be driven by the federal government’s Economic Recovery and Growth Plan (‘ERGP’) 2017– 2020 which was launched in April 2017, under which the government aims to support economic activity, create employment opportunities and engender economic diversification.17 The objective of the ERGP is to increase investment in roads, rail, broadband coverage, ports, construction and real estate, manufacturing, agriculture, oil & gas, solid minerals, tourism, trade and finance.18  

2.1.3.

13 KPMG, “Government and institution measures in response to COVID-19”, https://home.kpmg/xx/en/ home/insights/2020/04/nigeria-government-and-institution-measures-in-response-to-covid.html, accessed on 14 September 2020. 14 Global Data, “Construction in Nigeria – Key Trends and Opportunities to 2022”, https://store. globaldata.com/report/gd-cn0403mr–construction-in-nigeria-key-trends-and-opportunities-to-2022/, accessed on 14 September 2020. 15 Global Data, “Construction in Nigeria – Key Trends and Opportunities to 2022”, https://store. globaldata.com/report/gd-cn0403mr–construction-in-nigeria-key-trends-and-opportunities-to-2022/, accessed on 14 September 2020. 16 Global Data, “Construction in Nigeria – Key Trends and Opportunities to 2022”, https://store. globaldata.com/report/gd-cn0403mr–construction-in-nigeria-key-trends-and-opportunities-to-2022/, accessed on 14 September 2020. 17 Global Data, “Construction in Nigeria – Key Trends and Opportunities to 2022”, https://store. globaldata.com/report/gd-cn0403mr–construction-in-nigeria-key-trends-and-opportunities-to-2022/, accessed on 14 September 2020. 18 The Nigerian Investment Promotion Commission, “Economic Recovery & Growth Plan 2017–2020”, pp.  52–83 https://nipc.gov.ng/ViewerJS/?#../wp-content/uploads/2019/01/Economic-RecoveryGrowth-Plan-2017-2020.pdf, accessed on 15 September 2020.

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2.1.4.

2.1.5.

2.1.6.

2.1.7.

2.1.8.

2.1.9.

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However, Nigeria still has a massive infrastructure deficit. It has been stated that a total funding of NGN130.8 trillion (U$400.0 billion) is required to develop the country’s overall infrastructure by 2020 under the ERGP. Accordingly, it was the plan of the government to borrow NGN9.8 trillion (US$30.0 billion) between 2017 and 2020 to develop infrastructure projects in the country.19 As the federal government lacks the resources to fund construction and infrastructure development on its own, it has taken steps to increase its cooperation or collaboration with private entities through public-private partnerships (‘PPP’). In furtherance of that objective, the federal government launched the PPP disclosure web portal (https://ppp.icrc.gov.ng/) in September 2017 to open up PPP opportunities to investors, by making them more transparent. This innovation is expected to engender confidence in the PPP model being deployed to critical finance sectors of the Nigerian economy. There has been progress in the federal government’s drive to develop infrastructure in Nigeria (whether solely funded by the government or in collaboration with the private sector). Some key projects under development include the construction of the Ibom Deep Sea Port project, the development of the Lekki Deep Sea port, the planned construction of the second Niger bridge; and rehabilitation of the Lagos-Ibadan expressway.20 The power sector also benefited from the government’s intervention. The federal government completed the concession of the 30MW Gurara hydroelectric dam, and is engaged in the development of the Mambilla power project and the development of hydroelectric power from existing small & medium dams across the country to generate off-grid power.21 The federal government is also exploring alternative financing for the development of transportation infrastructure. Proceeds from the inaugural Sukuk Issuance by the federal government are to be invested in road projects. Various incentives have also been put in place to improve investment. For instance, private companies can recoup their investments (that is, financing and construction of road projects) through tax relief. Some states had also been actively involved in infrastructure development in the power sector. For example, Lagos State enacted the Lagos State Electric Power Sector Reform Law, 2018 (Lagos), which provides the legal framework

19 Global Data, “Construction in Nigeria – Key Trends and Opportunities to 2022”, https://store. globaldata.com/report/gd-cn0403mr–construction-in-nigeria-key-trends-and-opportunities-to-2022/, accessed on 15 September 2020. 20 The Infrastructure Concession Regulatory Commission, “Published PPP Projects Pipeline”, https:// www.icrc.gov.ng/projects/ppp-projects-pipeline/, accessed on 15 September 2020. 21 The Infrastructure Concession Regulatory Commission, “Published PPP Projects Pipeline”, https:// www.icrc.gov.ng/projects/ppp-projects-pipeline/, accessed on 15 September 2020.

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for the generation and distribution of up to 3,000 MW of electricity within and outside Lagos. It was expected that this would facilitate investments in the power infrastructure required to give effect to the law. 2.1.10. The residential and non-residential building sector was expected to gain traction between 2018 and 2020 as a result of Nigeria’s gradual emergence from recession. 2.1.11. Unfortunately, Nigeria is now struggling to deal with the effects of the COVID19 pandemic. The World Bank has projected that the collapse in oil prices coupled with the COVID-19 pandemic would plunge the Nigerian economy into a severe economic recession, the worst since the 1980s.22 Further, with the drop in oil prices, government revenues are expected to fall from an already low 8 % of GDP in 2019 to a projected 5 % in 2020. This comes at a time when fiscal resources are urgently needed to contain the COVID-19 outbreak and stimulate the economy. Meanwhile, the pandemic has also led to a fall in private investment due to greater uncertainty, and is expected to reduce remittances to Nigerian households, which in recent years have been larger than the combined amount of foreign direct investment and overseas development assistance.23  

 

2.2. Participants 2.2.1.

Whilst there may be many participants in construction and other infrastructure projects in Nigeria, the principal participants include: project owners (or employers), consultants, contractors, project managers, financiers or lenders, and host communities.

Project Owners 2.2.2. The project owner conceptualises the construction or infrastructure project and may commence the construction or development process by commissioning a contractor to oversee and deliver the project. The project owner or employer may be an individual, a corporate organisation or other entity, or a government or public entity. They work with the financiers or lenders to provide the funds required for the project. 2.2.3. Generally, the project owner has title or some other proprietary interest over the land on which the construction project is to be executed, and is required

22 The World Bank, “Nigeria’s Economy Faces Worst Recession in Four Decades”, https://www. worldbank.org/en/news/press-release/2020/06/25/nigerias-economy-faces-worst-recession-in-fourdecades-says-new-world-bank-report, accessed on 15 September 2020. 23 The World Bank, “Nigeria’s Economy Faces Worst Recession in Four Decades”, https://www. worldbank.org/en/news/press-release/2020/06/25/nigerias-economy-faces-worst-recession-in-fourdecades-says-new-world-bank-report, accessed on 15 September 2020.

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2.2.4.

2.2.5.

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to obtain permits, licences and other authorisations related to their title on the project land. In some projects, the project owner is also the financier of the project and comes up with the design for the project. However, in other cases, the project owner may be a consortium that consists of the party with title over the land and an investor who has agreed to finance the project on the basis of a contract executed between both parties. During the design and construction phases of the project, the project owner directly or indirectly monitors the progress of the project, including any significant variations to the construction project. In many projects, upon completion of the project, the project owner may alienate the project property or occupy the property and be responsible for its operation and maintenance. The federal and state governments in Nigeria are particularly active project owners, especially as it relates to complex infrastructural developments like roads, rails, bridges and airports. The private sector is also actively involved in construction and other infrastructure development, primarily via the PPP model.

Lenders or Financiers 2.2.6. Lenders or financiers (such as individuals, commercial banks, investment banks and construction lending banks) provide the funds for the projects. Sources of project funds include construction and development loans, mezzanine finance and project finance with a special project vehicle (equity) and syndicated non-recourse loans and limited recourse finance. Contractors 2.2.7. The contractor may be: (i) a Nigerian company that is registered to carry out construction works and has the requisite permits or licences; or (ii) a foreign company that has obtained the approval or consent of the Federal Executive Council (‘FEC’) to execute a specified individual construction project without having to incorporate a local entity. 2.2.8. The contractor is required to execute construction projects in accordance with approved building designs, permits and regulations. It may also be the contractor’s duty to obtain building approvals and all other permits relating to the construction project, which are necessary for the successful execution of the project. Subject to the approval of the project owner or employer, the contractor may also be responsible for retaining the services of consultants for the project, such as architects, engineers, quantity surveyors, etc. Consultants 2.2.9. Consultants (such as architects, engineers and quantity surveyors) are vital participants in many major construction projects. They are responsible for the

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design stage of the construction process, which is integrated to ensure that the project owner’s concept of the project is realised. 2.2.10. The architect (which may be an individual or a firm of licensed architects) must be licensed by the Architects Registration Council of Nigeria24 and may, subject to the terms of the construction contract between the project owner and the contractor, be commissioned by either the project owner or the contractor. The architect is responsible for preparing the project design and supervises the architectural aspects of the project. 2.2.11. The engineer is also a key participant in construction projects in Nigeria. Engineers must be licensed by the Council for the Regulation of Engineering in Nigeria (‘COREN’)25. Mechanical engineers, structural engineers, electrical engineers and civil engineers may be used in construction projects. 2.2.12. The quantity surveyor is responsible for advising on the cost of a proposed construction project. In some projects, they are appointed on the recommendation of an architect. The quantity surveyor usually assists in cost-related matters such as the preparation of a cost plan, evaluation of contractor’s financial tenders, post-contract cost monitoring, and the valuation of variations to the project cost. Project Manager 2.2.13. In some construction projects, the project owner may commission a project manager to oversee or supervise the project and to ensure that the project is carried out in line with the project owner’s specifications. The project manager is tasked with providing updates to the project owner on the progress of the project, as well as any other information relating to the project. Host Communities 2.2.14. Host communities (ie, the city or town where the proposed project is located) are also an important factor in construction projects. In many cases, they are a source of labour for the construction project. The activities of host communities have an impact on the success or failure of the project. For instance, security concerns arising from the militancy of members of host communities in the Niger Delta region of Nigeria have resulted in the delay of some construction projects in the region.

24 Sections 1 and 2 of the Architects (Registration, Etc.) [1969] Act, Chapter A19, LFN, 2004. 25 Section 6 of the Engineers (Architects (Registration, Etc.) Act [1970], Chapter E11, LFN, 2004.

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2.3. Work, Health and Safety 2.3.1.

2.3.2.

26 27 28 29 30 31 32 33

There are no federal statutes that comprehensively regulate health and safety on construction sites. However, there are a number of sector-specific statutes that contain some health and safety provisions. For instance, the Factories Act (Nigeria) Chapter F1, LFN, 2004 (‘Factories Act’) (and several accompanying regulations issued pursuant to the Act) mandates employers who operate factories to, amongst other things: (a) ensure that the factories are not overcrowded as to cause risk or injury to the health of the persons employed therein;26 (b) provide sufficient and suitable lighting in every part of a factory in which persons are working or passing;27 (c) ensure that all machinery, electrical equipments or appliances intended for use in a factory shall be safe for use by all persons required to use same;28 (d) take all necessary steps to protect factory employees from the inhalation of dust, fumes or other impurities that may be injurious or offensive to employees;29 (e) ensure that employees do not eat or drink in a room where a poisonous or injurious substance that may give rise to dust or fumes is used;30 (f) ensure that employees who undertake any process that may involve excessive exposure to wet or injurious substances wear protective clothing and appliances, such as gloves, goggles, footwear and head coverings;31 and (g) provide suitable goggles or effective screens to protect the eyes of the employees in a factory where electric welding is carried on.32 The Docks (Safety of Labour) Regulations, [L.N. 42 of 1958) (Nigeria), a subsidiary law of the Factories Act, require employers to provide measures to prevent accidents at docks and adequate life-saving appliances or other means of rescue from drowning at docks.33 The safety measures provided for under the Regulations also mandate employers to provide first-aid boxes at

Section 8 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Section 10 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Sections 15, 16, 17, 18 and 19 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Section 45 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Section 46 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Section 47 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Section 48 of the Factories Act (1987) (Nigeria) Chapter F1, LFN, 2004. Rule 7 of the Docks (Safety of Labour) Regulations.

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2.3.3.

2.3.4.

2.3.5.

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every working place34, and a suitable ambulance or boat for the removal of sick people35. The Docks (Sanitary Accommodation) Regulations, [L.N. of 1959) (Nigeria) (which is also a subsidiary legislation of the Factories Act) mandates employers to provide adequate sanitary conveniences36 and proper lighting and ventilation of the sanitary conveniences37. The Nigerian Electricity Regulatory Commission (‘NERC’), which is responsible for regulating the Nigerian Electricity Supply Industry (‘NESI’), issued the Nigerian Electricity Health and Safety Code, 2014 (Nigeria) and the Nigerian Electricity Health and Safety Standards Manual, pursuant to its powers under the Electric Power Sector Reform Act, [2005] (Nigeria). The Code contains detailed provisions on the evaluation of safety programs,38 safety and industry best practices39, workers safety rules,40 accident investigation and reporting41 and risk management.42 Similarly, the Manual has detailed provisions on fire safety, protection, evacuation, first responders and emergency planning in the NESI.43 In addition, some of the regulations issued pursuant to the National Environmental Standards and Regulations Enforcement Agency Act, (Nigeria) [2007] as amended44 (‘NESREA Act’) contain provisions relating to work, health and safety. Some states have also enacted safety laws for the construction sector. For instance, Lagos State — Nigeria’s most populous state and the seat of many construction projects — enacted the Construction Workers Safety Law, 2003 (Lagos), which mandates employers to provide a safe, risk-free working environment for their employees45, as well as insurance cover against illness and injury46.

34 Rule 8 of the Docks (Safety of Labour) Regulations. 35 Rule 10 of the Docks (Safety of Labour) Regulations. 36 Rules 4 and 5 of the Docks (Sanitary Accommodation) Regulations. 37 Rule 6 of the Docks (Sanitary Accommodation) Regulations. 38 Part 1 of the Nigerian Electricity Health and Safety Code, 2014. 39 Part 2 of the Nigerian Electricity Health and Safety Code, 2014. 40 Part 3 of the Nigerian Electricity Health and Safety Code, 2014. 41 Part 4 of the Nigerian Electricity Health and Safety Code, 2014. 42 Part 5 of the Nigerian Electricity Health and Safety Code, 2014. 43 Articles 1(b), 1(c), 1(d) and 1(e) of the Nigerian Electricity Health and Safety Standards Manual. 44 Amended by the National Environmental Standards and Regulations Enforcement Agency (Establishment) (Amendment) Act, 2018. 45 Section 1 of the Construction Workers Safety Law, 2003. 46 Section 3 of the Construction Workers Safety Law, 2003.

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2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

2.4.4.

47 48 49 50 51 52 53

The Environmental Impact Assessment Act, [No. 86 1992] (Nigeria) Chapter E12, LFN, 2004 (‘EIA Act’) and the NESREA Act are key laws regulating the protection of the environment from the adverse effects of large-scale construction. The EIA Act sets out the general principles, procedures and methods to facilitate environmental impact assessments (‘EIA’) of certain public and private projects. The Act requires the completion of an EIA prior to the execution of any large-scale construction project.47 It also mandates the proponents of such projects to make public announcements and calls for comments from stakeholders and interested persons.48 Unless this is done, an EIA Certificate will not be issued by the Environmental Assessment Department of the Federal Ministry of Environment.49 If it is found that the proposed project would not cause any significant adverse environmental effects or that such effect can be mitigated, the Nigerian Environmental Protection Agency (‘the Agency’) may take steps to ensure that any mitigation measures that the Agency considers appropriate are implemented.50 Where, in the opinion of the Agency, the project is likely to cause significant adverse environmental effects that may not be mitigated or public concerns warrant it, the Agency shall refer the project to the Federal Environmental Protection Council for a referral to mediation or a review panel.51 However, where in the opinion of the Agency, the project is likely to cause significant adverse environmental effects that cannot be mitigated, the Agency shall not do anything that would permit the project to be carried out in whole or in part.52 The NESREA Act established the National Environmental Standards and Regulations Enforcement Agency (‘NESREA’). NESREA is a parastatal of the Federal Ministry of Environment and has the mandate to protect and develop the environment and Nigeria’s natural resources in collaboration with relevant stakeholders within and outside Nigeria. The NESREA Act empowers NESREA to enforce compliance (through monitoring and regulatory measures)53 with all environmental laws, guidelines, policies, standards and regulations in Nigeria, and compel compliance with relevant international agreements, proto-

Section 2 of the EIA Act. Section 7 of the EIA Act. Section 8 of the EIA Act. Section 21(1)(a) of the EIA Act. Section 21(1)(b) of the EIA Act. Section 21(1)(c) of the EIA Act. Section 7 of the NESREA Act.

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cols, conventions and treaties relating to the environment, to which Nigeria is a signatory. NESREA is also tasked with making and reviewing regulations or guidelines on air and water quality, effluent limitations, control of harmful substances, and other forms of environmental pollution and sanitation.54 The NESREA Act prohibits the discharge of hazardous substances into the environment without lawful authority.55 Where a party contravenes the Act, they are liable to pay a fine not exceeding NGN 1 million and face an imprisonment term of five years. For a company, there is an additional fine of NGN 50,000 for every day that the offence persists.56 NESREA has made regulations on air quality, noise, land pollution, water pollution and carbon emission, with far-reaching effects on construction activities. The Nigerian Urban and Regional Planning Act, [No. 88 of 1992] (Nigeria) Chapter N138, LFN, 2004 is also applicable to construction projects, as it aims to oversee the deliberate and purposeful planning of the country to prevent overcrowding and poor environmental conditions. For instance, the Act provides that a developer (whether private or government) shall apply for a development permit in such manner as may be prescribed by regulations made pursuant to the section.57 Further, no development shall be commenced by any government or its agencies without obtaining an approval from the relevant development control department.58 The Act also provides that only a registered architect or town planner can prepare a building plan;59 and that an application for a development permit must be rejected if it will be harmful to the environment or represent a nuisance to the community60. The Act also provides that it is an offence to disobey a stop-work order, and the punishment is a fine not exceeding NGN10,000 or, in the case of a company, a fine not exceeding NGN50,000.61

2.5. Quality Assurance 2.5.1.

54 55 56 57 58 59 60 61

It is essential that a high standard of quality be maintained throughout the construction value chain (from production to storage of building materials, transportation of building materials to the construction site, the actual con-

Sections 8 and 20(1) of the NESREA Act. Section 27(1) of the NESREA Act. Section 27(2) of the NESREA Act. Section 30(1) of the Nigerian Urban and Regional Planning Act. Section 30(2) of the Nigerian Urban and Regional Planning Act. Section 30(3) of the Nigerian Urban and Regional Planning Act. Section 31 of the Nigerian Urban and Regional Planning Act. Section 59 of the Nigerian Urban and Regional Planning Act.

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2.5.3.

2.5.4.

2.5.5.

2.5.6.

2.5.7.

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struction, post-construction quality control checks, etc), as this is key to the integrity of any construction project. However, quality assurance has its challenges in Nigeria, such as a lack of uniformity in the laws across states, and bureaucracy in state departments that hinders the obtaining of the approvals. The federal government has set standards for cement and other construction and building materials in Nigeria. This is to ensure that the quality of construction projects is on par with internationally acceptable standards.62 Several bodies or institutions also play a key role as regards ensuring that construction projects in Nigeria are of internationally acceptable standards. One such body is the Quantity Surveyors Registration Board of Nigeria (‘QSRBN’), established under the Quantity Surveyors (Registration, Etc.) Act, Chapter Q1, LFN 2004. The QSRBN regulates the quantity surveying profession and practice in Nigeria. The OSRBN is empowered to: (i) determine what standards of knowledge and skill are to be attained by persons seeking to become registered as quantity surveyors and raising those standards from time to time as circumstances may permit;63 (ii) ensuring that all quantity surveyors employed in the private and public sectors are registered with QSRBN;64 and (iii) regulating and controlling the practice of the quantity surveying profession in all its aspects and ramifications.65 Another body is the Nigerian Institution of Estate Surveyors and Valuers (‘NIESV’). The Institution was officially recognised upon the enactment of the Estate Surveyors and Valuers (Registration Act) Decree No 24 of 1975 (Nigeria). NIESV conducts examinations and training for its members and seeks to set high-quality standards of professional conduct and practice. Also, the Council for the Regulation of Engineering in Nigeria66 (‘COREN’) plays a key role in registration and certification of engineering practitioners. Registration with COREN is mandatory for Nigerians and expatriates seeking to be engineering practitioners in Nigeria. Some agencies of state governments also play a role in quality assurance. For instance, the Lagos State Physical Planning and Development Authority (‘LASPPDA’) is an authority under the Ministry of Lands and Physical Planning. Before the commencement of the construction of a building in Lagos State, it is mandatory to obtain a development permit or approval from the

62 https://www.worldcement.com/africa-middle-east/02062014/son_restricts_32_5_grade_cement_ to_plastering_work_285/. 63 Section 1(b) of the Quantity Surveyors (Registration, Etc.) Act. 64 Section 1(c) of the Quantity Surveyors (Registration, Etc.) Act. 65 Section 1(d) of the Quantity Surveyors (Registration, Etc.) Act. 66 Established by the Engineers (Registration, etc.) Act, 1970 (Nigeria) Chapter E11, LFN 2004 (as amended).

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Lagos State Government. The office in charge of this is the LASPPDA.67 This body also enforces the Lagos State Physical Planning and Development Regulations, 2005 (Lagos).

2.6. Construction Contracting Dynamics 2.6.1. 2.6.2.

2.6.3.

2.6.4.

There is no law in Nigeria that governs the choice or manner of the drafting of construction contracts. Thus, the parties are free to contract as they please. One common construction contracting practice is that of competitive bidding, where the project owner or employer selects a contractor by calling for tenders for the project. The project owner then awards the project to the lowest bidder. Usually, the construction contract would provide that where a bid is selected by the project owner, the contractor must execute and conclude the project for the amount stated in the contractor’s bid. Another construction contracting type is that of a negotiated contract, where the project owner selects a contractor on the basis of their technical and financial capabilities and then negotiates a contract with the contractor. This is common in projects that are privately funded. Another construction contracting practice is that of competitive negotiation, where contractors are pre-qualified on the basis of their technical expertise and bid prices. Thereafter, they are ranked according to their technical qualifications. The bid of the first-ranked contractor is opened. If the project owner is satisfied with the price, the project is awarded to the contractor. If not, they may negotiate a price. If negotiations fail, the project owner opens the bid of the second-ranked contractor and commences negotiations. The process continues until a contractor is selected by the project owner. In some cases, fresh tenders are called if negotiations with the third-ranked contractor fail.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Generally, parties are free to agree to the terms of a contract (their rights and liabilities) if the said terms are not illegal. The courts treat this freedom as sacrosanct and have consistently affirmed the principle that parties shall be bound by the conditions and terms of a contract which they executed volun-

67 Section 4(1) of the Lagos State Urban and Regional Planning and Development Law (No. 9) (Nigeria), 2005.

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tarily. For instance, in the case of Nika Fishing Co. Ltd. v. Lavina Corporation,68 Nigeria’s Supreme Court held that: “It is the law that parties to an agreement retain the commercial freedom to determine their own terms. No other person, not even the court, can determine the terms of contract between parties thereto. The duty of the court is to strictly interpret the terms of the agreement on its clear wordings…Finally, it is not the function of a court of law either to make agreements for the parties or to change their agreement as made.”

3.1.2.

3.1.3.

68 69 70 71 72

However, in appropriate circumstances, the courts will refuse to give effect to contracts that are deemed to be illegal or void, and therefore unenforceable. In several cases, Nigerian courts have held that a contract that violates the express provisions of a statute or that facilitates the commission of a crime is deemed to be illegal, and consequently unenforceable. In the case of West Construction Company Ltd v. Batalha,69 the Supreme Court held that a contract will not be enforced in the following circumstances: (a) Where both parties knew that the performance of the contract necessarily involves the commission of an act which was to their knowledge criminal; (b) Where both parties knew that the contract is intended to be performed in a manner which, to their knowledge is legally objectionable in that sense; (c) Where the purpose of the contract entered by the parties is legally objectionable, and that notwithstanding such knowledge, the parties went ahead with the contract; or (d) Both parties participate in performing the contract in a manner which they know to be legally unacceptable. The decisions of various Nigerian courts provide guidance on the elements of a valid contract. From those precedents, the elements of a valid contract in Nigeria can be summarised as follows: (a) There must be a valid offer. This must be a precise, definite or unequivocal undertaking with the intention that it shall become binding on the party making it immediately when it is accepted by the party to whom the offer has been made.70 Thus, an invitation to tender may not constitute a valid offer since the lowest tender may be rejected without any legal consequences;71 (b) There must be a valid acceptance of the offer. This should be a final and unqualified expression of assent to the terms of the offer;72

(2008) 16 Nigeria Weekly Law Reports (Pt. 1114) 509, at page 543. (2006) Law Pavilion Electronic Law Reports (‘LPELR’)-3478(SC). Achoru v. INEC. (2010) LPELR-3588(CA), p. 43. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 19. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, page 20.

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(c)

3.1.4.

3.1.5.

3.1.6.

3.1.7.

Consideration is thus mandatory for enforceability. Consideration must move from the promisee and it need not be adequate but must have some value in the eyes of the law;73 (d) There must have been a clear intention of the parties to create a legally binding agreement or relations;74 (e) The parties must have the legal capacity to enter into the contract; and75 (f) The contract must not be contrary to public policy.76 In line with the common law doctrine of privity of contract, only parties to an agreement may enforce the agreement or maintain an action there under.77 Where a party has been induced to enter into an otherwise valid contract as a result of fraudulent or negligent misrepresentation by the other party, the innocent party may sue to recover damages or rescind the contract.78 However, rescission may be refused by the courts in the following circumstances: (a) The innocent party has affirmed the contract;79 (b) If there has been a substantial lapse of time between the conclusion of the contract and the institution of the action to set it aside;80 (c) If a third party has acquired rights in the subject-matter of the contract for value and without notice of the misrepresentation; or81 (d) In the case of innocent misrepresentation only, where the contract has been executed.82 Parties will be freed or discharged from their obligations to each other through four major ways; (i) performance, (ii) agreement, (iii) breach, or (iv) frustration.83 There are several remedies available for breach of contract: the most common being the award of damages. The essence of damages in breach of contract cases is based in restitutio in integrum, that is the amount of damages to be paid to the party wronged by the breach is the amount of damages necessary

73 Abba v. Shell Petroleum Development Company of Nigeria Limited (2013) LPELR-20338(SC). 74 West Construction Company Ltd v. Batalha (2006) LPELR-3478(SC). 75 Chief D. S. Yaro v. Arewa Construction Ltd. & Ors. (1998) LPELR-3517(SC). 76 Revenue Mobilization, Allocation & Fiscal Commission v. Units Environmental Sciences Ltd (2010) LPELR-9205(CA). 77 Ebhota & Ors. v. Plateau Investment and Property Development Co. Ltd. (2005) LPELR-988(SC), p. 28. 78 Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 335. 79 Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 335. 80 Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 335. 81 Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 335. 82 Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 335. 83 Ahmed & Ors v. Central Bank of Nigeria (2012) LPELR-9341(SC).

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to put the party wronged and aggrieved in the position he would have been had there been no breach.84 3.1.8. Generally, penalty clauses in contracts are unenforceable on the grounds that they are unfair, unconscionable or contrary to public policy.85 However, if the amount stated in an agreement to be payable by either party in the event of the breach of a contract is deemed to a liquidated damages provision (ie, a fair pre-estimate of the probable damage that the party is likely to suffer in the event of a breach), then the courts may enforce such a clause.86 3.1.9. Some statutes contain provisions that may impact on the right of parties to contract freely as respects contracts (including construction contracts). For instance, the Land Use Act, [1978] (Nigeria) Chapter L5, LFN, 2004 requires parties contracting to assign title to land, to seek and obtain the consent of the governor of the State for such purpose.87 Consequently, parties cannot freely contract to exclude the requirement to obtain the said consent.88 3.1.10. Also, by virtue of s 78 of the Companies and Allied Matters Act, 2020 (‘CAMA’), before a foreign contractor can carry on construction business in Nigeria, it must be incorporated as a separate entity in Nigeria. Until so incorporated, the foreign company shall not carry on business in Nigeria. However, the foreign company may also apply for exemption from incorporation where it (a) was invited to Nigeria by or with the approval of the federal government to execute any specified individual project;89 (b) is in Nigeria for the execution of specific individual loan projects on behalf of a donor country or international organisation;90 (c) is a foreign government-owned company engaged solely in export promotion activities;91 or (d) is an engineering consultant and technical expert engaged in a specialist project under contract with any government or their agencies.92 Any contracts entered into by the foreign company for the execution of projects in Nigeria prior to such incorporation (or the grant of exemptions) is void and incapable of enforcement by a court of law.93 3.1.11. In addition, the Nigerian Insurance Act, [2004] (Nigeria) Chapter I17, LFN, 2004 may also impact on the terms of a construction contract. Under the Act, every public building under construction must be insured against the hazards

84 85 86 87 88 89 90 91 92 93

Stephenson Standard Company Ltd v. Yifa Nigeria Ltd (2012) LPELR-9707(CA), pp. 16–17. Oyeneyin & Anor v. Akinkugbe & Anor (2010) LPELR-2875(SC), pp. 31–32. Koumoulis v. Leventis Motors Limited (1973) LPELR-1710(SC), p. 22. Sections 21 and 22 of the Land Use Act. Sections 21 and 22 of the Land Use Act. Section 80(1)(a) of CAMA. Section 80(1)(b) of CAMA. Section 80(1)(c) of CAMA. Section 80(1)(d) of CAMA. Section 78(2) of CAMA.

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of collapse, earthquake, storm, fire and flood.94 Thus, parties to a construction contract may be required to include insurance-related terms in the construction contract.

3.2. Legal Framework 3.2.1.

3.2.2.

3.2.3.

94 95 96 97

There is no statute in force in Nigeria which specifically governs or regulates construction contracts. Construction contracts in Nigeria are mainly regulated by the general principles of contract, and parties are free to contract as they please provided that the terms of the contract are not illegal and do not violate public policy. However, some states in Nigeria have enacted contract laws which either codify or reform common principles of contract. For instance, Lagos State enacted the Law Reform (Contracts) Law (Nigeria), [2015], Chapter L 81, Laws of Lagos State, 2015 which states in its long title that its objective is to “…reform some aspects of the common law, strengthen common law causes of action and remedies and make provisions for frustration and enforcement of contracts in Lagos State.” However, there are statutes, regulations, guidelines and codes that may be applicable in different respects to construction projects and should be considered whilst drafting a construction contract or executing a construction project in Nigeria. The applicability of the some of these laws may depend on the nature of the project and identity of the parties: (a) Public Procurement Laws: The Public Procurement Act, 2007 establishes the National Council on Public Procurement95 and the Bureau of Public Procurement96 as the regulatory authorities responsible for the monitoring and oversight of public procurement, harmonising of existing government policies and practices by regulating, setting standards and developing the legal framework and professional capacity for public procurement in Nigeria. Some states have also enacted public procurement laws. For instance, Lagos State enacted the Lagos State Public Procurement Agency Law, 2011 (Lagos) Chapter L56, Laws of Lagos State, 2015 to regulate public procurement in the state. The law establishes the Lagos State Public Procurement Agency97 and the Lagos State Public Procurement Governing

Section 64 of the Insurance Act. Section 2 of the Public Procurement Act. Sections 4, 5 and 6 of the Public Procurement Act. Section 1 of the Lagos State Public Procurement Agency Law, 2011.

Nigeria

(b)

(c)

(d)

(e) (f)

(g)

699

Board,98 which are tasked with administering or regulating the procurement process in the state.99 The Land Use Act100: The Act vests all land comprised in the territory of each state in the governor of that state and title in such land cannot be alienated without the consent of the governor.101 Urban and Regional Planning Laws: The Nigerian Urban and Regional Planning Act, [No. 88 of 1992] (Nigeria) Chapter N138, LFN, 2004 mandates the federal government to formulate national regulations for urban and regional planning and development.102 The Act establishes a National Urban and Regional Planning Commission, a State Urban and Regional Planning Board and a Local Planning Authority.103 These bodies exercise development control in their respective jurisdictions and it is expected that any construction project would comply with planning laws. NESREA Act: The NESREA Act established the National Environmental Standards and Regulations Enforcement Agency (‘NESREA’). NESREA is a parastatal of the Federal Ministry of Environment and has the mandate to protect and develop the environment and Nigeria’s natural resources in collaboration with relevant stakeholders within and outside Nigeria. The Environmental Impact Assessment Act: This Act operates to protect the environment. The Companies and Allied Matters Act, 2020: The Act regulates the formation, management and operation of companies in Nigeria. Before a foreign contractor sets up an operation to perform contracts in Nigeria, it is required to be incorporated as a separate legal entity in Nigeria or obtain the requsite exemptions.104 The Infrastructure Concession Regulatory Commission Act, 2005 (Nigeria): This establishes the Infrastructure Concession Regulatory Commission (‘ICRC’) which is charged with facilitating, monitoring and implementing public private partnerships and concession agreements between the government and private entities. There are also other laws that govern or regulate some of the professionals who are usually involved in construction projects in Nigeria. Some of these laws include: (i) Architects (Registration, Etc.) Act, 1969 (Nigeria) Chapter A19, LFN, 2004: The Act establishes the Architects Registration Council of

98 Section 2 of the Lagos State Public Procurement Agency Law, 2011. 99 Sections 3, 14-16 of the Lagos State Public Procurement Agency Law, 2011. 100 [1978] (Nigeria) Chapter L5, LFN, 2004. 101 Section 22(1) of the Land Use Act. 102 Section 2(a) of the Nigerian Urban and Regional Planning Act. 103 Section 3 and 4 of the Nigerian Urban and Regional Planning Act. 104 Section 78 of the Companies and Allied Matters Act, 2020.

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(ii)

(iii)

(iv)

105 106 107 108 109 110 111 112 113

Nigeria (‘ARCON’): ARCON is charged with determining the standards of knowledge and skill that are to be acquired by persons seeking to become members of the architectural profession.105 It is also empowered to secure the establishment and maintenance of a register of persons entitled to practise the profession and the publication from time to time of lists of those persons.106 Builders (Registration, etc.) Act, 1989 (Nigeria) Chapter B13, LFN, 2004: This establishes the Council of Registered Builders of Nigeria. The Council is charged with determining who are builders for the purposes of the Act and determining what standards of knowledge and skill are to be attained by persons seeking to become registered as builders.107 The Council also regulates and controls the practice of the building technology profession.108 Engineers (Registration, etc.) Act, 1970 (Nigeria) Chapter E11, LFN 2004 (as amended)109: The Act establishes the Council for the Regulation of Engineering in Nigeria (‘COREN’). This body is charged with determining the standards of knowledge and skill that are to be acquired by persons seeking to become members of the engineering profession.110 It is also empowered to secure the establishment and maintenance of a register of persons entitled to practise the profession and the publication from time to time of lists of those persons.111 Estate Surveyors and Valuers (Registration, etc.) Act, 1975 (Nigeria) Chapter E13, LFN 2004: This establishes the Estate Surveyors and Valuers Registration Board of Nigeria which is charged with determining what standards of knowledge and skill are to be attained by persons seeking to become registered as estate surveyors and valuers and reviewing such standards from time to time.112 It is also empowered to secure the establishment and maintenance of a register of persons entitled to practise as estate surveyors and valuers and the publication from time to time of lists of those persons.113 The body has the

Section 2(1)(a) of the Architects (Registration, Etc.) Act. Section 2(1)(b) of the Architects (Registration, Etc.) Act. Section 2(a) and (b) of the Builders (Registration, etc.) Act. Section 2(d) of the Builders (Registration, etc.) Act. Amended by the Engineers (Registration, etc.) (Amendment) Act, 2018 (Nigeria). Section 1(1)(b) of the Engineers (Registration, etc.) Act (as amended). Section 1(1)(c) of the Engineers (Registration, etc.) Act (as amended). Section 2(b) of the Estate Surveyors and Valuers (Registration, etc.) Act. Section 2(c) of the Estate Surveyors and Valuers (Registration, etc.) Act.

Nigeria

(i)

701

power to regulate the activities of estate surveyors and valuers in Nigeria.114 Quantity Surveyors (Registration, Etc.) Act, 1986 (Nigeria) Chapter Q1, LFN, 2004: The Act establishes the Quantity Surveyors Registration Board of Nigeria (‘QSRBN’) which regulates and controls quantity surveyors in Nigeria. It collaborates with the Nigerian Institute of Quantity Surveyors (‘NIQS’), relevant federal ministries (including Works, Lands, Housing and Urban Development), and agencies and departments in the construction industry.

3.3. Public Policy 3.3.1.

3.3.2.

Under Nigerian law, some contracts may be deemed to be illegal on grounds of public policy and this stance is based on the principles of English common law. Such contracts may be considered to be so injurious to society and prejudicial to the social and economic interests of Nigeria that they are prohibited and declared illegal.115 Under this principle, a construction contract may be deemed to be contrary to public policy and therefore illegal under the following circumstances: (a) Where the contract has as its object (or contemplates) the commission of a crime, tort or fraud. However, the fact that an illegal act is committed while performing an otherwise lawful agreement will not render the latter unlawful;116 (b) Where the contract is prejudicial to public safety;117 (c) Where the contract is prejudicial to the administration of justice. This is where the contract has the effect of impeding or preventing the course of justice, or of stifling prosecution; or118 (d) Where the contract operates to defraud the state of revenue.119

3.4. Statute Law 3.4.1.

114 115 116 117 118 119

Construction spreads across various industries, including power, health, oil and gas, agriculture and housing. Therefore, construction contracts are regu-

Section 2(d) of the Estate Surveyors and Valuers (Registration, etc.) Act. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 386. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 387. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, pp. 391 to 393. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, pp. 393 to 395. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, pp. 397 to 399.

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lated by the statutory laws relevant to the industry in which the contract operates. Some of the statutes that may need to be considered whilst negotiating a construction contract or executing a construction project in Nigeria include: (a) Architects (Registration, Etc.) Act, 1969 (Nigeria) Chapter A19, LFN 2004; (b) Builders (Registration, etc.) Act, 1989 (Nigeria) Chapter B13, LFN 2004; (c) Companies and Allied Matters Act, 2020; (d) Construction Workers Safety Law, 2003 (Lagos) Chapter C12, Laws of Lagos State, 2015; (e) Harmful Waste (Special Criminal Provisions, etc.) Act, 1988 (Nigeria) Chapter H1, LFN, 2004; (f) Engineers (Registration, etc.) Act, 1970 (Nigeria) Chapter E11, LFN 2004 (as amended);120 (g) Environmental Impact Assessment (EIA) Act, 1992 (Nigeria) Chapter E12, LFN 2004; (h) Estate Surveyors and Valuers (Registration, etc.) Act, 1975 (Nigeria) Chapter E13, LFN 2004; (i) Infrastructure Concession Regulatory Commission (Establishment, Etc.) Act (Nigeria) 2005; (j) Nigerian Insurance Act, 2004 (Nigeria) Chapter I17, LFN, 2004; (k) Nigerian Urban and Regional Planning Act, [No. 88 of 1992] (Nigeria) Chapter N138, LFN, 2004; (l) Lagos State Public Procurement Agency Law, 2011 (Lagos) Chapter L56, Laws of Lagos State, 2015; (m) Law Reform (Contracts) Law (Nigeria), 2015, Chapter L81, Laws of Lagos State, 2015; (n) Limitation Act, 1996 (Nigeria) Chapter 522, Laws of FCT, 2007; (o) National Environmental Standards and Regulations Enforcement Agency Act, (Nigeria) [2007] as amended;121 (p) National Office for Technology Acquisition and Promotion Act, 1979 (Nigeria), Chapter N62, LFN 2004; (q) Nigerian Investment Promotion Commission Act, 1995 (Nigeria) Chapter N117, LFN 2004; (r) The Public Procurement Act, 2007; (s) Quantity Surveyors (Registration, Etc.) Act, 1986 (Nigeria) Chapter Q1, LFN, 2004; and (t) Sale of Goods Act, 1893 (Nigeria).

120 Amended by the Engineers (Registration, etc.) (Amendment) Act, 2018. 121 Amended by the National Environmental Standards and Regulations Enforcement Agency (Establishment) (Amendment) Act, 2018.

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3.5. Implied Contract Terms 3.5.1.

122 123 124 125 126

Certain terms are construed as part of a contract, although not expressly included by parties to the contract. These terms are either implied by virtue of established usage and trade practices, by statute, or by decisions of the courts. (a) Terms implied by custom or trade: A contract is subject to terms that are sanctioned by custom, whether commercial or otherwise, although such terms have not been expressly mentioned in the contract.122 Courts will take notice of any reasonable custom or trade practice that can be proved satisfactorily.123 However, the overriding principle is that although contracts may be subject to trade practices, no evidence of custom or practice can override the terms of a written contract.124 (b) Terms implied by statute: In appropriate circumstances, the courts have gradually accepted and enforced certain terms into contracts even though the said terms were not expressly stipulated in the contract.125 For instance, ss 12–15 of the Sale of Goods Act, 1893 (Nigeria) implies into every contract certain conditions such as the seller’s right to sell, the fitness of the goods for the purpose made known to the seller, the merchantable quality of the goods, etc. Similarly, ss 7(2) and 10 of the Infrastructure Concession Regulatory Commission (Establishment, etc.) Act (Nigeria), 2005 requires contractors to insure a concession project, and vest power in the Infrastructure Concession Regulatory Commission (‘ICRC’) to inspect any land or assets comprised in any concession. Thus, where such terms are not expressly stated in a concession contract, it is likely that the courts will hold those terms as having been implied by statute. (c) Terms implied by decisions of the courts: While the courts are careful not to create a new contract for the parties, the courts may choose to imply terms into a contract, which the court considers to be reasonable and just, to make a contract workable. In Mazin Eng. Ltd v Tower Aluminium,126 the respondent had agreed to supply aluminium roofing sheets to the appellant pursuant to a contract. However, the respondent had informed the appellant that the roofing sheets were not available in Nigeria and would be imported from Belgium. The Supreme Court held that there was an implied term that the obligations of parties would only be enforceable on approval by the Central Bank of the respondent’s application for foreign exchange to purchase the roofing sheets from Belgium.

Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 138. Afrab Chem Ltd v. Owoduenyi (2014) LPELR-23613(CA), pp 28–29. Afrab Chem Ltd v. Owoduenyi (2014) LPELR-23613(CA), pp 28–29. Prof. I.E. Sagay (2000) Nigerian Law of Contract Spectrum Law Publishing, p. 143. (1993) 5 Nigeria Weekly Law Reports (Pt. 295) 526 at 537.

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3.6. Construction of Contract Terms 3.6.1.

3.6.2.

3.6.3.

As with every other contract in Nigeria, construction contracts are construed to give effect to the plain and explicit terms used in the agreement. Nigerian courts have consistently held that where there is a contract governing a transaction between the parties, the court’s primary duty is to interpret that contract to ensure that the wishes of the parties, which are expressed in the contract document, are honoured.127 In interpreting the terms of a contract, the question is not what the parties to the document may have intended to do when they signed the contract, but what is the meaning of the words used in the document. However, where the meaning of the words used in the contract is not clear, the court may then consider the intention behind the words.128 Ultimately, it is not the function of a court of law to make an agreement for parties or to change their agreement as made.129 Parties are therefore bound by the express terms of the contract, and the court confines itself to the plain terms and conditions embodied in the contract agreement.130 Where the contract is made up of several documents, all of the relevant documents are read together.131 The parties are not allowed to read into the contract extraneous terms on which they reached no agreement and which do not form part of the contract.132

3.7. Private and Public Procurement 3.7.1.

3.7.2.

The general rule is that all public procurement or disposition of public assets must be by open competitive bidding. This is the provision of some of the primary statutes on the subject in Nigeria for federal government projects — The Public Procurement Act, 2007 and the Infrastructure Concession Regulatory Commission (Establishment, etc.) Act, 2005 (Nigeria) (‘ICRC Act’). The ICRC Act creates the ICRC which regulates federal government PPPs in Nigeria. Section 4 of the ICRC Act expressly provides that all public projects involving private sector financing, construction, operation and maintenance must be subject to an open competitive bid. The concession contract shall be

127 Nika Fishing Co. Ltd. v. Lavina Corporation (2008) 16 Nigeria Weekly Law Reports (Pt. 1114) 509, p. 543. 128 Adetoun Oladeji (Nigeria) Ltd. v. Nigerian Breweries Plc (2007) LPELR-160 (SC), p. 14. 129 Diamond Bank Ltd. v. Ugochukwu (2007) ALL FWLR (Pt. 384) 290, pp. 304–305. 130 Nika Fishing Co. Ltd. v. Lavina Corporation, supra. 131 CBN v. Igwillo (2007) LPELR-835(SC), p. 40. 132 Ashaka Cement Plc v. Asharatul Mubashshurun Investment Ltd (2016) LPELR-40196(CA).

Nigeria

3.7.3.

3.7.4.

3.7.5.

133 134 135 136 137

705

awarded to the bidder who, having satisfied the pre-qualification criteria, submits the most technically and economically comprehensive bid.133 The ICRC’s functions include taking custody of every concession agreement made under the Act and monitoring compliance with the terms and conditions of such agreement; ensuring efficient execution of any concession agreement or contract entered into by the Government; and ensuring compliance with the provisions of the Act.134 The regulatory practice for PPP projects is that a certificate of ‘No Objection’ from the ICRC is required for a PPP project. The ICRC only issues such a certificate when it is satisfied that the project was competitively and publicly tendered. Thus, the ICRC discourages single vendor and direct procurement. However, single vendor and direct procurement will be adopted if after the advertisement of the project, only one contractor or project proponent applied or submits a bid or proposal.135 The Public Procurement Act also provides that all procurement of goods and works by all procuring entities shall be conducted by open competitive bidding and the winning bid shall be that which is the lowest evaluated responsive bid as regards the work specification and standard.136 However, there are exceptions to open and competitive bidding in ss 40–43 of the Procurement Act as follows: (a) Restricted tendering: If approved by the Bureau of Public Procurement, a procuring entity may, for reasons of ‘economy and efficiency’, engage in restricted tendering on the basis that: (i) the goods, works or services are available only from a limited number of contractors; (ii) the time and cost required to review numerous tenders is disproportionate to the value of the proposed contract; or (iii) the procedure is used as an exception rather than a norm.137 However, even in cases of restricted tendering, s 40(2) of the Procurement Act provides that where it is determined that the goods, works or services are available from a limited number of suppliers or contractors, the procuring entity shall invite tenders from all the suppliers and contractors who can provide the goods, works and services. (b) Selective tendering (request for quotations): Under this method, the procuring entity obtains quotations from at least three unrelated contractors or suppliers and selects the most favourably priced tender. This

Section 4(2) of the ICRC Act. Section 20 of the ICRC Act. Section 5 of the ICRC Act. Section 24 of the Public Procurement Act, 2007. Section 40(1)(a)-(c) of the Public Procurement Act, 2007.

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method is only permitted when the value of the goods, works or services is too small to justify the resources that a full tender process requires.138 (c) Single source (direct) procurement139: This is permitted where, amongst other reasons: (i) the goods, works or services can only be provided by one contractor, and no reasonable alternative exists (e.g., advice of a proprietary nature where a sole firm has the expertise);140 (ii) tendering is impractical due to urgency as a result of unforeseen circumstances, which were not the result of any dilatory conduct on the part of the procuring entity;141 (iii) owing to a catastrophic event, there is an urgent need for the goods, wotrks or services, making it impractical to use other methods of procurement because of the time involved in using those methods;142 or (iv) the purpose of the contract is for research, experiment, study or development and does not involve the production of goods in commercial quantities or the recovery of costs.143 (d) Emergency procurement:144 A procuring entity is empowered to engage in direct contracting of goods, works and services in emergency situations, ie, where: (i) the country is either seriously threatened or confronted with disaster, war insurrection, etc; (ii) the condition or quality of goods, equipment, building, etc, may severely deteriorate unless action is urgently and necessarily taken to maintain them at their actual value or usefulness; or (iii) a public project may be severely delayed for want of an item of only minor value. It is important to note that the ICRC Act and the Procurement Act apply to ministries, departments and agencies of the federal government. However, legislation enacted by some state governments also provide for an open competitive bidding process for PPPs and public procurement. For instance, the Lagos State Public Procurement Agency Law, 2011 (Lagos) provides that the procurement of works, goods and services by procuring entities must be con 

3.7.6.

138 139 140 141 142 143 144

Section 41 of the Public Procurement Act, 2007. Section 42 of the Public Procurement Act, 2007. Section 42(1)(a) of the Public Procurement Act, 2007. Section 42(1)(b) of the Public Procurement Act, 2007. 42(1)(c) of the Public Procurement Act, 2007. Section 42(1)(e) of the Public Procurement Act, 2007. Section 43(1)(a) to (c) of the Public Procurement Act, 2007.

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ducted by open competitive bidding except where provided by the law.145 The law also provides for restricted tendering and emergency procurements as exceptions to the mandatory open bidding process.146 The Lagos State Public Private Partnership Law, 2011 (Lagos) also envisages an open tendering process in respect of PPPs. Thus, bidding for PPPs and public procurements in Nigeria are open and competitive. This is, however, subject to the various exceptions provided for by the relevant legislation.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

4.1.3.

4.1.4.

The government plays an active role in the construction industry in Nigeria, mainly through legislation and regulation. One key role of the government is as respects the issuance of the requisite licences, permits and approvals which are required for construction projects in Nigeria. As was mentioned in section 3.1.9 above above, title to all land in a state is vested in the governor of a state and his consent is required before such title can be alienated.147 Thus, for private projects, it is necessary for the parties to engage with the government for either (i) the allocation of land to the project owner or the project vehicle and issuance of a certificate of occupancy or any other title document; or (ii) the grant of consent to a land sale or lease transaction and issuance or endorsement of such documentation that the project owner requires to secure its interest in the land that has been earmarked for the construction project. However, for public projects, there may be no need for the issuance of title documents since the government is the project owner. However, it may be necessary for the government to assist the contractor to secure access or right of way to the land, or assist with obtaining approvals or permits from local public authorities. The government is also responsible for the issuance of approvals for building and other structural designs, as well as development and other planning permits. As was previously explained in section 2.4.6 above, the Nigerian Urban and Regional Planning Act [No. 88 of 1992] (Nigeria) Chapter N138, LFN,

145 Section 32 of the Lagos State Public Procurement Agency Law, 2011. However, note that provisions relating to open competitive bidding apply only to the procurement of goods and services with a monetary value of over NGN100 million. 146 Sections 59 and 60 of the Lagos State Public Procurement Agency Law, 2011. 147 Section 22 of the Land Use Act, [1978] (Nigeria) Chapter L5, LFN, 2004.

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4.1.5.

4.1.6.

4.1.7. 4.1.8.

148 149 150 151 152 153

2004 vests responsibility for territory planning on the National Urban and Regional Planning Commission, a State Urban and Regional Planning Board and a Local Planning Authority. The National Urban and Regional Planning Commission is tasked with the formulation of national policies for urban and regional planning, the initiation, preparation and implementation of the National Physical Development Plan and regional plans.148 The State Urban and Regional Planning Board is responsible for urban planning policies and masterplans, as well as development control in a state.149 While the Local Planning Authority is responsible for, amongst other things, preparing town, rural, local and subject plans and undertaking development control within its area of jurisdiction.150 These bodies exercise development control in their respective jurisdictions and it is expected that any construction project would comply with planning laws or regulations in force in the relevant jurisdiction. In exercise of the powers conferred on them under the Nigerian Urban and Regional Planning Act (and state and local planning laws)151 the federal, state and local authorities are responsible for granting development or construction permits for all forms of physical development and monitoring these developments to ensure that the developments are fit for human use. In many cases, the governments also grant the requisite approvals for each stage of the project and carry out regular monitoring to ensure that all construction and other developmental projects are carried out in line with the planning or developmental masterplan for the area; and that the construction materials used in projects meet the set standards or specifications. The government is also responsible for the issuance of environmental impact assessment certificates or approvals.152 The government is also involved in the imposition of sanctions on developers and other parties for non-compliance with development guidelines and regulations. For instance, under the Nigerian Urban and Regional Planning Act, [No. 88 of 1992] (Nigeria) Chapter N138, LFN, 2004, the government can sanction a project owner or contractor for failing to disobey a stop-work order.153

Section 2(a) of the Nigerian Urban and Regional Planning Act. Section 3 of the Nigerian Urban and Regional Planning Act. Section 4 of the Nigerian Urban and Regional Planning Act. By virtue of sections 2, 3 and 4 of the Nigerian Urban and Regional Planning Act. Sections 2, 9, 13 and 21 of the Environmental Impact Assessment Act. Section 59 of the Nigerian Urban and Regional Planning Act.

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4.2. Codes of Practice 4.2.1.

The National Building Code, 2018 (Nigeria) sets the minimum standard on matters such as building design, construction, and post-construction, with a view to ensuring quality, safety, and proficiency in the building construction industry.

4.3. Licensing of Professionals and Contractors 4.3.1.

154 155 156 157 158 159

The government has provided the legal framework for the licensing of professionals (who participate in construction projects in Nigeria) by enacting legislation to regulate the registration and oversight of the said professionals. The relevant laws are: (a) Architects (Registration, Etc.) Act, 1969 (Nigeria) Chapter A19, LFN, 2004: The Act establishes the Architects Registration Council of Nigeria (‘ARCON’): ARCON is charged with determining the standards of knowledge and skill that are to be acquired by persons seeking to become members of the architectural profession.154 It is also empowered to secure the establishment and maintenance of a register of persons entitled to practise the profession and the publication from time to time of lists of those persons.155 (b) Builders (Registration, etc.) Act, 1989 (Nigeria) Chapter B13, LFN, 2004: This establishes the Council of Registered Builders of Nigeria. The Council is charged with determining who builders are for the purposes of the Act and determining what standards of knowledge and skill are to be attained by persons seeking to become registered as builders.156 The Council also regulates and controls the practice of the building technology profession.157 (c) Engineers (Registration, etc.) Act, 1970 (Nigeria) Chapter E11, LFN 2004 (as amended)158: The Act establishes the Council for the Regulation of Engineering in Nigeria (‘COREN’). This body is charged with determining the standards of knowledge and skill that are to be acquired by persons seeking to become members of the engineering profession.159 It is also empowered to secure the establishment and maintenance of a reg-

Section 2(a) of the Architects (Registration, Etc.) Act. Section 2(b) of the Architects (Registration, Etc.) Act. Section 2(a) and (b) of the Builders (Registration, etc.) Act. Section 2(d) of the Builders (Registration, etc.) Act. Amended by the Engineers (Registration, etc.) (Amendment) Act, 2018. Section 1(1)(b) of the Engineers (Registration, etc.) Act, as amended.

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(d)

(e)

ister of persons entitled to practise the profession and the publication from time to time of lists of those persons.160 Estate Surveyors and Valuers (Registration, etc.) Act, 1975 (Nigeria) Chapter E13, LFN 2004: This establishes the Estate Surveyors and Valuers Registration Board of Nigeria which is charged with determining what standards of knowledge and skill are to be attained by persons seeking to become registered as estate surveyors and valuers and reviewing such standards from time to time.161 It is also empowered to secure the establishment and maintenance of a register of persons entitled to practise as estate surveyors and valuers and the publication from time to time of lists of those persons.162 The body has the power to regulate the activities of estate surveyors and valuers in Nigeria.163 Quantity Surveyors (Registration, Etc.) Act, 1986 (Nigeria) Chapter Q1, LFN, 2004: The Act establishes the Quantity Surveyors Registration Board of Nigeria (‘QSRBN’) which regulates and controls quantity surveyors in Nigeria. It collaborates with the Nigerian Institute of Quantity Surveyors (‘NIQS’), relevant federal ministries (including Works, Lands, Housing and Urban Development), and agencies and departments in the construction industry.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

160 161 162 163

There are no statutorily prescribed standard forms of contract for use in Nigeria. Therefore, parties are at liberty (with the guidance of their professional advisers) to adopt any of the commonly used template contracts which is most suitable for the project. As mentioned in section 3.1.1 above, parties are free to agree to any contractual term provided that the said terms are not illegal or contrary to public policy. In many cases, the nature and location of the project determines the form of the construction contract that will be adopted by the parties, and the forms of contract are often subject to substantial changes or alterations to reflect the desired terms between the parties.

Section 1(1)(c of the Engineers (Registration, etc.) Act, as amended. Section 2(b) of the Estate Surveyors and Valuers (Registration, etc.) Act. Section 2(c) of the Estate Surveyors and Valuers (Registration, etc.) Act. Section 2(d) of the Estate Surveyors and Valuers (Registration, etc.) Act.

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5.2. Most Commonly Used 5.2.1.

The most used standard form contracts used in Nigeria are: (a) the Joint Contract Tribunal (‘JCT’) standard forms of contract; (b) the Bureau of Public Enterprises’ (‘BPE’) standard bidding and contract documents for public procurement works; (c) the Engineering Consultancy and Project Management Services Agreement, Charges and Conditions of Engagement produced by the Assoiciation of Consulting Engineers of Nigeria (‘ACEN’), the Council for the Regulation of Engineering in Nigeria (‘COREN’) and the Nigerian Society of Engineers; and (d) the suite of template contracts prepared by the Fédération Internationale des Ingénieurs Conseils (FIDIC), ie, the International Federation of Consulting Engineers.

5.3. Example 1: The JCT standard form contract 5.3.1.

5.3.2.

The JCT’s standard building contract is commonly used in Nigeria for large projects, and a variation of the contract is adapted and used by Nigeria’s Federal Ministry of Power, Works and Housing. The JCT standard building contract is designed for large or complex construction projects where detailed contract provisions are needed. Standard Building Contracts are suitable for projects procured via the traditional or conventional method.164 Whilst the 2005 edition is more commonly used, the JCT’s most recent template contracts are the 2016 suite of contracts. We have highlighted below some of the key clauses of the JCT Standard Building Contract (without quantities), which are used for projects that are generally not complex enough to require bills of quantities. (a) The project owner (employer, as used in the contract) must provide drawings together with a description of works, and either a specification or work schedules at tender stage; (b) The price and payment structure of the contract is based on a lump sum with monthly interim payments; (c) Sub-Contractors can be appointed with written permission of the architect/contract administrator or selected from a list of three names; and (d) Provisions are included for collaborative working, sustainability, advance payment, bonds (advance payment, off-site materials, retention),

164 The Joint Contract Tribunal, “Contract families, Standard Building Contract” https://www.jctltd. co.uk/category/standard-building, accessed on 14 September 2020.

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third party rights and collateral warranties, named specialists, and a ‘Contractor’s Designed Portion’.165

5.4. Example 2 – BPE’s standard bidding and contract documents 5.4.1.

5.4.2.

The BPE has its own standard bidding and contract documents which are used for the public procurement of small works and large works, respectively.166 The documents issued in respect of large works are used for the procurement of works and related services under national competitive tendering when financed by the national budget and to enable a procuring entity to select the lowest evaluated tender. It can also be used for international competitive bidding.167 Some important provisions of the bidding and contract documents clauses are set out below: (a) In view of the federal government’s preference for domestic contractors, such contractors must first provide the evidence that they, either as an individual or as a group, qualify with the following provisions: (i) it is incorporated or otherwise organized in Nigeria; (ii) its principal place of business is located in Nigeria; (iii) more than 50 % of the equity is held by nationals of Nigeria and its assets are not controlled by a foreign firm or firms; (iv) its chief officers are nationals of Nigeria; and (iv) more than 50 % of the persons who will perform services under the contract, whether employed directly or by a subcontractor, are nationals of Nigeria;168 (b) The project owner shall provide the bill of quantities and description of work method and schedule at the tender stage.169 All drawings prepared by the contractor for the execution of the temporary or permanent works, are subject to prior approval by the project owner’s representative before their use;170  

 

165 The Joint Contract Tribunal, “Standard Building Contract Without Quantities (SBC/XQ)” https:// www.jctltd.co.uk/product/standard-building-contract-without-quantities, accessed 14 September 2020. 166 The Bureau of Public Procurement, “Public Procurement Documents”, https://www.bpp.gov.ng/ all-downloads/, accessed on 14 September 2020. 167 The Standard Bidding Documents for the Procurement of Works, p. I. 168 Para. H1, Section 2 (Special Instructions to Tenderers), The Standard Bidding Documents for the Procurement of Works, p. 28. 169 Clause 19 of the Instructions to Tenderers, The Standard Bidding Documents for the Procurement of Works, p. 8. 170 Clause 25 of the General Conditions of Contract, The Standard Bidding Documents for the Procurement of Works, p. 37.

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The contractor shall obtain approval of the employer in writing of all sub-contracts to be awarded under the contract if not already specified in the tender;171 and Disputes shall ultimately be settled by arbitration conducted in accordance with the Arbitration Act of Nigeria as at present in force172 and in the place stated in the special conditions of contract.173

5.5. Example 3: FIDIC template contracts 5.5.1.

5.5.2.

5.5.3.

5.5.4.

Some engineering, procurement and construction contracts are prepared on the basis of FIDIC’s template contracts, which have been adopted by ACEN. The following editions of the FIDIC contracts were published in 2017: (a) Conditions of Contract for Construction, Second Edition, 2017 (ie, the ‘Red Book’); (b) Conditions of Contract for Plant & Design Build, Second Edition, 2017 (ie, the ‘2017 Yellow Book’); and (c) Conditions of Contract for EPC/Turnkey Projects, Second Edition, 2017 (ie, the ‘2017 Silver Book’) The Red Book is suitable for projects where the employer or engineer is primarily responsible for the project design. The work done under a Red Book governed contract is assessed according to the bill of quantities, although payment can also be made on a lump sum basis.174 The FIDIC suite of contracts is reviewed by ACEN. A variation of the contract is adapted and used by the Federal Ministry of Power, Works and Housing and the Bureau of Public Procurement (as provided in its Standard Bidding Documents and Conditions of Contract).

171 Clause 16 of the General Conditions of Contract, The Standard Bidding Documents for the Procurement of Works, p. 36. 172 The Act in force at present is the Arbitration and Conciliation Act, 1988 (Nigeria) Chapter A18, LFN, 2004. 173 Clause 82.4 of the General Conditions of Contract, The Standard Bidding Documents for the Procurement of Works, p. 54. 174 Clause 14 of the Red Book.

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5.6. Construction Contract Models 5.6.1.

Some of the construction contract models used in Nigeria are: (a) Build-Own-Operate: By this arrangement, the private sector partner finances, builds, owns and operates a facility or service in perpetuity; (b) Build-Operate-Transfer: The private sector partner finances, designs, builds and operates a public facility for a specified period following which possession of the facility is transferred back to the government; (c) Design-Build: In this model, the private sector contractor simply agrees to design and build the infrastructure to meet the public project owner’s specifications, for a fixed contract price; (d) Design-Build-Finance-Operate: The private sector partner designs, finances and develops a new facility under a long-term lease and then operates the facility throughout the term of the lease. The facility would then be returned to the government at the end of the lease period; and (e) Joint Venture-Operate: By this arrangement, the public and private entities enter into a joint venture agreement wherein the special purpose vehicle controlled principally by the private entity operates the asset perpetually.

6. Key Issues 6.1. Duration and Project Completion Period 6.1.1.

The construction contract should provide clear and specific timelines for the delivery of the project and for extensions of the completion period, taking into account events of force majeure or incidents beyond the control of the contractor.

6.2. Scope of Work 6.2.1.

The construction contract should state in unambiguous terms the scope of work of the contractor. In some instances, construction projects in Nigeria have been unduly delayed (with attendant financial losses) as a result of inadequate and unclear terms on the scope of work of the contractor. Such ambiguous provisions usually lead to litigation and failed projects.

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6.3. Performance Guarantees or Bonds 6.3.1.

6.3.2.

6.3.3.

This is usually a vital issue in construction contracts commonly used in the construction industry, as it insures a project owner or employer against the risk of a contractor (or other parties to a construction contract) failing to fulfil their contractual obligations. Usually, a key consideration in determining whether a performance bond is required is the perceived financial strength of the contractor. The construction contract must set out the exact nature of the performance bond (whether it is on demand or conditional), the value of the bond and the duration of the bond. In many cases, the project owner or employer is advised to properly manage the risk of non-completion of the project by the contractor, and the performance bond should remain in place until the end or expiration of the defects liability period, when the final certificate is issued. As in many jurisdictions, the bonds or guarantees can be issued by an insurance company or a bank, although the contractor still bears the cost for the bond or guarantee.

6.4. Risk Allocation 6.4.1.

The contract should contain terms relating to the allocation of the risks associated with the project. In some construction contracts, a party to a contract bears the risk where the risk is within the party’s control or when it is efficient for the party to bear the risk.

6.5. Payment Provisions 6.5.1.

6.5.2.

The construction contract should state, in unequivocal terms, the payment provisions for the contract. If the mode of payment is unclear, there may be problems in effecting payments when due. Although some contracts do not contain payment provisions (which implies that the contractor will only be paid upon completion of the project), that may lead to ambiguity, and it may be best to include a term that states when the payment to the contractor is due. Most contracts contain provisions for progress payments, which are made at different intervals during the project, following the completion of a milestone and submission of a request for payment by the contractor. One issue that may arise here is how the project owner determines that the contractor has actually completed the phase of work in respect of which it claims payment. This is important because if the project owner withholds payment of the

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amount demanded by the contractor, the contractor may deem such retention to be a breach of contract. In construction contracts between a contractor and a sub-contractor, provision may be made for ‘pay if paid’ provisions, i.e. where parties agree that a contractor would only be bound to pay the sub-contractor upon receipt of payments from the Project Owner or Employer. Further, the construction contract may provide for a ‘pay-when-paid’ clause which would be to the effect that the contractor would pay the subcontractor within a specified period of time after the contractor has been paid by the owner, rather than within a period of time after the subcontractor has performed its work.  

6.6. Defects Liability Period and Payment of Retention Sum 6.6.1.

6.6.2.

6.6.3.

6.6.4. 6.6.5.

An explicit defects liability clause, which sets out in detail the contractor’s obligation to remedy defective work which becomes apparent during the defects liability period, should be included in a construction contract. In some contracts, the project owner either retains a proportion of the project sum or payment, or a performance bond (or a reduced performance bond) as security for the contractor’s performance of its obligations during the defect liability period. A proper defects liability clause should state the length of the defect liability period, the scope of the defects that the contractor is expected to repair or remedy, the exact amount of the project sum that the project owner retains as security for the repair of the defect, the procedure for notifying the project owner of the defects, and any circumstance under which the defects liability period may be extended (and caps on such extensions). The length of the defects liability period usually depends on the nature of the contract and the agreement of the parties. It has been suggested that, with the prevalence of collapsed buildings in Nigeria, the liability of the contractor should not be limited to the defect liability period. Latent defects in the work (ie, defects that are not readily detectable) may lead to the partial or complete collapse of the work within a few years of construction. Since Nigerian law does not provide for a liability period for inherent defects, the parties need to provide for that term in the contract. The inclusion of such a clause makes the contractor liable to the project owner and other third parties if the building collapses within a period of years.

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6.7. Insurance 6.7.1.

There are statutory insurance obligations arising from the provisions of the Insurance Act, 2004 (Nigeria) Chapter I17, LFN 2004. Section 64 of the Insurance Act provides that: “(1) No person shall cause to be constructed any building of more than two floors without insuring with a registered insurer his liability in respect of construction risks caused by his negligence or the negligence of his servants, agents or consultants which may result in bodily injury or loss of life to or damage to property of any workman on the site or of any member of the public. (2) The duty to insure under subsection (1) of this section shall arise when a building is under construction.”

6.7.2.

6.7.3.

6.7.4.

In the same vein, Section 65(1) of the Act provides that every public building shall be insured with a registered insurer against the hazards of collapse, fire, earthquake, storm and flood. The term “public building” was defined in section 65(2) of the Act to include a tenement house, hostel, a building occupied by a tenant, lodger or licensee and any building to which members of the public have access for the purpose of obtaining educational or medical service, or for the purpose of recreation or transaction of business. The insurance cover for a construction project is usually provided for in the construction contract. In many cases, the insurance policies usually taken out in respect of construction contracts include (i) all risk insurance; (iii) latent defect insurance, and (iv) public liability insurance. In some cases, there may be a requirement for professional indemnity insurance for claims pertaining to professional negligence. There is also the question of life insurance for employees. Under Section 4(5) of the Pension Reform Act, 2014, every employer shall maintain a group life insurance policy in favour of each employee for a minimum of three times the annual emoluments of the employee and premium shall be paid not later than the date of commencement of the cover.

6.8. Fit for Purpose 6.8.1.

6.8.2.

An assessment of fitness-for-purpose obligations will be heavily dependent on whether the party in question is a consultant (such as an architect or engineer) or a contractor. A consultant usually has an implied obligation to carry out his duties or render the services for which he has been engaged with the reasonable care, skill, diligence and expertise. In some construction contracts, the parties may also specifically insert a clause that expressly mandates the consultant to ex-

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ercise reasonable care, skill and diligence which is to be expected of someone in that position with similar project experience. Thus, the consultant may be subject to a fit for purpose obligation and may be liable for professional negligence. In Mr Ray Akanwa v. Hon. Sylvester Ogbaga,175 it was held that where a person acting in professional or official capacity undertakes an act or omission in bad faith or without due care, he will be liable in professional negligence for any injury arising from such act or omission. As regards a contractor, where the contractor is not responsible for the design, he will (in the absence of any contrary provision in the contract) be subject to an implied obligation that the completed building will be fit for the intended purpose. In some cases, this obligation is expressly stipulated in the contract. However, in a design and build contract where the contractor is responsible for the design and construction, the contractor would have an obligation to ensure that the completed project is fit for purpose.

6.9. Late Completion 6.9.1.

6.9.2.

In the absence of the occurrence of a force majeure event, a contractor is required to complete the construction by the date stated in the construction contract otherwise he would be in breach of his obligations under the construction contract. However, in many contracts, if the delay was on account of the actions of the employer, then the contractor would be entitled to an extension of the completion timelines. However, if the delay in completion is as a result of the acts or omissions of the contractor, the employer may be entitled to the payment of liquidated damages if that is provided for in the construction contract. In many cases, the amount to be paid as liquidated damages is capped at a certain percentage of the total contract sum.

6.10. Force Majeure 6.10.1. Nigerian courts recognise the concept of force majeure, which is widely used in construction contracts in Nigeria. Force majeure clauses commonly cover issues arising from natural events, local political events and foreign political situations. The force majeure events stipulated in construction contracts usually include events like earthquakes, fire, floods, epidemics, adverse weather con-

175 (2016) LPELR-41054(CA).

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6.10.2.

6.10.3.

6.10.4.

6.10.5.

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ditions and other acts known as acts of God, as well as war, riots, civil disorder, strikes and other industrial action, confiscation, or other adverse action by the Government or any of its agencies. Usually, it is agreed that neither party will be liable for any delay in performing or failure to perform any of its obligations as a result of the force majeure events which are beyond the party’s control. However, force majeure will not include any event caused by the negligence or intentional act of any party, or insufficiency of funds or the inability of a party to pay any sum of money required to be paid under the construction contract. In some cases, the courts have been asked to determine whether a force majeure clause was properly invoked. In Globe Spinning Mills Nigeria Plc v. Reliance Textile Indutries Limited,176 the respondent declared force majeure in respect of a sale agreement on the basis of (i) failure of government to curb illegal importation of banned textile fabrics; (ii) permanent loss of market with no future anticipated turn around due to huge supply of low priced illegally imported fabrics; and (iii) frequent and unpredictable interruptions in gas supply which is the only financially viable source of energy; and (iv) mounting cash losses coupled with a large level of unsold stocks and high customer credit. The court held that none of the events relied on by the respondent could be termed as force majeure and stated that the reasons given by the Respondent are the usual vicissitudes of the trade in Nigeria.

6.11. Limitation of Liability 6.11.1.

From the contractor’s perspective, it is important that a limitation of liability clause is included in the construction contract, to generally establish the maximum liability or exposure of the contractor. If the contractor wishes to limit its liability according to the level of compensation received, the contractor’s liability for damages is limited to a specified amount.

6.12. Project Variation 6.12.1.

The construction contract should contain provisions for variations to the project, which should allow the project owner to notify the contractor of any changes to the original specifications or design plan for the project, and give

176 (2017) LPELR-41433(CA), p. 27.

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the contractor the opportunity to reassess the costs that will be incurred as a result of the altered project. 6.12.2. Project variation provisions may also contain ‘change orders’, which prescribe the steps that the contractor may take to notify the project owner of any changes to the initial project specifications or design, budget or schedule that the contractor will need to adjust as a result of the amended plans.

6.13. Time Bars 6.13.1. The limitation periods for actions arising from disputes pertaining to a construction period is codified in the Limitation Act, 1996 (FCT) Chapter 522, Laws of FCT, 2007 (which applies in the FCT) and the Limitation Laws of various states in the federation. 6.13.2. In Lagos State, Sections 8 (1) (a) of the Limitation Law of Lagos State (1966) Chapter L84, Laws of Lagos State, 2015 (‘Limitation Law’) provides that actions founded on simple contract must be commenced within six years from the date on which the cause of action arose. For contracts made under seal (ie, by way of a Deed), Section 12(1)(a) of the Limitation Law provides that the limitation period shall be twelve years. 6.13.3. Thus, where the construction contract is made by way of a simple contract, the limitation period is six years. However, where a construction contract is made by way of deed, the applicable limitation period is twelve years. 6.13.4. One exception to the effect of the limitation period is as respects acknowledgement of debt. Nigerian courts have held that where a claim for a debt is statute barred, the limitation law provides an exception to the effect that where the debt has been acknowledged by the debtor, then the debtor remains liable to pay. However, for an acknowledgement to avail a claimant, it must be shown that such an acknowledgment which must be in writing is clear, unequivocal and unconditional.177

7. Dispute Resolution 7.1.1.

Disputes arising between parties to a construction contract in Nigeria may be resolved by several mechanisms, including litigation in the Nigerian courts, or mediation, conciliation or arbitration, which would be based on the prior agreement of the contracting parties.

177 Ihesiaba v. Young Shall Grow Motors Ltd (2016) LPELR-42257(CA), pp. 29 to 34.

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7.1.2.

7.1.3.

7.1.4.

7.1.5.

7.1.6.

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Generally, litigation in the public courts is the parties’ default dispute resolution mechanism if there was no prior agreement as to an alternative method of dispute resolution. Where contracting parties are citizens of a common country, and the contract is to be performed within that country, litigating the parties’ dispute in the courts of that country may offer advantages compared to binding arbitration. However, where conflict of law issues arise from the parties’ contractual arrangement, for example, where parties are from different countries, or the contract is to be performed in a country different from the domicile of the parties, then international commercial arbitration may offer some advantages over litigation. In every case, however, parties must examine their circumstances and choose which dispute resolution option best suits their needs, and may provide for this in their agreement. Alternative dispute resolution (‘ADR’) mechanisms are also available in the Nigerian legal system. The Arbitration and Conciliation Act (1988) (Nigeria), Chapter A18, Laws of the Federation of Nigeria [‘LFN’], 2004 (‘ACA’) constitutes the legal framework for the settlement of commercial disputes through arbitration and conciliation. Another option for parties to a construction contract is to provide for dispute resolution using a technical dispute resolution board. The FIDIC Silver Book (ie, the Conditions of Contract for EPC/Turnkey Projects) recommends that contentious disputes be referred to an independent and impartial Dispute Avoidance/Adjudication Board (‘DAAB’).178 The DAAB is typically comprised of person(s) with technical know-how in construction projects. The parties have the option of appointing either a sole adjudicator or a three-person panel, which can be appointed as a ‘standing DAAB’, that is, a DAAB that is appointed at the start of the contract who visits the site on a regular basis and remains in place for the duration of the contract to assist the parties. This specialised form of arbitration offers certain advantages to contracting parties, including the DAAB’s intimate acquaintance with the construction project, which is expected to lead to a faster and more efficient dispute resolution, and, when appointed as a ‘standing DAAB’, the potential to help the parties avoid disputes altogether.

178 Clause 21 of the FIDIC Silver Book, Second Edition 2017.

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Norway 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 4. 4.1. 5. 5.1. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 7.

Context 724 The Country 724 The Legal System 724 The Economy 724 The Construction Industry 725 Size and Nature 725 Participants 726 Work, Health and Safety 726 Protection of the Environment 727 Quality Assurance 727 Construction Contracting Dynamics 727 Legal Underpinnings of Contracts 727 Freedom of Contract 727 Legal Framework 728 Statute Law 728 Private and Public Procurement 728 Government Involvement 729 Legislation and Regulation 729 Construction Contracts 730 Available Contracts 730 Key Issues 730 Overview 730 Fit for Purpose 731 Late Completion 731 Latent Conditions 731 Force Majeure 731 Limitation of Liability 732 Duration of Exposure 732 Time Bars 732 Bribery and Corruption 732 Dispute Resolution 733

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1. Context 1.1. The Country 1.1.1. 1.1.2.

1.1.3.

Norway is a monarchy. It comprises 19 counties with a population of approximately 5.3 million. Norway gained independence from Denmark in 1814, and in the same year adopted the Norwegian Constitution and entered into a union with Sweden. Norway gained independence from Sweden in 1905 and appointed King Haakon VII of the House of Glücksburg as its monarch. The national administration under the government (ministries) are in two sub-levels with 11 counties and 356 municipalies, both with administrative and political tasks. The government is appointed by the King based on the political parties’ representation in the Storting. Elections are held every two years, alternating between national elections to the Storting (held every four years), and county and municipal elections (also held every four years).

1.2. The Legal System 1.2.1. 1.2.2.

1.2.3. 1.2.4.

Norway’s legal system is a civil law system, similar to the legal systems of Denmark, Sweden and Germany. The highest court in Norway is the Supreme Court. The Supreme Court is created by the Norwegian Constitution.1 Cases are heard at first instance in the District Court, and can be appealed to the Appeal Court. A limited number of cases are heard by the Supreme Court. The Supreme Court itself decides the cases to be heard. The courts handle both civil and criminal cases. Expert judges normally take part in construction disputes in the District Court and Appeal Court. In the District Court, expert judges hold the majority; there are two expert judges and one professional judge. In the Appeal Court there are three professional judges and two expert judges.

1.3. The Economy 1.3.1.

In 2020 Norway has the second largest GDP (nominal) in the world per capita USD 102,577.2

1 The Constitution of the Kingdom of Norway chapter D The Judicial Power. 2 Statiscs Norway ssb.no.

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The Oil Fund [Oljefondet] consists of revenue from oil and gas production. Today, the fund is among the largest in the world and the single largest investor in listed companies. The fund derives its financial backing from oil profits rather than pension contributions. As of 1 September 2020, its total value has passed NOK 1040 Billion, holding more than 1 % of global equity markets.  

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The construction industry is a major part of the Norwegian economy, being 16 % of Norway’s GDP in 2017, an increase of 5.4 % from 2016. The transport/ infrastructure and oil & gas sectors constitute the main areas for heavy construction in Norway.  

 

Tranpsort sector 2.1.2. Four national agencies are responsible for air, sea, rail and road transport in Norway being the Norwegian air traffic authority/Avinor AS, Norwegian Coastal Administration/Kystverket, Norwegian Railway Directorate/ Jernbanedirektoratet and the Norwegian Public Roads Administration/Statens vegvesen. They prepare input to the Government which is followed by a white paper from the Government. This white paper is the basis for the annual state budgets in the Norwegian transport sector. The present plan is for the period 2018-2029, coordinating the investments carried out by the national agencies above. 2.1.3. Government and other funding has an annual average of a million NOK for the 2017 price level for the period 2018-2029 in the transport sector.The total sum of government funding is 56 663 77 748 NOK and other funding (estimated) is 8 500 10 900 Billion NOK.3 The oil and gas sector 2.1.4. The oil and gas sector is Norway’s largest measured in terms of value added, government revenues, investmens and export value4. 2.1.5. Expected investments in oil & gas sector exceeds NOK 172 Billion in 2020 for investment in renewable energy5.

3 Meld. St. 33 (2016–2017) Report to the Storting (white paper) National Transport Plan 2018–2029. 4 Statistics Norway (National accounts), Ministry of Finance (The Revised National Budget 2020). 5 Statistics Norway ssb.no.

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2.2. Participants 2.2.1.

There are several major national general contrators, the largest being Skanska Norge AS. Veidekke ASA, AF gruppen ASA NCC Construction AS and Peab AS. In the last few years, other major European contractors (including WeBuilt SA Pizzarotti, Acciona and others) have entered the Norwegian market and have been awarded major road and railway projects. The government has established a separate legal entity, Nye Veier AS, being funded to be the employer.

2.3. Work, Health and Safety 2.3.1. 2.3.2.

2.3.3.

2.3.4.

2.3.5.

Working conditions are regulated by both legislation and agreements. Legislation regulating working conditions applies to all employees. Two of the most important Acts that apply to employees are the Working Environment Act6 and the Holidays Act.7 Agreements set out normal pay and working conditions. The most important of these agreements is the collective pay agreement concluded between the central confederations of employees (Feellesorganisasjonen)8 and employers9. There are also agreements that apply to individual workplaces, concluded between the employer and the employees’ representatives. The Norwegian Labour Inspection Authority is the public body responsible for ensuring that the provisions of the Working Environment Act are complied with. The Norwegian Labour Inspection Authority has offices throughout Norway and provides information to both employees and employers. Inspectors from the Norwegian Labour Inspection Authority visit workplaces to check the conditions at the premises. Companies can ask the Norwegian Labour Inspection Authority for guidance in complying with the Working Environment Act. Norwegian Labour Inspection Authority employees are required to treat all information as confidential. If one complains about workplace conditions, one’s name will not be given to an employer without consent.10

6 Arbeidsmiljøloven [Working Environment Act] (Norway) Act No 4 of 4 February 1977. 7 Ferieloven [Holiday Act] (Norway) Act No 21 of 5 November 1988. 8 Ferieloven [Holiday Act] (Norway) Act No 21 of 5 November 1988. 9 https://www.nho.no/en/english/articles/labour-relations. 10 See .

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2.4. Protection of the Environment 2.4.1. 2.4.2.

Norway is a signatory to the Declaration of the United Nations Conference on the Human Environment (‘Stockholm Declaration’).11 The Pollution Control Act imposes duties to obtain knowledge of the ground conditions and local environment. The owner holds an objective liability for resultant pollution to its sites.12

2.5. Quality Assurance 2.5.1.

In addition to the permits and authorisations required according to the Planning and Building Act each contractor normally has his own quality assurance system.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

Standard agreed documents are generally used, with the contract and conditions mainly chosen by the client. Major clients, such as governmental and municipal bodies, and state-controlled companies such as Statoil, may vary these standard documents. There are additional contracts and conditions set for public private partnerships, due to project financiers’ requirements.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

In principle, contracting parties are free to include any terms in their construction contracts, provided that they are not in conflict with statute law or public policy. However, this is seldom done, as standard agreements are often used. The contract itself states the private law between the parties.

11 Declaration of the United Nations Conference on the Human Environment, UN Doc A/Conf.48/14/ Rev.1 (16 June 1972). 12 Forurensningsloven [Pollution Control Act] (Norway) Act No 6 of 13 March 1981. See also .

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Courts generally uphold the principle of pacta sunt servanda in respect of a valid contract, but with exceptions if the contract is very favorable for one of the parties.

3.2. Legal Framework 3.2.1. 3.2.2.

3.2.3.

3.2.4.

3.2.5.

The contract constitutes the regulation between the parties. To be able to perform design and construction tasks in Norway, international contractors and designers need to be aware of the permits/authorisations required according to the Planning and Building Act which are issued by directorates of building quality. Foreign contractors/designers may act as sub-consultants/designers under a permit held by the main contractor/designer, or through a joint venture in which another partner holds the necessary permits. To obtain a building permit, the developer must have contracted with consultans and contractors holding an authorisation by the directorate to confirm compliance with the requirements set in the building permit/s and the planning and building legislation. The authorisation is given to consultants and contractors to undertake that they will ensure compliance with building regulations. Further, contractors and designers must comply with the Building Regulations. The Planning and Building Act sets statutory requirements with more detailed requirements in the Building Regulations (TEK17). There are also often local regulations set in the zoning plan/s. The Directorate for building quality is the official body under the Ministry of Local Government and Modernisation. As Norway is a civil law country, judges interpretations of contracts may take into account both the written and oral communications between the parties prior to contracting. Court cases and industry practice may also affect the interpretation of contracts.

3.3. Statute Law 3.3.1.

No specific statute regulates professional construction contracts.

3.4. Private and Public Procurement 3.4.1.

As a member of the EEA, and a party to the EEA agreement, Norway has implemented EU legislation on, inter alia, public procurement. Consequently, Norwegian legislation on public procurement coincides to a large extent with

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EU procurement legislation where the relevant EEA/EU thresholds regarding contract value are met. In addition, national legislation applies to some extent below the EEA/EU thresholds, see question 2.4 below. Directive 2004/17/EC13 and Directive 2004/18/EC14 have been implemented into Norwegian law through three different pieces of legislation: (a) The Procurement Act, which is of general application and includes the general principles applicable to public procurement;15 (b) The Procurement Regulation, which sets out the detailed provisions for procurement in classic sectors;16 and (c) The Utilities Regulation, which applies to contracting entities that pursue activities in the water, energy, transport and postal services sectors, and likewise sets out the detailed provisions for such procurement.17 Further to this, the Regulation on the Complaints Board for Public Procurement contains procedural rules for the Complaints Board for Public Procurement (‘KOFA’).18

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

4.1.2.

Stortinget holds the legislative power (Constitution – note). The ministries prepare a law proposal (Odeltingsproposisjon Ot.prp.) to be dicussed in the actual committee and the committee presents a proposal for decision. The laws regularly include a delegation clause for respective ministries to issue regulations. ThePlan and Building Act contains such delegation to the Directorate for building quality. The most important of these delegations is TEK 17 containing both material (technical requirements) and procedural rules.

13 Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 Coordinating the Procurement Procedures of Entities Operating in the Water, Energy, Transport and Postal Services Sectors [2004] OJ L 134. 14 Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts [2004] OJ L 134. 15 Anskaffelsesloven [Procurement Act] (Norway) Act No 73 of 17 June 2016. 16 [Anskaffelsesforskriften] [Public Procurement Regulation] (Norway) Regulation No 1744 of 20 December 2016. 17 [Forsyningsforskriften] (Norway) Regulation No 1745 of 20 December 2016. 18 [Forskrift om klagenemd for offentlige anskaffelser] [Regulation on the Complaints Board for Public Procurement no 1288 of 15 November 2002 ] (Norway)].

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5. Construction Contracts 5.1. Available Contracts 5.1.1.

The Norsk Standards (‘NS-Standards’) are standard agreed documents that are commonly used in both design and construction. There are also some standardized deviations/special provisions in public design and construction contracts, as well as in contracts used by major companies (e.g., Equinor). These standard contracts have been developed by representatives of employers, and designers and contractors (i.e., designer/contractor organizations and public bodies). The NS-Standards range from construction contracts for traditional buildings to contracts for design-build. They also include a series of sub-contract construction contracts. NS-Standard forms are all available in English. Standard construction forms include: (a) NS 8405: Norwegian building and civil engineering contract; (b) NS 8415: Norwegian contract for sub-contracts concerning the execution of building and civil engineering works; (c) NS 8407: General conditions of contracts for design and built contracts; (d) NS 8417: General conditions of contract for design and built; (e) NS 8406: Simplified Norwegian building and civil engineering contract; and (f) NS 8416: Simplified Norwegian contract for sub-contracts concerning the execution of building and civil engineering works. Standard design forms include: (a) NS 8401: General conditions of contract for design commissions; and (b) NS 8402: General conditions of contract for consultancy commissions with remuneration on the basis of actual time taken. The standard form for supervision is NS 8403: General conditions of contract for construction commissions. This form, in combination with standard construction and design forms, is normally used for construction management. These standard form contracts may be varied but, in general, parties adhere to the standard forms.  

5.1.2.

 

5.1.3.

5.1.4.

5.1.5.

5.1.6.

5.1.7.

6. Key Issues 6.1. Overview 6.1.1.

The information below is based on the NS-construction contracts as described above and general principles. In PPP road contracts there been a more tailormade contract based on an offshore standard agreed contract (NTK 2015).

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It shall be noted that certain clauses are more or less identical in NS-contracts such as changes, delay, force majeure and delays.

6.2. Fit for Purpose 6.2.1.

The Contractor is obliged to deliver the contract object as defined in the contract and to comply with the technical requirements set in the law and regulations. Construction contracts regularly uses a code system NS 3420 (containing items covering all phases of the construction). In the design built contract NS 8407, the Contractor must also comply with the zoning plan and the conditions set out in the building permission/s.

6.3. Late Completion 6.3.1.

A progress plan shall be issued containing progress deadlines. The completion date set in the contract and reflected in the progress plan must be met or the Client will be entitled to a daily penalty charge. This may be agreed to apply to other deadlines as well if expressly agreed in the contract. The rates that apply are to maximum– limit of 10 % of the Contract sum. This regulation is similar in all NS-contracts.  

6.4. Latent Conditions 6.4.1.

Which of the parties that holds the risk for latent conditions is different in NS 8405/6 (construction contract) and NS 8407 (design build). In the construction contract NS 8405/6, the risk is on the Employer’s side. In the design build NS 8407 clause 23.1 states “The client shall be liable for ground conditions if they deviate from what the design and build contractor had reason to expect when preparing its tender.” In practice, the Contractor holds an obligation of diligent inspections and to obtain available documentation in official register.

6.5. Force Majeure 6.5.1.

The wording of the force majeure clause is similar in all NS-contracts, which defines the the situation as being circumstances outside a party’s control, such as extraordinary weather conditions, orders or prohibitions by public authorities, strikes, lockouts and agreements entered into at national level

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between employers’ organisations and trade unions., and the right of time extension. It is expressly stated that the Contractor does not have a right to any economical compensation in the extended period.

6.6. Limitation of Liability 6.6.1.

There is no limitation regarding defects. The penalty for delays is limited to 10 % of the contract sum, save for willful misconduct or gross negligence.  

6.7. Duration of Exposure 6.7.1.

It is stated in all NS-standards that notification of a defect may not be submitted more than five years after taking over the site. Further it is stated that “for the parts of the contract work that have been remedied in accordance with clause 42.3, a new five year period shall run from completion of the remediation work on the part in question, but the new period shall not exceed the original deadline by more than one year”.

6.8. Time Bars 6.8.1.

There are several clauses containing a “duty of notication” attached to both the Employer and Contractor respectively. The notification must be forwarded in writing “without undue delay”. This applies to the notification when claiming time extension and changes. If not notified without “undue delay”, the right is precluded.

6.9. Bribery and Corruption 6.9.1.

6.9.2.

There is no general bribery legislation in Norway instead prosecution is based on the Criminal Code. Bribery receives significant attention from ØKOKRIM and the police. Several cases involving bribery have been prosecuted in recent years19. The Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM) is the central unit for investiga-

19 https://www.okokrim.no/.

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6.9.5.

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tion and prosecution of economic and environmental crime, and is very active. Facilitation payments are not allowed under national law. Both the company and employees acting on behalf of the company may be prosecuted. There are several recent cases in which both the company and employees involved have been prosecuted.20 Penalties for bribery include fines and imprisonment. There has been a dramatic increase in the quantum of fines in recent years.21

7. Dispute Resolution 7.1.1.

7.1.2.

7.1.3. 7.1.4.

The venue for disputes is regulated by the Norwegian Civil Procedure Code, which establishes the construction sites as the venue for disputes, if arbitration is not agreed. Norwegian law and ordinary courts are mandatory as the jurisdiction of public contracts and in principle private contracts the parties are free to agree upon choice of law and jurisdiction. Arbitration is available in Norway but is used in a limited number of disputes. Ad hoc arbitration is most commonly used and is regulated by the law of arbitration, that is where parties agree upon a form of arbitration that is specific to a particular dispute, without referring the matter to any arbitral institution. Contracts involving international parties often refer to the ICC in the dispute clause. International arbitration is supported in Norway. Norway is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.22 Mediation is increasingly used in construction disputes, either by the courts or ad hoc (i.e., out of court). The Dispute Act regulates both ad hoc mediation and mediation by the courts.23 The Norwegian Bar Association has several accredited mediators, including mediators with expertise in construction law, who can be appointed by the parties.24  

20 https://www.okokrim.no/. 21 https://www.okokrim.no/. 22 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959). 23 Tvisteloven [Dispute Act] (Norway) Act No 90 of 17 June 2005, chapter 6 and 7. 24 See Den Norske Advokatforening, Mekling.no (Website) .

Jaime Gray, Jonnathan Bravo and Guillermo Alarcón

Peru 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 3. 3.1. 3.2. 3.3. 3.4. 4. 4.1. 4.2. 5. 5.1. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 6.10. 6.11. 6.12. 6.13. 7.

Context 736 The Country 736 The Legal System 737 The Economy 738 The Construction Industry 739 Size and Nature 739 Participants 740 Work, Health and Safety 740 Protection of the Environment 741 Legal Underpinnings of Contracts 741 Statute Law 741 Construction of Contract Terms 742 Private and Public Procurement 742 Public-Private Partnership Law 743 Government Involvement 744 Legislation and Regulation 744 Licensing of Professionals and Contractors Construction Contracts 745 Available Contracts 745 Key Issues 746 Overview 746 Interpretation of the Scope 746 Price 747 Changes 747 Extensions of Time 748 Satisfaction of Client 749 Late Completion 750 Latent Conditions 750 Force Majeure and Acts of God 751 Limitation of Liability 752 Duration of Exposure 753 Time Bars 754 Back Charges 755 Dispute Resolution 756

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

1 2 3 4

Ancient Peru was the seat of several prominent Andean civilizations, most notably that of the Incas, whose empire was conquered by the Spanish Conquerors in 1533. Peruvian independence was declared in 1821 and the remaining Spanish forces were defeated in 1824. Peru today is a presidential representative democratic republic, divided at central and regional government levels and provincial municipalities across the country. It operates under the Constitución Política del Perú de 1993 [Political Constitution of Peru of 1993] (‘1993 Constitution’)1. Since the early 1990s, the country has embarked on a series of reforms of which fiscal consolidation, trade openness, exchange rate flexibility, financial liberalization, higher reliance on market signals and prudent monetary policy, including a strong buildup of reserves, have been key components, largely due to the 1993 Constitution. Those reforms have led to several statutes that aim to attract foreign investments into Peru. For example: (a) Ley de Contrataciones del Estado [Government Procurement Law] (Peru) Ley No 30225 (‘Public Procurement Law’)2 deals with the possibility for private companies to compete under a basic scheme of design-bid-build to contract services, goods or works with the Peruvian government; (b) Decreto Legislativo que regula la Promoción de la inversión Privada mediante Asociaciones Público Privadas y Proyectos en Activos [Legislative Decree that Regulates the Promotion of Private Investment through Public-Private Partnerships and Projects in Assets] (Peru) Decreto Legislativo No 1362 (‘Public-Private Partnership Law’)3 that regulates the regime in which private companies invest and build big infrastructure projects to later recover the investment in a long-term basis by operating the infrastructure under the PPP scheme (in many kinds of modalities: BOT, BOOT, DBOT, DCMF); and (c) Ley que Impulsa la Inversión Pública Regional y Local con Participación del Sector Privado [Law that Promotes the Local and Regional Public Investment with Participation of the Private Sector] (Peru) Ley No 29230 (‘Works for Taxes Law’)4 deals with the implementation of priority public infrastructure projects by allowing companies to fund and imple-

See: http://www.congreso.gob.pe/Docs/files/constitucion/constitucion2019/index.html. See: https://cdn.www.gob.pe/uploads/document/file/298343/DS082_2019EF.pdf. See: http://www.gob.pe/institucion/mef/normas-legales/226844-1362. See: https://www.proinversion.gob.pe/RepositorioAPS/0/0/arc/MOXI_LEY_29230/Ley-29230.pdf.

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ment public projects and later recover the total amount of investment from its third category income tax.

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

The Peruvian legal system is a civil law system based, regrettably, on different European civil codes, including the French Civil Code5, the Napoleonic Code6, the Italian Civil Code7, the German Civil Code8 and the Spanish Civil Code9. Therefore, there is continuous confusion on the use of its rules (although this is sometimes not appreciated in practice). The 1993 Constitution guarantees the independence of the judiciary (the hierarchical system of courts). The highest court in Peru is the 16-member Supreme Court. Superior courts, sitting in the departmental capitals, hear appeals from the provincial courts of first instance, which are divided into civil, criminal, labour, family, commercial and special chambers. Additionally, the Constitutional Tribunal is the highest body that oversees matters of constitutionality (lower courts can deal with some constitutional matters too). Arbitration is available in Peru and recognized under Article 63 of the 1993 Constitution. Domestic arbitrations (arbitrations not involving an international party) are governed by the Decreto Legislativo que norma el arbitraje [Legislative Decree that Rules Arbitration] (Peru) Decreto Legislativo No 1071 (‘Arbitration Act’). Non-fundamental rights and disputes not excluded by law can be decided by arbitrators. International and investment arbitration is also supported in Peru. Peru is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’).10 Other ADR methods used in Peru are conciliation, introduced by law as a mandatory part of the pretrial process, but voluntary for arbitration (Article 45 of the Public Procurement Law); negotiation, which is allowed by the Código Civil [Civil Code] (Peru) Decreto Legislativo No 295 (‘Peruvian Civil Code’) and typically included in contracts as the first step to resolve disputes; and dispute boards

5 See: http://www.fd.ulisboa.pt/wp-content/uploads/2014/12/Codigo-Civil-Frances-French-CivilCode-english-version.pdf. 6 See: http://files.libertyfund.org/files/2353/CivilCode_1566_Bk.pdf. 7 See: http://www.jus.unitn.it/cardozo/obiter_dictum/codciv/codciv.htm. 8 See: https://www.gesetze-im-internet.de/englisch_bgb/. 9 See: https://www.refworld.org/cgi-bin/texis/vtx/rwmain/opendocpdf.pdf?reldoc=y&docid=5a8ad 42e4. 10 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959).

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which were incorporated under the Article 45.3 of the Public Procurement Law and Article 56.4 of the Public-Private Partnership Law.

1.3. The Economy 1.3.1.

Peru has experienced significant micro and macroeconomic growth in recent years, despite the global economic crisis that has affected other countries so adversely. The Peruvian economy has grown rapidly in the last decade and continues to lead regional growth, with the GDP per capita expected to exceed the global average by 2020. According to the World Bank11, in 2008 Peru achieved a GDP growth rate of 9.1 %, and in 2013, 2014, 2015, 2016 and 2017, GDP increased by 5.8 %, 2.3 %, 3.2 %, 3.9 % and 2.5 %, respectively. Considering the last global crisis and comparing the other Latin American countries, Peru is in the top list of leading countries in this region. Impressive though recent GDP growth has been, figures relating to construction activity have been even more positive. According to the Banco Central de Reserva del Perú, sustainable growth in construction activity was recorded as follows: 5.8 % in 2016, 5.8 % in 2017, and 5.7 % in the last term of 2018. Therefore, despite recent local political crises, construction activity has maintained stable levels of growth. The Peruvian government is the most important client in the construction industry. According to the Organismo Supervisor de las Contrataciones del Estado [Supervisory Body of Public Procurement] (‘OSCE’)12, the public entity in charge of supervising public procurements, in 2017 alone the Peruvian government invested around USD5 billion in public projects under the Public Procurement Law (design-bid-build scheme). By the end of November 2018, the Peruvian government invested around USD3.5 billion under the same scheme. With this growth in construction activity, concern among professionals (contractors, clients, consultants, designers, engineers, etc) to have projects completed on time and in line with the contractual scope has led them to a greater awareness of the need for both better contracts and improved mechanisms to protect their interests. One of the mechanisms considered particularly important in a contract is the dispute resolution method. It is so important that, as will be seen in this chapter, Peruvian professionals have been involved in a big debate about the need to use Dispute Boards as an alternative dispute resolution method in con 

 

1.3.2.

 

1.3.3.

1.3.4.

1.3.5.

 

 

 

 

 

 

11 Visit: https://www.worldbank.org/en/country/peru/overview. 12 Visit: https://www.gob.pe/qu/busquedas?contenido[]=publicaciones&institucion[]=osce&reason =sheet&sheet=1.

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struction contracts. In fact, dispute boards have now been included under Article 45.3 of the Public Procurement Law and Article 56.4 of the Public-Private Partnership Law.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

2.1.3.

2.1.4.

According to the Instituto Nacional de Estadística e Informática [National Institute of Statistics and Information Technology] (‘INEI’)13, the contribution to GDP from the construction industry for 2007–18 averaged USD1.975 billion, reaching an all time high of USD2.711 billion in the fourth quarter of 2014 and a record low of USD1.067 billion in the first quarter of 2007. In the last quarter of 2018, the GDP from construction increased to USD2.312 billion. Construction works in Peru are often affected by unpredictable situations due to factors such as climate or soil conditions, with the result that few, if any, will be completed as planned. Technical variations are common practice in Peru — not only at the owners’ demand, but also because of poor engineering. The Peruvian market in the construction sector is composed of many construction companies. They cover the full range of project types, with some companies trying to participate in all of them. The main types of projects in the construction sector are the following: residential buildings, buildings for offices, oil and gas, mining, hydroelectric plants, road works and ports. The main national and foreign construction companies are the following: (a) GyM SA; (b) Odebrecht Perú Ingeniería y Construcción SA; (c) CBI Peruana SAC; (d) Conirsa SA; (e) JJC Contratistas Generales SA; (f) Cosapi SA; (g) Abengoa SA; (h) HV Contratistas SA; (i) Ingenieros Civiles y Contratistas Generales; (j) Constructora Andrade Gutiérrez SA; (k) EnergoprojektNiskogradnja SA; (l) Skanska; (m) Camargo e Correa; (n) Queiroz Galvao;

13 Visit: http://m.inei.gob.pe/estadisticas/indice-tematico/construccion-11154/.

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(o) (p) (q)

OAS; OHL; and San José Perú SAC.

2.2. Participants 2.2.1.

2.2.2.

2.2.3.

In the Peruvian construction industry, as in most of the construction industries around the world, there is a number of participants in a construction project that not always are aligned to work together. Depending on the type of project, the project delivery system chosen, and the risks assigned, the participants (or their roles) may change. In this regard, there will be a client (sometimes wrongly called ‘employer’), a contractor, subcontractors, vendors, suppliers, designers, consultants, supervisors, construction manager, management contractor, project management officer (PMO) and financer, among others. In the last months there has been an increase in interest in using a PMO for the execution of construction projects. This interest came, first, under a Government to Government Agreement by which a Foreign Government offers the Peruvian Government the experience, expertise and transfer of knowledge to implement, execute and conclude construction and/or infrastructure projects (by the time we are writing this piece of paper, both the UK and France have a Government to Government Agreement with Peru and some construction projects are under execution). However, the success of the Panamerican and Parapanamerican Games Lima 2019 using a PMO composed of UK companies have called the attention of the Peruvian Government and recently enacted a new law that purports to regulate the figure of the PMO [which are called ‘Asistencia Técnica Especializada’ (Specialized Technical Assistance)]. It can be found in the Ley que Aprueba Procedimiento para la Contratación del Servicio de Asistencia Técnica Especializada para la Gestión de Inversiones [Law that approves the Procedure for Contracting the Services of Specialized Technical Assistance] Supreme Decree No 236-2020-EF (Peru). It is quite clear that those are the first steps for the Peruvian Government in the long way of implementing real PMO’s inside each Ministry and public entity with an infrastructure office.

2.3. Work, Health and Safety 2.3.1.

The Ley de Seguridad y Salud en el Trabajo [Health and Safety at Work Law] Law No 29783 (Peru) requires employers to develop an action plan for the prevention of workplace accidents. Employers are liable for all of the economic costs related to workplace accidents or injuries. In addition, all employers

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must notify authorities of fatal accidents within 24 hours and must keep records on work-related accidents and risks. Companies that have a workforce of more than 20 employees must establish an Occupational Health and Safety Committee. Employers must also maintain a safe and healthy work environment and provide employees with adequate protective gear. Employers are also obliged to provide workers with information concerning workplace risks, as well as with occupational safety and health training.

2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

The environment and its protection have been a major topic for discussion in Peru in recent years. Politicians recognize that Peru has an incredibly diverse environment that needs to be protected. Accordingly, they recognize the obligation to include policies on environmental protection and conservation in their action plans. At the end of 2018, the Peruvian Congress and the President approved the Ley que Regula el Plástico de Un Solo Uso y los Recipientes o Envases Descartables [Single Use Plastic and Disposable Containers Law] Ley No 30884 (Peru), which deals with the adverse impact of single-use plastic, plastic marine waste, disposable containers, and other polluting elements on human health and the environment. There are, of course, other laws that regulate the environment in Peru; some examples of these are the Ley General del Ambiente [General Environmental Law] (Peru) Ley No 28611, the Ley General de Aguas [General Water Law] (Peru) Ley No 17752, and the Ley de los Recursos Hídricos [Water Resources Law] (Peru) Ley No 29338. All of these laws must be applied in every sector, whether it be mining, agriculture or the construction sector. Constructors must comply with environmental regulations as they are directly liable for violating the laws. The sanctions are usually severe.

3. Legal Underpinnings of Contracts 3.1. Statute Law Peruvian Civil Code 3.1.1. The Peruvian Civil Code came into force in 1984. The Peruvian Civil Code governs civil relations of natural persons and legal entities, public or private. Contracts, guarantees, goods and real estate are the most relevant

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matters regulated in connection with construction contracts and public procurement. The Peruvian Civil Code is divided into different sections called ‘books’. As is the case with most civil codes in the continental tradition (civil law), the Peruvian Civil Code has, among others, one book which regulates legal transactions, one for obligations, and one for the sources of obligations (including contracts (in general), specific contracts, unjust enrichment, unilateral promise, and torts). One type of contract specifically regulated in the Peruvian Civil Code is the construction contract. Although there are few rules that apply to this type of contract (28 Articles), they help to resolve many issues that arise during the execution of construction contracts (from Article 1771 to Article 1789 of the Peruvian Civil Code). Construction contracts are regulated by these Articles and, of course, by those included in the book of sources of obligations related to contracts, and the book of legal transactions.

3.2. Construction of Contract Terms 3.2.1.

3.2.2.

3.2.3.

There are four general rules of interpretation of contract terms, three of them are included in the book of ‘Acto Jurídico’ (Legal Acts) of the Peruvian Civil Code and one in the book of ‘Contratos’ (Contracts). Pursuant to Article 168 of the Peruvian Civil Code, the contract shall be interpreted according to what has been expressly included in it and following the principle of good faith. In this regard, the good faith principle is recognized as a legal baseline to construct contract terms, which is a clear difference with common law systems. According to Article 169 of the Peruvian Civil Code, the contract terms are constructed by means of the others, being attributed to the doubtful ones the meaning that results from the set of all. Also, pursuant to Article 170 of the Peruvian Civil Code, the expressions that have several meanings shall be understood in the most suitable to the nature and object of the contract. Finally, according to Article 1362 of the Peruvian Civil Code, the contracts are binding to what has been expressed in them. It also states that it is presumed that the declarations expressed in the contracts respond to the common will of the parties and whoever denies that assumption must prove it.

3.3. Private and Public Procurement Public Procurement Law 3.3.1. Public construction contracts are regulated by the Public Procurement Law and Reglamento de la Ley N° 30225, Ley de Contrataciones del Estado [Regula-

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3.3.3.

3.3.4.

tion of Law No 30225, Public Procurement Law] (Peru) Decreto Supremo No 344-2018-EF (‘Public Procurement Regulation’). These laws are recognized as the General Regime and govern most public procurement relations: public works, acquisitions, consultancy services, services in general, rentals, and insurance for all public entities of the Peruvian government. The executive branch of the government created the OSCE, which is a special agency for public procurement issues. Its purpose is to monitor all of the proceedings, bids and actions taken by all entities and public servants in relation to public procurement, with a special emphasis on public works contracts. It also has an administrative tribunal which is the highest authority in the settlement of disputes arising from bids and any other dispute that may occur prior to the signing of a contract. The General Regime regulates not only the bidding process itself, but the contracting procedures, the execution of contracts, the most important contract conditions, extensions of time or additional costs, the termination of the contract, and the dispute resolution methods, which in all cases is a mandatory arbitration. Conciliation and dispute boards are also recognized as dispute resolution mechanisms to solve disputes under public construction contracts. The Contraloría General de la República [Comtrollership General of the Republic] becomes involved in cases where approval is required for additional costs. Such approval is needed when these additional costs total over 15 % of the original contract amount.  

3.4. Public-Private Partnership Law 3.4.1.

3.4.2.

3.4.3.

The Public-Private Partnership Law and Reglamento del Decreto Legislativo N° 1362, Decreto Legislativo que regula la Promoción de la Inversión Privada mediante Asociaciones Público Privadas y Proyectos en Activos [Regulation of Legislative Decree No 1362, Legislative Decree that Regulates the Promotion of Private Investment through Public-Private Partnerships and Projects in Assets] (Peru) Decreto Supremo No 240-2018-EF regulate contracts where both the state and a private investor are jointly involved in the construction, exploiting or operation of an infrastructure project. In PPP contracts, similarly to concession contracts, many other contracts linked to the project are involved: there are subcontracts, financial contracts, consultancy services contracts, supervising contracts, and construction contracts. The ‘project delivery system’ chosen by the agents involved in a PPP depends on the kind and magnitude of the project. It is common to use a design-build system or ‘management at agency’ system. In these cases, construction contracts not only oblige the contractor to execute the works, but also usually require the contractor to comply with the pre-

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paration of the design, commissioning (turnkey mode) and operation of the project. If there is no situation ruled in this law for the execution phase, then the Public Procurement Law can be applied (supplementary application) and, if the Public Procurement Law does not regulate specific situations, then the Peruvian Civil Code applies (supplementary application too). Until recently, there was another regime governed by the Texto Unico Ordenado de las normas con rango de Ley que regulan la entrega en concesión al sector privado de las obras públicas de infraestructura y de servicios públicos [Single Unified Text of the Standards with the Rank of Law that Regulate the Concession to the Private Sector of Public Infrastructure Works and Public Services] (Peru) Decreto Supremo No 059-1996-PCM (‘Concession Law for Public Infrastructure Works’) and Reglamento del Texto Unico Ordenado de las normas con rango de ley que regulan entrega en concesión al Sector Privado de las obras públicas de infraestructura y de servicios públicos [Regulation of the Single Ordered Text of the Norms with the Rank of Law that Regulate the Concession to the Private Sector of the Public Works of Infrastructure and Public Services] (Peru) Decreto Supremo No 060-1996-PCM, which was the first law of its kind regarding the possibility for the Peruvian government to grant a concession to a private entity for the construction, exploiting or operation of an infrastructure work or a public service. The idea was to update and improve the regulation, to go from a type of ‘concession 1.0’ to a ‘concession 2.0’. However, the Public-Private Partnership Law has been modified in many aspects recently and has derogated almost everything in the Concession Law for Public Infrastructure Works regime. Only two Articles of the Concession Law for Public Infrastructure Works remain in force. These Articles are related to ‘legal stability agreements’ and the transfer value of some goods to the Governmemnt during or at the end of the concession.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

For further reference, see Section 1 of this chapter.

4.2. Licensing of Professionals and Contractors 4.2.1.

Pursuant to Article 3 of the Ley que Autoriza a los Colegios de Arquitectos del Perú y al Colegio de Ingenieros del Perú para Supervisar a los Profesionales de

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Arquitectura e Ingeniería [Law that Authorize Peruvian Architecture Bars and Peruvian Engineering Bar to Supervise Professionals of Architecture and Engineering] Law No 16053 (Peru), the license of engineers and architects can be obtained only through universities. To practice in engineering and architecture it is essential to register the licenses obtained at the universities in the Engineering Bar and Architecture Bar. Additionally, Article 1 of the Ley que Complementa la Ley No 16053 [Law the complements the Law No 16053] Law No 28858 (Peru) includes a list of requirements to practice in engineering and architecture as well as the main activities for each profession.

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

5.1.3.

5.1.4.

There are no specific construction standard forms in Peru; most contracts are drawn up for the specific case. Nevertheless, FIDIC formats are becoming more frequent, including the FIDIC Red Book, FIDIC Pink Book, FIDIC Yellow Book, FIDIC Silver Book, FIDIC Blue Book and FIDIC Emerald Book. In addition, there is a growing interest in other standard forms of contracts, such as the NEC3 and NEC4. The NEC contract was first used in Peru for the construction of the infrastructure for the Pan American and Parapan American Games, held in Peru in 2019. NEC 3 is being used for the Reconstruction with Changes Project (a project with many packages to rebuild schools, hospitals, roads and other works in the North of Peru14). Regarding collaborative contracts, there are some Peruvian professionals, who studied the MSc in construction law and dispute resolution at King’s College London, who worked closely with David Mosey (Director of the Centre of Construction Law & Dispute Resolution at KCL) in the translation of FAC-1 into Spanish. This was the first time FAC-1 was translated into this language around the world. The Peruvian Government has contracted an international law firm to work on a standard contract for Public-Private Partnership Projects exclusively, hence, this will be probably the first standard form for infrastructure projects for the Peruvian construction industry.

14 Visit: https://www.rcc.gob.pe/2020/.

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6. Key Issues 6.1. Overview 6.1.1.

6.1.2.

6.1.3.

Many of the key issues in construction contracts are a consequence of bad translations from the original language into Spanish. As already stated, FIDIC forms are used in Peru both in public and private works. However, in any case, translations are frequently not as good as they should be. This leads to another issue: as translations are often bad, there are frequently conflicts in the wording of some clauses with the Peruvian Civil Code. Almost invariably, the key issues surrounding construction contracts involve a conflict of contractual or legal interpretation. Another factor leading to construction contract problems is the lack of knowledge among professionals about the construction sector and its nature. Lawyers, architects and engineers sometimes wrongly assume things to be true: for example, it is not true that extensions of time must always be compensated; it is not true that contractors are always responsible for the different site conditions; and it is not true that a lump sum contract implies an unchangeable price (as it depends on whether there are variations).

6.2. Interpretation of the Scope 6.2.1.

6.2.2.

6.2.3.

6.2.4.

6.2.5.

All contracts include a clause where parties agree on the main scope with which the contractor must comply. The typical wording of this clause obliges the contractor to execute works to build and deliver a construction work to the owner. Although it may seem clear that the contractor is obliged to execute works to deliver, for example, a hydroelectric plant or a highway to the owner, there is one classic issue that arises during the execution of the contract, which can be summarized in the following question: what is the scope of the contract? Many owners think that the scope of the contract implies the execution of the works based on a fit for purpose clause. Even if there is not an express fit for purpose clause, they believe the contractor should comply with it as a sort of implied term in the contract. On the other hand, many contractors think they must comply with their obligations based solely on the clauses expressly agreed with the owner. Contractors execute the works based on the technical and economic proposal. Indeed, they believe they are obliged to execute a contract not a work. To avoid such issues, the inclusion of an express fit for purpose clause is recommended if the owner wants to oblige the contractor to deliver the work the owner needs. Even if the Peruvian Civil Code may help to resolve disputes

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related to the interpretation of the scope, the best way to avoid these issues is by including specific clauses.

6.3. Price 6.3.1.

6.3.2.

6.3.3.

Articles 1776 and 1781 of the Peruvian Civil Code regulate two modalities commonly used in construction contracts in Peru: the lump sum and the unit price systems. However, these are not the only methods used. With the development of more specialized construction contracts, due to the high demand for mining and the energy sector, and the exponential growth of the real estate sector, the terms of the price may contain rules for time and materials (reimbursable expenses), target prices or price caps. A common problem in lump sum contracts is that owners understand the lump sum as ‘all inclusive’ when, in fact, there is an equation of a fixed-price in exchange of an agreed scope. For example, a general feature of price clauses is an indication that the contract price fully compensates the contractor for all expenses, direct costs, indirect costs, incidental costs, utility costs, losses, damages, taxes, and everything that is necessary for the proper execution of the work, not subject to any adjustment. One example of a price clause that is typically misunderstood in a ‘lump sum’ contract is the following: For the satisfactory performance and completion of the works in accordance with this Agreement, the Owner shall pay the Contractor the Lump Sum rate specified in Exhibit ‘A’ attached hereto. The rates will be firm during all the Agreement period and will not be modified by any concept, including, but not limited to, cost escalations and currency fluctuations.

6.3.4.

However, unless otherwise specified in the contract, a lump sum price is a fixed-price for a specific scope; if the scope varies, the price may also vary. This is not fully understood in the Peruvian construction industry.

6.4. Changes 6.4.1.

A very common clause in construction contracts in Peru is one referring to changes of scope. Generally, if not always, the contractor is entitled to compensation for variations agreed in writing with the owner. The owner, in turn, is entitled to compensatory adjustment if such changes mean less work or a decrease in the cost of the works. Generally, the owner is entitled to make changes in the scope consisting of additions, reductions or other revisions by change orders or work instructions, which are binding on the contractor.

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One example of a variation clause is the following: The Owner shall have the right at any time to request changes to the scope of works, and no such change shall impair or invalidate this Agreement. Such changes may include additions, deletions, substitutions, alterations, changes in quantity, form, kind, position, dimension, level or line, and changes in the specified sequence, method or timing of the Works. This change request shall not be denied by the contractor unless there is a reasonable justification.

6.4.3.

6.4.4.

One major issue for changes of scope is when parties do not incorporate in the contract a table of applicable prices for the new activities of the new scope. Problems arise in determining if the contractor must use the prices of the contract or different prices for the new activities. If the contract prices offer no benefit to the contractor, the contractor will discuss with the owner the application of different prices, but if the contract prices benefit the owner, the owner will naturally insist that the contract prices should apply. These disputes frequently end in arbitration. Another main issue is when an owner’s instructions for a change of scope are made orally and not in writing. There is a bad practice among engineers in Peru to not invariably require the owner to provide written notice of the change. Instead, contractors start performing the changes and wait until the end of the works to claim for the additional costs of the changes. Under these circumstances, owners are reluctant to recognize changes made with oral instructions. As a consequence, these disputes inevitably end in arbitration.

6.5. Extensions of Time 6.5.1.

6.5.2.

Time is an important element in construction contracts. As construction lawyers, engineers, architects, designers, owners, financers, subcontractors, and even the State (in public contracts) know, one of the most important issues they need to deal with is that related to completing the works on time. One example of an extension of time clause is the following: The Contractor will have the right to an extension of time only in cases of delay if the causes are not attributable to him. The request for an extension of time must be notified to the Owner immediately after the Contractor becomes aware or should reasonably have become aware of the circumstances of the extension of time. The Contractor must notify the Owner of the support for the extension of time, which must be accompanied by the corresponding information and/or documentation so that the Owner can make a decision. If the request for an extension of time proceeds, the Owner shall grant to the Contractor the extension of time and the costs in the event that the critical path is affected.

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The problem is — and this is not a new one in this industry — that the nature of construction is so complex and unpredictable that almost no construction projects are completed by the time initially agreed. The problems are exacerbated by other specific factors that make construction activity more unpredictable in Peru: soil conditions are often problematic, climatic conditions are very diverse, and archaeological remains can be found in almost any province in Peru. With this in mind, it is common practice to include clauses related to extensions of time in construction contracts. However, one of the main issues is that contractors usually do not have good control over the schedule and sometimes they do not even have a bare minimum of accurate information about it. Consequently, when they claim for an extension of time they do not have adequate proof to justify the time required to complete the works. Even when contractors are entitled to an extension of time, the lack of good control and updating of the schedule makes it difficult to prove the time claimed.

6.6. Satisfaction of Client 6.6.1.

6.6.2.

6.6.3.

6.6.4.

Owners usually include in the contracts that the contractor must comply its obligations to the satisfaction of the owner. However, contractors tend to change this and specify that they shall comply its obligations according to the agreed specifications and scope. Hence, contractors avoid being conditioned to the subjective satisfaction of the owner. Moreover, the subjective satisfaction standard is not in line with the provisions of the Peruvian Civil Code which states that when stipulated in a clause that the works be done to the satisfaction of the owner, if there is lack of conformity it will mean reserved acceptance of the work, subject to the relevant statement of an expert. Nonetheless, owners treat the satisfaction clause as a way to require fitness for purpose, even if it has not been established in the contract. It is not usual to have a contractual definition of what are ‘the generally accepted best practices’ or ‘highest standards’, for example. Owners use these circumstances to argue that the meaning of the above statements is owner satisfaction. One example of the above-mentioned clause is the following: The Contractor guarantees that it will perform the work with due diligence and in a safe, competent and according to generally accepted best practices for the type of Contract, in strict accordance with the contractual documents requirements and all applicable statutes, rules and regulations of any government agency or any other government authority having jurisdiction, in accordance with the highest standards and in accordance with any policies and environmental guidelines, safety and health requested by the Owner.

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The Owner may reject any work performed by the Contractor if it thinks that it does not comply with the rules and standards for the type of contract or does not comply with the contract documents standards and may withhold the entire payment of the Contractor for as long as the Contractor takes to complete the works to the satisfaction of the Owner. The Owner will have no obligation to reimburse the Contractor for the costs and expenses associated with any of these remedial works.

6.7. Late Completion 6.7.1.

6.7.2.

6.7.3.

Most contracts include a penalty clause, which states that the contractor must pay a predetermined daily or weekly amount or percentage of the contract price, as a penalty for late completion or late milestones. The amount nominated by way of penalty is usually, if not invariably, established by the owner. Penalty clauses are limited to a percentage of the contract sum, usually 10 %. However, the penalty clause does not constitute a waiver of any right the owner may have in light of damages. In penalty clauses, it is also common for the owner to have the right to terminate the contract if they get to the established ceiling. One example of a penalty clause is the following:  

In the event that the Contractor does not comply with the time for completion and / or any milestone provided in the Contract, it shall be liable to a penalty equal to 0.1 % of the contract value for each day of delay. This penalty will reach a maximum of ten (10 %) of the contract amount, to be deducted from the final invoice and / or withholding of the Guarantee Fund and / or the Performance Bond, if that be not enough. The Owner may terminate this contract and execute all guarantees if the Contractor exceeds 10 % of the contract amount in penalties.  

 

 

6.7.4.

It is important to remark that penalty clauses in Peru — as stated above — must not be understood according to the doctrine of penalty clauses under the common law (either the USA or UK system), nor as liquidated damages under the common law. Penalty clauses have some elements of both doctrines, but their particular elements were derived from the typical civil law tradition.

6.8. Latent Conditions 6.8.1.

Most contracts do not contain a specific clause dealing with latent conditions. If the contract does not provide for latent conditions, then the general provision under the Peruvian Civil Code is that the cost of overcoming the latent condition must be borne by the owner. Article 1784 of the Peruvian Civil Code provides that the contractor is responsible for latent site conditions if the con-

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6.8.4.

6.8.5.

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tractor developed the studies, drawings and other documents necessary for the execution of the works, or if the contract establishes the contractor’s responsibility. One issue in latent conditions clauses occurs when owners try to place more risk on the contractor, shifting the risk of the information and studies provided by the owner to the contractor. Clauses written by the owner protect them from deficiencies or inadequacies in information, requiring the contractor to review or ‘validate’ information, even when picking up another firm’s design and carrying it to completion. However, contractors are beginning to limit ambiguity regarding how latent conditions will be dealt with, clarifying or trying to clarify the terms of the contract, whether it is at the tendering phase or before execution. Contractors are trying to include the right to rely on information obtained from the client or generally accepted public sources. The right to rely further defines and narrows the application of the standard of care. If the contractor is unsuccessful in obtaining these modifications to the contract, in some cases, verification of all of the information provided is completed and priced into the work proposal. Another issue occurs in relation to the risks involving soil. Pursuant to Article 1774.2 of the Peruvian Civil Code, the contractor is bound to inform the owner immediately about any defects in the soil if they are discovered before or during the execution of the work and affect its performance. Article 1784 of the Peruvian Civil Code also provides that the contractor will be responsible for the latent site conditions only if the contractor has developed the studies, drawings and other documents necessary for the execution of the works (except if agreed otherwise). In other words, the risk regarding soil conditions belongs to the owner if the owner develops those studies (as occurs in a traditional project delivery system: design-bid-build). One of the owner’s clauses which shifts latent conditions to contractors is as follows: The Contractor declares that the Owner has provided information regarding the conditions of soil, topography, geological and soil mechanics of the site of the Work. It also states that the Contractor is responsible for reviewing, interpreting the information provided and making corrections as necessary at cost to comply with the Contract. The parties agree that the Owner is not liable for the accuracy, adequacy, completeness or reliability of information, verbal or written that has been provided for the purposes of, or in the Contract.

6.9. Force Majeure and Acts of God 6.9.1.

Pursuant to Article 1315 of the Peruvian Civil Code, the party unable to duly perform their obligations in a timely manner due to an event of force majeure

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(defined as an unforeseen event impossible to resist) will not be responsible for fulfilling the obligation for the duration of the event. Nonetheless, the contractor may not be excused from performing their obligations if the parties agree that a force majeure case would not release the contractor from liability. The concepts of force majeure and acts of God are not problematic, as they are widely known in Peru. The basic principle is that parties must not be held liable for damages arising from events beyond their control or from unforeseen acts of nature. Therefore, parties cannot be excused from performing their obligations if they are unable to prove that they made all efforts to comply with the contract. In most cases, the issue is the recognition of an act that qualifies as force majeure or an act of God, since sufficient evidence needs to be presented to demonstrate that any given event qualifies. Experience shows that it is best practice to have a contractual definition of the events that are not force majeure, to determine which events are and are not force majeure (for example, weather conditions). According to Article 1327 of the Peruvian Civil Code, the alleging party is under a duty to mitigate its loss. Compensation is not due for damages which the alleging party could have avoided by employing ordinary diligence, unless otherwise agreed in the contract. One typical clause is the following: It is clearly established that the Parties shall not be responsible and will not incur an event of default only if the total and / or timely delivery of the works is prevented by an act of God event or force majeure. The Party affected by the occurrence of such event will be excused from performing its obligations throughout the extension of that event and its effects. To this end, the affected Party shall notify the other Party within forty-eight (48) hours of such circumstances occurring or becoming known. The affected Party shall make every reasonable effort to remove or remedy the cause of such act of God or force majeure or mitigate its effect as quickly as may be possible. In the event the Contractor is affected by force majeure, it shall notify the Owner also with the steps it proposes to take including any mitigation measures and reasonable alternative means for remedy and/or performance that is not prevented by act of God or force majeure. The Contractor shall not take any such steps unless directed in writing so to do by the Owner.

6.10. Limitation of Liability 6.10.1. It is not common practice to include a limitation of liability clause. The liability of the contractor is usually unlimited. However, there are some companies that seek to include such clauses. Most owners do not accept this kind of clause and they argue the application of the Peruvian Civil Code.

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6.10.2. Indeed, Article 1328 ofthe Peruvian Civil Code establishes the prohibition for limiting or excluding liability in cases where the damage is a consequence of gross negligence or willful misconduct. That is why many, if not all, contractors are not allowed to include a limitation of liability clause. Even if they include such a clause, it will probably be considered void. 6.10.3. One typical example of a limitation of liability clause is the following: The Contractor will defend, protect, indemnify and hold harmless the Owner, its directors, officers, employees, representatives and agents, and each of them, for, from and against any and all liabilities, claims, demands, damages, losses, costs and expenses, of any kind or description, including, but not limited to, judgments, amounts agreed upon in settlement and reasonable attorneys’ fees, caused by, arising out of, resulting from, attributable to or in any way incidental to the performance of the works (‘Losses’), except to the extent that any such Losses are directly caused by the Owner’s gross negligence or willful misconduct.

6.10.4. This clause complies with the Peruvian Civil Code rules for contractual responsibility. One example of a typical clause that does not comply with the rules of the Peruvian Civil Code is the following: The Contractor will not be responsible for gross negligence or willful misconduct if the works delivered to the Owner do not comply with the objectives of the Owner or if defects are detected during or at the end of the completion of the works.

6.10.5. According to Article 1328 of the Peruvian Civil Code, in the above-mentioned clause the contractor is trying to exclude liability for defects. Hence, it will be considered void. Even if the real intentions of the parties were to exclude liability (which is rare, but not imposible if economic and commercial factors are considered), the clause itself is considered void. 6.10.6. The writing of the rules of the Peruvian Civil Code has been criticised a lot in forums and conferences. As an example of interpretation problems, if the Peruvian Civil Code prohibits not only the exclusion, but the limitation of liability, contractors will not be allowed to include a cap of money as a penalty clause because, in that case, the clause will be considered void. Obviously, it is not only unjust for the contractor, but a commercial nonsense.

6.11. Duration of Exposure 6.11.1.

The law in Peru provides a time limit for bringing claims due to supervening destruction or ruin in relation to a construction project. Article 1784 of the Peruvian Civil Code states that, if in the course of five years from the acceptance of the works, the construction is destroyed in part or presents a danger of ruin or serious defects of construction, the contractor is responsible to the owner whenever it is informed in writing within six months of the discovery.

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Any different pact will be null; it is not permissible to exclude or limit the operation of the Peruvian Civil Code through contracts in this case. These time limits vary between five and seven years under the Peruvian Civil Code and the Public Procurement Law, respectively. An example of a duration of exposure clause in a Peruvian public construction contract is the following: The conformity of the works by the Public Entity does not undermine their right to later claim for defects or hidden defects, as provided by Article 50 of the Public Procurement Law, and in accordance with the terms of reference and technical file.

6.11.3. It is agreed that, if in the course of seven years from the receipt of the works, the construction is totally or partially destroyed for reasons attributable to the contractor or construction defects, the contractor is liable and, in this case, the public entity may start the actions set out in Article 212 of the Reglamento de la Ley de Contrataciones del Estado [Regulation of the Public Procurement Law] Supreme Decree No 350-2015-EF (Peru).

6.12. Time Bars 6.12.1. 6.12.2.

6.12.3.

6.12.4.

6.12.5.

There has been significant discussion about the possibility of including timebars clauses in construction contracts. It is common practice in construction contracts to establish a period in which the contractor may submit its claims related to additional price or extension of time for completion. If the contractor does not submit its claims during this period, the owner will not recognize the additional price or extension of time. In other words, the contractor will not have the right to any additional payment or time for completion. Article 2003 of the Peruvian Civil Code establishes the following: ‘Expiration extinguishes the right and the corresponding action’. Furthermore, Article 2004 establishes that the ‘expiration periods are established by the law, and it is prohibited to make it by another way’. Because of Article 2004, in some arbitration proceedings some professionals have argued that parties are not allowed to include time-bar clauses in a contract where there is a time limit that one party can invoke to the other as a defensc against the possibility of taking more time to complete the works or claiming more money when the time limit has already been reached. In contrast with other jurisdictions, such as Brazil or Chile, in Peru there is express reference to the way time-bar clauses must be applied. Some countries do not prohibit parties to agree on this type of clause, while others allow them expressly to agree on time-bar clauses. In Peru, time-bar clauses cannot be agreed in a contract.

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6.12.6. FIDIC contracts include a time-bar clause related to the possibility of a claim for extension of time and additional costs (see sub-clause 20.1 of FIDIC Red Book 1999 or sub-clause 20.2.1 of FIDIC Red Book 2017). Some professionals argue that these clauses are void or partly void under Peruvian Civil Code Article 2004. However, as Peruvian legal doctrine mostly recognizes, the prohibition included in Article 2004 applies when a loss of rights is involved. As the FIDIC time-bar clause does not mean a loss of rights (the party has the right only when the requirements and procedure are satisfied), Article 2004 must not be applied and the clause must not be void. 6.12.7. In any case, the discussion about the possibility of including a time-bar clause in a contract is still alive and generates issues between parties when they seek to submit claims. 6.12.8. One of the typical time-bar clauses in Peruvian construction contracts is the following: Contractor’s claim The Contractor shall give notice to the Owner about the extension of time and/or additional payment to which he considers himself to be entitled. The notice shall be given no later than 30 days after the Contractor becomes aware of the event. If the notice is not given within such period, the extension of time and/or the additional payment will not be recognized by the Owner.

6.12.9. One of the typical time-bar clauses used in Peru through a FIDIC standard form is the following (see sub-clause 20.1 of FIDIC Red Book 1999): Contractor’s claim If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provision of this Sub-Clause shall apply.

6.13. Back Charges 6.13.1. Construction contracts in Peru usually provide for remedies in the event of a default in performance by a contractor retained under the contract. It is important that a party carefully document the back charges they are seeking against the party who is seeking payment. It is common for owners to bill back charges to contractors, including a factor of 10–30 % overhead, and  

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profit applied to the total of the items included in the back-charge clause. These items are normally supervisors’, laborers’, suppliers’ or subcontractors’ costs. 6.13.2. One common issue in the application of these clauses is when owners decide to finish themselves the works not performed by the contractor, retaining contractor’s payments until the works are finished. When the works are finished, the owner back charges the contractor with all the costs incurred to finish the works and, in the end, the contractor usually does not receive any payment, or its payment is greatly diminished due to the owner abusing their right to back charges. 6.13.3. One typical clause is the following: In any event, pursuant to the provisions of this Contract, if the contractor receives a notice from the Owner to remedy deficiencies or failures to comply with the Works or to replace lost or damaged materials, damage to property of the Owner or a third party, and the Contractor declares or its actions demonstrate its inability or unwillingness to proceed with the remedy within a reasonable time, the Owner may make the respective corrections, whether to replace the non-conforming works, redo the works on its own or by a third party or replace goods by the quickest ways available, in which case the Contractor will be charged the costs incurred.

6.13.4. The cost of the back charges includes: (a) labor costs incurred, including all payroll additives; (b) net costs incurred by material given; (c) costs incurred by suppliers and subcontractors of lower rank, directly related to the implementation of corrective measures; (d) equipment rental and tools, charged according to the rates in effect in the area of the works; and (e) an additional 25 % applied to the total of the items referred to in the preceding points, to account for the owner’s overheads and supervision and administrative costs.  

7. Dispute Resolution 7.1.1.

7.1.2.

The dispute resolution method most often used in construction matters in Peru is arbitration. Pursuant to Article 45 of the Public Procurement Law, arbitration is mandatory in public procurement contracts. Litigation is not commonly used because it takes too long to resolve controversies and judges do not specialize in construction law, nor have the necessary skills to resolve construction disputes. A modification to the Public-Private Partnership Law was approved some years ago, by which parties are allowed to resolve controversies through the participation of an amiable compositor, a neutral facilitator during negotia-

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tion, with the aim of achieving a negotiated solution through flexible mechanisms or a dispute board. Article 9.6 of the previous Public-Private Partnership Law established the following before the modification: 9.6

7.1.4.

56.2

56.4

56.5

56.6

56.7

7.1.6.

Public-Private Partnership Contracts must include arbitration as the mechanism to settle disputes and shall contain provisions governing the procedure and causes for renegotiation and termination of contracts, including rules for the assignment of contractual status.15

Now, the new Public-Private Partnership Law states the following: 56.1

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Public-Private Partnership contracts must include an arbitration clause as the mechanism to settle disputes. The arbitral awards must be published in the institutional webpage of the public entity of the project. The Public-Private Partnership contracts can include a clause which allows the participation of an amiable compositor during the negotiation phase, who propose a formula to settle the disputes. In case the formula is accepted partially or totally by the parties, it produces the same effects as a legal transaction. … Additionally, parties can submit their disputes to a Dispute Adjudication Board pursuant to the agreed in the contract. The DAB’s decision is binding for the parties but does not limit their right to go to arbitration. The procedures, eligible institutions, terms and conditions for election, appointment and/or constitution of the Amiable Compositor and the Dispute Resolution Boards will be established in the regulation of this Law. Both the Amiable Compositor and the members of the Dispute Adjudication Boards may be neutral third parties of a different nationality from the parties. The provisions of the preceding paragraphs do not apply when disputes are submitted to an International Dispute Settlement Mechanism referred to in the Law N° 28933. The services provided by the Amiable Compositor, by the members of the Dispute Adjudication Boards, by the Centers and the Institutions that manage the abovementioned alternative dispute resolution mechanisms are not in the scope of the Public Procurement Law, provided that such services are required within the execution of Public-Private Partnership contracts.

However, the Public Procurement Law includes the dispute board as one of the dispute resolution methods to be used for work execution contractual matters, excluding the tendering phase. The dispute board is now a condition precedent to the initial arbitration in this kind of public contract. In this law, Article 45 establishes the following:

15 Unfortunately, there is no official English language version of the law and its modifications. However, we have tried to translate the modifications as accurately as possible.

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Article 45. – Dispute resolution mechanisms during the contract execution 45.1 Any dispute between the parties related to the execution, interpretation, resolution, nonexistence, ineffectiveness or invalidity of the contract is resolved through conciliation or arbitration under the agreement of the parties. Disputes concerning the nullity of the contract can only be submitted to arbitration. Parties may submit disputes arising from work contracts to the Dispute Adjudication Board, according to the reference value and other requirements established in its regulation, obtaining binding decisions. The regulation of this law may establish other dispute resolution mechanisms. The decision of the Entity or the Comtrollership General of the Republic to approve or not the execution of additional work cannot be submitted to conciliation or arbitration or to the Dispute Resolution Board. Claims related to improper or unjust enrichment, payment of compensation or any other claim arising or originate at the lack or partial approval of additional work, by the Entity or the Peruvian General Comtroller, cannot be submitted to conciliation, arbitration or any other dispute resolution mechanism set out in this Law or its regulation. They can only be submitted to the judiciary. Any agreement to the contrary is void. 45.2 … In cases where, according to the preceding paragraph, the Dispute Adjudication Board is applicable, parties may submit to this mechanism all disputes arising during the execution of the work until its full reception. Decisions issued by the Dispute Adjudication Board may only be submitted to arbitration within thirty (30) working days of reception of the work. Disputes arising after such reception may be submitted directly to arbitration within thirty (30) working days, as stated in the regulation of this Law.

7.1.7. 7.1.8.

Only time will tell if the DAB or the amiable compositor methods are effective and if parties in private construction contracts will prefer those to arbitration. A typical clause in construction contracts does not include a Dispute Board as a mechanism to settle disputes. It is more than usual to include arbitration instead: Any dispute, controversy or claim between the Parties as to the performance of this Agreement or the rights or liabilities of the Parties, or any matter arising out of the same or connected therewith, which cannot be settled amicably, shall be settled by arbitration before three (3) arbitrators, in accordance with the Rules of Conciliation and Arbitration of the Lima Chamber of Commerce, to whose management the parties submit unconditionally. The award of the arbitrator shall be in writing and shall be final and binding upon the Parties. Any judgment upon such award may be enforced in any court having jurisdiction or application may be made to such court for a judicial confirmation of such award and judgment or order of enforcement as the case may be. The costs of the arbitration proceedings shall be borne in the manner determined by the arbitrators.

Mirella Lechna-Marchewka and Hanna Drynkorn

Poland 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 4. 4.1. 4.2. 5. 5.1. 5.2. 5.3. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 6.10. 7. 7.1. 7.2.

Context 760 The Country 760 The Legal System 760 The Economy 762 The Construction Industry 762 Size and Nature 762 Participants 765 Protection of the Environment 766 Quality Assurance 767 Construction Contracting Dynamics 769 Legal Underpinnings of Contracts 769 Freedom of Contract 769 Legal Framework 769 Public Policy 770 Implied Contract Terms 770 Private and Public Procurement 771 Government Involvement 771 Legislation and Regulation 771 Licensing of Professionals and Contractors 771 Construction Contracts 772 Historical Background 772 Available Contracts 774 Amendment of Contracts and Bespoke Contracts Key Issues 777 Overview 777 Fit for Purpose 777 Late Completion 779 Latent Conditions 780 Force Majeure 780 Role of the Engineer 781 Sub-construction 782 Limitation of Liability 783 Duration of Exposure 784 Time Bars 785 Dispute Resolution 786 Arbitration 786 Dispute Adjudication Board 786

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1. Context 1.1. The Country 1.1.1.

1.1.2.

1.1.3.

1.1.4.

Poland is the ninth largest country in Europe with a population of 38 million people. It is a unitary state and is divided into 16 provinces. The capital of Poland is Warsaw. Despite its territorial division, the national law is applied uniformly. Legislation is created by the Parliament consisting of the Senate (upper house) and Sejm (lower house). The Sejm has 460 representatives and the Senate has 100 representatives. Poland gained independence in 1918. However, the development of a free market economy, civil and human rights, as well as the introduction of the rule of law and principles of democratic and modern society, only emerged after the breakdown of the Communist regime in 1989. Since 1 May 2004, Poland has been a member of the EU but has not yet adopted its common currency, the Euro. Poland is a member of NATO, the UN (Poland was one of its founding Member States), WTO, OECD and other international political and economic organisations.

1.2. The Legal System 1.2.1.

In Poland, as in most European countries, there is a system of civil law. This means that codes and regulations constitute mandatory legal provisions in the vast majority of cases. Therefore, all activities in the legal sphere are determined by written laws in the first instance, while national cases referring to certain points of law are only applied for interpretative purposes.

Legislative Hierarchy 1.2.2. The Constitution of Poland1 (the ‘Constitution’) contains the country’s supreme laws. It also establishes the hierarchy of the sources of Polish law as follows: (a) The Constitution; (b) Ratified international treaties; (c) National statutes; (d) Regulations,; and (e) Acts of local law. 1.2.3. EU regulations have also been binding since Poland’s accession to the EU. Poland, together with every new EU Member State, was obliged to introduce

1 Konstytucja Rzeczypospolitej Polskiej [The Constitution of the Republic of Poland].

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the acquis communautaire into the national legal system and respect its provisions. The acquis communautaire is the EU’s legal legacy encompassing all primary rights, i.e. all founding and accession treaties, as well as international treaties and secondary laws (including international treaties concluded by the EC and EU), Court of Justice adjudication, and declarations, resolutions and principles governing EC law. Unlike the common law system, previous court decisions do not have binding power in the Polish legal system and may only be used as an argument when written laws are insufficiently clear. It could be said that case law takes the form of an ad verecundiam argument where statutory law leaves a gap.  

1.2.4.

The Court System 1.2.5. The Polish justice system is organised into a hierarchy of courts. There are District Courts, Regional Courts, Appellate Courts and the highest Polish judiciary institutions—the Supreme Court, Supreme Administrative Court and Constitutional Court. 1.2.6. Resolutions adopted by a panel of seven judges of the Supreme Court and Supreme Administrative Court are treated as legal principles that should be respected by all other judicial bodies. However, there is no formal legal requirement to comply with them. Arbitration Tribunals 1.2.7. There are two main commercial arbitration courts in Poland: the Court of Arbitration at the Polish Chamber of Commerce (Sąd Arbitrażowy przy Krajowej Izbie Gospodarczej) and the Court of Arbitration Lewiatan (Sąd Arbitrażowy przy Konferederacji Lewiatan). There is also a special court for construction disputes called the Court of Arbitration at the Association of Consulting Engineers and Experts (Sąd Arbitrażowy przy Stowarzyszeniu Inżynierów Doradców i Rzeczoznawców). These main arbitration courts in Poland register approximately 500 cases each year. 1.2.8. If one of the parties to a contract is foreign entity, it is more likely that the parties will submit their dispute to an international arbitration tribunal. Parties most commonly select the ICC International Court of Arbitration or the Vienna International Arbitral Centre.

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1.3. The Economy 1.3.1.

1.3.2.

1.3.3.

1.3.4.

The Polish economy is the sixth largest in the EU, the largest in Eastern Europe and one of the fastest growing economies in the world2. Poland was the only EU Member State to escape the GDP slump in 2008 and there has been no recession in the Polish economy since December 2009.3 According to the European Commission, the rate of Polish economic growth was approximately 4.1 per cent in 20194. The Polish State steadfastly pursued a policy of economic liberalisation throughout the 1990s, with positive economic growth but negative results for some sectors of the population. The privatisation of small and medium stateowned companies and a liberal law on establishing new firms encouraged development of the private business sector, which has been the main driver of Poland’s economic growth. The agricultural sector remains handicapped as it struggles with structural problems, surplus labour, inefficiencies in small family farms and a shortage of investment. Restructuring and privatisation of ‘sensitive sectors’ (such as coal mining) has also been slow, although a recent wave of foreign investment in energy and steel has begun to turn the tide. Thanks to steady economic growth for 30 years, Poland has made great economic progress and is now ranked 21st worldwide in terms of GDP.5 The largest component of its economy is the service sector.6

2. The Construction Industry 2.1. Size and Nature 2.1.1.

The well-being of the construction industry in Poland is determined by the availability of EU assistance funds. As a result, most development takes place

2 The World Bank; available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations= EU&most_recent_value_desc=true. 3 M. Drozdowicz-Bieć, Reasons Why Poland Avoided the 2007-2009 Recession, Warsaw School of Economics (WSE) 2011, available at: http://kolegia.sgh.waw.pl/pl/KAE/struktura/IRG/publikacje/ Documents/pim86_2.pdf. 4 European Commission, Economic forecast for Poland, available at: https://ec.europa.eu/info/ business-economy-euro/economic-performance-and-forecasts/economic-performance-country/ poland/economic-forecast-poland_en. 5 International Monetary Fund, World Economic Outlook, October 2019, available at: http:// statisticstimes.com/economy/projected-world-gdp-ranking.php. 6 International Business Publications, Poland Investment and Business Guide Volume 1 Strategic and Practical Information, lulu.com 2017, p. 32.

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in sectors where Poland is required to attain EU standards. The construction industry is growing in the areas outlined below. Incineration Plants 2.1.2. Due to EU regulations requiring EU Member States to reduce landfill waste,7 Poland has experienced a surge of investment for incineration plant projects. These projects are aimed at changing the manner in which garbage is handled in Poland—from storage to incineration.8 2.1.3. Some incineration plant projects will be structured as classic procurement using only public funds, whereas other plants will be financed in cooperation with private investors as a public-private partnership. The size of the incineration plant projects differ in accordance with the needs of a local community. One waste-to-energy project is valued at approximately US. 95–235 million. Power Investments 2.1.4. There is also increased development in sector-specific infrastructure, such as power plants and thermal power plants. Recently, modernisation of existing installations are underway or planned in Poland due to ageing power plants. 2.1.5. At the same time, investments in the renewable energy sector are increasing in Poland, an example of which is the commencement of construction of the largest wind farm in the Baltic Sea in 2020, worth EUR 1.1–1.3 billion (approximately USD 1.3–1.5 billion).9 2.1.6. After several years of uncertainty, the Minister of Climate in 2020 announced construction of the first nuclear power plant in Poland. It is to start in 2026, and by 2040 six nuclear units will be built in Poland.10 The Reactors for the planned final nuclear capacity of 6–9 GW are expected to cost over PLN 100 billion (approximately USD 25.5 billion)11.

7 Council Directive 1999/31/EC of 26 April 1999 on the landfill of waste (Official Journal L 182, 16/07/ 1999 p. 1–19). 8 Council Directive 1999/31/EC of 26 April 1999 on the landfill of waste (Official Journal L 182, 16/07/ 1999 p. 1–19). 9 Construction of Polish wind farms on the Baltic Sea – expected impulse for the offshore industry during the crisis; available at: https://www.marinepoland.com/news/construction-of-polish-wind-farmson-the-baltic-sea—expected-impulse-for-the-offshore-industry-during-the-crisis.html. 10 Construction of Poland’s first nuclear power plant to begin in 2026; available at: https://notes frompoland.com/2020/06/16/construction-of-polands-first-nuclear-power-plant-to-begin-in-2026/. 11 Construction of Poland’s first nuclear power plant to begin in 2026; available at: https://notes frompoland.com/2020/06/16/construction-of-polands-first-nuclear-power-plant-to-begin-in-2026/.

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Railways 2.1.7. The Railways offer significant prospects for the construction industry. Investments in Poland will focus both on the modernisation of the existing connections and on the construction of new ones (e.g. construction of railway lines to the Central Communication Port – the so-called “Y” line).12 The EU plans to provide Poland with large funds for railway investments in the financial prospective for 2021–2027.13  

Ports and Maritime Infrastructure 2.1.8. The Minister of Maritime Economy and Inland Navigation has drawn up a list of the most important investments in ports and maritime infrastructure until 2030.14 These include port channels and docks, the construction of new quays with the necessary technical infrastructure, and the adaptation of terminals to support intermodal transport. The development of maritime infrastructure will involve the construction of new facilities or upgrading of existing ones.15 Along with the current and planned investments, expenses in this sector of the economy are to reach PLN 25 billion (approximately USD 6.5 billion). Roads 2.1.9. Lately, much investment in Poland has been associated with the construction of new roads. More than 2,000 km of highways and expressways have been built over the last 10 years. There is still much planned investment in roads, which aims to improve current road conditions and to creating a complete road network. Recently, another infrastructure project has begun, Poland’s 100 Ring Roads Program 2020-2030, the value of which is estimated at EUR 6.55 billion (approximately USD 7.7 billion).16 Broadband Network 2.1.10. A wireless broadband network is being developed across the entire country. Networks in several regions have already been completed, e.g. in Mazowieck 

12 Central Transport Hub to include 1,600km of new railway lines; available at: https://polandin. com/41899932/central-transport-hub-to-include-1600km-of-new-railway-lines. 13 Poland: €676 million worth of EU investments in better rails and roads; available at: https://ec. europa.eu/commission/presscorner/detail/en/IP_19_5552. 14 “Program for the development of Polish seaports until 2030” adopted on September 17, 2019. Available at: https://www.paih.gov.pl/poland_in_figures/transport. 15 Port of Gdynia will invest EUR 1.8 billion; available at: https://www.flandersinvestmentandtrade. com/export/nieuws/port-gdynia-will-invest-eur-18-billion. 16 Poland to spend EUR 6.55bln on 100 ring roads; available at: https://www.thefirstnews.com/ article/poland-to-spend-eur-655-bln-on-100-ring-roads-10378.

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ie and Podkarpackie. The value of investment in one region is approximately approximately USD 1.18 million.

2.2. Participants 2.2.1.

2.2.2.

Given that the development of public infrastructure in Poland is supported by EU funds, the largest infrastructure projects in Poland are associated with the public sector. Therefore, the main participants in the large-scale construction market in Poland are public bodies performing public functions (as Contracting Authorities) and private construction companies (as Contractors). The specifics of the entities taking part in the investment process in Poland are briefly presented below: (a) Investor – who should be understood as a natural or legal person or other organizational unit that initiates construction activity necessary to carry out the intended investment, allocates adequate funds for the implementation of this activity, performs or ensures the preparation of activities required by Construction Law to prepare a given construction, implements the investment or organizes its implementation, and in the final stage of a given activity, performs the activities necessary to take up the use of the object or objects of the investment or transfers it to the entity that will start using them. The investor is therefore the organizer of the construction process and then becomes its participant. (b) Contracting Authority/Employer/Ordering Party – who should be understood as an entity that orders the performance of the contract. Within the meaning of Public Procurment Law17 (hereinafter “PPL”), these entities are obliged to use public procurement procedures when purchasing works, supplies or services. It should be mentioned that the investor will not always be the same entity as the contracting authority/ employer/ordering party. (c) Contractor – who should be understood as the entity that commits to return the facility provided for in the contract, made in accordance with the design and the principles of technical knowledge. A contractor within the meaning of the PPL is a natural person, a legal person or an organizational unit without legal personality who applies for a public contract, has submitted an offer or concluded a public procurement contract. (d) Subcontractor – should be understood as a company or person performing tasks within work commisioned to the main contractor.

17 The Act of 11 September 2019 on Public Procurement Law (Journal of Laws 2019 item 2019).

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(e)

(f)

Engineer – The concept and function of the contract engineer does not result from the provisions of Construction Law, but was introduced by the International Federation of Engineers-Consultants (Fédération internationale des ingénieurs-conseils, abbreviated as FIDIC). If the investment involves the Investor Supervision Inspector, such person also form part of the Contract Engineer.The basic tasks of the Contract Engineer are: (i) technical supervision over construction works and the quality of their execution; (ii) supervision over all documentation prepared by the contractor; and (iii) exercising control over the correctness of the application of EU procedures and completing all formalities in this area (the majority of projects under which a contract engineer is employed are investments co-financed from EU funds). Environmental NGOs – are entities, which are not mentioned in the Construction Law, as participants of the investment process, yet if they signal their willingness to take part in the so-called “environmental proceedings” they might be granted with rights of the parties in such proceedings. Thus, environmental NGOs are important participants in a project given their capacity to suspend or delay it where they successfully prove a negative effect on the environment.

2.3. Protection of the Environment 2.3.1.

2.3.2.

Poland has been an EU Member State since 2004 and therefore its law and environmental policies must comply with the aims and activities of the EU. Poland also has an obligation to transpose the extensive EU environmental legal framework into its national law and to ensure that existing law enables a high level of protection and improvement of environmental quality. Within the construction context, the environment is protected at two stages— before construction when a decision on environmental conditions is required, and after construction when emission permits are issued.

Decisions on Environmental Conditions 2.3.3. The grant of a construction permit depends upon an environmental impact assessment. Consequently, the environmental impact assessment stage is one of the most sensitive stages of investment in Poland, especially where projects pose significant environmental impact and face negative public opinion. 2.3.4. However, some projects also require a decision on environmental conditions (decyzja o środowiskowych uwarunkowaniach). Such a decision is typically a

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prerequisite for subsequent permits required for a project—specifically a construction permit. The decision binds the authorities issuing subsequent administrative decisions and therefore determines many of the substantial features of a given undertaking at the very beginning. Emissions Permits 2.3.5. Emissions permits are administrative decisions issued by environmental protection bodies to establish the permitted scope of environmental exploitation through the emission of substances or energy. Permits differ in accordance with the effect on the environment. 2.3.6. An emissions permit must be granted before the commencement of specific types of activity that result in emissions. If emissions from a certain installation are low, an emissions permit may not be required. In this situation, it may only be necessary to notify an environmental protection body of the intent to engage in a certain activity instead of obtaining a permit. 2.3.7. An investment might require sector-specific permits, e.g. for emissions of gas or dust into the atmosphere, drainage of wastewater into water or soil, or the generation of waste. If the effect is greater, an integrated emissions permit will be required. Types of the latter projects are listed in the regulation of the Minister of the Environment.18 An integrated emissions permit refers to all the emissions related to a project and specifies the connections between them.  

Environmental NGOs 2.3.8. Environmental NGOs are able to participate in so-called ‘environmental proceedings’ and are very active in Poland. If they declare their access to proceedings, they are conferred broad rights and are entitled to join proceedings as a party. Therefore, environmental NGOs are important participants in a project given their capacity to suspend or delay it where they successfully prove a negative effect on the environment.

2.4. Quality Assurance Supervising Authorities 2.4.1. The Construction Law Act19 establishes several institutions that ensure a quality outcome in the construction process. For example, the Construction Supervi-

18 Regulation of the Minister of the Environment of 27 August 2014 on types of installations that may cause significant pollution of individual natural elements or the environment as a whole (Journal of Laws of 2014, item 1169). 19 The Act of July 7, 1994 – Construction Law (Journal of Laws 1994 No. 89 item 414).

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sion Inspectorate has been set up as a body that oversees the construction process and the quality of construction materials. There are also regional Construction Supervision Authorities that are primarily responsible for supervising compliance with construction law regulations and issuing administrative decisions in cases specified by construction law— including building permits. The specific responsibilities of the Construction Supervision Authorities also include: (a) Reviewing compliance of land use against zoning plans and environmental requirements; (b) Monitoring the safety of people and property during construction; (c) Reviewing the compliance of architectural and structural plans with appropriate legislation, standards and technical principles; and (d) Ensuring the proper exercise of independent technical functions in the construction industry.

Building Permits 2.4.4. A building permit is effectively an administrative decision that establishes the conditions for securing the construction site, the construction work, length of use, and demolition deadlines for temporary structures. It also sets out requirements for site supervision and when further permissions are required, e.g. on the grounds of safety of people or property, or to protect the environment. A building permit is issued on the application of the investor. 2.4.5. Apart from the exceptions specified in the Construction Law Act, a building permit is required for the commencement and continuation of construction work, which includes the execution, reconstruction, expansion, or upward extension of a building, as well as the carrying on of other works.  

Control of Building Materials 2.4.6. As an EU Member State, Poland was obliged to implement Directive 305/ 201120 on the harmonised conditions of marketing construction materials. Therefore, the Building Materials Act21 outlines the requirements that building material manufacturers must fulfil before they may enter the market. Inspections are conducted by the Voivodship Construction Site Inspectors (in Polish: Wojewódzcy Inspektorzy Nadzoru Budowlanego) to review the accuracy of building material labelling, product characteristics, and a manufacturer’s submitted product specification. 20 Regulation (EU) No 305/2011 of the European Parliament and of the Council of 9 March 2011 Laying Down Harmonised Conditions for the Marketing of Construction Products and Repealing Council Directive 89/106/EEC [2011] OJ L 88/5. 21 Act of 16 April 2004 on construction products (Journal of Laws 2004 No. 92 item 881).

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2.5. Construction Contracting Dynamics 2.5.1.

EU funding still strongly drives the Polish economy and its dynamic growth. Larger investments are usually structured through the FIDIC standard form contract (see Section 5.2). EU support is generally related to projects in the public arena, such that the vast majority of construction contracts include public entities. Further, these public entities have historically maintained a privileged position in contracts. They are also obliged to obey the mandatory provisions of the Public Procurement Law which regulates the use of public finances. These factors have a high degree of influence upon contractual terms and conditions in the resulting construction contract.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

Freedom of contract is one of the main principles of Polish contract law and is regulated by the Civil Code22. According to this principle, parties executing a contract may arrange their legal relationships at their discretion, so long as the content or purpose of the contract is not contrary to the nature of the relationship, the law, or the principles of community life.

3.2. Legal Framework 3.2.1.

3.2.2.

All contracts must comply with mandatory provisions of law. If a contract contains any provision that is inconsistent with such laws, the provision will not be effective and will be automatically replaced by a corresponding legal provision. There are also legal provisions that provide freedom for the parties to regulate certain issues, in the absence of which the law will apply to regulate that issue in the agreement. The investment process in Poland is regulated by many laws. The basic regulations that are essential to the investment process are the Construction Law and Civil Code. In addition, there are several other laws which must be considered when drafting a construction contract, such as the Law on Spatial Planning and Development23, Countering of Unfair Competition Act24, Energy

22 The Act of 23 April 1964 – Civil Code (Journal of Laws 1964 No. 16 item 93). 23 Act of 27 March 2003 on spatial planning and development (Journal of Laws 2003 No. 80, item 717). 24 The Act of 16 April 1993 on Countering Unfair Competition (Journal of Laws 1993 No. 47 item 211).

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Law25, and Public Procurement Law for public projects, as well as many other specific regulations. The government has considered adopting a ‘Construction Code’. It is to contain all regulations on the design and construction phases of a construction project. The intention of adopting a Construction Code is to increase the transparency of regulations referring to the investment process by placing them all in one legal instrument.

3.3. Public Policy 3.3.1.

3.3.2.

The strategic objectives of Polish public policy are to develop a competitive economy based on knowledge and entrepreneurship, which is capable of sustained and balanced development. Further objectives include employment growth and the improvement of social, economic, and territorial integration with the EU on a regional and national level. The national development plan is implemented by operational programs that are co-financed by European funds.

3.4. Implied Contract Terms 3.4.1. 3.4.2.

3.4.3.

3.4.4. 3.4.5.

The Polish legal system is a typical example of the civil law system, in that there is no concept of implied contract terms. Instead, the general principle of freedom of contract is limited by the provisions of national law, which consists of mandatory and non-mandatory provisions. Mandatory legal provisions apply under any contract, both when the contract addresses an issue differently to the regulation, or when the issue is not dealt with by the contract at all. These provisions are particularly relevant to employment contracts and consumer contracts. Non-mandatory provisions only apply to issues that are not regulated by a contract. Their purpose is to effectively supplement the contract. The public procurement system, however, mainly consists of mandatory provisions since the spending of public funds is specifically regulated.

25 The Act of 10 April 1997 – Energy Law (Journal of Laws 1997 No. 54, item 348).

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3.5. Private and Public Procurement 3.5.1.

3.5.2.

There is a significant difference between the regulations governing private investments and public investments. Since public investors implement projects for public purposes with public money, they must comply with the PPL in addition to general rules pertaining to contracts. The most important constraints imposed on public investors and their contractors are: (a) compliance with compulsory provisions of the PPL which governs the selection of project bidders and limits the freedom of choice of a contractor; (b) limitation on substantial changes to a public contract. Amendments may be implemented only in situations stipulated in the PPL (articles 454 and 455 of PPL); and (c) obligation to include a standard clause on sub-contracting in public contracts.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

Since Poland is ruled by a system of statute, national legislation plays a key role in shaping contractual relations (see Section 3.2). Consequently, the Polish legislator has quite a significant influence on contract wording.

4.2. Licensing of Professionals and Contractors Construction Licensing 4.2.1. Construction process participants such as architects and engineers must be appropriately certified and supervised by professional associations. The professional and independent solving of architectural, technical, and organisational issues in construction can only be conducted by persons with the requisite technical education and professional experience. 4.2.2. Licences for performing such independent technical functions are issued under special regulations by the appropriate professional authorities, e.g. the Regional Chambers of Civil Engineers and Regional Chambers of Architects. To qualify, an individual with suitable education and practical experience must pass an exam held by the General Office of Construction Supervision. The exam tests knowledge of the construction process and the ability to apply technical knowledge.  

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To conduct independent technical functions in construction, an individual must be admitted to the Central Register of Construction Licensees (by way of an administrative decision) and be registered as a member of the appropriate professional chamber (confirmed by a certificate issued by that chamber).

Business Licensing 4.2.4. While all parties are welcome to conduct business in Poland, the law is clear on the limitations applying to specific business sectors. These limitations are mainly the need to obtain concessions or permits. (a) Concessions – are required for conducting economic activity in areas of special importance for the security of the state or its citizens or another essential public interest such as mining, manufacturing and sale of explosives, arms, ammunition, technology for the military/police, protection of persons and property, energy, air transport, distribution of radio and television programs, and casinos. (b) Permits – these are administrative decisions regarding the conduct of business in areas such as the sale of alcoholic beverages, production of medicinal products, conducting financial activities (e.g. brokerage activity), and running a commodity exchange. 4.2.5. Some types of business must also be registered for so-called ‘regulated activities’. Registration in relation to these activities is meant to protect customers and their interests. Over 20 activities require registration, e.g. the storage of personal data, detective services, medical and dental practices, nursing, driving schools, alcohol production, travel agencies and intermediaries, and financial brokers. 4.2.6. As in many other countries, businesses in Poland must also be registered as a company in an individual business register or in the National Court Register.  

 

5. Construction Contracts 5.1. Historical Background Communism 5.1.1. Contract formation in Poland is still influenced by practices that were present during the communist era. Since everything was State-controlled in the communist system, contractual relations and the allocation of risk were less important. 5.1.2. For example, during the communist period, the principle of freedom of contract did not exist. All legal relations between parties to the investment process were determined by written laws, while the forms of construction con-

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tract were imposed by the State through the Regulation of the Minister of Construction.26 Furthermore, the terms and conditions of contracts for construction and design work were regulated in detail in acts of law (Regulation of the Minister of Construction) that were issued under delegated legislation. These regulations were changed every few years due to changes in the system. The general terms for construction work set out in the Regulation of the Minister of Construction consisted of only about eight clauses, comprising less than an eight page document. It applied to both the main contract and subcontracting, and included two separate standards for engineering and construction works. Furthermore, the investment market was highly dependent on State policy and the influence wielded by employers. All of these regulations were eventually repealed in 1992 following the enormous change to the system of governance from socialist to democratic, which decisively influenced politics, economy and law in Poland. At that time, all manifestations of the socialist system and economy were eliminated from the Polish legal system through an amendment to the Civil Code. However, the Regulation of the Minister of Construction had lasting effect on the wording of standard contracts. Regulations applicable shortly before the collapse of Communism (from 1974 and 1983)27 influenced subsequent contracts which, with some modification, were still applied—since Poland was unaccustomed to any other standard.

Introduction of FIDIC 5.1.7. FIDIC contract terms began to appear in Poland in the 1990s in connection with public investment projects for EU pre-accession programmes financed by EU assistance funds. The pre-accession programmes (PHARE28,

26 Ordinance of the Minister of Construction and Building Materials Industry of April 8, 1974 regarding general conditions of contracts for design work in construction and for the execution of construction projects and for the performance of construction and installation renovations (M.P. 1974 no 14 item 94). 27 Ordinance of the Minister of Construction and Building Materials Industry of April 8, 1974 regarding general conditions of contracts for design work in construction and for the execution of construction projects and for the performance of construction and installation renovations (M.P. 1974 no 14 item 94)and also: Resolution No. 11 of the Council of Ministers of 11 February 1983 on general terms and conditions of contracts for design work in construction as well as on the execution of investments, construction works and renovations (M.P. 1983 No. 8 item 47). 28 PHARE (Poland and Hungary Assistance for the Restructuring of the Economy) is the most important program of non-refundable EU assistance to Central and Eastern European countries. It was established in 1989 to support economic and systemic changes in Poland and Hungary and was subsequently expanded to remaining Central and Eastern European countries. It was transformed in 1997 into an instrument directed at 10 candidate states: Poland, Hungary, the Czech Republic, Slovakia,

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ISPA29 and SAPARD30) were instruments financed by the EU to assist applicant countries of Central and Eastern Europe in their preparations for joining the EU and to eliminate economic inequities. They assisted Poland in a period of massive economic restructuring and political change. 5.1.8. The expanded use of FIDIC contract terms was also associated with the start of projects financed by loans from the World Bank, EBRD and EIB. 5.1.9. Access to funding from these three funds or financial institutions was conditional upon using FIDIC contract terms. Use of FIDIC was aimed at ensuring funds were spent in accordance with comprehensible principles and rules, and with transparency to donors and lenders. The FIDIC terms controlled key requirements and procedures, ensuring the proper use of funds for various types of infrastructure investment and construction projects. 5.1.10. Projects co-financed with EU funds were subject to inspection and approval by the authority that supervised the transfer of EU funds and had to be executed using the FIDIC contract form. Consequently, there was little room for modifying the FIDIC contractual terms. 5.1.11. Adaptation of FIDIC contract terms in Poland, specifically the characteristic FIDIC disruption of the division of duties and risks, began after the end of EU pre-accession programmes. Currently, even if a contract is performed with EU funds, it is not as strictly supervised by the terms of contract.

5.2. Available Contracts FIDIC 5.2.1.

Most instances of FIDIC or other standard form contract use occur in public investment projects, as well as in the back-to-back contracts referring to them. Businesses in which both parties are private entities usually involve smaller-scale investments and are rarely based on the internationally known forms of contract. Sometimes private investments are based on FIDIC or other

Lithuania, Latvia, Estonia, Romania, Bulgaria and Slovenia. Presently, the implementation of pre-accession funds is complete and in exchange Poland benefits, among others, from the EU Cohesion Fund. 29 ISPA (Instrument for Structural Policies for Pre-Accession) was designed to address environmental and transport infrastructure priorities identified in the Accession Partnerships agreements between the EU and the abovementioned 10 applicant countries of Central and Eastern Europe. 30 SAPARD (Special Accession Programme for Agriculture and Rural Development) was created as an instrument of assistance to the abovementioned 10 applicant countries to the EU. It served as a process of structural transformation for rural areas in candidate countries. Its program implementation also involved preparing institutions and beneficiaries in these countries to benefit from Common Agricultural Policy instruments following EU accession. The conclusion of contracts with SAPARD beneficiaries ended on 15 August 2004.

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standard form contracts when EU funding requires the assurance of clarity (which is considered as provided when a standard form contract is applied). FIDIC became very popular once officially translated into Polish, since there were no other standard forms of contract in Poland. Other contract forms are not as widely known in Poland. Importantly, there are two different translations of the FIDIC standard form of contract that are applied in Poland. All FIDIC books (except the Blue Book) have been translated into Polish by SIDiR31—the official FIDIC representative in Poland. SIDiR was established in March 2000 and its activities better prepare Polish consultants, investors and contractors in complying with the requirements of the common European construction market, and facilitating entry into foreign markets. Additionally, the Red, Yellow and Silver FIDIC Books have been translated to Polish by Cosmopoli Consultants—a consulting engineering firm that is a SIDiR member and active in promoting FIDIC in the Polish market. Importantly, the Polish versions of FIDIC prepared by these two organisations differ from one another. There are stylistic differences between the Polish translations as well as differences in the naming of certain institutions. For example, ‘notice of dissatisfaction’ is translated differently—in one version it is translated as ‘notice of dissatisfaction’, while in another it is ‘protest’. However, there are also differences that pose greater significance in contract interpretation.32 Contracting parties have the discretion to select the translation of their choice. The choice of version is significant, as each usually sets out that in the event of a discrepancy between language versions or resulting interpretative problems, that the Polish version is binding—unlike the original FIDIC provisions which deem the English version as binding.

Public Procurement Office Form 5.2.8. The Public Procurement Office (‘PPO’) plays a policy making and co-ordinating role for the whole public procurement system and is an independent unit within the Polish Government. The President of the PPO is appointed by the Prime Minister. 5.2.9. The key duties of the PPO are to prepare drafts of legislative acts on public procurement, arrange appeal proceedings under the Public Procurement Law, check the regularity of conducted procedures, prepare training programs, or-

31 Polish abbreviation for Association of Consulting Engineers and Experts. 32 For example, Sub-clause 20.4 section 5 demonstrates how it may be unclear whether a failure to submit a notice of dissatisfaction by one of the parties will deprive that party of the right to initiate arbitration proceedings, depending on the Polish version used.

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ganise and inspire training events in the field of public procurement, and maintain international cooperation on issues relating to public procurement. 5.2.10. There were attempts to introduce a Polish standard form contract. The President of the PPO prepared a standard form contract that is independent from the functions of the FIDIC standard. In April 2014, the President announced a standard public procurement contract for linear investment. It has been drafted following significant experience in road construction projects and in consultation with the biggest construction firms in Poland. 5.2.11. The basic idea was to balance the division of risk and delineate not only the obligations of contractors, but also the obligations of employers, limited liquidated damages, and employer’s liability for design mistakes. It also provides a mechanism of wage indexation on the basis of indicators outlined in the contract price (which does not constitute a change of contract), as well as arrangements for the acceptance of work and periodic advance payment for work. 5.2.12. The PPO form of contract is based on the FIDIC form—it contains 37 clauses and comprises 68 pages, skipping provisions where they do not respond to Polish law. It also introduces customs of the Polish construction market, e.g. the Polish Common Court is deemed the only competent body to solve disputes. Above all, its content is interesting as a form of construction contract that aims to fit the Polish legal landscape. However, it cannot be considered a standard, as it is not commonly used in the Polish construction market.  

5.3. Amendment of Contracts and Bespoke Contracts 5.3.1.

One of the main advantages of the FIDIC standard form contract lies in the equitable distribution of risks between the contracting authority and the contractor. In Poland this balance is generally not maintained. Often, the amended version of a contract is very different from the original version and contains provisions decisively favouring one of the parties—obviously, the party that has prepared the contract. In most cases, that party is the public entity, i.e. the contracting party that organises the tender proceedings and holds a dominant position therein. It can be concluded, therefore, that the FIDIC standard form contract is often used in Poland as a foundation rather than a complete solution. Polish contracting authorities do not treat it as having been created with an overarching framework with interrelated provisions that interact in such a way as to lead to successful execution of the contract. Namely, where profits are properly allocated and both sides are satisfied with the actual and economic effects of contract execution. As a result, there is debate around how FIDIC should be implemented, with significant opposition to the way it is currently being implemented. The cus 

5.3.2.

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tom to make many amendments is often justified by the fact that FIDIC should be adapted not only to the specific investment project, but also to the mandatory provisions of law—which differs a lot from the principles upon which the FIDIC was created.

6. Key Issues 6.1. Overview 6.1.1.

The FIDIC contract form was created in the common law system, whereas in Poland we have the civil law system. Differences between the standard form contract terms in different jurisdictions mainly arise as a result of the specific characteristics of these two systems. Nonetheless, in many ways there will be similarities between the standard form contract terms from different jurisdictions, as they reflect the needs of the investment process—which are the same regardless of the applicable law.

6.2. Fit for Purpose 6.2.1.

Construction contracts in Poland regulate the fit for purpose issue by reference to the notion of ‘building practice’. This is a non-statutorily defined notion which may be understood as providing the most optimal financial and functional solutions in compliance with binding construction law provisions. In this respect, it is clear that the scope of the task commissioned by the Contractor is not limited to the investor’s requirements specified in the contract— the contractor is also expected to incorporate the requirements of ‘building practice’. This is why the decisive participants of the investment process (e.g. the designer, Construction Supervision Inspectorate, building site manager) are considered to perform professions of public trust, as they possess specialist knowledge, which the investor does not have. It is often assumed that even in the absence of express contractual provisions obliging parties to execute a project with due diligence and in line with construction practice, that these obligations are required by statutory regulations. Fit for purpose creates the duty to take customs existing in the construction industry into consideration, e.g. customs relating to building completion, quality of materials and due diligence in selecting employees and subcontractors. It must, therefore, be assumed that taking account of the specific nature of a given building structure and constructing it in accordance with its intended purpose is the contractor’s statutory responsibility. Contractual sti 

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pulations imposing such an obligation on the contractor can only facilitate an investor in pursuing its rights. 6.2.4. In addition, regardless of whether the investor’s expectations concerning the quality of the building structure are expressly incorporated into the construction contract, the contractor should take this into account to avoid being accused of improperly performing the contract. 6.2.5. Provisions of the Civil Code will also apply where no contractual provisions exist between the parties in relation to evaluating the quality of the contractor’s construction works. Pursuant to these provisions, a contractor is obliged to fulfil its obligations in compliance with the specification and in a manner that corresponds to its socio-economic purpose, public policy principles, and other established customs. 6.2.6. Article 357 of the Civil Code is essential in this respect. This article addresses construction contract execution quality and refers to a situation in which an investor inadequately specifies its expectations. In such circumstances, the contractor should provide guidance on what constitutes average quality (e.g. corresponding to the average features of the specified item as available in the local market) and performance should be assessed according to such a standard. 6.2.7. Furthermore, a contractor running a business activity will be held to more stringent evaluation criteria. Where a contractor’s activity is commercial or professional, it is deemed to signify that it is performed on a continuing basis and with particular knowledge and skills, which should be taken into account when construing a contractor-businessman due diligence standard.33 6.2.8. All of the abovementioned contractor obligations associated with being fit for purpose emanate from general Civil Code rules and customs associated with the investment process, and have arisen from legal provisions. In the event of a conflict, the contractor’s actions are evaluated in the context of the specific circumstances of a case. 6.2.9. In the absence of a fit for purpose clause, the question of whether a contractor’s obligations have been fulfilled will always involve some uncertainty, as it will depend upon the interpretation of the provisions referring to the general obligations of a contractor. 6.2.10. However, the fit for purpose clause remains subject to discussion, as the prevailing approach is that the clause is redundant since general terms of contract and general principles of law sufficiently secure the owner’s interests, while implementation of the fit for purpose clause is inappropriately restrictive for a contractor.  

33 Sąd Najwyższy [Supreme Court of the Republic of Poland], Case Ref. III CRN 77/93, OSN 1994, No 3, Item 69, 17 August 1993.

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6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

Culpable delay in completing construction works comes within the statutory category of improper fulfilment of an obligation. Under the Civil Code, an investor is entitled to compensation for such delay. However, it is common practice for parties to building contracts to regulate this issue differently. Most contracts contain a liquidated damages clause for culpable delay, although a contractor may also assume responsibility for non-culpable delay where expressly specified in the contract.34 However, pursuant to recent judiciary rulings, parties to a contract may not specify that a contractor will be obliged to pay liquidated damages where failure to meet a deadline is due to circumstances for which the investor is liable.35 The amount of liquidated damages is usually a percentage of the contract sum. It should be emphasised that such a provision on the contractor’s liability for delay (improper performance of an obligation) significantly impacts the investor’s statutory right to claim redress. Only if the contract expressly specifies that the amount of compensation may exceed the level of liquidated damages, can the contractor be held liable for all damage incurred by the investor, i.e. not only up to the amount of liquidated damages calculated in accordance with the contract. In the Polish system, liquidated damages are treated as surrogate compensation. Therefore, the ability to claim ‘supplementary’ compensation is dependent on it being expressly provided for in the contract. Absence of such terms is detrimental to the investor. The most important difference between the mechanism for claiming liquidated damages and compensation is not having to prove the existence or the amount of the loss, or the causal link between the contractor’s behaviour and the loss—which strengthen the investor’s position. However, these elements are necessary when proving quantum for compensation claims. The concept of mitigating liquidated damages by the court may be beneficial for a contractor. Mitigation may be pleaded on different criteria, e.g. flagrant overcharging (inadequate amount of liquidated damages to the accompanying circumstances), the investor’s contribution to the damage, lack of actual damage occurring, etc. In mitigating liquidated damages the court should be directed by the functions that liquidated damages are meant to fulfil, including fulfilling an obli 

6.3.4.

6.3.5.

 

6.3.6.

34 Sąd Najwyższy [Supreme Court of the Republic of Poland], Case Ref. I CSK 124/2013, 29 November 2013. 35 Sąd Najwyższy [Supreme Court of the Republic of Poland], Case Ref. I CSK 124/2013, 29 November 2013.

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gation and penalty or compensatory functions permitting redress of the damage incurred by the investor.36

6.4. Latent Conditions 6.4.1.

6.4.2.

6.4.3.

6.4.4.

The legal consequences of a contractor discovering physical hindrances (latent conditions) at the building site are not regulated in Polish law. However, it is common practice that contracts (with similar terms to FIDIC) will allow the contractor (i) an extension of time for completion, or (ii) receipt of additional payment, in circumstances where a contractor discovers physical hindrances or hydrological/climatic conditions while conducting construction works, and are of the nature that could not have been foreseen but could have been specified in the investor’s project planning documentation. Receiving payment is conditional on the contractor notifying the investor about the occurrence of such conditions within a specified time. The risk of unforeseen physical hindrances usually encumbers the investor—just as FIDIC contractual provisions do. A similar situation arises with archaeological sites, which usually require additional work and prolong construction work. Pursuant to construction work practice, the investor bears the risk of a contractor uncovering archaeological sites. Sometimes investors seek to avoid incurring liability for such unforeseen events. Disputes frequently arise between the parties in such circumstances, given the contractor’s knowledge and experience of hindrances that might arise at such building sites. In relation to visible ground conditions, investors organise local inspections during which contractors can familiarise themselves with the land upon which the investment is to be carried out before entering into a contract with an investor. In concluding a contract, a contractor is usually obliged to declare that it is familiar with the ground conditions of the specific building site, and that those conditions have been accounted for in the agreed works and payment.

6.5. Force Majeure 6.5.1.

Force majeure is not defined in law, although parties frequently define it in contracts. Jurisprudence establishes that force majeure is an event of an incidental or meteorogical nature that cannot be averted and over which man has no control (vis maior, quae humana infirmitas resistere non potest).

36 Sąd Najwyższy [Supreme Court of the Republic of Poland], Case Ref. CSK 259/2006 (panel of 7 judges), ruling of 30 November 2006.

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In practice, parties usually refer to this clause to avoid liability for arrears when unfavourable weather conditions arise during contract execution, e.g. intense rainfall or strong wind.  

6.6. Role of the Engineer 6.6.1.

6.6.2.

One can say that construction law talks of rights, responsible persons, permissions, approval of documentation and so on, while FIDIC contractual terms address deadlines, mode of payment, appeals, etc. Consequently, these are mutually supplementary provisions for the construction process, and in principle, they are not inconsistent with one another. However, in certain aspects construction law influences the way that FIDIC standards are applied. For example, the Construction Law requires certain participants in the investment process to engage in construction and allocates them numerous obligations—primarily under administrative rather than civil law, the exercise of which is overseen by State institutions, e.g. Construction Supervision Inspectorates will inspect the proper performance of construction processes, as they are in charge of maintaining the public safety. However, while the Construction Law does not specifically establish the role of a contractual engineer, it does address the functions of participants related to the investor, such as the investor’s Supervision Inspector, designer and construction site manager, or works manager. Furthermore, in Polish practice an engineer is prevented from applying FIDIC instruments to resolve disputes at an early stage. Polish law does not envisage the institution of engineer in the same sense as in FIDIC. It leads to a reduction of this role to that of a ‘mailman’ between the parties—rather than that of a coordinator of the entire construction project and as an independent arbitrator. Additionally, an engineer is also usually deprived of the attribute of impartiality, as in fact, it usually acts for the interest of the employer. Some investments are subject to different limitations pertaining to an employer’s contract violation under which an engineer must make objective findings. A reservation is sometimes raised by the introduction of clauses appointing an engineer and stipulating that: (a) an engineer cannot make vital decisions without the employer’s consent; (b) an engineer cannot make independent decisions without consulting the employer; (c) an engineer is prohibited from acting to the detriment of an employer; or (d) an engineer is prohibited from presenting evidence or testifying against an employer in the event of a dispute.  

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The above example shows how different the role of engineer is in the practice of FIDIC contracts adopted in Poland. They thereby distort assumptions and solutions provided therein according to which the FIDIC role of an engineer has vital significance.

6.7. Sub-construction 6.7.1.

6.7.2.

6.7.3.

6.7.4.

Both the Civil Code and Public Procurement Law envisage specific rules regarding the employment of subcontractors and securing their position. The situation of subcontractors under Polish mandatory provisions may be compared to the regulations of FIDIC Red Book. Under the Civil Code37 the investor is jointly and severally liable with a contractor for the payment of remuneration due to subcontractor for the construction works performed by the latter, that have been previously notified to the investor in details either by the contractor or the subcontractor prior to commencing the works, unless within 30 days from the receiving a suitable notification the investor has objected towards the subcontractor or the contractor in regard to performing such works by the subcontractor. The notification is not required where the investor and the contractor have determined in a contract, made in a written form on pain of invalidity, a precise subject of construction works that shall be performed by a given subcontractor. Any contractual provisions contrary to this are invalid. However, the general Civil Code rules were regarded as insufficient and ineffective in protecting the interests of subcontractors, many of whom became victims of the insolvency of main contractors. Subsequently, in 2014, Polish lawmakers decided to comprehensively regulate the position of subcontractors to all public contracts. The Public Procurement Law provides a mechanism for direct payment. The effects of direct employer’s payment of remuneration to a subcontractor are as follows: (a) The employer deducts the amount of paid remuneration from the remuneration due to the contractor; and (b) It may constitute a basis for the employer’s withdrawal from a public procurement contract, e.g. in the event of needing to repeatedly make direct payments to subcontractors or further subcontractors, or of making direct payments exceeding 5 per cent of the value of a public procurement contract.  

37 Civil Code art 647 [1].

Poland

6.7.5.

6.7.6. 6.7.7.

783

Legislation establishes a number of principles to govern the settlement of payments between an employer and a contractor in order to spur contractors to settle amounts due to subcontractors in a timely manner, as well as to motivate employers to organise funds for eventual payment of remuneration directly to a subcontractor. These principles are set out below38. (a) In the case of works contracts with an execution period longer than 12 months, where the contract provides for the payment of: 1) the remuneration due to the economic operator in instalments – the condition of payment by the contracting authority of the second and subsequent instalments of the remuneration due for accepted works is the presentation of proof of payment of due remuneration to subcontractors and further subcontractors involved in the execution of accepted works; 2) the total remuneration due to the economic operator after the execution of all works – the contracting authority shall be obliged to provide for advance payments, whereas the granting of further advance payments by the contracting authority requires the presentation of proof of payment of due remuneration to subcontractors and further involved in the execution of the part of the contract for which the advance payment was granted. Both regulations (PPL and Civil Code) limit the liability of the investor to payment of the principal amount—without interest. To sum up, subcontractors have two legal grounds available to pursue claims for fees owed to them in construction work contracts. However, subcontractors of supplies and services may only use the mechanism of direct payment from the employer pursuant to the PPL.

6.8. Limitation of Liability 6.8.1.

6.8.2.

Limitation of liability in construction contracts is usually indicated by the upper limit of the contractual penalty to which the party performing its commitment improperly is liable. However, investors do their best to avoid introducing such provisions. Consequently, they are usually only included in contracts where the content is not imposed by one party, but results from negotiations between the parties. For limitation of liability in relation to loss of profit and indirect or consequential damages, past Polish judicial decisions indicate that the parties may agree to contractual penalties that exceed the value of the contract where a

38 In accordance with article 447 of the PPL.

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Mirella Lechna-Marchewka and Hanna Drynkorn

loss of profit is incurred by the investor, e.g. when the investor forfeits EU grants for failing to complete a project on time. Notably, deadlines for contract performance are usually inflexible. Therefore, it is crucial for a contractor to double-check not only the penalty clauses in its construction contract, but also whether the work schedule is realistic and whether there are any mechanisms allowing flexibility to extend the completion deadline.  

6.8.3.

6.9. Duration of Exposure 6.9.1.

6.9.2.

6.9.3.

6.9.4.

6.9.5.

Polish law has two methods of dealing with liability of the contractor for defects in construction work (or in the erected building)—a warranty against defects and a guarantee. A warranty against defects in the work is a statutory safeguard to protect the interests of the party ordering the work. It is unrelated to the investor’s claim for damages or a contractual penalty. Protection by way of a warranty against defects is effective given that disclosure of a defect in the work occurs upon handover, at which time it is covered by the statutory guarantee. The right to claim under a warranty against defects in the work carried out in the building expires after three years, and after one year in the case of other structures. The time limit commences from the date of handing over the structure to the investor. The law provides the ability to grant a guarantee of quality. Although, it requires a separate regulation in the construction work contract in which the contractor provides a specific guarantee for that work, and—unlike a warranty— the parties may freely determine the conditions of the guarantee of quality. The contract should specify all the requirements of the construction work to protect the interests of the party ordering the work, especially the quality of materials and equipment, execution technology or quality control, as well as the terms of work handover. Upon accepting the construction work, the contractor should issue documentation to the investor confirming the grant of a guarantee on construction work alongside the annex containing technical documentation, e.g. attestations, certificates of applied materials, warranty cards, device operation manuals, etc. Pursuant to Polish civil law, FIDIC contract provisions concerning the Defect Notification Period39 as the period of the contractor’s liability for defects in  

6.9.6.

39 The Defect Notification Period is defined in the clause 1.1.3.7. of conditions of contract for Plant and Design-Build for electrical and mechanical works and for building and engineering works designed by the contractor (1999).

Poland

6.9.7.

785

construction work (or in the erected building) must be specified as the date of expiry of the investor’s rights under the warranty for physical defects contractually agreed by the parties,40 and the statutory regulation concerning that instrument should be applied. The date is usually determined by the parties to be 36 months from the date of the Takeover Certificate41. FIDIC Conditions of Contract42 do not contain any provisions relating to the run of the warranty for defects period i.e. in the FIDIC terminology, the Defect Notification Period. Therefore, the general principles of the Civil Code should be applied, according to which reporting a defect is not sufficient to interrupt the run of the warranty. Before expiry of the warranty, it is necessary that the eligible party (here it is the investor) takes direct action to make a claim under the warranty (i.e. bringing a lawsuit against the contractor or summoning the contractor to a conciliation hearing), otherwise the claim expires. Regardless of the instrument of warranty, the investor may—at its discretion— claim its rights under the guarantee of quality granted by the contractor.  

 

6.9.8.

6.10. Time Bars 6.10.1. The freedom of contract principle is entrenched in Polish civil law, but cannot breach mandatory legal regulations—which prevail over contractual arrangements. 6.10.2. Statutory limitation periods vary according to the type of contract. The basic period is 6 years unless regulated differently by law, and three years for contracts between business persons and claims relating to periodical performances. The three year limitation period applies to construction contracts due to the engagement of professional entities. 6.10.3. Contracting parties are unable to agree shorter limitation periods than that provided in legal provisions. 6.10.4. As to the FIDIC clause limiting the time within which a contractor’s may make a claim,43 this clause is sometimes amended in Polish contracts to 28 days.

40 Civil Code art. 558.1. 41 The Takeover Certificate is defined in the clause 1.1.3.5. of the conditions of contract for Plant and Design-Build for electrical and mechanical works and for building and engineering works designed by the contractor (1999). 42 Conditions of contract for Plant and Design-Build for electrical and mechanical works and for building and engineering works designed by the contractor (1999). 43 Sub-clause 20.1 of conditions of contract for Plant and Design-Build for electrical and mechanical works and for building and engineering works designed by the contractor (1999), 20.2.2 of FIDIC Conditions of Contract for Plant and Design-Build for electrical & mechanical plant, and for building and engineering works, designed by the contractor (2017).

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Then, the abovementioned problem of permissibility to change relevant regulation arises. 6.10.5. Including the abovementioned deadline in contracts governed by Polish law entails risk, as its effectiveness is subject to a court’s assessment and likely to be considered null and void as it creates a 28 day limitation period, contrary to the mandatory provisions of Polish civil law. However, there is legal uncertainty over this issue due to a lack of uniform rulings by the courts.

7. Dispute Resolution 7.1. Arbitration 7.1.1.

7.1.2.

7.1.3.

7.1.4.

7.1.5.

The contractual parties may select to have their matter heard either before the Common Court or the Arbitration Court. There is a clause in the Polish Code of Civil Procedure that grants arbitration rulings the same enforceability as traditional court judgments. Disputes arising out of contracts incorporating FIDIC are more likely to be handled by arbitration than others, since FIDIC contracts contain an arbitration clause by default. Arbitration remains undervalued in the Polish construction industry. Although arbitration guarantees quick proceedings, confidentiality and a professional (often technical) approach to the matter, parties are typically reluctant to submit disputes to arbitration and usually amend the arbitration clause to the jurisdiction of the Common Courts. In particular, parties rarely include an arbitration clause in contracts relating to infrastructure projects procured by the State—which constitute the vast majority of construction contracts in Poland. This is because the State Treasury insists that any disputes arising out of these contracts should be resolved by State courts. Potential contractors usually do not have negotiating power on the content of the public procurement contracts and are thus bound to agree to the terms proposed by the awarding entity. It is mainly the parties of high-value, private (i.e. not including a public authority) contracts that agree to arbitration. Such parties usually prioritise the confidentiality of a case and speed of proceedings, while high costs do not deter them from submitting the dispute to arbitration.  

7.2. Dispute Adjudication Board 7.2.1.

The Dispute Adjudication Board (DAB) operates at the authorisation of the parties and is the first step in the dispute resolution process for the contracts.

Poland

7.2.2.

7.2.3.

7.2.4.

7.2.5.

7.2.6.

7.2.7.

787

It aims to resolve disputes before they go on to more formal arbitration. It consists of 1 or 3 persons, usually engineers or lawyers, experienced in the work of the contract. The DAB members must be independent although they are chosen by the parties of the contract. The legal nature of DAB and its decision are not addressed by any Polish regulations. Regarding dispute resolution, there are frequently doubts around the functioning of the Dispute Adjudication Board (‘DAB’) and its decisions. For the most part, these doubts arise from non-compliance of the DAB with mandatory national legislation. Given that the institution of DAB is unknown to the national regulations, there are problems with establishing the legality of DAB decisions and the obligation to submit disputes for resolution by DAB. Although Polish regulations do not set out the procedure of undertaking decisions by DAB (but neither do they prohibit it), the FIDIC clause establishing DAB is not always amended when the FIDIC forms of contract are used under Polish law – which means that the parties agree to the procedure of resolving cases by the DAB. The Polish legal system is a system of statutory law. Therefore, while in view of the primacy of contractual arrangements in the common law system where the effects of the activities of the DAB are such as agreed by the parties, in the Polish system they must conform to the mandatory rules of the law. And the Polish rules of the law do not contain a conforming structure. This can be compared to a binding designation by a third party of the content of a performance—a structure known to Polish civil law. It is commonly understood that the provisions relating to the DAB require the parties to refrain from instituting arbitration proceedings until the occurrence of a specific event (pactum de non petendo). The doctrine means that if the parties agree to FIDIC model contract terms stating that until they run out of procedures for termination of a contract dispute, such dispute shall not reach arbitration and thus will not be able to become a subject of proceedings before the arbitration court. At the same time it is emphasised that rejecting a DAB decision does not trigger arbitration proceedings and arbitrators are not bound by decisions of the DAB—such decisions should be treated purely as evidence in the case. Where one party does not wish to appoint the DAB, it constitutes grounds to directly refer the dispute to arbitration.44 Given that the three-phase dispute resolution procedure provided in FIDIC is not known to the Polish legal system, the tendency is to abandon it in favour of the traditional Polish State court procedure.

44 It stems from sub-clause 20.8 – FIDIC Yellow Book 1999 – “…and there is no DAB in place, whether by reason of the expiry of the DAB’s appointment or otherwise…”.

Margarida Olazabal Cabral, Catarina Brito Ferreira, Mara Rupia Lopes and Lourenço Limão Oliveira

Portugal 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 5.3. 5.4. 5.5. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7.

Context 790 The Country 790 The Legal System 790 The Economy 791 The Construction Industry 791 Size and Nature 791 Participants 792 Work, Health and Safety 795 Protection of the Environment 797 Quality Assurance 798 Construction Contracting Dynamics 799 Legal Underpinnings of Contracts 799 Freedom of Contract 799 Legal Framework 800 Public Policy 801 Statutes on Private Construction Works 801 Implied Contract Terms 802 Construction of Contract Terms 803 Private and Public Procurement 803 Government Involvement 805 Legislation and Regulation 805 Codes of Practice 806 Licensing of Professionals and Contractors 806 Construction Contracts 808 Available Contracts 808 Most Commonly Used 808 Example 1 – Design and Construct Contract – AS4300 808 Example 2 – FIDIC 808 Amendment of Contracts and Bespoke Contracts 808 Key Issues 809 Overview 809 Fit for Purpose 809 Late Completion 810 Latent Conditions 810 Force Majeure 810 Limitation of Liability 811 Duration of Exposure 811

https://doi.org/10.1515/9783110712728-026

790

6.8. 6.9. 6.10. 6.11. 7. 7.1. 7.2. 7.3.

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Time Bars 812 Defects 812 Completion of the Construction 813 Modifications and Additional Services or Works Dispute Resolution 815 Overview 815 Dispute Resolution in Courts 815 Arbitration of Disputes 816

814

1. Context 1.1. The Country 1.1.1. 1.1.2. 1.1.3. 1.1.4. 1.1.5. 1.1.6.

Portugal is located in Southwestern Europe, bordering the North Atlantic Ocean, and situated west of Spain. Portugal is a semi-presidential republic and is organised into 18 districts. A 1910 revolution overthrew the monarchy, and for most of the following six decades, authoritarian governments ran the country. In 1974, a left-wing military coup installed broad democratic reforms. The following year, Portugal granted independence to all of its African colonies. Portugal is a founding member of NATO and entered the EC (now the EU) in 1986. Portugal is part of the following international organisations: ADB (nonregional member), AfDB (nonregional member), Australia Group, BIS, CD, CE, CERN, CPLP, EAPC, EBRD, ECB, EIB, EMU, ESA, EU, FAO, FATF, IADB, IAEA, IBRD, ICAO, ICC (national committees), ICCt, ICRM, IDA, IEA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, IMSO, Interpol, IOC, IOM, IPU, ISO, ITSO, ITU, ITUC (NGOs), LAIA (observer), MIGA, MINUSMA, NATO, NEA, NSG, OAS (observer), OECD, OPCW, OSCE, Pacific Alliance (observer), Paris Club (associate), PCA, Schengen Convention, SELEC (observer), UN, UNCTAD, UNESCO, UNHCR, UNIDO, Union Latina, UNWTO, UPU, WCO, WFTU (NGOs), WHO, WIPO, WMO, WTO and ZC.

1.2. The Legal System 1.2.1. 1.2.2.

The legal system of Portugal is a civil law system. The country accepts compulsory ICJ jurisdiction with reservations and accepts ICC jurisdiction.

Portugal

791

1.3. The Economy 1.3.1. 1.3.2. 1.3.3.

In 2019, the country’s gross domestic product (‘GDP’) amounted to € 213.3 billion, corresponding to a 2% increase from the previous year1. In the second quarter of 2020, the unemployment rate in Portugal was of 5.6%2. Education-wise, on average, 40% of all upper secondary students enrol in vocational education and training. Last year, 37% of 25–34 year olds had a university/university level degree in Portugal3. According to the Programme for International Student Assessment (‘PISA’), in 2018, the average Portuguese 15-year-old student, when rated in terms of reading, mathematics and science was placed within OECD’s average. The PISA results of the Portuguese students have been continuously improving. In fact, Portugal is one of the few OECD nations with a positive trajectory of improvement in all three subjects4.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

2.1.3.

According to the latest forecast published by the Portuguese Federation of Construction and Public Works Industry (FEPICOP) for the construction sector, in 2020 the construction segment is expected to grow by 5.5%. This confirms the continuation of the sector’s positive trajectory, albeit with a slight slowdown since the growth in 2019, which had been of more than 6%5. Throughout the first quarter of 2019, employment in the construction industry increased by 1.6% to more than five million workers and unemployment in the sector also decreased by 26.3%6. In the first quarter of 2019, according to the same organisation, the licensing of new public work dwellings grew by 77% up to April of 20197.

1 Statistics published in Pordata’s website at https://www.pordata.pt/DB/Europa/Ambiente+de+Con sulta/Tabela. 2 Statistics published by the Portuguese National Institute of Statistics (INE). 3 Statistics published in the OECD website at https://gpseducation.oecd.org/CountryProfile? primaryCountry=PRT&treshold=10&topic=EO. 4 Statistics published in the OECD website at https://www.oecd.org/pisa/publications/PISA2018_CN_ PRT.pdf. 5 Statistics published at FEPICOP’s website at http://www.fepicop.pt/. 6 Statistics published at FEPICOP’s website at http://www.fepicop.pt/index.php?id=19&pesq= emprego&x=0&y=0. 7 Statistics published at FEPICOP’s website at http://www.fepicop.pt/index.php?id=19&pesq= emprego&x=0&y=0.

792

2.1.4. 2.1.5.

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In 2019, the GDP from construction increased by 4%8. The growth of the Portuguese construction sector over the last couple of years is mostly attributable to the Portuguese hospitality and real estate boom, which will probably come to a halt due to the Covid-19 pandemic, although news sources report that ongoing construction projects have generally not stopped during the pandemic – the implications of the pandemic on the construction sector are still to be fully perceived by the market players9.

2.2. Participants 2.2.1.

Law No. 31/200910 approved the legal framework applicable to the professional qualifications required for technicians responsible for drawing up and signing construction projects, the inspection of works and construction management. The statute states that participants of the construction industry include: (a) Project author: The technician or technicians which independently design and sign the architecture project and which are part of the engineering projects or landscape architecture projects. They are also responsible for signing the relevant responsibility declarations11; (b) Project coordinator: The author of one of the projects or the technician who provides the project team with the necessary professional qualification. They are responsible for ensuring the composition of the project team complies with the characteristics of the project, in addition to ensuring the participation of the technical authors, the compatibility between the various projects, and the fulfilment of the necessary conditions for compliance with the legal and regulatory provisions applicable to each specialty by each project author12; (c) Construction supervision officer: The technician qualified under the terms of Law No. 31/2009 which is responsible for verifying the execution of the work in accordance with the execution project. When applicable, they are also responsible for compliance with the conditions of the license or the prior notice, compliance with applicable legal and regula-

8 Statistics by Fepicop cited by https://vilanovaonline.pt/2018/12/31/obras-setor-da-construcaodevera-crescer-4-em-2019/. 9 See for instance, Hermano Rodrigues for Jornal Económico at https://jornaleconomico.sapo.pt/ noticias/o-setor-da-construcao-e-a-recuperacao-da-crise-covid-19-622960. 10 Law No. 31/2009, of 3 July. 11 S. 3(b) of Law No. 31/2009. 12 S. 3(e) of Law No. 31/2009.

Portugal

2.2.2.

13 14 15 16 17 18 19 20

793

tory standards, and the performance of the powers provided in the Public Procurement Code in public works13; (d) Project manager: The authorised technician responsible for ensuring the execution of the work, compliance with the project execution and the legal and regulatory standards in force and, where applicable, fulfilment of the conditions of the license or prior communication14; (e) Employer/Owner of the works: The entity on whose behalf the construction works are carried out, the owner of the public works as defined in the Public Procurement Code, the concessionaire in respect of work performed on the basis of a public works concession contract, as well as any person or entity that contracts for the project preparation15; (f) Inspection company: A natural or legal person which, using qualified technicians, assumes the contractual obligation of inspecting the works16; (g) Project company: A natural or legal person which, using qualified technicians, assumes the contractual obligation to prepare the project17; (h) Contractor: This is the natural or legal person which undertakes a construction work and assumes liability for the performance and execution of the work18; and (i) Project team: A multidisciplinary team whose purpose is to prepare a project that is contracted by the developer, specially regulated by law or provided for in a public contractual procedure. A project team consists of several project authors and the project coordinator who all must fulfil their corresponding duties19. According to Law No. 41/201520, construction works can only be performed on national territory by: (a) Natural persons domiciled in any Member-State of the European Economic Area; (b) Private legal persons with a corporate object of an industrial or commercial nature, with their registered office located in any Member-State of the European Economic Area and incorporated under the law of any such States; or

S. 3(f) of Law No. 31/2009. S. 3(e) of Law No. 31/2009. S. 3(h) of Law No. 31/2009. S. 3(i) of Law No. 31/2009. S. 3(j) of Law No. 31/2009. S. 3(k) of Law No. 31/2009. S. 3(l) of Law No. 31/2009. Law No. 41/2015, of 3 June.

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(c)

Natural or legal persons of any Member-State of the World Trade Organization which are established in Portugal, namely through permanent representation under Portuguese law, or who are enabled to carry out public works21.

Additional Qualification Requirements 2.2.3. Performance of the activities of a contractor for public or private works in Portugal is subject to a license or a certificate and depends on the fulfilment, by the applicants, of the following requirements: (a) Commercial suitability; (b) Technical capacity; (c) Economic and financial capacity; and (d) The holding of employment accident insurance for workers hired under national law or who carry out work in the national territory22. 2.2.4. Additional qualification requirements apply to the project author, i.e., projects should be prepared by architects, engineers and technical engineers and, where necessary, landscape architects, with qualifications appropriate for the nature of the project in question, without prejudice to other technicians whose competence in design projects may also be recognised by law23.  

Types of Construction Works 2.2.5. Construction works are divided into classes, depending on the maximum value of the works in question. The categories are listed in a Ministerial Order approved by the member of the Government responsible for the construction sector. Currently, there are nine classes, encompassing works with values up to the following maximum limits24: (a) Class 1 – Up to € 166,000; (b) Class 2 – Up to € 332,000; (c) Class 3 – Up to € 664,000; (d) Class 4 – Up to € 1,328,000; (e) Class 5 – Up to € 2,656,000; (f) Class 6 – Up to € 5,312,000; (g) Class 7 – Up to € 10,624,000; (h) Class 8 – Up to € 16,600,000; and (i) Class 9 – Above € 16,600,000.

21 S. 4 of Law No. 41/2015. 22 S. 6(1) of Law No. 41/2015. 23 S. 4(1) of Law No. 31/2009. 24 Ministerial Order (Portaria) No. 119/2012, of 30 April, as amended by Amendment Notices No. 25/2012, of 23 May, and No. 27/2012, of 30 May.

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2.2.6.

795

Within each class, there may be several categories of works25: (a) 1st Category – buildings and built heritage; (b) 2nd Category – communication routes, urbanisation works and other infrastructure; (c) 3rd Category – hydraulic works; (d) 4th Category – electrical and mechanical installations; and (e) 5th Category – other works.

2.3. Work, Health and Safety 2.3.1.

2.3.2.

2.3.3.

2.3.4.

25 26 27 28 29 30 31

Pursuant to Annex I of Regulation (EU) No. 305/201126, which lays down the EU harmonised conditions for the marketing of construction products, provides that construction works as a whole and in their separate component parts must be fit for their intended use, taking into account, in particular, the health and safety of persons involved throughout the life cycle of the works. Subject to normal maintenance, construction works must satisfy these basic requirements for an economically reasonable and useful life27. Construction works must be designed and built in such a way that they will, throughout their life cycle, not be a threat to the hygiene, health or safety of workers, occupants or neighbours. This means that they must be designed and built in such a way that they do not present unacceptable risks of accident or damage in the service or operation of the works such as slipping, falling, collision, burns, electrocution, injury from explosion or burglaries. In particular, construction works must be designed and built taking into consideration accessibility and use for disabled persons28. Portugal approved, through Law No. 102/200929, the legal regime for the promotion of health and safety at work. Under this general framework, a worker has the right to work under conditions that ensure its health and safety, and this must be guaranteed by the employer or, in situations identified by law, by the natural or legal person in charge of the premises where the activity is carried out30. Specific health and safety provisions apply to the construction sector in particular, notably those contained in Decree-Law No. 273/200331, which estab-

Ministerial Order (Portaria) No. 19/2004, of 10 January. Regulation (EU) No. 305/2011 of the European Parliament and the Council of 9 March 2011. Para. 1 of Annex I of Regulation (EU) No. 305/2011. Para. 4 of Annex I of Regulation (EU) No. 305/2011. Law No. 102/2009, of 10 September. S. 5(1) of Law No. 102/2009, of 10 September. Decree-Law No. 272/2003, of 29 October.

796

2.3.5.

2.3.6.

2.3.7.

32 33 34 35

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lishes general planning, organisation and coordination rules to promote safety, hygiene and health at work in construction sites. Decree-Law No. 273/2003 transposes Directive 92/57/EEC on the minimum health and safety requirements applicable to work carried out on temporary or mobile construction sites32. In order to ensure the health and safety protection of all agents on the site during the use of the works and other subsequent interventions, the project author or project team should take into account the general principles of prevention of professional risks set out under the applicable legal framework. In integrating such general principles of prevention, the following must be taken into account33: (a) Architectural options; (b) The technical choices developed in the project, including the methodologies related to the construction processes and methods, as well as the material and equipment to be incorporated in the building; (c) The definitions of the project implementation procedures, including those relating to stability and various specialities, the building implementation conditions, and the constraints involved in carrying out the work; (d) The organisational solutions for planning the work and its milestones, as well as the practical date for completion; (e) Certain risks to the health and safety of the workers in specific works, for which the author of the project may provide supplementary solutions to the guidelines laid down in the project; and (f) The guidelines regarding the use, maintenance and conservation of the building. The contractor must appoint a project safety coordinator34: (a) If the project is developed by more than one person, provided that: (i) their architectural options and technical choices are of technical complexity which therefore justify the application of the general principles of professional risk prevention; or (ii) the works to be carried out involve special risks; or (b) If the intervention of two or more corporations in the execution of the works is envisaged, including the executing entity and subcontractors. The contractor shall develop and specify the proposed health and safety plan complementing the envisaged measures. The development of the health and safety plan and amendments thereto are subject to technical validation by the safety coordinator and approval by the owner of the works35.

S. 1 of Decree-Law No. 272/2003. S. 4(2) of Decree-Law No. 272/2003. S. 9(1) of Decree-Law No. 272/2003. S. 11(1) of Decree-Law No. 272/2003.

Portugal

2.3.8.

797

The enforcement of the rules set out above is under the remit of the General Labour Inspectorate (Inspeção Geral do Trabalho)36.

2.4. Protection of the Environment 2.4.1.

2.4.2.

2.4.3.

36 37 38 39 40

Under Annex I of Regulation (EU) No. 305/2011, construction works must be designed and built in such a way that they will not have an exceedingly high impact, over their entire life cycle, on the environment or climate, in particular as a result of any of the following37: (a) The emission of toxic gas; (b) The emission of dangerous substances, volatile organic compounds (VOC), greenhouse gases or dangerous particles; (c) The emission of dangerous radiation; (d) The release of dangerous substances into ground water, marine waters, surface waters or soil; (e) The release of dangerous substances into drinking water or substances which have an otherwise negative impact on drinking water; (f) The discharge of wastewater, emission of flue gases or disposal of solid or liquid waste; or (g) Dampness in parts of the construction works or on surfaces in the construction works. The Portuguese environmental legal framework is underpinned by Law No. 19/201438. The framework expressly recognises environmental rights through the promotion of sustainable development, supported by proper management of the environment, in particular ecosystems and natural resources. It is also concerned with contributing to the development of a low carbon society and a ‘green economy’ and the rational and efficient use of natural resources to ensure the well-being and progressive improvement of the quality of life of citizens39. Public and private projects that are likely to have significant effects on the environment must be preceded by an Environmental Impact Assessment (‘EIA’). The EIA must be carried out before the construction works, as per Decree-Law No. 151-B/201340, which approved the regime applicable to the EIA. Projects which are subject to EIA include (but are not limited to): installations for the reprocessing of irradiated nuclear fuels; integrated chemical installations;

See rec. 8 of Decree-Law No. 272/2003. Para. 3 of Annex I of Regulation (EU) No. 305/2011. Law No. 19/2014, of 14 April. S. 2(1) of Law No. 19/2014. Decree-Law No. 151-B/2013, of 31 October.

798

2.4.4.

2.4.5.

2.4.6.

2.4.7.

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commercial ports for loading and unloading berths with shore connection and external ports (excluding berths for ferryboats) which can receive vessels of more than 4000 GT or 1350 tonnes; and sewage treatment plants41. According to the Decree-Law No. 151-B/2013, the applicant shall submit the EIA, along with a previous assessment, a preliminary design or implementation project, as the case may be, and the shipping note according to the model made available online by the EIA authority, to the licensing or other competent entity for authorisation of the project. The regime applicable to management of waste operations resulting from the construction or demolition of buildings or from landslides, including the prevention and reuse, collection, transport, storage, sorting, treatment, recovery and disposal of such waste was approved by Decree-Law No. 46/200842. The management of such residue is carried out in accordance with the principles of self-sufficiency, prevention and reduction, hierarchy of waste management operations, citizen accountability, waste management regulation and equivalence43. The management of waste is the responsibility of all those involved in its lifecycle, from the original product to the waste produced, in proportion to their contribution to the generation of such waste, except for waste produced in works exempt from prior notification, which is managed by the public body responsible for the management of urban waste44. In the event that the producer of the waste cannot be determined, the responsibility for its management rests with whoever holds the waste. Responsibility for the management of waste of the aforementioned entities is extinguished once the waste is delivered to either a licensed waste management operator or the entities responsible for waste stream management systems45.

2.5. Quality Assurance 2.5.1.

41 42 43 44 45 46

Every construction work must meet the quality standards defined in the construction contract. In the absence of express reference in the contract to the quality standards, the generally applicable standards to works of the same nature shall apply. Furthermore, Section 1225(1) of the Portuguese Civil Code46 (‘Civil Code’), provides for a general warranty rule whereby if, in the five years

Annex I of Decree-Law No. 151-B/2013. Decree-Law No. 46/2008, of 12 March. S. 2 of Decree-Law No. 46/2008. S. 3(1) of Decree-Law No. 46/2008. S. 3(3) of Decree-Law No. 46/2008. Approved by Decree-Law No. 47344/66, of 25 November.

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from the acceptance of the works, the works partially or utterly collapse due to defects, or evidence any defects, the contractor is liable for damage caused to the owner of the works or a third-party acquirer thereof. Warranty periods apply to buildings and other structures, and the quality requirements must be met throughout the entire warranty period.

2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

There is no legally mandated standard form contract. The construction contract form is chosen by its parties or imposed within the context of a public procurement procedure. The entity financing a project normally reviews the terms of the selected contract and proposes amendments. The financing entities tend to impose clauses regarding requirements for reports on progress, compliance with the work plans and sanctions for delays, amongst others.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

The Civil Code sets out the principles of contract law, amongst which is the principle of freedom of contract47. According to this principle: (a) Parties are free to enter into contracts; (b) Parties are free to agree on any contractual terms (except for mandatory legal provisions); and (c) No party may be forced into a contract, except when the duty to enter into a contract arises out of law or a free will engagement. Whenever non-mandatory statutory provisions regulate contractual terms (i.e., statutory provisions which may, by agreement, be waived or derogated by the parties and are therefore deemed to be not mandatory provisions), the parties may agree to different terms or even exclude the regulation of such terms. If the parties do not expressly address the regulated matters, the nonmandatory statutory provisions will apply. Nevertheless, the parties cannot, through contract, modify, restrict or avoid the application of mandatory statutory provisions and public policy, whether from national or international norms.  

3.1.3.

47 S. 405 of the Civil Code.

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3.1.4.

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In the event of a dispute regarding contractual terms not expressly governed by the contract or the law, courts will consider the general usage of such terms and the principles of justice, reasonableness and good faith, as well as the application of analogous statutes and laws to make a determination. The Portuguese legal system applies the pacta sunt servanda principle48 under which a valid contract shall have the force of law between its parties. This principle is generally enforced by court.

3.2. Legal Framework 3.2.1.

3.2.2.

3.2.3.

3.2.4. 3.2.5.

The fundamental legal principles of the Portuguese legal system are enshrined in the Constitution, approved in 1976 and, as a civil law system, codified statutes usually organised in codes and published in the country’s official gazette. Written law is the primary source of law – unlike in common law systems where precedents have a binding authority; in Portugal, precedent is regarded by courts as merely persuasive authority. As in other civil law systems, there is a clear distinction between public law which, in general terms, governs relationships between individuals (legal and natural persons) and the Government, and private law, which regulates the relationships between individuals. The principal source of private law is the Civil Code. For the construction industry, the most relevant provisions of the Civil Code are the rules governing obligations and contracts. The Civil Code provides general conditions for contracts and contains a specific section on private works contracts49. This section regulates the general conditions for a construction contract, providing for the definition of a construction contract, the distribution of risk, the obligations of the parties, guarantees and other provisions. The Public Procurement Code50 regulates public works contracts. In addition, public law regulates issues such as territorial planning, the issuance of building permits and constructions licensing, and the performance of construction works and commissioning.

48 S. 406 of the Civil Code. 49 «Contratos de empreitada» regulated in SS. 1207 to 1230 of the Civil Code. 50 Approved by Decree-Law No. 18/2008, of 29 January.

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3.3. Public Policy 3.3.1.

3.3.2.

3.3.3.

According to the Civil Code, contracts contrary to public policy or common usage/morality are considered null and void. The concept of public policy is not detailed in the Civil Code and is defined by scholars as the set of general principles governing the legal order which, despite not being expressly legislated, contain the fundamental rules on which law is based and which, consequently, must be respected. The concept of common usage or morality consists of norms of conduct of a non-legal nature that reflect the dominant rules of social morality of a certain time and of a certain community. It invalidates a contract being entered into in order to directly, wilfully or deliberately harm a third party51. In the field of international arbitration, public policy is interpreted as international public policy, which includes the fundamental principles of due process and the rule of law. In assessing whether a contract is contrary to public policy, its impact on the public, the State and individuals shall be considered.

3.4. Statutes on Private Construction Works 3.4.1. 3.4.2.

3.4.3.

3.4.4.

3.4.5.

51 52 53 54

As mentioned above, the Civil Code is the main source of rules and regulations which are relevant to the private construction industry. Under the Civil Code, construction contracts are agreements whereby one of the parties undertakes to carry out a certain work for the other party at a price52. The contractor must carry out the work in accordance with the agreement, and without defects that exclude or reduce the value of the works or its suitability for ordinary use or the use provided for in the contract53. The owner of the works may inspect the execution of the work at its own cost, provided that such inspections do not disturb the ordinary course of the work. The inspection carried out by the owner of the works or its commissioner does not prevent the former from enforcing its rights against the contractor, even in the event of patent (apparent or notorious) defects54. The contractor must supply the materials and tools necessary for the execution of the work, unless otherwise agreed. The materials must correspond to

SS. 280 and 281 of the Civil Code. S. 1207 of the Civil Code. S. 1208 of the Civil Code. S. 1209 of the Civil Code.

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3.4.6.

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the characteristics of the work and cannot be of an inferior quality, unless the contract provides otherwise55. If the parties do not establish the price or agree on a method of determining such a price, the Civil Code provides that the price shall amount to what the contractor normally charges for similar wor, and, ultimately, the price may be determined by a court. Similarly, the Civil Code provides that, unless otherwise provided in the contract, the price is payable upon reception of the works56.

3.5. Implied Contract Terms 3.5.1.

3.5.2.

55 56 57 58 59 60 61 62 63

Since the construction agreement is a typified agreement under Portuguese civil law, there are several contractual terms which are implied, meaning they will be treated as integrated into all construction agreements unless parties agree otherwise. This would cover matters such as: (a) The right of the employer to supervise the works (to the extent it does not disturb the contractor’s activity)57; (b) The contractor is generally responsible for providing the necessary materials and tools58; (c) The materials and tools should correspond to the characteristics of the works and should not be inferior to the quality deemed to be ‘average’59; (d) If the parties do not provide for a price, the contractual price would amount to the price practiced by the contractor at the time the agreement was entered into or the market price, and in the absence of these determinations, the court is competent to establish the price60 and the price is payable at acceptance61; (e) In respect of transfer of risk, the implied rule is that if the land is owned by the employer the works are the property of the employer and the material supplied by the contractor passes onto the property of the employer as it is incorporated on the ground62; and (f) The warranty period is of five years counted from acceptance63.

S. 1210 of the Civil Code. S. 1211 of the Civil Code. S. 1209(1) of the Civil Code. S. 1210(1) of the Civil Code. S. 1210(1) of the Civil Code. S. 1211(1) of the Civil Code. S. 1211(2) of the Civil Code. S. 1212(2) of the Civil Code. S. 1225 of the Civil Code.

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3.6. Construction of Contract Terms 3.6.1. 3.6.2.

The construction of the contractual terms will be made in accordance with the general civil law rules provided in Sections 236-239 of the Civil Code. When there is doubt as to what the parties actually agreed, for instance due to the use of ambiguous wording, the prevalent notion will be the most equitable one, i.e., that strikes a balance between the parties64.  

3.7. Private and Public Procurement 3.7.1.

3.7.2.

Public construction contracts must be awarded in accordance with public tender procedures which are regulated by the Public Procurement Code, which transposes the Public Procurement Directives65. Under the Public Procurement Code, the obligation to award construction contracts via tender procedures is imposed on the following contracting authorities66: (a) The State; (b) The Autonomous Regions (the Regional Governments of Madeira and the Azores); (c) Local authorities; (d) Public institutes; (e) Independent administrative entities; (f) The Bank of Portugal; (g) Public foundations; (h) Public associations; (i) Associations consisting of one or more of the legal persons referred to above, provided that the association is mainly funded by such persons, is subject to their management control or has a management or supervisory body of which the majority of members is nominated by such persons, either directly or indirectly; and (j) Bodies governed by public law, i.e., any legal persons which, regardless of their public or private nature:  

64 S. 237 of the Civil Code. 65 The Public Procurement Code was approved by Decree-Law No. 18/2008, of 29 January, amended by Law 59/2008, of 11 September, Decree-Law No. 223/2009, of 11 September, Decree-Law No. 278/ 2009, of 20 October, Law No. 3/2010, of 27 April, Decree-Law No. 131/2010, of 14 December, Law 64B/2011, of 30 December, Decree-Law No. 149/2012, of 12 July, Decree-Law No. 214-G/2015, of 2 October, Decree-Law No. 111-B/2017, of 31 August, Decree-Law No. 33/2018, of 15 May, Decree-Law No. 179/ 2019, of 4 December, and, most recently, by Portuguese Parliament Parliamentary Resolution No. 16/ 2020, of 19 March. 66 S. 2 of the Public Procurement Code.

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(i)

have been created specifically to meet the needs of the general interest and do not have an industrial or commercial nature, i.e., those entities whose economic activity is not subject to competitive market, namely because either the entity is not aimed at generating profit or it does not undertake the losses of their activity; and (ii) are mainly financed by the aforementioned entities or by other bodies governed by public law, or the management of the organisation is controlled by the aforementioned entities or bodies governed by public law, or have a management or supervisory body of which the majority of members are nominated by those entities or bodies governed by public law, either directly or indirectly; and any legal person who is in the situation referred to in the preceding subparagraph (j)(ii) in respect of an entity which is itself a contracting authority. The abovementioned contracting authorities may award a contract through direct adjustment award, prior consultation, public tender, tender limited by prior qualification, negotiation procedure, competitive dialogue and partnership for innovation67. When a construction contract is awarded by one of the contracting authorities listed above it is considered a ‘Public Works Contract’ for the purposes of the Public Procurement Directives and must include the following details: (a) Reference to the acts of awarding the contract and approving the draft contract; (b) The contractual price or the information necessary for its determination; (c) The time limit for completion of the works; (d) Reference to the guarantee provided by the successful tenderer; (e) The identification of the contract manager on behalf of the contracting authority; and (f) Any conditions of modification of the contract expressly set forth, including clauses of revision or option, in a clear, precise and unequivocal manner. The provisions of awarded public works contracts cannot be changed during the contractual term except: (a) Where the circumstances on which the parties have based the decision to contract have undergone an abnormal and unforeseeable change, provided that adherence to the obligations stipulated by the contract would seriously affect the principle of good faith and the change in circumstances is not covered by the risks inherent in the contract; or  

3.7.3.

3.7.4.

3.7.5.

67 S. 16 of the Public Procurement Code.

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805

(b)

3.7.6.

3.7.7.

On grounds of public interest as a result of new needs or a re-balancing of existing circumstances68. The amendment of any public contract is subject to the following limits: (a) The amendment cannot lead to a substantial change in the subject-matter of the contract; (b) The amendment may not serve to prevent, restrict or distort competition; (c) The amendment is not permitted when, had it been part of the tender specifications, it would have led to an objectively verifiable change in the ranking of the evaluated tenders or the admission of other tenders; (d) The total price increase resulting from any amendment shall not exceed 25% of the initial price in the case of subparagraph (a) of paragraph 3.7.5. above and 10% of the initial contractual price in the case of subparagraph (b) of paragraph 3.7.5. above; (e) The amendment may not impact the economic balance of the contract in such a way that the contractor is placed in a more favourable position in comparison with the initial economic balance of the contract69. The contractor is entitled to the restoration of the economic balance of the contract whenever the basis for the amendment of the contract is, inter alia: (a) An unusual and unforeseeable alteration of the circumstances which supported the decision of the contracting authority (i.e., the public authority which entered into the agreement), occurring outside the operation of the contractual relationship, and which has a specific impact on the contractual situation of the contracting party; or (b) Grounds of public interest. In other cases of abnormal and unforeseeable changes to the circumstances, the contract may be amended or, alternatively, the contractor will be entitled to just compensation70.  

3.7.8.

4. Government Involvement 4.1. Legislation and Regulation 4.1.1.

In this respect, the most important statutes in Portugal are the following: (a) The Portuguese Public Procurement Code (Decree-Law No. 18/2008, of 29 January, as amended);

68 S. 312 of the Public Procurement Code. 69 S. 313 of the Public Procurement Code. 70 S. 314(1) of the Public Procurement Code.

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(b) (c) (d) (e)

The Portuguese Legal Framework of the Public-private partnerships (Decree Law No. 111/2012, of 23 May, as amended); The Legal Regime of Urban Planning and Building (Decree-Law No. 555/99, of 16 December, as amended); The Expropriations Code (Law No. 168/99, of 18 September); and The Administrative Procedure Code (Decree-Law No. 4/2015, of 7 January).

4.2. Codes of Practice 4.2.1. 4.2.2.

There are no codes of practice specifically applicable to the construction industry in Portugal. In any case, some professional organisations have their own code of ethics which could be of relevance in the construction sector. These would include the Professional and Ethics Code of the Portuguese Association of Engineers (‘Ordem dos Engenheiros’), which provides for matters such as the duties of engineers towards the client, the community and their employer. However, construction agreements seldomly make reference to these soft law instruments, and the practice of the contractor is generally contractually regulated by reference to the market standards.

4.3. Licensing of Professionals and Contractors 4.3.1.

4.3.2.

Construction activities are regulated by Law No. 41/201571, and special licensing is required for their commencement (either through a license or certificate), issued by the Institute of Public Markets, Real Estate and Construction, IP72. According to Law No. 31/2009, as referred to in Section 2.2. above, participants of the construction industry include the project author, project coordinator, construction supervision officer, project manager, employer, inspection company, project company, contractor and the project team73.

71 Law No. 41/2015, of 3 June, as amended by Law No. 25/2018, of 14 June, establishes the legal framework applicable to the performance of the construction activity. 72 S. 5 of Law No. 41/2015. 73 Law No. 31/2009, of 3 July, as amended by Law no. 25/2018, of 14 June, establishes the legal framework for the professional qualification required for technicians responsible for the preparation and subscription of construction projects, for the supervision of works and for work management, that are not subject to special legislation.

Portugal

4.3.3.

4.3.4.

4.3.5.

4.3.6. 4.3.7.

807

The qualification requirements for these roles are determined by the same statute, which also regulates the qualification requirements (academic degrees/ work experience) for the abovementioned roles, as well as the procedure for issuing, changing, suspending, reinstating and withdrawing qualification certificates74. Architects validly registered before the Professional Association of Architects (‘Ordem dos Arquitectos’) are qualified to conduct architectural projects75. Engineers or technical engineers who are validly registered before either the Professional Association of Engineers (‘Ordem dos Engenheiros’)76 or the Professional Association of Technical Engineers (‘Ordem dos Engenheiros Técnicos’)77 are qualified to prepare engineering projects. Only engineers and technical engineers can coordinate demolition projects to the extent that they are qualified for their design. If the contract is of class 5 or higher (see paragraph 2.2.5. above), the engineer must have at least five years of professional experience in drafting or coordinating this type of project78. Where a demolition project is drawn up by a project team, the team must consist predominantly of engineers and technical engineers79. Architects, engineers and technical engineers validly registered before their respective Professional Associations must request a declaration and/or certificate of professional qualification which must indicate their membership number, the title of their area of expertise and their level of qualification and/or degree of specialisation, as well as the number of years of their professional experience80.

74 Statutes of the Professional Association of Architects approved by Decree-Law No. 113/2015, of 28 August, as amended by Law No. 123/2015, of 2 September; Statutes of the Professional Association of Engineers approved by Decree-Law No. 119/92, of 30 June, as amended by Law No. 123/2015, of 2 September; and Statutes of the Professional Association of Techinical Engineers approved by Decree-Law No. 349/99, of 2 September, as amended by Law No. 157/2015, of 17 September. 75 S. 4(2) of the Statutes of Decree-Law No. 113/2015, of 28 August. 76 S. 7 of Decree-Law No. 119/92, of 30 June. 77 S. 6 of the Statutes of Decree-Law No. 349/99, of 2 September. 78 S. 4 of Law No. 40/2015, of 1 June, and respective Annex. 79 S. 6(3)(g) of Law No. 31/2009. 80 SS. 3 and 4 of the Instruction of the Professional Association of Engineers No. 420/2015.

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5. Construction Contracts 5.1. Available Contracts 5.1.1.

There are no Portuguese standard form construction contracts.

5.2. Most Commonly Used 5.2.1.

The main industry players typically use their own standard form construction contract and parties will generally negotiate the terms of their construction agreement freely and on a case-by-case basis.

5.3. Example 1 – Design and Construct Contract – AS4300 5.3.1.

This Australian standard form contract is not used in construction projects in Portugal.

5.4. Example 2 – FIDIC 5.4.1.

FIDIC’s conditions of contract, as issued by the International Federation of Consulting Engineers, are sometimes used for construction works. While FIDIC forms are popular, they do not constitute common practice.

5.5. Amendment of Contracts and Bespoke Contracts 5.5.1. 5.5.2.

Amendments to a construction contract are dependent upon the agreement between the contractor and the owner of the works. For public works contracts, the draft of the contract to be executed is provided by the public authority during the award procedure. Public works contracts may be amended under the terms referred to in paragraphs 3.7.5. and 3.7.6.

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6. Key Issues 6.1. Overview 6.1.1.

6.1.2.

6.1.3.

As mentioned above, the construction agreement is typified under the Civil Code, which defines this type of agreement as a type of contract by which one of the parties accept to carry out specific works for the payment of a price81. According to this provision, the fundamental components of a construction agreement are the parties, the works and the price82. Within these three vertices, there are a variety of different issues of paramount relevance to the parties. Since construction agreements are prolonged in time, i.e., the performance of the parties is not simultaneous or instantaneous but rather gradual over time, parties also tend to stipulate the rules and timing for the initiation and conclusion of the works83 as well as other matters such as fitness for purpose, late completion amongst others.  

6.2. Fit for Purpose 6.2.1.

6.2.2.

The general rule is that the contractor is bound to deliver the works in accordance with what was agreed with the employer and free of defects which exclude or reduce the value of the works, as well as their fitness for ordinary purpose or their fitness to comply specifically with what was provided in the agreement84. This principle is generally construed as an extension of the general principle of good faith established in section 762(2) of the Civil Code. This means, inter alia, that the contractor is bound to abide by the technical standards and to act with a standard level of diligence. Furthermore, the threshold of technical standards employed by the contractor is generally determined by reference to the complexity of the works, i.e., the climate and place where the works are executed85.  

81 82 83 84 85

S. 1207 of the Civil Code. See Martinez, Pedro Romano. Direito Das Obrigações. Almedina, pg. 362. Martinez, Pedro Romano. Direito Das Obrigações. Almedina, pg. 363. S. 1208 of the Civil Code. Prata, Ana. Código Civil – Anotado – Volume I.

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6.3. Late Completion 6.3.1.

6.3.2.

6.3.3.

In relation to public works contracts, under the Public Procurement Code, in the event of a delay in the beginning or completion of the execution of works that is attributable to the contractor, the employer may impose a penalty on the contractor or, under certain circumstances, terminate the contract. Such a penalty is calculated on the basis of each day of delay at an amount corresponding to one thousandth of the contract price, unless the contract provides for a higher penalty rate, which is statutorily limited to double the statutorily stipulated amount. The maximum penalty is limited to 20% of the contract price86. Nevertheless, the contractor is entitled to reimbursement of contractual penalties paid for non-compliance with interim completion deadlines where the works are completed within the period of final completion of the contract87. In private construction contracts, it is common practice to establish that, if the contractor fails to complete the works according to the specifications provided in the contract and fails to meet either the final or any interim deadlines, the employer may impose contractual penalties or terminate the contract.

6.4. Latent Conditions 6.4.1.

6.4.2.

Portuguese law does not expressly regulate the issue of latent conditions, i.e., which party bears the risk of latent conditions in the works site which could not reasonably be anticipated by the diligent contractor. In any case, Section 1225 of the Civil Code does provide that if the works collapse or are damaged by a fault of the terrain where they were built, then the contractor is liable for the damage caused. These matters are generally regulated in the agreement with the parties generally attempting to set out a fair and equitable allocation of risk for latent conditions.  

6.5. Force Majeure 6.5.1.

Portuguese legislation neither provides a definition for the concept of force majeure or any similar concepts, nor does it determine the applicable regime

86 S. 403 of the Public Procurement Code. 87 S. 403(2) of the Public Procurement Code.

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6.5.3.

811

in the case of force majeure. It is common practice for the construction contract to determine which events qualify as force majeure, establish the relevant procedure and determine the allocation of risk in such an event. Events stemming from force majeure are generally subject to mitigation measures by the party claiming to be affected by such events. Standard provisions regarding events of force majeure usually foresee that the affected party shall be exempted from liability for failure, lack or delay in the performance of the contract due to a force major event and include the reinstatement of the economic balance through compensation, or, if such a solution is not possible, termination is generally the remedy that follows. The Civil Code provides that, however, should the circumstances on which the decision of the parties to enter into the contract was based change abnormally, the affected party may terminate the contract, or amend it, provided that demanding compliance would materially breach the principle of good faith and that the risk of the change is not covered by the customary risks of entering into such a contract. If the party affected decides to terminate the contract, the other party may oppose the termination by accepting the amendment of the contract88.

6.6. Limitation of Liability 6.6.1.

6.6.2.

Under the Civil Code, the liability of the parties can be contractually limited, other than for fraud or wilful misconduct. It is customary to agree on a monetary limitation and to exclude certain losses such as loss of profits or indirect losses (which otherwise could be included in the obligation to compensate arising in cases of breach)89. Public contracts may also include penalty clauses (the limitation of liability in the Public Contracts Code is regulated by the Civil Code but is also subject to the constitutional and legal principles applicable to the Public Administration).

6.7. Duration of Exposure 6.7.1.

See sections 6.8. and 6.9. below.

88 S. 437 of the Civil Code. 89 S. 494 of the Civil Code.

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6.8. Time Bars 6.8.1. 6.8.2.

On warranty periods see sections 6.9.1. and 6.9.2. below, although a shorter or longer warranty period could be contractually agreed to between the parties. The contractor will be freed from all liability for defects if the employer knowingly accepted the works90. Patent defects are presumed to be known to the employer91. Conversely, latent defects must be communicated by the employer to the contractor within 30 days of becoming aware of them92.

6.9. Defects 6.9.1.

6.9.2.

90 91 92 93 94 95 96

In accordance with the Civil Code, the owner of the works is bound to communicate any defects in the works to the contractor within 30 days of becoming aware of such defects93. The contractor will not be liable for any defects if the owner accepted the work whilst aware of such defects. Patent defects are deemed to be known to the owner of the works, regardless of whether or not the inspection was carried out94. If the defects can be corrected, then the contractor will be liable for carrying out the necessary corrections and remedial works. If, on the other hand, the defects cannot be corrected, the contractor is liable for the reconstruction of the works. If the defects are not eliminated or the works are not rebuilt and the defects render the work unfit for purpose, the owner’s remedy is a reduction of the price or termination of the contract. The exercise of these rights does not exclude the right to compensation95. Unless otherwise provided in the contract, under the Civil Code, the contractor remains liable for five years from the owner’s acceptance if the works partially or utterly collapse due to defects, or evidence any defects. In any case, the defect must be communicated to the contractor within one year of the owner becoming aware of the defect, and compensation must be claimed within the subsequent year96. For the purposes of public works contracts, the works will be deemed unsuitable for provisional acceptance if the employer does not certify the correct execution of the construction and the demolition waste prevention and management plan. The non-acceptance certificate, whether applicable to all or

S. 1219(1) of the Civil Code. S. 1219(2) of the Civil Code. S. 1220(1) of the Civil Code. S. 1220(1) of the Civil Code. S. 1219 of the Civil Code. SS. 1221 and 1222 of the Civil Code. SS. 1224 and 1225 of the Civil Code.

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part of the works, will be served to the contractor who must cure the defects within a reasonable time. If the defects identified in the non-acceptance certificate are not cured within the prescribed period, the owner of the works may execute the correction of the defects, either personally or through a third party97. As soon as the defect correction works have been completed, a new provisional acceptance procedure shall take place98. On the date of the signature of the provisional acceptance statement, the warranty period begins, during which the contractor is bound to correct all defects in the work. The warranty period varies in accordance with the defect and is as follows: (a) Ten years if the defect is related to a structural construction element of the works; (b) Five years if the defect is related to a non-structural construction element of the works or a technical installation therein; or (c) Two years if the defect is related to equipment which is part of the works but are autonomous (i.e., severable) from the remainder of the works. The contract may stipulate different warranty periods than those provided above, but longer warranty periods will only apply if and when they are proposed by the contractor during the tender and prior to procurement99.  

6.9.3.

6.10. Completion of the Construction 6.10.1. For private construction contracts, the Civil Code provides that the owner of the works must inspect the works before accepting them100. The purpose of such an inspection is to assess whether the works comply with the provisions of the contract and are free of defects. The inspection must be done within the usual period of time or, alternatively, within a reasonable period after the owner of the works is in a position to conduct such an inspection101. The law does not set out what a usual or reasonable period of time would be in this respect, but this will be a case-by-case analysis depending on the size and complexity of the works and the experience and conditions of the parties themselves. 6.10.2. For public works contracts, the provisional acceptance of the works depends on an inspection, which must be carried out as soon as the works are completed (in whole or in part), at the request of the contractor or at the owner’s initiative, taking into account the practical date for completion or any applicable partial completion milestones. The purposes of the inspection are, inter alia, to:

97 S. 395 of the Public Procurement Code. 98 S. 396(4) of the Public Procurement Code. 99 S. 397 of the Public Procurement Code. 100 S. 1218(1) of the Civil Code. 101 S. 1218 of the Civil Code.

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(a) (b)

Verify that the contractor has performed its legal and contractual obligations; and Assert the correct execution of the construction and the demolition waste prevention and management plan, in accordance with the applicable legislation102.

6.11. Modifications and Additional Services or Works 6.11.1.

Under the Civil Code, in private construction contracts, the employer may demand modifications to the plan for the agreed works to the extent that its cost does not exceed one fifth of the agreed price and the nature of the works is not modified103. Where a change demanded by the employer increases the cost or volume of the works, the price shall be increased and the completion deadlines shall be extended accordingly104. If the change has instead resulted in a decrease in the cost or volume of the works, these cost savings shall be deducted from the price105. 6.11.2. Under the Public Procurement Code, the owner of the works cannot purchase additional services or works from the same contractor in relation to certain awarded public works contracts. However, it is possible to execute complementary works, which were not provided for in the initial contract, in kind or in quantity. 6.11.3. When the need for complementary works arises out of circumstances which were not initially provided, the owner of the works may order the contractor to execute the work, provided that: (a) The complementary works are not technically or economically severable from the subject-matter of the contract without constituting an inconvenience and resulting in a significant increase in costs for the owner of the works; (b) The price of such complementary works, including any additional work also arising out of unanticipated circumstances, does not exceed 10% of the contract price; and (c) The sum of the contract price and the price for the complementary works does not exceed the permissible limits for the applicable tender procedure106.

102 103 104 105 106

SS. 394 and 395 of the Public Procurement Code. S. 1216(1) of the Civil Code. S. 1216(2) of the Civil Code. S. 1216(3) of the Civil Code. S. 370(2) of the Public Procurement Code.

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6.11.4. Where complementary works are a result of unforeseeable circumstances, assessed according to whether a diligent contracting authority would have foreseen such circumstances, the owner of the works may request the execution of complementary works if: (a) The complementary works are not technically or economically severable from the subject-matter of the contract without constituting an inconvenience and resulting in a significant increase in costs for the owner of the works; and (b) The price of such complementary works, including any additional work also resulting from unforeseeable circumstances, does not exceed 40% of the contract price107. 6.11.5. Any additional work which exceeds the thresholds above must be awarded through a new tender procedure108.

7. Dispute Resolution 7.1. Overview 7.1.1.

In Portugal, disputes arising from construction contracts can generally be resolved through judicial or extrajudicial means (such as out of court settlement, mediation and arbitration).

7.2. Dispute Resolution in Courts 7.2.1.

7.2.2.

There are no specialised courts dealing with construction disputes in Portugal. The Portuguese legal system distinguishes between public and private law; in general terms, administrative courts are charged with resolving construction disputes between public and private persons (namely disputes regarding public works), while disputes between private persons are brought before civil courts. Civil courts are ranked as follows: (a) The Supreme Court of Justice; (b) The courts of appeal; and (c) The courts of first instance, including the courts with wider territorial jurisdiction, and the county courts.

107 S. 370(4) of the Public Procurement Code. 108 S. 370(5) of the Public Procurement Code.

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7.2.6.

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As a general rule, all claims are brought before the courts of first instance, unless otherwise provided by law. The courts of appeal hear appeals from the courts of first instance. The administrative courts are the competent judicial authorities for reviewing the legality of administrative acts, regulatory norms issued by the Public Administration and disputes arising from public contracts. The administrative courts are ranked as follows: (a) The Administrative Supreme Court; (b) The central administrative courts; and (c) The administrative courts of first instance.

7.3. Arbitration of Disputes 7.3.1. 7.3.2.

7.3.3. 7.3.4.

Portugal is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’)109. The majority of construction disputes are submitted to courts, whether civil or administrative. From our experience, arbitration does not yet represent a widespread practice in the Portuguese construction sector. However, arbitration is progressively being used as a means of dispute resolution in large construction projects. Furthermore, the Public Procurement Code contains special rules which provide for disputes arising out of a public contract to be settled by arbitration110. Arbitral awards are deemed binding and enforceable in Portugal. Foreign arbitral awards can only be denied recognition and enforcement in Portugal on the grounds specified in Article V of the New York Convention111.

109 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 38 (entered into force 7 June 1959) (‘New York Convention’). 110 S. 476 of the Public Procurement Code. 111 New York Convention (n. 1) art. V.

Artashes Oganov, Dmitry Bogdanov and Ophelia Amirova

Russia 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 7.

Context 818 The Country 818 The Legal System 820 The Economy 821 The Construction Industry 822 Size and Nature 822 Participants 823 Work, Health and Safety 824 Protection of the Environment 825 Quality Assurance 826 Construction Contracting Dynamics 827 Legal Underpinnings of Contracts 827 Freedom of Contract 827 Legal Framework 828 Public Policy 828 Statute Law 829 Implied Contract Terms 829 Construction of Contract Terms 830 Private and Public Procurement 831 Government Involvement 833 Legislation and Regulation 833 Codes of Practice 835 Licensing of Professionals and Contractors 836 Construction Contracts 837 Available Contracts 837 Most Commonly Used 839 Key Issues 839 Overview 839 Fit for Purpose and Technical Documentation 840 Baseline Data 841 Period of Work Execution and Late Completion 841 Latent Conditions 843 Force Majeure 843 Limitation of Liability 844 Duration of Exposure 844 Time Bars and Statute of Limitations 845 Dispute Resolution 846

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1. Context 1.1. The Country 1.1.1.

The Russian Federation,1 the largest country in the world in terms of area, is geographically located in Eurasia from Eastern Europe to the Pacific coast. Russia covers eleven time zones and includes a wide variety of environments and landscapes, which has a significant impact on its economy, including the construction industry.

Federal Structure and Local Authorities 1.1.2. In accordance with the Konstitutsiya Rossiiskoi Federatsii ot 12 dekabrya 1993 goda [Constitution of the Russian Federation of 12 December 1993] (‘Constitution’), the Russian Federation consists of 85 ‘constituent subjects’, ie, regions within the federation.2 The regions enjoy some autonomy over their internal economic and political affairs. Some powers are vested exclusively with federal authorities, some are jointly exercisable by the federal and regional authorities, and the residual powers are exercised by the regional authorities. Among other things, the Constitution vests regional authorities with powers to pass laws, provided those laws do not contradict the Constitution or existing federal laws.3 1.1.3. The local (municipal) government is at the lowest level of the political system and has as an intricate two-tier structure, where municipalities are subdivided into city districts and municipal districts, with municipal districts being further subdivided into urban and rural settlements. Municipalities have their own budgets and powers, both depending on how much authority the regional government has delegated to them. The municipal authorities may set taxes on land, property of natural persons and trade. They are also involved in municipal land management — they act as landlords in lease agreements, allocate land plots for construction, and act as the seller during the privatisation of municipal land. Key Governmental and Judiciary Bodies 1.1.4. The President is the ‘head of state’, elected every six years. The President determines the main trends of domestic and foreign policy and represents the country in both domestic and foreign affairs. The President is the Commander-in-Chief of the Russian Armed Forces.4 1 2 3 4

The names ‘Russia’ and ‘the Russian Federation’ are both official and interchangeable. The number of constituent subjects may change from time to time, if the subjects merge or split. Constitution of the Russian Federation – Art 71, 72, 73, 76. Constitution of the Russian Federation – Art 80, 81, 87.

Russia

1.1.5.

1.1.6.

1.1.7.

1.1.8.

1.1.9.

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The Government of the Russian Federation [Pravitelstvo] exercises executive power at the federal level, with the Prime Minister acting as its head. The Government enacts and implements the decisions made by the President and the laws adopted by the federal legislature.5 The Constitution vests legislative authority in the Federal Assembly [Federalnoye Sobraniye], the Parliament, which consists of two chambers: an upper chamber called the Federation Council [Soviet Federatsii] and a lower chamber called the State Duma [Gosudarstvennaya Duma]. The Federal Assembly exercises the legislative power in Russia at the federal level. The Federation Council is occupied by representatives of the executive and legislative branches of the Russian regions, the resigned President and up to 30 representatives appointed by the President. The State Duma consists of 450 deputies who are elected by proportional representation based on lists prepared by the political parties represented at the federal level. The State Duma members are elected every five years.6 The judiciary is split into three branches:7 (a) The Courts of General Jurisdiction; (b) The Commercial [Arbitrazhnie] Courts; and (c) The Constitutional Court. The Courts of General Jurisdiction deal with criminal cases, administrative cases, and civil cases involving individuals who are not engaged in business activities.8 The District Court9 is the court of first instance for most cases, unless the cases fall within the jurisdiction of the Magistrate Courts10 or Martial Courts.11 The Superior Court of the General Jurisdiction branch is the Supreme Court of Russia (the ‘Supreme Court’). Decisions of the lower courts can be appealed in the Court of Appeal of General Jurisdiction, in the Court of Cassation of General Jurisdiction or in the Supreme Court as a supervision instance12. The Commercial Courts deal with economic disputes involving individuals engaged in business activities and disputes between legal entities and their participants, e.g., their shareholders. The Commercial Court system consists (in in 

5 Constitution of the Russian Federation – Art 110, 114, 115. 6 Constitution of the Russian Federation – Art 94, 95, 96. 7 Federal’ny Konstitutzionny Zakon ‘O Sudebnoy Sisteme’ [Federal Constitutional Law ‘On Judicial System’] (Russia) 31 December 1996, No 1-FKZ – Art 4. 8 Federal’ny Konstitutzionny Zakon ‘O Sudakh Obschei Yurisdiktsii’ [Federal Constitutional Law ‘On Coutrs of General Jurisdiction’] (Russia) 07 February 2011, No 1-FKZ – Art 4. 9 Usually there is one District Court per city and nearby villages. If the city is rather big, it is divided into districts, with each having its own District Court. 10 Magistrate Courts generally hear cases with small claim values. 11 Martial Courts hear cases involving military servicemen. 12 Federal’ny Konstitutzionny Zakon ‘O Verkhovnom Sude Rossiiskoi Federatsii’ [Federal Constitutional Law ‘On Supreme Court of the Russian Federation’] (Russia) 05 November 2014, No 3-FKZ – Art 2.

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creasing order of hierarchy) of the Regional Commercial Courts, the Commercial Courts of Appeal, the Federal District Commercial Courts and the Supreme Court.13 Disputes on intellectual property rights are referred to the Intellectual Property Court, which is a part of the Commercial Courts branch.14 The Intellectual Property Court, so far, is the only specialised commercial court in Russia. 1.1.10. The Constitutional Court has jurisdiction to decide whether federal and regional legislation and regulations and non-effective international treaties of Russia are in line with the Constitution. This court also resolves jurisdictional disputes between the federal and the regional authorities and is empowered to interpret and provide guidance on the provisions of the Constitution.15

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

1.2.4.

The Russian legal system belongs to the continental European legal family. The legal structure was redeveloped at a rapid pace during the 1990s to replace the Soviet era legislation as the country moved away from a command economy model. The Constitution, the federal laws, and the regional laws form the foundation of the Russian legal system. The presidential decrees, the resolutions of the Russian Government and the decisions of various ministries supplement and elaborate the provisions of the primary legislation. The Constitution states that general principles of international law and international treaties are a part of the Russian legal system.16 Consequently, if Russia has ratified an international treaty containing provisions contradicting the provisions of any domestic legislation, the provisions of the international treaty prevail.17 The Constitution, however, has supreme power and the Constitutional Court may declare any decisions of international bodies or courts non-enforceable in Russia if such decisions contradict the Сonstitution or in other way are contrary to the foundations of the public (legal) order of the Russian Federation.18 The Grazhdanskii Kodeks Rossiiskoi Federatsii [Civil Code of the Russian Federation] (‘Civil Code’) sets out the foundation of the civil law and is the key

13 There used to be the Supreme Commercial Court; however, it has been merged with the Supreme Court. The rulings and clarifications issued by the Supreme Commercial Court remain in force. 14 Federal’ny Konstitutzionny Zakon ‘Ob Arbitrazhnikh Sudakh’ [Federal Constitutional Law ‘On Commercial Courts’] (Russia) 28 April 1995, No 1-FKZ – Art 3, 4, 5, 43.2. 15 Constitution of the Russian Federation – Art 125. 16 Constitution of the Russian Federation – Art 15. 17 Constitution of the Russian Federation – Art 15. 18 Constitution of the Russian Federation – Art 15, 125. See also Section 3.3.

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source of law for business. The civil law is constantly evolving. Many significant amendments came into force in September 2014 and September 2015, aiming to make internationally recognised business instruments available under Russian law, and to improve the legal framework in general. These ongoing changes strive to accommodate the growing trend of subjecting complicated transactions to Russian law and the Russian state courts, instead of resorting to English law and the international arbitration tribunals, which were traditionally the ‘well-trodden path’ in Russia. It is yet to be seen how the new concepts will be construed and implemented in practice. Nevertheless, many companies are already using these legal instruments in their projects.

1.3. The Economy 1.3.1.

1.3.2.

Russia has an upper-middle income mixed economy with state ownership in strategic areas. Market reforms in the 1990s resulted in massive privatisation of the Russian industry and agriculture, with notable exceptions to the energy and defence-related sectors. Notwithstanding the de jure privatisation of property by transferring it from direct state ownership to the companies, the overall share of state participation in the economy (directly and via state owned companies) is still significant. According to the official assessment, it amounts to approximately 70 % of the gross domestic product.19 Russia’s vast geography is an important determinant of its economic activity, with some sources estimating that over 30 % of the world’s natural resources are in Russia. The World Bank estimates the total value of such natural resources at USD75 trillion.20 Russia relies on energy revenues to drive most of its growth. It has the world’s largest proven natural gas reserves and acts as the largest exporter of natural gas. It is also the second-largest exporter of petroleum.21 The Russian GDP for 2019 was equal to USD1.699 trillion (nominal, ranked as 11th in the world) and purchasing power parity was equal to USD4.281 trillion (ranked as 6th in the world).22 During 2019, GDP grew about 1.3 % compared to 2018. The construction industry contributes around 6 % of GDP.23  

1.3.3.

 

1.3.4.

 

 

19 Doklad FAS o Sostoyanii Konkurentsii [Review of Federal Antimonopoly Service on State of Competition] (Russia) 2019. 20 “Russian natural resources”. European Parliamentary Research Service Blog. 21 US Energy Information Administration, International statistics, accessed 1 Dec. 2013. 22 World Bank. 2020. Global Economic Prospects, June 2018: Heightened Tensions, Subdued Investment. Washington, DC: World Bank. 23 https://rosstat.gov.ru/folder/14458.

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Russia was ranked 28th in the World Bank’s ease-of-doing-business overall rank for 2020. In terms of dealing with construction permits, it was ranked 26th.24

2. The Construction Industry 2.1. Size and Nature 2.1.1.

From 2011 to 2017, the construction industry in Russia gradually decreased in the volume of works calculated in constant prices. In 2017 there was a slight increase driven by the 2018 FIFA World Cup. In 2018 and 2019, there was a positive trend and the actual total price of construction works performed in 2019 was about RUB9.1 trillion (approximately USD120.5 billion), which is higher than in 2018 by 0.6 % and in 2017 – by 6.9 %. About 2.4 million people are employed in the construction industry and have an average monthly salary of about RUB43,000 (approximately USD570).25 Following the aforementioned positive trend, the number of commissioned buildings has been gradually increasing since 2018. There were around 305,500 buildings commissioned in 2019, including around 286,000 (93.6 %) residential buildings.26 Most non-residential industrial construction takes place in transport, energy, natural resources and agriculture sectors.27 Despite the above, many contractors, small and big alike, are still facing financial and other difficulties, which are sometimes followed by dissolution or bankruptcy. Most contractors perceive the existing situation as non-predictable in terms of current projects’ profitability and possible number of future construction projects. This is also due to the COVID-19 crisis and its consequences. The perception is almost as negative as it was in 2009 after the financial crisis of 2007–08. The detrimental factors include high prices for construction materials, low solvency of employers (delays in payments), lack of demand, and difficulties (high cost) of financing. The Government is currently taking the measures to support the construction industry. For example, by providing reduced state-subsidised interest rates for personal mortgage loans to support residential construction.  

2.1.2.

 

 

2.1.3. 2.1.4.

24 25 26 27

Doing Business 2019 – Equal Opportunity for All – World Bank Group. https://rosstat.gov.ru/folder/14458. https://rosstat.gov.ru/folder/14458. https://rosstat.gov.ru/folder/14458.

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2.2. Participants 2.2.1. 2.2.2.

2.2.3.

2.2.4.

2.2.5.

2.2.6.

There are two obvious groups of players in the construction industry: employers and contractors. In terms of total number of projects and capital expenditure per project, the biggest employer is the State, which includes both federal, regional and local bodies and state-owned companies like the Russian Railways, Gazprom, RusHydro, Rosatom and the Russian Highways. There are also many private employers, mainly large companies.28 Considering the continuous economic sanction tension, grown out of political conflicts between Russia and some western countries, there are even fewer foreign investors than there used to be in the beginning of 2010s.29 The employer must have the ownership title or other rights over the land plot where construction works are carried out. Key obligations of the employer are to provide access to the construction site, to pay for works, and to provide technical documentation setting out requirements for works. The employer is also responsible for obtaining approval of the design documentation, the construction permit, and the commissioning permit. The employer, however, may delegate some functions to a special entity appointed by the employer — the technical customer [tekhnichesky zakazchik]. The technical customer may also, on behalf of the employer, enter into construction contracts with a general designer or general contractor, carry out construction control, and interact with other participants of the construction process and supervising authorities. The contractor is responsible for carrying out construction works and preparing the ‘as-built’ documentation.30 Save for turnkey contracts, the employer normally nominates separate people to perform engineering surveys, prepare design documentation and perform construction works. Depending on the specifics of the project (technical complexity, hazards or uniqueness of facilities, and other criteria set by the Gradostroitel’ny Kodeks Rossiiskoi Federatsii [Town Planning Code of the Russian Federation] (‘Town Planning Code’)), the results of engineering surveys and the design documentation may be subject to expert review. In such cases, construction works may be commenced only if a positive opinion has been obtained by the employer as a result of expert review.31

28 For example, see the rating of largest Russian companies prepared by RA Expert (https://raexpert. ru/ratings/). 29 Emerging Portfolio Fund Research (EPFR). 30 Preparing quality ‘as-built’ documentation is important for obtaining commissioning permits from state authorities and successfully bringing the building into operation. 31 Town Planning Code – Art 49.

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There are also certain public authorities that are usually involved in the construction process. For example, save for limited exceptions provided by the Town Planning Code, local (municipal) authorities are responsible for the issuance of construction and commissioning permits.32 Other competent bodies are authorised to perform state construction supervision, including on-site inspections, testing and documents review.33

2.3. Work, Health and Safety 2.3.1.

The general requirements for health and safety at work are provided in the Trudovoi Kodeks Rossiiskoi Federatsii [Labour Code of the Russian Federation] (‘Labour Code’). Under the Labour Code, the employer must ensure the safety of its employees when performing the works. This includes regular training on the applicable rules and requirements, procuring adequate individual protective gear, controlling the level of work safety, and implementing work safety management systems.34 There are also comprehensive health and safety regulations concerning performance of specific types of works (e.g., works at heights, works with open fire, electrical works, etc).35 The health and safety requirements for construction works must be accounted for at the design stage, and must be reflected in the relevant sections of the design documentation.36 The design documentation must include construction planning designs describing the overall construction process, particular works execution designs describing the technological process of performing particular works, and a construction site master plan describing the location of objects on the construction site, and passage and access routes. All these documents must be prepared with regard given to work, health and safety rules.37 The general contractor, if any, is responsible for the construction site management and safety in general, and both contractors and sub-contractors are responsible for safety while performing particular works. The relevant con 

2.3.2.

2.3.3.

32 Town Planning Code – Art 51. 33 Town Planning Code – Art 7, 8. 34 Labour Code – Art 22. 35 See, e.g., Prikaz MinTruda Rossii ‘Ob Utverzhdenii Pravil Po Okhrane Truda v Stroitelstve’ [Order of the Ministry of Labour of the Russian Federation ‘On Approval of the Rules on Labour Protection in Construction’] (Russia) 1 June 2015, No 336n. 36 Prikaz MinTruda Rossii ‘Ob Utverzhdenii Pravil Po Okhrane Truda v Stroitelstve’ [Order of the Ministry of Labour of the Russian Federation ‘On Approval of the Rules on Labour Protection in Construction’] (Russia) 1 June 2015, No 336n. – Art 8. 37 Labour Code – Art 215.  

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tractor must appoint one or several trained and certified employees to be in charge of health and safety-related issues.38 Compliance with the applicable requirements is supervised by the competent authorities, such as the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (‘Rospotrebnadzor’), Federal Environmental, Industrial and Nuclear Supervision Service of Russia (‘Rostechnadzor’), Federal Service for Labour and Employment (‘Rostrud’), and their regional subdivisions.

2.4. Protection of the Environment 2.4.1.

General requirements for the protection of the environment are in Federal’ny Zakon ‘Ob Okhrane Okruzhayushchey Sredy’ [‘Federal Law On Environment Protection’] (Russia) 10 January 2002, No 7-FZ (‘Environmental Protection Law’). It provides that any design documentation for any facilities must contain a section with a list of measures on protection of the environment. This must include assessment and calculation of negative impacts on the environment (e.g., maximum volumes of pollutants that could be emitted into the air or water sources and maximum volumes of waste that could be produced during the operation of facilities), as well as descriptions of measures necessary to reduce such impacts.39 Expert review of the design documentation must include an examination of the environmental protection measures.40 When construction takes place in specially protected natural areas, or when constructing waste disposal facilities, an environmental expert review is required in addition to the general expert review of design documentation.41 Any activities that may have a negative impact on the environment must be authorised through relevant permits or licenses.42 For any violation of the environmental protection requirements, the polluter must fully compensate the damage caused to the environment.43 Such compensation is usually calculated considering actual costs to restore the environment to its original state, direct damages caused, lost profit and also costs of recultivation works, if there are any. Otherwise, officially adopted methods  

2.4.2. 2.4.3.

2.4.4. 2.4.5.

38 ‘GOST 12.0.230-2015. Mezhgosudarstvenny Standart. Sistema standartov bezopasnosti truda’ [GOST 12.0.230-2015. International Standard. Health and Safety System] (Russia) 01 March 2017 – Art 5.3.4.5. 39 Environmental Protection Law – Art 34. 40 Town Planning Code – Art 49. 41 Town Planning Code – Art 49. 42 Environmental Protection Law – Art 31.1. 43 Environmental Protection Law – Art 78.

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and principles should apply. In addition, the relevant natural or legal person in breach may be held administratively liable.44 In cases of grave consequences (e.g., death, harm to health, mass animal mortality, etc), the guilty person may also be subject to criminal liability.45  

2.5. Quality Assurance 2.5.1.

2.5.2.

2.5.3.

2.5.4. 2.5.5.

Pursuant to the Town Planning Code, construction works must be executed in compliance with design documentation, town planning requirements, permitted use of the land plot, and all other applicable restrictions and technical requirements, to ensure quality and safety of construction works, and protection of third parties and the environment.46 Both the employer (acting directly or through the technical customer) and the general contractor must perform construction control. As part of such construction control, the general contractor must implement a quality control system.47 The general designer may also be asked by the employer or the technical customer to perform on-site supervision over compliance of construction works with design documentation.48 Depending on the specifics of the project, there may be either federal or regional state construction supervision performed by the authorities.49 The quality of materials in use and installed equipment in some cases must be confirmed by the quality certificates issued either by the manufacturer or the importer of such goods.50

44 Kodeks Rossiiskoi Federatsii ob Administrativnikh Pravonarusheniyakh [Code of the Russian Federation on Adminstrative Offences] (‘Administrative Offences Code’) (Russia) 30 December 2001, No 195FZ – Sec 8. 45 Ugolovniy Kodeks Rossiiskoi Federatsii [Criminal Code of the Russian Federation] (‘Criminal Code’) (Russia) 13 June 1996, No 63-FZ – Sec 26. 46 Town Planning Code – Art 52. 47 Town Planning Code – Art 53. 48 Svod Pravil SP 246.1325800.2016 ‘Polozhenie ob avtorskom nadzore za stroitelstvom zdanii i sooruzhenii’ [Code Practice SP 246.1325800.2016 ‘Regulation on the supervision of authors for construction of buildings and structures’] (Russia) 14 March 2016. 49 Town Planning Code – Art 54. 50 Postanovleniye Pravitelstva Rossiiskoi Federatsii ‘Ob utverzhdenii edinogo perechnya produktsii, podlezhaschei obyazatelnoy sertifikatsii’ [Decree of the Government of the Russian Federation ‘On Approval of the Unified List of Production, which has to be Certified’] (Russia) 01 December 2009, No 982.

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2.6. Construction Contracting Dynamics 2.6.1.

2.6.2.

There are no specific legal provisions on the process of construction contracting. The Civil Code generally provides that both parties should negotiate any contract in good faith and any losses51 caused by unreasonable or unexpected breakdown of negotiations52 may be subject to compensation by the party in breach of its general obligation to act bona fide.53 In practice, the employer or the technical customer initiates the negotiations with contractors (often by announcing a tender) and proposes the first draft of the contract. Both parties are free to suggest their revisions and comments to the draft, although for tenders, the contractor’s discretion is rather limited. Usually, the executed contract is the result of negotiations involving legal, commercial and technical aspects. The negotiations period for significant construction contracts may vary from a few months to several years.

3. Legal Underpinnings of Contracts 3.1. Freedom of Contract 3.1.1.

3.1.2.

Freedom of contract is the fundamental principle of the Russian civil law. Under the Civil Code the principle of freedom of contract includes three main elements: (a) Freedom to conclude a contract; (b) Freedom to enter into a contract, whether provided by law or not provided by law; and (c) Freedom to determine the terms of the contract.54 This means that any party may enter or not enter into any type of contract, provided by law or not, on any conditions, unless such behaviour violates any Russian law.

51 In that case, losses are referred to costs incurred by other party in relation to negotiations, and to loss of opportunity to conclude an agreement with third party. 52 Unreasonable and unexpected breakdown means that under the respective circumstances other party would not expect termination of negotiations. 53 Civil Code – Art 434.1. 54 Civil Code – Art 421.

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3.2. Legal Framework 3.2.1.

3.2.2.

Statute law is the primary source of Russian law. Legislation consists of federal laws, regional laws, and executive bodies’ decrees and orders further elaborating on the laws.55 Russian law does not recognise precedents; however, court practice has indirect, yet significant impacts on the legal environment. Court practice (specifically, the decisions and clarifications of the Supreme Court, the Supreme Commercial Court and the Constitutional Court) may determine how a particular rule of law or provision of contract is construed. Further, to get a better understanding of how the law will be applied, one must pay attention to the existing court practice.

3.3. Public Policy 3.3.1. 3.3.2.

3.3.3.

3.3.4.

There is no legal definition of ‘public policy’, ‘public order’ or ‘public interest’ under Russian law. The Civil Code only provides that, to the extent relevant to international private law, in exceptional cases a rule of foreign law is not applicable when the consequences of its application would clearly be contrary to the foundations of the legal order (public policy) of the Russian Federation.56 Under the Arbitrazhnyy Protsessual’nyy Kodeks Rossiiskoi Federatsii [Arbitration Procedure Code of the Russian Federation], the Russian Arbitration Courts may refuse to recognise or enforce any foreign court decision or arbitration award, particularly if the relevant decision or award or its enforcement would contradict the public order (public policy)57 of the Russian Federation.58 The Russian courts are very restrictive in their application of the above provisions on public policy. In several available cases, the courts referred to violation of such fundamental principles of the Russian civil law as equality of participants of civil legal relations59, and their good faith.60

55 For more detail, see Section 3.4. 56 Civil Code – Art 1193. 57 According to Obzor Praktiki Verkhovnogo Suda [Review on Practice of Supreme Court] (Russia) No 5, 2017, ‘public order’ means the fundamental bases of law (principles), which are mandatory, universal, socially and politically valuable. Such principles form the economic, political and legal framework of state. Thus, ‘public order’ is defined, but the ‘legal order’ and ‘public policy’ not. However, these wordings are usually used as synonymous and interchangeable. 58 Arbitration Procedure Code of the Russian Federation – Art 244. 59 E.g., Ruling of Supreme Court on 02 October 2017 No 305-ES17-10458 on case No A40-230545/2016. 60 E.g., Decision of Moscow District Arbitrate Court on 08 November 2017 No F05-15935/2017 on case No A40-4681/2017.

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3.4. Statute Law 3.4.1.

3.4.2.

3.4.3.

3.4.4. 3.4.5.

The Civil Code, being the key source of law for business, is the prime piece of legislation governing commercial and contractual aspects of construction. The Civil Code contains general provisions on contracts for construction works, design and engineering survey works, and construction-related services. Apart from the Civil Code, there are other federal and regional laws and executive orders that govern legal relations in the construction industry. The Town Planning Code determines the functions of the main participants of construction projects, sets general requirements thereto, and describes the main stages of the construction process, including the main permits to be obtained at specific stages. The Zemel’ny Kodeks Rossiiskoi Federatsii [Land Code of the Russian Federation] governs the issues of obtaining rights to land plots and permitted uses of land plots. Several sector-specific laws govern specific aspects of design and construction.61 In addition to the laws, there is also a vast and complicated set of by-laws, technical standards and regulations to be complied with (sometimes on a voluntary basis), depending on the type of works to be performed, e.g., regulations on works at heights, works with open fire, electrical works, etc.62  

3.5. Implied Contract Terms 3.5.1.

3.5.2.

There are quite a few implied contract terms in Russian law that are applicable to contracts in general and to construction contracts in particular. Since Russia is a statute law country, implied contract terms are set out in relevant legislation. There are two types of implied contract terms: mandatory and provisional. Mandatory contract terms apply to all construction contracts regardless of the will of the parties, and regardless of whether such mandatory contract terms

61 See, e.g., Federalniy Zakon ‘O gosudarstvenno-chastnom partnerstve, munitsipalno-chastnom partnerstve i vnesenii izmeneniy v otdelniye zakonodatelniye acti Rossiiskoi Federatsii’ [Federal Law ‘On Public-Private Partnership, Municipal-Private Partnership in the Russian Federation and Amendments to Certain Legislative Acts of the Russian Federation’] (Russia) 13 July 2015, No 224-FZ (‘Public and Private Partnership Law’) – Art 6, 33; Federal’ny Zakon ‘O Promyshlennoy Bezopasnosti Opasnykh Proizvodstvennykh Ob’ektov’ [Federal Law ‘On Industrial Safety of Hazardous Production Facilities’] (Russia) 21 July 1997, No 116-FZ (‘Industrial Safety Law’) – Art 3, 6, 8. 62 E.g., ‘Polozheniye. Raboti s povishennoy opasnost’yu. Organizatsiya provedeniya’ [Regulations. Dangerous Works. Organization of Perfomance] (Russia) 1 March 1999 No POT RO 14000-005-98.  

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are explicitly incorporated into the text of the contract or not. Mandatory contract terms are always a part of a contract and always apply. For example, the employer must, in a timely manner, provide the contractor with the land plot to perform the construction works.63 Provisional contract terms are provided by the law and apply to all relevant contracts. However, the parties may agree on different terms or may exclude the application of provisional contract terms at will in the contract. Thus, provisional contract terms apply if the parties have not agreed otherwise or have not excluded their application. For example, unless otherwise is provided for by the construction contract, the employer may terminate the construction contract early at any time provided that the employer has paid the respective portion of the price for the works actually performed by the contractor and reimbursed the latter for the losses caused by such early termination.64

3.6. Construction of Contract Terms 3.6.1.

3.6.2.

The ‘plain-meaning rule’ or ‘literal rule’ is the principle rule for construing contract terms.65 When interpreting the terms of a contract, the court must take into account the literal meaning of words and expressions. There are several supplements to this principle, if the literal meaning of the contract is vague. In particular, the following factors need to be considered: (a) Contextual meaning: the meaning of the vague terms of the contract may be identified by matching such terms with other terms of the contract and with the meaning of the contract as a whole; (b) Actual will (intent) of the parties; (c) Contract goals; and (d) Corresponding circumstances, including the negotiations and the correspondence preceding the conclusion of the contract, the habitual practices in the relationship between the parties (including other contracts), and the behaviour of the parties.66 If the above principles fail, then the courts may resort to the contra proferentem principle of interpretation,67 where the preferred meaning is the one that

63 Civil Code – Art 747. 64 Civil Code – Art 717. 65 Civil Code – Art 431. 66 Civil Code – Art 431. 67 The contra proferentem principle is not set out in the law. However, it is recommended by the Supreme Commercial Court clarifications set out in Postanovleniye Plenuma Vysshego Arbitrazhnogo Suda ‘O svobode dogovora i yeyo predelakh’ [Decree of Plenum of Supreme Commercial Court ‘On Freedom of Contract and Limits Thereto’] (Russia) 14 March 2014, No 16.

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works against the interests of the party who provided the wording. And in cases where one party is a professional (e.g., a bank, insurer, financial lessor, etc), it is assumed that the professional party has provided the drafting in question.  

3.7. Private and Public Procurement 3.7.1.

Private companies in Russia are generally free to decide how and what to procure. However, major companies (e.g., Lukoil, Rusal, NLKM, Nornikel, Sibur) usually have their own procurement policies, which they adopt voluntarily. Governmental bodies and certain state-controlled or state-regulated entities are bound by relevant procurement laws and regulations. Private and state procurement procedures have similarities however, private procurement is obviously more agile. The three main procurement procedures are as follows: (a) Public procurement: Highly regulated and rigorous, public procurement involves government bodies and agencies procuring works for state needs through a tendering process. These works are funded by state or local budgets. In rare cases set out by the law, direct procurement without tender is possible.68 (b) Mandatory private procurement: Significantly regulated, yet more agile than state procurement, this is procurement by de jure private entities. These de jure private entities are state-controlled or state-regulated, e.g., state corporations, companies with state-ownership exceeding 50 % (including subsidiaries), natural monopolies, and other similar entities that meet the criteria set out in the law.69 Russian law does not provide detailed regulation but sets out general guidelines and prescribes the regulated entities to adopt their procurement policies based on such guidelines and follow these adopted procurement policies.70 Most such policies replicate provisions of the law on state procurement or customary practice common for state procurement for uniformity purposes and  

 

 

68 Federalniy Zakon ‘O kontraktnoi systeme v sfere zakupok tovarov, rabot, uslug dlya obespecheniya gosudarstvennikh i munitsipalnikh nuzhd’ [Federal Law on Contract System in Procurement of Goods, Works, Services for Governmental and Municipal Needs] (‘Public Procurement Law’) (Russia) 05 April 2013, No 44-FZ – Art 93. 69 Federalniy Zakon ‘O zakupkakh tovarov, rabot, uslug otdelnimy vidami yuridicheskih lits’ [Federal Law on Procurement of Goods, Works, Services by Certain Types of Legal Person] (‘Procurement of State-owned Entities Law’) (Russia) 18 July 2018, No 223-FZ – Art 1. 70 Federalniy Zakon ‘O zakupkakh tovarov, rabot, uslug otdelnimy vidami yuridicheskih lits’ [Federal Law on Procurement of Goods, Works, Services by Certain Types of Legal Person] (‘Procurement of State-owned Entities Law’) (Russia) 18 July 2018, No 223-FZ – Art 2.

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to some extent, because the same authorities adopt recommended standardised procurement policies and supervise both types of procurement. Nevertheless, the fact that the regulated entity adopts its own procurement policy means that such policy may be more agile compared to procurement for state needs. Exceptions can be made within the policy, such as direct procurement from a particular supplier or contractor without a competitive tender process, if it is in the best interests of the particular project. (c) Voluntary private procurement: This is the most agile type of procurement, which the private employer conducts at its own discretion. However, if the tender is formally announced, then laws on the protection of competition apply and the contract must be entered into with the tender winner, regardless of the fact that the employer would be able to engage any contractor on any conditions if there was no tender. There are also other types of ‘procurement’ regulated by different legislation, e.g., concessions and PPPs. Most tenders can be searched and even participated in electronically via the internet;71 however, wet ink bid submissions are still quite common, especially for major tenders (with values exceeding approximately USD10 million), where qualification and expertise are pre-bid selection criteria. Generally, all submissions and documents must be in Russian (or translated into Russian), and foreign official documents must be notarised and attached with an apostille. Foreign companies may participate in tenders directly as bidders, or via subsidiaries incorporated in Russia (and provide expertise to such subsidiaries), or may become subcontractors. Usually, to participate in a construction tender and complete works in Russia, a foreign company at minimum will have to create a branch, representative office, or subsidiary in Russia. The most common procurement procedures are: (a) Tender: Price, quality and experience are usual tender criteria, and prebid selection is common, where participants may be required to prove their competence, e.g., evidence of experience or production capacity; (b) Auction: Price is the only tender criterion; however, pre-bid selection is possible;  

3.7.3.

3.7.4.

3.7.5.

3.7.6.

 

71 Most public tenders are published on the Unified Procurement Information System website, the Official Website of the Russian Federation to Post Information about the Bid, private websites of employers, or specialised websites providing services for conducting tenders online: Edinaya informatsionnaya sistema v sphere zakupok [Unified Procurement Information System] (Web Page, 2020) ; Ofitsial’niy sait Rossiiskoi Federatsii dlya razmeshcheniya informatsii o provedenii torgov [The Official Website of the Russian Federation to Post Information about the Bid] (Web Page, 2020) .

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(c)

3.7.7.

3.7.8.

Invitation to make binding offers: The employer invites all interested or particular contractors to send binding offers, which may be accepted at the employer’s discretion; (d) Public binding offer: The employer invites contractors to accept the employer’s offer on a first come, first served basis; (e) Invitation to make proposals (non-binding offers): The employer invites contractors to send proposals for informational purposes, and the employer may enter into negotiations with such contractors or use another tender procedure, taking into account the received proposals, if any; and (f) Direct procurement: The employer enters directly into negotiations with one or several contractors without any prior formal selection process. All of the above procurement procedures may be open to all interested contractors (‘open tenders’) or subject to direct invitation from the employer (‘closed tenders’). Most of the legislation regulating the tender process focuses on the employer’s side (procurement planning, allowed tender and pre-bid selection criteria, rules on applicability of particular tender procedures for certain situations, rules on protection of competition),72 and contractors simply need to follow the instructions in the tender documents. However, it is advisable for contractors to make sure that the tender does not contradict the legislation, since a contract made upon an invalid tender is invalid as well.73 Thus, the contractor may lose time and money if the employer fails to conduct a tender properly. The tender may be found invalid by a court upon the claim of a supervising authority or third party (e.g., actual or potential competitors) if their rights were violated.74  

4. Government Involvement 4.1. Legislation and Regulation Construction Permits 4.1.1. Most construction activities and all major construction projects require authorisations and permits from state authorities. The list of such permits and authorisations may differ depending on the type of construction works and the property to be constructed.

72 Public Procurement Law – Art 8, 16 to 23, 32, 51. 73 Civil Code – Art 449. 74 Civil Code – Art 449.

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A construction permit must be obtained prior to commencement of construction works. The construction permit is a formal document that confirms that the prepared design documentation meets the compulsory requirements of the law.75 To obtain the construction permit: (a) The applicant must have rights to the land plot; (b) The applicant must receive a positive expert opinion on the design documentation; and (c) There must be no contradictions between the documents on rights to the land plot, the design documentation and the land plot development plan.76 The Town Planning Code requires the applicant to have rights (ownership or lease) to the land plot.77 If someone constructs a building on a land plot over which they have no rights, or without the construction permit, then the building may be declared an ‘unauthorised structure’ by the courts, and consequently demolished at the expense of the person who developed the ‘unauthorised structure’.78 A holder of rights to the land plot (acting as the employer in the construction process) or a technical customer (engaged by the employer and acting as its agent) may obtain the construction permit.79 The construction permit must contain essential information on construction such as the time period for the construction works, the estimated future area of the constructed property and the name of the developer (employer). A valid construction permit is one of the documents required to commission the constructed property.80

Commissioning 4.1.7. Property commissioning is the second most significant formal milestone in the construction process. Commissioning may be divided into two stages: (a) Acceptance of the contractors’ works by the employer; and (b) Commissioning of the constructed property by state authorities. 4.1.8. The first stage — acceptance of works — is critical in respect of the contractual relationship with the contractors or the general contractor. Following the acceptance of the works, the contractor or the general contractor is usually en-

75 76 77 78 79 80

Town Planning Code – Art 51. Town Planning Code – Art 51. Town Planning Code – Art 51. Civil Code – Art 222. Town Planning Code – Art 51. Town Planning Code – Art 55.

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titled to payment in accordance with the contract. Also, the warranty period begins from the acceptance date. The second stage — commissioning by the authorities — is crucial for the state registration of the ownership rights. During this stage the state construction supervisory authority examines the compliance of the constructed property with the construction permit, the design documentation and the land plot development plan. If certain parameters (such as the total area, total structural volume, etc) differ, the commissioning permit is not be issued and it is impossible to register the property.81 Because ownership rights arise only upon state registration,82 no commissioning means no state registration, which in turn means no ownership rights.

4.2. Codes of Practice 4.2.1.

4.2.2.

Regulations on health and safety, as well as requirements for the due performance of construction works, are set out in various documents adopted by state authorities and professional associations. Such documents may be binding or of a recommendatory nature. Most of the documents on health and safety are adopted by state authorities, e.g., Rostrud and Rospotrebnadzor. These include labour safety standards;83 rules and model instructions on occupational safety;84 and sanitary and epidemiological rules and standards.85 Construction rules86 set out requirements for particular construction works. Such rules were adopted by different authorities responsible for construction  

4.2.3.

81 Town Planning Code – Art 55. 82 Civil Code – Art 131. 83 For example, Prikaz MinTruda ‘Ob utverzhdenii pravil po okhrane truda v stroitelstve’ [Order of the Ministry of Labour of the Russian Federation ‘On Approval of the Rules on Labour Protection in Construction’] (Russia) 1 June 2015, No 336n. 84 E.g., Svod Pravil ‘Bezopasnost’ truda v stroitelstve. Otrasleviye tipoviye instruktsii po okhrane truda‘ [Code of Rules. Occupational Safety in Construction. Sectoral Model Instructions on Occupational Safety] 08 January 2003. S. 12-135-2003. 85 E.g., Sanitarniye pravila i normi [Sanirary Rules and Norms]. 27 March 1999. No 2.1.2.729–99. 86 The usual abbreviations are ‘SP’ and ’SNiP’ followed by the number and date. The list of applicable rules is approved by Postanovleniye Pravitelstva Rossiiskoi Federatsii ‘Ob Utverzhdenii perechnya natsionalnikh standartov i svodov pravil (chastey takikh standartov i svodov pravil), v rezultate primeneniya kotorikh na obyazatelnoy osnove obespechivaetsya soblyudeniye trebovaniy federalnogo zakona ‘Tekhnichesky Reglament o bezopasnosti zdaniy i sooruzheniy’ [Decree of the Government of the Russian Federation ‘On Approval of the List of National Standards and Sets of Rules (Parts of Such Standards and Sets of Rules), Applying which on a Mandatory Basis Ensures the Enforcement of the Requirements Set Out by Federal Law ‘Technical Regulations on the Safety of Buildings and Structures’] (Russia) 26 December 2014, No 1521.

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over the years, including Soviet authorities, the Ministry of Regional Development of Russia (‘Minregion’) and the Ministry of Construction Industry, Housing and Utilities Sector (‘Minstroy’). Currently, Minstroy is responsible for amending and updating existing construction rules, as well as for adopting new construction rules. Requirements for construction materials are called ‘state standards’, and the list of approved standards is published by Federal Agency on Technical Regulating and Metrology (‘Rosstandard’).87 There are also professional associations, which are self-regulated organisations88 that can adopt binding rules and non-binding guidelines on various aspects of the construction process for their members.

4.3. Licensing of Professionals and Contractors 4.3.1.

There are generally no licensing requirements for contractors or constructions works. Under Federalniy Zakon ‘O litsenzirovanii otdelnikh vidov deyatel’nosti’ [‘Federal Law On licensing certain types of activities’] (‘Licensing Law’) (Russia) 04 May 2011, No 99-FZ, only a few types of activities indirectly associated with construction require a license,89 e.g., conducting industrial safety expertise; installing, maintaining and repairing fire alarms and fire safety systems; geodesics and mining surveying; and operating some industrial facilities classified as posing fire, explosion, nuclear, toxic or biological hazards.90 However, contractors may need other authorisations and permits for certain works. For example, contractors must become members of self-regulated organisations (‘SROs’) to do the following construction and design works: (a) Designing buildings and structures; (b) Constructing, reconstructing, demolishing and carrying out major repairs of buildings and structures; and (c) Surveying for the purposes of constructing buildings and structures.91 With some exceptions, none of the survey, design or construction activities mentioned above are permitted without an SRO membership. Failure to com 

4.3.2.

4.3.3.

87 The usual abbreviation is ‘GOST’ followed by a number and date. A list of applicable standards is published at ‘Standarti i reglamenti’ [Standards and Regulations], Rosstandart: Federal Agency on Technical Regulating and Metrology (Web Page, 2020) . 88 See Section 4.3. 89 Licensing Law – Art 12. 90 Not applicable to ordinary surveying for general construction purposes. 91 Town Planning Code – Art 55.1.

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ply with this requirement may result in administrative92 and even criminal liability (the latter – only in case of grave consequences).93 Both Russian and foreign legal entities may be members of an SRO. To participate in SROs, contractors, among other things, must confirm that they have qualified personnel and appropriate internal policies, make membership payments, and maintain required insurance coverage. SRO membership fees and insurance requirements depend on the type of construction works and may be substantial. Additionally, some types of dangerous equipment, including construction cranes, elevators and high-pressure equipment, require registration with Rostechnadzor before they can be operated. Insurance and licences to operate may also be required.94

5. Construction Contracts 5.1. Available Contracts 5.1.1.

5.1.2.

There are no mandatory or recommended standard form construction contracts in Russian legislation. Thus, contracts may greatly vary in terms of detail, complexity and risk allocation. However, Minstroy has recently adopted the standard conditions of state and municipal contracts for construction works.95 With certain exceptions, such standard conditions should be followed in case of state procurement. The simplest construction contract must be in writing and must represent an agreement of the parties on a few material conditions stipulated by the Civil Code. Such simple contracts may be about five pages long,96 which would suffice for the contract to be legally valid. However, such simple contracts may be rather vague and therefore, for practical reasons, are not recommended for any major construction project. The material conditions that par-

92 Administrative Offences Code – Art 9.5.1. 93 Criminal Code – Art 216. 94 Federalniy Zakon ‘O promishlennoy bezopasnosti opasnikh proizvodstvennih obyektov’ [Federal Law on Idustrial Safety of Dangerous Production Equipment] (Russia) 21 December 1997, No 116-FZ – Art 2, 3. 95 Prikaz MinStroy ‘Ob utverzhdenii Tipovykh usloviy kontraktov na vypolnenie rabot po stroitelstvu (rekonstruktsii) objekta kapitalnogo stroitelstva i invormatsionnoy karty tipovykh usloviy kontrakta’ [Order of the Ministry of Construction Industry, Housing and Utilities Sector of the Russian Federation ‘On Approval of the Standard Conditions of the Contracts for Works on Construction (Reconstruction) of Capital Construction Facility and Information Card of the Standard Conditions of Contract’] (Russia) 14 January 2020, No 9/pr. 96 Unilingual without annexes, and probably no annexes would be needed.

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ties must agree on, so that the construction contract is deemed concluded under Russian law, are listed in Section 6.1.1. Complex projects are often accompanied by heavily negotiated, tailor-made construction contracts based on best market practice, available international standard forms (like FIDIC), and contracts recommended in other jurisdictions (especially if projects involve foreign contractors). However, this way is only possible if the parties are ready for extensive negotiations. Lawyers must revise and adapt foreign standard forms and market practice concepts so that they comply with Russian legal requirements. Such contracts may be about 70 or more pages.97 To avoid unnecessary delays caused by extensive negotiations, experienced employers usually prepare a draft contract and then expect a competent contractor to provide comments and adjustments with prime focus on key commercial issues. In turn, contractors may suggest their own draft or extensive comments to the existing draft. However, this generally leads to lengthy negotiations (in some cases more than one year), loss of momentum and, potentially, ultimate failure to reach an agreement. In regard to procurement: (a) State procurement: The employer provides the draft contract as part of the tender documents and negotiations are not envisaged or are limited. However, contractors may request clarifications, and the employer may implement changes to the contract before the preferred bidder is selected and the tender stage is over. (b) Mandatory private procurement: The negotiations process is about the same as for state procurement however, there is more room for negotiations with the preferred bidder. (c) Voluntary private procurement: There are almost no restrictions or rules limiting negotiations apart from some rules on the protection of competition. There is an unofficial and rather questionable practice for state and mandatory private procurement where, if an employer is concerned with a lack of potential contractors, the employer will try to discuss major or important tenders with at least some contractors98 to make sure that envisaged tender conditions are adequate and at least two bidders will show up to compete.99

97 Unilingual without annexes (similar to conditions of contract in FIDIC drafts). There would also be annexes with various technical and commercial details. 98 Usually there are only one or two contractors in each region of the Russian Federation with enough capacity to handle major construction, who usually participate in such tenders. 99 It may happen that no bidders will come to tender, so the employer will have to cancel and reschedule it, amend the terms and repeat all the paperwork, which causes delays even before entering into a contract.

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5.2. Most Commonly Used 5.2.1.

FIDIC 5.2.2.

Every employer uses its own draft contracts, because there are no mandatory or recommended standard form construction contracts. Considering that a significant share of construction procurement is conducted via tenders, and most tenders involve publishing draft construction contracts, it is possible to find samples of construction contracts by searching for relevant tender documents online.100

Over the last decade the FIDIC draft contracts, especially the Silver Book, have become increasingly popular, especially when foreign contractors are involved. However, it is not possible to make a contract based on FIDIC forms under Russian law without a few adjustments to address the intricacies of the Russian accounting rules, construction requirements and overall regulatory environment. In general, such adjustments do not affect the risk allocation.

6. Key Issues 6.1. Overview 6.1.1.

To draft a valid construction contract under Russian law it is advisable to pay attention to the following key issues: (a) Mandatory and provisional rules set out in the Civil Code regarding contracts in general, procurement contracts, construction procurement contracts, and design procurement contracts; in particular, the rule that the material conditions set out by the law must be agreed by the parties so that the contract is deemed concluded (including the scope of works together with technical documentation and bill of quantities, time for completion, and price);101 (b) Construction and town planning legislation, ie, the Town Planning Code and relevant regional town planning laws and regulations; (c) Legislation on land plots provision and applicable limitations on their use and development, ie, the Land Code and relevant regional laws and regulations;

100 For example, available tenders and related documentation are accessible after registration at: http://rostender.info/tender. 101 Civil Code – Art 432, 708, 740, 743, 746.

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(d) (e)

Legislation applicable to certain types of contracts, e.g., on procurement for state needs, PPPs and concessions; Applicable technical regulations that may directly or indirectly affect costs, e.g., the actual scope of works, requirements for quality of works, time for completion, etc; Tax and accounting rules; and General commercial issues, such as the scope of works description, acceptance procedure (taking over by the employer), materials and assistance from the employer, price and payment mechanics, suspension of works, utilities, engaging subcontractors, etc.  

 

(f) (g)

6.2. Fit for Purpose and Technical Documentation 6.2.1.

6.2.2.

6.2.3.

The contractor must perform the works in accordance with technical documentation and the ‘smeta’.102 Usually, technical documentation in construction is represented by project design and working design or, if there is no project design yet, terms of reference (specifications). ‘Smeta’ is a variety of bill of quantities that is most likely rather detailed and includes a breakdown of all works and materials. Generally, all technical documentation must be specified in the contract. Lack of technical documentation or lack of the employer’s requirements of the works in the contract may cause the contract to be deemed non-concluded. However, if there is no dispute about the end result of the works or if it is necessary to fill in only particular gaps in requirements, the works must satisfy the requirements stipulated by the contract or the requirements usual for such works.103 Under turnkey contracts, generally the contractor prepares all technical documentation and submits it to the employer for approval; such technical documentation usually includes the following: (a) Terms of reference with key requirements for the works; (b) Town planning documents; (c) Terms of reference regarding the survey for the project design; (d) Results of the survey for the project design; (e) The project design, including the results of any additional survey, special technical requirements,104 and requirements set out by third parties (e.g., utilities owners or neighbouring enterprises, if necessary); and (f) The working design.  

102 Civil Code – Art 743. 103 Civil Code – Art 721. 104 Sometimes, if the works are unique or new technologies are used, the parties must develop their own technical regulations on works or constructions and seek approval with the relevant authorities.

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Also, in some cases external approvals are necessary, e.g., approval of special technical requirements or approval by Glavgosexpertiza,105 approvals and technical conditions from utilities networks owners, etc.106  

6.3. Baseline Data 6.3.1.

The employer must provide the contractor with baseline data, including various documents regarding land plot, town planning documentation defining the allowed construction, survey data, information on utilities connection conditions, terms of reference, and other documents and data relevant for the construction.107 However, these duties to gather baseline data may be delegated to the contractor under the contract. Unless the contract provides otherwise, the party that gathered the baseline data is responsible for the quality and reliability of such data.

6.4. Period of Work Execution and Late Completion 6.4.1.

6.4.2.

The period of work execution may be set in the contract by defining the calendar dates or time periods, which start running at a specified date or when conditions precedent are fulfilled. A mix of these two approaches is possible. The parties may also specify interim deadlines or milestones in the contract. For example, a simple timeline for a turnkey contract may include the following: (a) The contract signing date; (b) A time period to prepare a draft project design after signing; (c) A time period to fulfil conditions precedent; and (d) A time period to complete the construction works, and a long stop date by which the construction must be completed. In any case, the parties must stipulate the start and end dates for the works as a whole and, unless the contract provides otherwise, the contractor must start the works by the start date and complete the works by the end date.

105 The Federal Autonomous Institution Glavgosexpertiza of Russia is a non-profit organization established for executing works and rendering services to exercise the powers of Minstroy in the sphere of organisation, and conducting state expert review of design documentation and engineering survey results. 106 Polozheniye ob organizatsii i provedenii gosudarstvennoy ekspertizi proyektnoi documentatsii i rezultatov inzhenernih iziskaniy [Regulation on Publuc Expertise of Design Documentation and Results of Engineering Surveys] (Russia) 05 March 2007, No 145. 107 Civil Code – Art 759.

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6.4.3.

6.4.4.

6.4.5.

6.4.6.

6.4.7.

108 109 110 111 112

Failure to meet deadlines may cause various consequences for the contractor, depending on the reason for delay. If the contractor does not promptly embark on the execution of the works or performs the work so slowly that it is obviously impossible to finish it by the time fixed, the employer has the right to terminate the contract and claim losses.108 This right of the employer is highly discretionary. However, to protect the contractor, the right to terminate may be limited by defining or setting criteria for ‘performing works slowly’ in the contract. The criteria might include lengthy delays or failure to meet certain deadlines and subsequent failure to remedy such delays beyond the time set in contract. Delays in works may have various reasons and consequences. The most common reasons for delay are: (a) Failure by a counterparty to fulfil its obligations in a timely manner; and (b) Non-party related events, including actions of third parties. Liability for delay may be avoided if: (a) The other party has failed to perform corresponding obligations.109 For example, if the employer fails to provide access to the land plot to the contractor, such that the contractor cannot start the works in due time, the contractor cannot be held liable for breach of the deadline to start the works. This does not grant the contractor an extension of time but provides a defence from liability; or (b) The delay results from force majeure.110 To enjoy the defence from liability the contractor must put the works on hold and notify the employer about: (a) The unsuitability or the substandard quality of the employer’s materials, equipment, technical documents or the thing delivered for processing or treatment; (b) Possible unfavourable consequences of the implementation of the employer’s directions on the method of performing the work; and (c) Other circumstances beyond the contractor’s control that endanger the end result of the work or make it impossible to finish the work on time.111 If the contractor fails to notify the employer and put the works on hold, the contractor may lose its right to claim that such circumstances prevented it from completing the works and will be fully liable for any default caused by such circumstances.112

Civil Code – Art 715. Civil Code – Art 406, 716, 719. See Section 6.6. Civil Code – Art 716. Civil Code – Art 716.

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The parties may stipulate in the contract a more extensive list of delays, as well as mechanics to adjust deadlines and extend time in case of such delays. It is highly advisable to do so because, from a practical standpoint, the level of detail of existing statutory rules is insufficient for complex construction projects. Failure by the party to meet the deadlines will generally grant another party the right to claim losses, to apply penalties and, sometimes, to terminate the contract.

6.5. Latent Conditions 6.5.1.

6.5.2.

Latent conditions are those that cannot be identified during site inspection and following reasonable investigation. Latent conditions cover not only those things which are obvious on the surface of the land and the soil itself but also utility services, mine shafts, contamination and other subsurface features. Unless it is a turnkey contract, the contractor is only responsible for the works and conditions set out in the contract, and the employer must deal with all other works and issues. The contractor may suspend the works as a result of latent conditions. Thus, a contract must explicitly shift the risks of unsuitable latent conditions onto the contractor. Otherwise, there is a high risk of dispute about whether dealing with latent conditions falls within the scope of works of the contractor or is the responsibility of the employer.

6.6. Force Majeure 6.6.1.

Unless otherwise stipulated by the law or by the contract, the person or entity that fails to discharge, or improperly discharges, their contractual obligations bears responsibility unless they prove that proper discharge was made impossible by a force majeure event, ie, because of extraordinary circumstances that could not have been averted.113 A list of events that the parties consider to be force majeure events may be specified in the contract. However, all force majeure events must be: (a) extraordinary; (b) unavertable under the given conditions; (c) not caused by one of the parties; and (d) as a matter of practice, not within the scope of entrepreneurial risk.114 Thus, breach of an obligation by any third parties having the separate contractual relations with the obliged party, absence of commodities on the market, and lack of money for payment are generally not force majeure events.

113 Civil Code – Art 401(3). 114 See, e.g., Ruling of Moscow District Arbitration Court of 06 December 2005 No 49-B05-19.  

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6.7. Limitation of Liability 6.7.1.

6.7.2.

6.7.3.

6.7.4. 6.7.5.

The person or entity whose right has been violated is entitled to demand full compensation for losses, unless recovery of losses is limited by law or by the agreement. Parties will usually wish to limit liability, so compensatory payments are often capped at an amount equal to the contract price or by another reasonable amount set out as a fixed sum in a contract. Losses include the expenses that the person or entity whose right has been violated made or will have to make to restore the violated right, the damage done to their property, and profits that the person or entity would have derived under ordinary conditions if the right was not violated.115 Because lost profits are hard to prove, it is better to contractually provide what will be considered lost profits and the evidence required to prove their amount. If the person or entity who violated the right has derived profits as a result of such violation, the person or entity whose right has been violated may claim, alongside compensation of its other losses, damages in an amount not less than such profits.116 However, in practice this is not a very common claim. Apart fromlosses, thepartymay alsoclaim penalties, iftheyare stipulatedincontract,117 and interest for the use of its money by the other party, if applicable.118 Penalties may be set by the law119 or by the contract. If payment of a penalty is required for non-discharge or improper discharge of an obligation, losses exceeding the penalty amount must also be reimbursed. The law or the agreement may stipulate when the following apply: when only the penalty, but not the losses must be exacted; when the losses must be exacted in full above the penalty; and when, according to the creditor’s choice, either the penalty or the losses may be exacted.120

6.8. Duration of Exposure 6.8.1.

The duration of exposure for breach of contract in most cases will be equal to the warranty period. The duration of exposure is also subject to the statute of limitations.121

115 Civil Code – Art 15. 116 Civil Code – Art 15. 117 Civil Code – Art 330. 118 Civil Code – Art 395. 119 E.g., the penalty for the failure to timely pay for utility services set by Art 155 of Zhilishchnii Kodeks Rossiiskoi Federatsii [Housing Code of the Russian Federation]. 120 Civil Code – Art 394. 121 See Sections 6.9.5–6.9.7.

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The employer has the right to make claims relating to improper quality of the completed work if it is discovered within five years of the date of delivery.122 Unless otherwise provided by the contract, the warranty period begins to run when the work is deemed to be accepted by the employer.123 Different time periods for discovery of improper quality of works may be stipulated by the law, by the contract, or by the customs of business turnover. The employer has the right to make claims associated with shortcomings in the work if such shortcomings were discovered during the warranty period.124 If the contract provides a warranty period of less than five years, the employer may still bring claims regarding defects within five years. To do so, the employer must prove that the defect or the reason for the defect occurred before delivery to the employer.125

6.9. Time Bars and Statute of Limitations 6.9.1.

Some rights exist only within a certain time period or under certain circumstances. When the time period expires, the relevant right ceases to exist if the party has not exercised it. Russian law provides two major time related limitations to rights and claims: (a) The time bars that may be set in the contract or in the law that define the time period when a party has a certain right; and (b) A statute of limitation that limits the right to bring a claim to court.

Time and Other Bars 6.9.2. The right of a party to a construction contract may be limited in time or by certain conditions to be met. The bar may be set by the law,126 or by the contract itself. Some time bars and other conditions set by the law are not amendable, and some of the rights set by the law may not be barred by the contract.127 6.9.3. If a party exercises such rights outside the set time limit, this would more likely constitute a breach of contract or law, which: (a) may lead to counter claims, e.g., if the other party suffered losses; or (b) may have a negative effect on the initial claim, if the failure to use the right within the time bar has contributed to the aggravation of the situation in question. Conditional bars  

122 Civil Code – Art 724, 756. 123 Civil Code – Art 724. 124 Civil Code – Art 724. 125 Civil Code – Art 724. 126 See, e.g., Civil Code – Art 196 to 197, 725. 127 E.g., the parties may not enter into an agreement to exclude or limit liability for wilful misconduct and the respective right of the affected party to claim the relevant losses (Civil Code – Art 401).  

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6.9.4.

work similarly to time bars but use other conditions than time to limit the existence of rights. One of the most notable bars relevant for construction contracts relates to the contractor’s right to protection from liability in the case of delays.128

Statute of Limitations 6.9.5. Statute of limitations periods are set by the law and cannot be amended by contract, unlike warranty periods. For contractor contracts (both employercontractor and contractor-sub-contractor one) in general the statute of limitation is one year. However, for construction contracts and other contractor contracts related to buildings or structures the statute of limitations period is three years. The statute of limitation covers any claims a party may have against the other one under the contractor contract. 6.9.6. Generally, the statute of limitations period begins to run upon acceptance of the works. However, if there is a warranty period for the works and the employer discovers any shortcomings and notifies the contractor within the warranty period, then the statute of limitations period begins to run from the date of such notice.129 6.9.7. By sole request of the defendant, the court must reject without review any claim that is made after the expiry of the statute of limitations period.130 However, there may be exceptional cases, when the court may ‘reinstate’ the statute of limitations period after expiry, e.g., if case the claimant is physically disabled.131 There is also a more rigorous general preclusive statute of limitations period equal to ten years from the moment of breach of right, and this general statute of limitations period cannot be ‘reinstated’.132  

7. Dispute Resolution 7.1.1. 7.1.2.

128 129 130 131 132 133

In Russia, disputes may be settled through negotiation (with or without the involvement of mediators), by state courts, or by arbitration tribunals. If the law or the contract provides for a mandatory pre-court or pre-arbitration dispute resolution procedure, the parties must complete this procedure or the time limit for the procedure must expire before the party may bring a claim to a court or to a tribunal.133 The outcome of any out-of-court dispute resolution

See Section 6.4.6. Civil Code Art 725. Civil Code – Art 199. Civil Code – Art 205. Civil Code – Art 196. E.g., Civil Code – Art 445, 452, 619.

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procedure, except an arbitration award, must be confirmed by agreement of the parties to be enforceable.134 Most commercial disputes, including construction-related disputes, may be referred to the arbitration tribunal upon the mutual agreement of the parties. International arbitration is also possible if there is a foreign element justifying the international arbitration, e.g., if one of the parties to the dispute is a foreign entity. However, if the dispute involves some kind of public element, e.g., the issuance of construction or commissioning permits, or tax-related issues, then the dispute can only be reviewed by the state courts. Therefore, submission of any dispute to an arbitration tribunal should be carefully considered. Moreover, to enforce the award of the arbitration tribunal, an interested party must obtain an enforcement order through the Russian state courts. One of the most respected domestic and international arbitration tribunals in Russia is the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (‘ICAC’). ICAC is the leading arbitration institution in Russia and in East European countries which deals with resolving disputes of international nature. It is the successor to the Foreign Trade Arbitration Commission (FTAC) created in 1932. Since 27 January 2017, the new Rules and Regulations of the ICAC came into effect in accordance with the new Russian legislation on arbitration. Since that date, ICAC administers arbitrations of internal disputes as well as specialized cases such as corporate and sport disputes (both internal and international). In addition, ICAC administers arbitrations of other disputes in cases provided by international treaties or by operation of Russian law. Apart from that, ICAC performs necessary functions related to administering ad hoc arbitrations.  

7.1.4.

7.1.5.

7.1.6.

 

134 Federalniy Zakon ‘Ob alternativnoy protsedure uregulirovaniya sporov s uchastiyem posrednika (protsedure mediatsii)’ [Federal Law on Alternative Procedure of Dispute Resolution with Involvement of Mediator (Mediation Procedure)] (Russia) 27 July 2010, No 193-FZ. – Art 12.

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Saudi Arabia 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 3. 3.1. 3.2. 4. 4.1. 4.2. 4.3. 5. 5.1. 6. 6.1. 6.2. 7.

Context 849 The Country 849 The Legal System 850 The Economy 853 The Construction Industry 854 Size and Nature 854 Participants 854 Work, Health and Safety 855 Government Involvement 856 Legislation and Regulation 856 Licensing 858 Legal Underpinnings of Contracts 859 Legal Framework 859 Freedom of Contract 860 Contractual issues 860 Construction Contracts 866 Construction Contract Types 866 Key Issues 868 Overview 868 Liquidated Damages 868 Arbitration 868

1. Context 1.1. The Country 1.1.1.

The Kingdom of Saudi Arabia (KSA) was established on 23 September, 1932, after the founder King Abdulaziz unified most of the Arabian Peninsula under his rule. KSA covers an area of 2,215,000 km2 making up the bulk of the Arabian Peninsula. It is made up of 13 different regions and, as of 2019, had a population of 34,218,169 people.1 KSA is the largest country on the Arabian Peninsula, and the only country with both a Red Sea coast and an Arabian (Persian) Gulf coast. It is bordered by Jordan and Iraq to the north, Kuwait to the northeast, Qatar, Bahrain, and the United Arab Emirates to the east,

1 Gov.sa Unified National Platform, https://www.my.gov.sa/wps/portal/snp/aboutksa/aboutksa. https://doi.org/10.1515/9783110712728-028

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Oman to the southeast and Yemen to the south. Riyadh is the capital of KSA. KSA is a monarchy that follows a hereditary system of ruling starting with the founder’s sons and their sons.2 The King appoints the Crown Prince, who takes over the King’s duties upon his passing until officially ascending to the throne. The legislative branch is represented by the Council of Ministers and the Shura (consultative) Council, both of which are presided over by the King.3 The rules pertaining to KSA’s system of governance were codified by King Fahad (the Kingdom’s fifth King and the founder’s fourth son) in the Basic Law of Governance, which is akin to a constitution,4 though it is sometimes said that the Quran is the constitution of KSA. KSA is a founding member of the Gulf Cooperation Council (GCC)5 and the Organization of the Petroleum Exporting Countries (OPEC),6 and is also a G20 state.

1.2. The Legal System 1.2.1.

1.2.2.

1.2.3.

The Saudi legal system is based on Sharia (Islamic) law. Under the Basic Law of Governance, the sources of law in KSA are the Quran and Sunnah (the teachings and actions of the Prophet Muhammad PBUH).7 And while the teachings of the Quran and Sunnah were the primary sources of law in KSA’s early days, the Kingdom has more recently introduced major changes to the legal system by codifying the law in certain areas, including commercial, corporate, and investment. These codes are also enforced as law in KSA to the extent that they do not violate Sharia rules and principles. While KSA continues to introduce major reforms to its legal system by codifying laws, Sharia remains the ‘common law’ of the land, supplemented by such codified laws. Laws and regulations are issued by Royal Decree, which are published in the Official Gazette.

2 Basic Law of Governance, Royal Decree A/90 dated 27/08/1412H (1 March 1992), Article 5. 3 Basic Law of Governance, Royal Decree A/90 dated 27/08/1412H (1 March 1992), Articles 56 and 68. 4 Basic Law of Governance, Royal Decree A/90 dated 27/08/1412H (1 March 1992). 5 Gulf Cooperation Council Official Website, https://www.gcc-sg.org/en-us/AboutGCC/Member States/Pages/Home.aspx. 6 OPEC Official Website, https://www.opec.org/opec_web/en/about_us/25.htm. 7 Basic Law of Governance, Royal Decree A/90 dated 27/08/1412H (1 March 1992), Article 7.

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The Court System 1.2.4. There are two court systems in KSA: (a) The Sharia courts, and (b) The Board of Grievances (administrative courts). 1.2.5. The Sharia courts are organized into Courts of First Instance, Courts of Appeal, and the Supreme Court. 1.2.6. Following a restructuring of the Saudi judicial system in 2007, the Sharia courts are now organized by subject matter: general civil courts; criminal courts; family courts; commercial courts; and labor courts.8 1.2.7. The Supreme Court is the country’s highest court and has jurisdiction to review all decisions of the specialized courts of appeals in civil and criminal cases.9 It replaced the Supreme Judicial Council as the highest court, and the Supreme Judicial Council now holds an administrative role that includes supervising judges and establishing courts.10 1.2.8. The restructuring of the judicial system also limited the jurisdiction of the Board of Grievances strictly to administrative matters.11 The Board of Grievance is organized into the High Administrative Court, the Administrative Courts of Appeal, and the Administrative Courts of First Instance. 1.2.9. In 2013, the Enforcement Courts were promulgated to take sole jurisdiction over all enforcement matters concerning domestic and foreign judgments and arbitral awards, and to streamline and expedite enforcement actions.12 Arbitration 1.2.10. In 2013, KSA introduced a new arbitration law based on the UNCITRAL Model Law on International Commercial Arbitration, bringing it into harmony with the arbitration laws of more than 50 countries, and promoting a more uniform approach to arbitration, and particularly international arbitration. 1.2.11. The new arbitration law significantly modernized arbitration practice in KSA. For example, under the new law, upon application of a party, courts must dismiss cases if an arbitration agreement applies to the dispute;13 parties may choose to apply any procedural rules to their arbitration, including those of

8 Law of the Judiciary, Royal Decree No. M78/1428 dated 19/09/1428H (1 October 2007), Article 9. 9 Law of the Judiciary, Royal Decree No. M78/1428 dated 19/09/1428H (1 October 2007), Article 11. 10 Law of the Judiciary, Royal Decree No. M78/1428 dated 19/09/1428H (1 October 2007). 11 Law of the Board of Grievances, Royal Decree No. M78/1428 dated 19/09/1428H (1 October 2007), Article 13. Previously, the Board of Grievances had administrative and non-administrative jurisdiction over commercial and enforcement cases, both of which have been reallocated to the commercial courts and the enforcement courts, respectively. 12 Enforcement Law, Royal Decree No. M53/1433 dated 13/08/1433H (3 July 2012). 13 Arbitration Law, Royal Decree No. M34/1433 dated 24/05/1433H (16 April 2012), Article 11.

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a domestic or foreign institution (such as, ICC, LCIA, DIFC-LCIA);14 and may choose to apply any substantive law to the subject matter of the dispute (but only to the extent that the rules of the substantive law chosen do not contradict Sharia law).15 In 2014, the Saudi Centre for Commercial Arbitration (SCCA) was established,16 and it commenced operations in 2016. The SCCA provides alternative dispute resolution services in both arbitration and mediation. The SCCA Arbitration Rules were drafted in line with international standards and best practices to accommodate modern arbitration practice and complement KSA’s new arbitration law. KSA is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), and the courts have enforced arbitral awards pursuant to the New York Convention.17

Mediation 1.2.14. Mediation is another method of alternative dispute resolution, which has grown more popular in recent years as a less complicated means of resolving disputes than arbitration. It is a voluntary, confidential process that is carried out by a neutral third-party (mediator) who facilitates negotiation to help the parties reach a settlement of their dispute(s). 1.2.15. Until recently, settlement agreements resulting from mediations were not binding on the parties similarly to an arbitral award and not enforceable through facilitative treaties like the New York Convention. In 2019, however, a new international instrument known as the United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention) opened for signature, and 52 states, including KSA, have signed. KSA ratified the Singapore Convention on 5 May 2020 (becoming the fourth country to do so). 1.2.16. To accommodate the growing demand for mediation, the SCCA has introduced mediation services and adopted modern mediation rules. 1.2.17. In response to Covid-19, the SCCA also launched the COVID-19 Emergency Mediation Program, in an effort to help reduce the pandemic’s impact on the business sector. The Program allowed parties to convert their settlement agreements into an enforceable/executable deed, enabling enforcement through the Enforcement Courts.18

14 Arbitration Law, Royal Decree No. M34/1433 dated 24/05/1433H (16 April 2012), Article 4. 15 Arbitration Law, Royal Decree No. M34/1433 dated 24/05/1433H (16 April 2012), Article 38. 16 Cabinet Decision No. 257/1435 dated 14/6/1435H (15 March 2014). 17 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, (entered into force 7 June 1959) (New York Convention). 18 SCCA Emergency Mediation Program, https://sadr.org/news-details/70.

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1.3. The Economy 1.3.1.

KSA is the largest free market economy in the Middle East and North Africa and accounts for 25 % of the total Arab GDP. KSA has the largest share of the world’s oil reserves (25 %), and extracting and exporting oil makes up most of its economy.19 As one of the world’s largest twenty economies, KSA is a G20 state.20 In 2016, KSA introduced Vision 2030, a comprehensive reform plan focused mainly on diversifying KSA’s economy and reducing its dependency on oil and gas revenue. Vision 2030 also includes social and cultural reforms to complement the economic reforms.21 Vision 2030 introduced several ‘vision realization programs’ aimed at achieving the Vision’s objectives across multiple areas of life, such as the quality of life program, financial sector program, and housing program, among others.22 One of the largest outcomes of Vision 2030 is KSA’s revolutionized foreign direct investment laws and other policies intended to attract foreign investment. Generally, KSA makes for an attractive foreign investment jurisdiction, with its 1.6 population growth rate, 50 % of which in the youth category (under 25), $782 billion nominal GDP and $23,570 GDP per capita.23 In 2019, KSA saw its biggest increase in foreign direct investment since 2009, with $3.5 billion worth of foreign investments in the first nine months of 2019.24 Notably, the construction industry accounted for among the highest numbers of new foreign investor licenses, demonstrating the growing construction industry in KSA.25 On 25 February 2020, a Royal Decree established the Ministry of Investment (MISA), which replaced the Saudi Arabian General Investment Authority, with a mission to “promote Saudi Arabia as a world-class investment destination, attract and retain investors, and expand their investments; for the benefit of a sustainable national economic growth”.26 For the first quarter of 2020, the KSA GDP amounted to SAR 695.6 billion (approx. USD 185 billion), 22 % of which came from oil and gas income, while the construction industry contributed 6 %.27  

 

1.3.2.

1.3.3.

 

1.3.4.

1.3.5.

 

 

19 Gov.sa Unified National Platform, https://www.my.gov.sa/wps/portal/snp/pages/1economic. 20 G20 Official Website, https://g20.org/en/Pages/home.aspx. 21 Vision 2030 Official Website, https://vision2030.gov.sa/en. 22 Vision 2030 Official Website, https://vision2030.gov.sa/en/programs. 23 Invest Saudi Official Website, https://investsaudi.sa/en/why-saudi-arabia/. 24 Investment Highlights, A special report by SAGIA – Winter 2019, https://investsaudi.sa/en/news/ a-special-report-by-invest-saudi-winter-2020/. 25 Investment Highlights, A special report by SAGIA – Winter 2019, https://investsaudi.sa/en/news/ a-special-report-by-invest-saudi-winter-2020/. 26 Ministry of Investment website, https://misa.gov.sa/en/about/. 27 KSA General Authority of Statistics, https://www.stats.gov.sa/sites/default/files/gdp_national_ accounts_indicators_2020q1_kpen_2.pdf.

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2. The Construction Industry 2.1. Size and Nature 2.1.1.

2.1.2.

Construction is a major industry in KSA due to the dominance of oil and gas projects. Even as KSA seeks to diversify its economy, it continues to expand and strengthen its oil and gas economy, which requires investing in major petrochemical plants and refineries that, in turn, constitute major construction projects. The public sector generates the largest construction projects in KSA and thus the largest employers are the government and government-owned entities. For instance, a national survey conducted on the value of construction projects in KSA in 2018 showed government entities as having the largest total value of construction projects.28

2.2. Participants 2.2.1.

2.2.2.

2.2.3.

Given the importance of the oil and gas industry, the largest procurement and construction employer is Saudi Aramco, the world’s largest oil producer and one of its biggest companies by revenue. Aramco’s growing need to expand its oil and gas production facilities regularly generates construction megaprojects, not only in oil and gas production transmission refinement and petrochemicals, but also in areas such as building construction, civil infrastructure, power generation and transmission, and water and wastewater.29 Other major players in the construction industry include SABIC, an Aramco subsidiary, and the government-owned Saudi Electricity Company. Over the past few years, other governmental entities have become major procurers of construction services, including the Saudi Railway Organization, the Saline Water Conversion Corporation,30 and various municipal airport and other transport authorities. Vision 2030’s economic diversification program aims to generate revenue from the tourism and entertainment sectors,31 which has resulted in the launch of a

28 KSA General Authority of Statistics Official Website, https://www.stats.gov.sa/en/1004-0. 29 Saudi Aramco Official Website, https://www.aramco.com/en/workingwithus/suppliers/con tracting-opportunities/project-management. 30 Saline Water Conversion Corporation Official Website, https://www.swcc.gov.sa/english/EServices/Business/Pages/Tenders.aspx. 31 Invest Saudi Official Website, https://investsaudi.sa/en/sectors-opportunities/tourism-cultureentertainment/.

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number of ‘giga’ projects across KSA, and created construction opportunities, all under the umbrella of the Public Investment Fund (PIF). Some of the currently most prominent projects in these sectors are: Neom, the Red Sea Project, Qiddiya entertainment city, and Amaala.32 These projects are in addition to major projects in the transportation, hospitality, and infrastructure sectors.33 As for contractors, KSA has its own pool of local contractors, including Saudi Bin Laden Group, Nesma & Partners, El Seif Engineering, and KBW Investments, as well as many international companies working either as engineers and contractors or as project management consultants.34

2.3. Work, Health and Safety 2.3.1.

2.3.2.

2.3.3.

Health and Safety regulations are important in KSA. In recent years, the Ministry of Human Resources and Social Development (MOHRSD) has increased its focus on worker health and safety in all work environments. The Labor Law is the main source of regulating worker health and safety rights and the obligations of employers and employees. Under the Labor Law, employers have a general obligation to maintain the health of their workers and safety of their workplaces, take necessary precautions to protect workers and inform them of safety instructions and safety hazards associated with the job. Employees are required to follow the instructions and use necessary personal protective equipment, which employers are responsible for providing.35 In 2018, MOHRSD issued a practical framework within which employers could protect the health and safety of workers.36 The resolution sets out minimum, medium, and high health and safety requirements depending on the workplace. Construction activities involving more than 50 employees are placed in the medium framework.

32 Neom Official Website, https://www.neom.com/en-us/about/; https://www.theredsea.sa/en/ project; https://qiddiya.com/en/about-qiddiya/master-plan/; https://www.amaala.com/en/masterplans/. 33 Construction Week Magazine, https://www.constructionweekonline.com/projects-tenders/ 169387-list-of-saudi-arabias-top-construction-projects-of-2019. 34 For example, AECOM, Atkins, Bechtel and WorleyParsons, all of whom have branches in KSA. 35 Labor Law, Royal Decree No. M51/1426 dated 23/08/1426H (27 September 2005), https://hrsd.gov. sa/sites/default/files/LABOR%20LAW.pdf, Articles 120–131. 36 Ministry of Human Resources and Social Development, Resolution Number 161238 dated 10/8/ 1439AH, which came into effect on 17/10/1439AH (1 July 2018).

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The minimum requirements applicable to all employers, include: (a) Adopting a written policy of processes and liabilities with regard to occupational accidents and illnesses, to be renewed every two years; (b) Informing employees of their rights and liabilities, through specific management teams assigned to develop and observe a health and safety framework; and (c) Training employees in health and safety issues, including courses delivered in the employees’ language(s); and (d) Auditing and risk assessments of health and safety policies to ensure compliance, identify shortcomings, and implement necessary preventive measures. Medium framework requirements additionally include:37 (a) Employees should participate in and be consulted on occupational health and safety issues including identifying risks, decisions on preventive measures, drafting safety guidelines, and choosing necessary personal protective equipment; (b) Employers must provide a system of communication with all employees on all health and safety measures, including a record of work-related injuries, any health risks in the workplace, and minutes of health and safety committee meetings; and (c) Employers must consider health and safety when contracting works whether long or short term.

3. Government Involvement 3.1. Legislation and Regulation 3.1.1.

The Government Tenders and Procurement Law (GTPL) regulates procurement and contracting by government entities, including in construction.38 The GTPL is among the most essential legislation for the construction industry, given that the public sector generates most of the construction work. Accordingly, the GTPL plays a crucial role in most, and most of the largest, construction contracts in KSA. Notably, however, the GTPL does not apply to Saudi Aramco (or

37 Ministry of Human Resources and Social Development, Resolution Number 161238 dated 10/8/ 1439AH, which came into effect on 17/10/1439AH (1 July 2018). See also Sara Khoja, Saudi Arabia puts the spotlight on Occupational Health and Safety, 12 November 2018, available at: https://www.cly deco.com/en/insights/2018/11/kingdom-of-saudi-arabia-puts-the-spotlight-on-occu. 38 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019).

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SABIC) which has its own well-developed procurement and contracting regime. The GTPL regulates contracts with all government entities (i.e., ministries, government agencies, authorities, departments, public institutions and agencies having an independent public legal personality). The GTPL regulates all matters relating to construction contracting, from the issuance of RFPs through to resolving disputes. The GTPL was amended on 16 July 2019, and amendments to its Implementing Regulations followed. The amendments introduced many changes and improvements affecting bidding and procurement processes and government contracts.  

Public Procurement 3.1.4. The GTPL established a unified e-portal of government procurements supervised by the Ministry of Finance (Portal).39 The Portal, also known as Etimad, streamlined the procurement process and increased transparency and efficiency among government tenders.40 3.1.5. The Portal includes a register for each government entity containing information, data and procedures related to contracts concluded and to projects and works put out to tender.41 All bids are submitted through the Portal and the relevant governmental entity will announce the names of the tenderers on the Portal.42 3.1.6. The GTPL allows several methods of tendering and contracting, depending on the circumstances, and public tenders, which are announced on the Portal, are most frequently used. Other methods include limited tenders, two-stage tenders, direct purchase, framework agreements, electronic reverse tenders, and competitions.43 The two-stage tender was an addition in the amended GTPL and allows a degree of flexibility for complex matters where it is not possible to agree technical specifications or final contractual terms at the early stages of a project.

39 Government Tenders and Procurement Law, Royal (16 July 2019), Article 1. 40 The Etimad Portal can be accessed through this LandingPage/monafsat. 41 Government Tenders and Procurement Law, Royal (16 July 2019), Article 17. 42 Government Tenders and Procurement Law, Royal (16 July 2019), Article 37. 43 Government Tenders and Procurement Law, Royal (16 July 2019), Title 2.

Decree No. M128/1440 dated 13/11/1440H link (only in Arabic): https://etimad.sa/ Decree No. M128/1440 dated 13/11/1440H Decree No. M128/1440 dated 13/11/1440H Decree No. M128/1440 dated 13/11/1440H

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Guarantees 3.1.7. The GTPL requires bidders to post a “Preliminary Guarantee” along with their bids, equal to 1–2 % of the value of the bid. Any bid submitted without a Preliminary Guarantee will be rejected.44 Within fifteen days of the notification of a tender award, the successful bidder shall submit a “Final Guarantee” equal to 5 % of the contract price.45 3.1.8. The government entity may (but is not required to) make an advance payment of not more than 10 % of the contract price, in exchange for a bank guarantee of the same amount.46  

 

 

3.2. Licensing 3.2.1. 3.2.2.

Foreign entities wishing to work on a construction project in KSA must obtain a foreign investor’s license from the Ministry of Investment. Generally, foreign participation in KSA companies may be up to 100 % (i.e., KSA allows foreign investors to own 100 % of KSA companies).47 Particular activities, however, can be carried out only by companies with a minimum percentage of Saudi participation. Notably, the management of construction projects, detailed engineering design, and EPC contracting are permitted only by companies with at least 25 % Saudi ownership.48 Subject to specific rules and restrictions relating to each type of license, the general process to issue a foreign investor’s license in KSA is streamlined and straightforward. For each type of license, there are service fees required to issue and operate the license, for ‘service’ licenses such as a license for construction activities, the foreign entity must pay: (a) A license fee of 2000 SAR annually for 5 years; and (b) A subscription fee of 10,000 SAR for the first year to obtain services from MISA’s investors’ relations centres.  

 

 

 

3.2.3.

3.2.4.

44 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Article 41. 45 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Article 61. 46 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Article 66; Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 108. 47 Investment Law, Royal Decree No. M/1 dated 5/01/1421H (06 April 2000), Article 5. 48 Investment Manual, Eighth Edition, 2020, Section 11.03 p. 126, available at: https://www.misa. gov.sa/media/1279/misa-service-manual-v2-8th-edition-en-v6.pdf.

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3.2.5.

3.2.6.

3.2.7.

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MISA provides a comprehensive ‘Investment Manual’ setting out the requirements to issue, amend, renew, or cancel licenses depending on the type of activity conducted by the entity.49 Once the foreign entity is operating in KSA, other licensing requirements concern industrial and building licenses, such as building permits. In KSA, a building permit is required for construction or renovation. The Ministry of Municipal and Rural Affairs is the central authority for all building and renovation related permits, under which the municipalities in different regions in KSA are authorized to issue such permits.50 In addition to the Ministry of Municipal and Rural Affairs and its municipalities, there is the Economic Cities and Special Zones Authority (ECZA), which oversees, regulates and supervises the Saudi economic cities and recently introduced special economic zones in accordance with the ECZA statute.51 KSA so far has two economic cities: Knowledge Economic City and King Abdullah Economic City, which aim to attract foreign investment through relaxed economic and social rules. The Special Economic Zones were recently established in 2018 as part of Vision 2030, offering fiscal and other incentives across multiple sectors, such as ICT, logistics, tourism, and industrial and financial services. One of the known special zones is NEOM, a futuristic smart city described as the “largest international special zone in the world”.

4. Legal Underpinnings of Contracts 4.1. Legal Framework 4.1.1.

4.1.2.

There is no codified legal framework governing contracts in Saudi Arabia. As noted, KSA strictly follows Sharia law and, where there is no codified legislation, it primarily relies on the texts of the Quran and Sunnah. At the same time, while case law may be referenced for guidance, KSA does not have a binding system of precedent as in common law jurisdictions, which leaves courts with discretion to interpret contracts within the bounds of Sharia. It is also common for Saudi courts to borrow from the laws of other Arab jurisdictions, most notably Egypt, to provide a framework for ruling on commercial and contract disputes. Courts occasionally turn to the Egyptian Civil Code

49 For more information, see: Investment Manual, Eighth Edition, 2020, available at: https://www. misa.gov.sa/media/1279/misa-service-manual-v2-8th-edition-en-v6.pdf. 50 https://www.momra.gov.sa/ar/e-services; https://balady.gov.sa/Services/Terms/?id=133 (in Arabic). 51 Royal Order No. A/240 dated 1/4/1441 AH – 28/11/2019.

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(which was adapted from French law but with close consideration of Sharia principles) for guidance. While there is no general contracts legislation, the GTPL considers most contractual issues arising in construction contracts; however, it only governs contracts with government entities.52

4.2. Freedom of Contract 4.2.1.

4.2.2.

4.2.3.

4.2.4.

Freedom of contract is one of the most important principles of contract under Sharia law. Sharia law supports the sanctity of contracts. As stated in the Quran “O you who believe, fulfil (your) obligation” and “fulfil every covenant, verily the covenants will be questioned about (on the Day of Reckoning),”53 and the Prophet’s saying: “Muslims are on (held to) their conditions.” In practice, Saudi courts typically uphold agreements so long as they do not conflict with any laws and basic principles of Sharia.54 Pursuant to Supreme Judicial Council decision no. 356/3 dated 28/3/1420H (corresponding to 12 July 1999): “if there is a clause between the parties that does not contradict Shari’a, then it is honored and no one shall cancel ... the contract except those who concluded it.” While freedom of contract is paramount, Sharia law also gives due consideration to principles of fairness in enforcing and interpreting contracts, and Saudi courts will often strike out or refuse enforcement of unfair contract terms. Sharia rules are deemed matters of public policy. Therefore, a contract that violates Sharia principles equally violates KSA public policy, and courts will strike agreements they consider contrary to Sharia. For example, because Sharia law prohibits interest (usury or ‘riba’), Saudi courts consistently refuse to enforce provisions for payment of interest both in contracts and arbitral awards.

4.3. Contractual issues 4.3.1.

Contractual issues arising in construction contracts are regulated by the GTPL in cases of government contracts, or Sharia law when it comes to private contracts. As shown below, the GTPL has specific rules applicable to issues arising in construction contracts. As such, while the GTPL applies exclusively to

52 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019). 53 (Qur’an 5:1) and (Qur’an 17:34) respectively. 54 Supreme Judicial Council decision no. 356/3 dated 28/3/1420H (12 July 1999).

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contracts with government entities, Saudi courts sometimes refer to it for guidance in relation to private construction contracts. Otherwise, courts consider issues in accordance with general principles of interpretation of contracts, sometimes drawn from Egyptian law. Variations 4.3.2. Under Article 69 of the GTPL, the employer may issue variations resulting in an increase to the contract price by no more than 10 %, or a decrease of no more than 20 % of the contract price. 4.3.3. To claim more than 20 % of the contract price, a Contractor must bring its claim before the Administrative Courts.55 4.3.4. Article 114 of the Implementing Regulations clarifies the rules regarding variations as follows:  

 

 

1- The additional works shall be subject of the contract and not outside its scope. 2- The amendments or changes necessary for the works shall serve the interest of the facility, provided that this does not result in violation of the terms and specifications or in a change in the scope of works or in the nature of the contract or its financial balance. 3- Ensuring availability of funds necessary to cover the value of the additional works before awarding them to the contractor. 4- If the additional works have no similar items or quantities in the contract, they shall be referred to the Bid Examination Committee or the Direct Procurement Bid Examination Committee, as the case may be, to study the assignment of these works and the reasonableness of the prices submitted by the contractor. If the contractor disagrees with the decision of the committee, said works shall be contracted with other contractors, in accordance with the provisions of the Law and this Regulation. 5- It is not permissible to assign additional works after the Government Entity receives the works subject-matter of the contract. 6- The person in charge of awarding the contract shall be competent to issue all orders for increasing or reducing the contractor’s obligations and the periods prescribed for additional works.

4.3.5.

4.3.6.

Contractors may not execute any of the additional works without a written instruction from the employer. Otherwise, the contractor is not entitled to the value of the variation.56 In a private contract, Saudi courts will generally uphold the contract provisions so long as they do not violate Sharia law principles.

55 Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 113, third(5). 56 Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 115.

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Delay penalties and extension of time 4.3.7. The GTPL provides for delay penalties (i.e. liquidated damages) in cases of delay for up to 6 % for supply contracts, and 20 % for other contracts, such as services or constructions contracts. Notably, delay penalties may exceed these amounts with the prior approval of the Minister of Finance, provided that bidders are informed of the excess penalty before submitting their bids.57 4.3.8. The GTPL stipulates specific circumstances in which employers must give an extension of time:58 (a) If the contractor is instructed to perform additional works, in which case the extension of time shall be proportionate to the volume and nature of the works and the date of assignment;59 (b) If the annual funds allocated to the project are not sufficient to complete the work within the specified time; (c) If the government entity caused the delay or it was caused by an “emergency;”60 (d) If the delay is caused by reasons beyond the control of the contractor; and (e) If the government entity issued an order wholly or partly suspending the works for reasons not attributable to the contractor. 4.3.9. Sharia principles governing private contracts do not provide particular rules on delay penalties or extensions of time. Courts will enforce contract provisions, subject to Sharia considerations, including considerations of fairness. 4.3.10. Saudi courts will enforce liquidated damages provisions. Because of fairness considerations under Sharia law however, Saudi courts may scrutinize liquidated damages claims closely and adjust awards to assure that they approximate actual losses in circumstances where the enforcement of the contractual  

 

 

57 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Articles 72–73. 58 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Article 74; Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 124: “… the entity may not issue a decision to extend the contract or inform the contractor to extend his contract in cases other than those specified under Article (74) of the Law”. 59 According to the Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 125(4): “If the contractor is assigned to carry out additional work, the contract execution shall be extended for a period commensurate with the size of the additional work assigned to the contractor”. 60 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Emergency is defined as: “A situation where the public safety, general security or public health are seriously and unexpectedly endangered or a situation threatening of the loss of lives or properties and which may not be dealt with using ordinary tender procedures”.

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provision would yield an unfair result. This practice stems from the Sharia expectation that damages paid must align with actual harm caused. 4.3.11. The Islamic Fiqh Council61 has noted that liquidated damages clauses are allowed under Sharia law, as long as the underlying obligation is not the payment of a debt, which would cause liquidated damages to be considered interest, and which is strictly prohibited under Sharia law. The Council further noted that courts may adjust these damages, upon a party’s request, where it is justified or the liquidated damages are ‘exaggerated’.62 Force Majeure 4.3.12. In respect of government contracts, the GTPL addresses force majeure or adverse circumstances in the following provisions. 4.3.13. Article 1 defines Emergency as “[a] situation where the public safety, general security or public health are seriously and unexpectedly endangered or a situation threatening of the loss of lives or properties and which may not be dealt with using ordinary tender procedures.” 4.3.14. Article 74 provides that a contractor would be entitled to an extension of time – and thus is relieved from liquidated damages: “3- If the delay is attributable to the Government Entity or to emergencies; 4- If the contractor delays the execution of the contract for reasons beyond his control; and 5- If an order is issued by the Government Entity to suspend the works or part thereof for reasons not attributable to the contractor.”

4.3.15. In relation to private contracts, courts typically will uphold contractual force majeure clauses that do not conflict with Sharia principles.63 Courts applying Sharia law have awarded extensions of time where a delay in performance was due to force majeure or adverse circumstances.64 4.3.16. In the absence of a force majeure clause, Saudi law distinguishes between force majeure, temporary force majeure, and adverse/urgent circumstances, even though these distinctions are not codified in any specific law. 4.3.17. While the term force majeure appears in some Saudi laws,65 the legal consequences of force majeure are not set out and, accordingly, the analysis of

61 The Islamic Fiqh Council is an affiliate of the Muslim World League, and is made up of a select group of Muslim scholars to consider and interpret issues based on the Quran and Sunnah. 62 Court of Appeal, Case No. 547 of 1437AH (14 February 2016), referring to Islamic Fiqh Council resolution no. 109 at the 12th meeting dated 23–28 September 2000. 63 Supreme Judicial Council decision no. 356/3 dated 28/3/1420H (corresponding to 12 July 1999). 64 Case No. 2812/1 of year 1424H; Case No. 1576/10 of year 1433H. 65 See, e.g., Article 28 of the Mining Investment Law (Royal Decree No. M47/1425 dated 20/08/1425 H); while not defined, consequences of force majeure appear in different provisions (161, 103, 162) of the Commercial Maritime Law (Royal Decree No. M/33 dated 05/04/1440 H).  

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force majeure claims reverts to Sharia law. The Sharia law concepts analogous to force majeure are: (i) Calamity (jai’hah); and (ii) Excuse (uthr). The Sharia principles below frame the general position adopted in Islamic jurisprudence. Note however, that there are different schools of Islamic interpretation with diverging views on some issues (including calamities, excuses and their effects). Islamic jurisprudence generally defines calamity as acts of god for which no one could be held liable, such as storms, rain, wind, as well as other acts of destruction, for example, army invasions.66 Pursuant to Imam ibn Yunus, the action of a ruler would also fall under the definitions of Calamity. The general criteria for invoking the principle of calamity include: (a) The calamity must be due to external reasons not related to the contracting parties; (b) The calamity must be exceptional and general, and not specific to the contracting party; (c) That the calamity cannot be avoided; and (d) The failed obligation is forthcoming (i.e., if the claiming party failed to fulfill its contractual obligation before the calamity occurred, the principle does not apply). Saudi courts have found that where a calamity is temporary, performance may be suspended during such period until the contract is capable of being performed again.67 In relation to Excuses (uthr), valid excuses have the effect of preventing, or substantially preventing, one or more parties from performing their obligations. The legal basis for the principle of valid excuse in Sharia law comes from necessity. Most Islamic scholars agree that any valid excuse that makes performance of the contract impossible or onerous for one of the contracting parties is a sufficient, though not automatic, ground for terminating the contract.68 Where the calamitous or excusing circumstances appear temporary, and where impossibility of performance is uncertain, the theory of adverse circumstances may apply. Saudi courts developed the application of an adverse circumstances doctrine following the Gulf War during which the performance of many contracts was prevented. The criteria include: (a) the contract is yet to be performed (obligations are forthcoming); (b) exceptional public circumstances occur after concluding the contract; (c) such circumstances were not foreseeable; and  

4.3.20.

4.3.21.

4.3.22.

66 Ibn Taymiya, Fatawa collection (278/30). 67 Case No. 2594/3 of year 1432H. 68 Al Kasani, Badai’h Alsanai’h fi Tarteeb Alsharai’h (197/4).

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(d)

the circumstances render performance of the contract burdensome (not impossible).69 4.3.23. In these circumstances, courts may adjust the parties’ obligations commensurate with the circumstances, and contracts shall return to their full force once the adversity is lifted.70 4.3.24. The Islamic Fiqh Council provided that where adverse circumstances arise upon which performance of the contract would lead to significant losses, a judge would have discretion to do what is fair, by either adjusting the contractual obligations, terminating the contract, or postponing performance – if the circumstances are temporary and would not prejudice the obligee.71 Disputes committees under GTPL 4.3.25. Pursuant to the GTPL, a committee specialized in examining claims by tenderers and contractors has been established. Under Article 86 of the GTPL, the committee is authorized to: a- Examine the grievances of the tenderers against the award decision or any other decision or procedure made by the Government Entity before the award decision. b- Examine the grievances of the contractors against the performance evaluation decisions. c- Examine the requests to amend prices in accordance with the provisions of Article (68) hereof.

4.3.26. The committee’s decisions are binding only on the government entity. If the contractor is dissatisfied with the committee’s decision, it may pursue other avenues of redress. 4.3.27. Article 86(4) however, requires the contractor advancing a grievance to deposit a guarantee that will be refunded only if it wins the application. Under the Implementing Regulations, the applicant must deposit the guarantee upon submitting the grievance, and a failure to do so results in rejecting the grievance. However, the guarantee need only be valid for 30 days without an obligation to renew the guarantee even if the committee did not issue a decision within that timeframe. 4.3.28. Furthermore, the GTPL established at Article 88 a separate committee specialized in examining violations by tenderers and contractors. This committee may punish the violators by forbidding contracting with government entities for up to five years or decreasing the contractor’s “rank,” or both. Alterna-

69 Case No. 1146/1 of year 1414H. 70 Case No. 173/1 of year 1414H; Case No. 50/1 of year 1415H. 71 Fiqh Council Resolution of the fourth meeting in 1402H in relation to adverse circumstances and their effects on contractual rights and obligations.

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tively, the committee may impose a penalty of up to 10 % of the total value of the contractor’s bid. 4.3.29. The Article 88 committee’s decisions are binding from the date they are issued. However, the violator may bring a grievance against a decision in the Administrative Court. If the violator does not challenge the decision, or the Administrative Court affirms it, then the committee will publish the decision in the local newspaper (at the contractor’s cost).72  

Termination under GTPL 4.3.30. Under Article 76(1) of the GTPL, the government entity must terminate the contract if the contractor (a) attempted to bribe a government employee or procured the tender by illegal means such as bribery, cheating, manipulation, or forgery, or engaged in the same in performing the contract; (b) becomes bankrupt, files for bankruptcy, is proven insolvent or is put under receivership, or if the contractor is a liquidated and dissolved company; or (c) assigns the contract without the government entity’s prior written approval. 4.3.31. Under Article 76(2) of the GTPL, the government entity may terminate the contract if the contractor (a) delays commencement of the work, or delays its execution, and fails to perform within fifteen days of notice; (b) dies; or (c) subcontracts the works without the government entity’s prior written permission. 4.3.32. When a contract is terminated under the GTPL, the remaining works are to be put out to tender in the same way as they were procured.73

5. Construction Contracts 5.1. Construction Contract Types 5.1.1. 5.1.2.

Private parties commonly choose forms of contract derived from the FIDIC “Rainbow Suite,” most commonly the Red, Yellow, and Silver 1999 editions.74 As for government contracts, the GTPL allows government entities to conclude its contracts in any of the following types:75

72 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Article 88. 73 Government Tenders and Procurement Law, Royal Decree No. M128/1440 dated 13/11/1440H (16 July 2019), Article 76(3). 74 Norton Rose Fulbright, Saudi Arabia: Construction force majeure and alternative relief, May 2020, available at: https://www.nortonrosefulbright.com/en/knowledge/publications/a1f1c98b/saudiarabia-relief-provisions-in-construction-contract-suites. 75 Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 95.

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(a) (b) (c) (d)

5.1.3.

Unit price contracts; Turnkey contracts; Lump/fixed price contracts; Contract in accordance with a specified margin or amount of profit, allowed only for officially priced materials, or materials that can be priced by the government entity; (e) Contracting as per the performance according to specific quantitative criteria; or (f) Contracts with project consultants. The government provides a standard form of contract with specific terms and conditions for each type of contract.76

Unit Price Contract 5.1.4. Unit price contracts “in which accounts are settled on the basis of the actual on-site assay of quantities, items, and numbers that have been executed”77 and subject to certain criteria: a- It shall be in public construction works and services, according to the calculated bill of quantities, and based on the designs and plans previously approved. b- The prices of the work items shall be fixed, but the quantities are not precisely determined or their final estimation is difficult. c- The payment requests shall be issued in batches, according to the works already completed, provided that those works are measured at the wok execution site.78

Turnkey Contract 5.1.5. Turnkey contracts are allowed in construction contracts, major infrastructure, industrial facilities, and similar contracts; the contractor is responsible for designs and execution in accordance with the tender’s technical specifications and the execution of the contract shall be in a lump sum as determined by the government entity. Lump sum Contract 5.1.6. A lump sum contract is only allowed where the contract is for simple works or works with immeasurable quantities, or the works remaining after the completing the project; in which case the lump sum amount shall cover all works.

76 Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 95: “… Contract models shall describe the terms of use of the indicated contracting types”. 77 Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 95(1). 78 Implementing Regulations of the Government Tenders and Procurement Law, Ministerial Decision No. 1242/1441 dated 21/03/1441H (18 November 2019), Article 95(1).

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6. Key Issues 6.1. Overview 6.1.1.

6.1.2.

6.1.3.

KSA has a competitive and well-developed engineering and construction market. A large number of international engineering, contracting and project management companies are active in the Kingdom. Government entities play an important role in the construction industry in KSA. Contractors and project managers contemplating a construction project in KSA should acquaint themselves with the rules and nuances of the GTPL as it plays an essential role in government projects. In instances where employers are not government entities, the terms and specifications in the construction project in KSA will consist of the parties’ contractual agreement, to which Saudi Law gives precedence.

6.2. Liquidated Damages 6.2.1.

The GTPL prescribes liquidated damages for delay (up to 6 % for supply contracts, and 20 % for other contracts), and liquidated damages clauses are regularly enforced under the GTPL. With private contracts the law is less certain. While parties may agree to liquidated damages, such clauses are subject to close scrutiny by tribunals. Courts will enforce liquidated damages provisions, as long as the court does not consider the damages to be exaggerated as compared to the actual harm resulting from the delay. In practice, a party seeking to enforce a liquidated damages clause will benefit from being able to demonstrate actual losses that approximate the liquidated damages sought.  

 

6.2.2.

7. Arbitration 7.1.1.

7.1.2.

Arbitration has become a popular method of dispute resolution in recent years, as government construction contracts are starting to move away from the traditional Board of Grievances (Administrative Court) route for dispute resolution. This move has been reinforced by a recent GTPL amendment allowing government entities to agree to arbitration, subject to ministerial approval. Parties to private contracts are free to agree their preferred means of dispute resolution and often choose arbitration.

Shona Frame

Scotland 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 3. 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 4. 4.1. 4.2. 4.3. 4.4. 4.5. 5. 5.1. 5.2. 5.3. 5.4. 6. 6.1. 6.2. 6.3. 6.4. 6.5. 6.6.

Context 870 The Country 870 The Legal System 873 The Economy 877 The Construction Industry 879 Size and Nature 879 Participants 885 PFI/PPP 887 Work, Health and Safety 888 Protection of the Environment 891 Quality Assurance 896 Construction Contracting Dynamics 900 Legal Underpinnings of Contracts 901 Freedom of Contract 901 Legal Framework 902 Public Policy 903 Statute Law 904 Implied Contract Terms 904 Construction of Contract Terms 905 Private and Public Procurement 907 Government Involvement 910 Legislation and Regulation 910 Competition Law 910 Bribery Act 2010 913 Codes of Practice 915 Licensing of Professionals and Contractors 916 Construction Contracts 917 Available Contracts 917 Most Commonly Used 918 Example 1 – SBCC 919 Example 2 – NEC4 920 Key Issues 924 Overview 924 Design Responsibility 924 Ground Risk 926 Coordination of Works with Others 927 Requirements to Achieve Completion 928 Late Completion 928

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6.7. 6.8. 6.9. 6.10. 6.11. 7. 7.1. 7.2. 7.3. 7.4.

Shona Frame

Copyright 929 Obligations to Procure Other Documents Force Majeure 931 Time Bars 931 Prescription 933 Dispute Resolution 935 Escalating Procedures 935 Adjudication 936 Arbitration and Court 937 Mediation 937

930

1. Context 1.1. The Country 1.1.1. 1.1.2.

1.1.3.

1 2 3 4 5 6

Scotland is a country which is currently part of the United Kingdom (‘UK’). Its head of state is the monarch of the UK, Queen Elizabeth II. Within the UK, Scotland has limited self-government through the Scottish Parliament in Edinburgh. The devolved Scottish Parliament was established by the Scotland Act 1998 (UK) (‘Scotland Act’)1 following a referendum in 1997. As well as creating the Scottish Parliament, the Scotland Act sets out how the 129 Members of the Scottish Parliament (‘MSPs’) are to be elected. One MSP is elected to each of Scotland’s 73 constituencies using the traditional ‘first past the post’ system, meaning that each election is won by the candidate receiving more votes than any other candidate. The remaining 56 MSPs are elected to represent 8 ‘regions’ of Scotland (7 MSPs per region). This is done using the ‘additional members system’, a form of proportional representation.2 The creation of a Scottish executive is also provided for by the Scotland Act,3 although this is now known as the Scottish Government.4 After each Scottish Parliamentary election, the Parliament formally nominates a First Minister (the Scottish equivalent of the Prime Minister) with the agreement of Parliament and the approval of the Queen.5 The First Minister then appoints Scottish Ministers to make up his or her cabinet.6

Scotland Act 1998, http://www.legislation.gov.uk/ukpga/1998/46. Scotland Act 1998 s1. Scotland Act 1998 s44. Scotland Act 2012 s12. Scotland Act 1998 s44. Scotland Act 1998 s47.

Scotland

1.1.4.

1.1.5.

1.1.6.

1.1.7.

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The Scotland Act also sets out how Bills are to be considered and passed. Such Bills become Acts of the Scottish Parliament once they have received royal assent. However, the Scotland Act goes on to specifically state that the UK Parliament retains its power to make laws for Scotland. Whilst some legislative powers have been devolved to the Scottish Parliament such as education, health, agriculture and justice, a set list of matters remains reserved to the UK Parliament, including defence, immigration, benefits and social security.7 Fifty-nine Members of Parliament (‘MPs’) represent Scottish constituencies in the UK Parliament, which consists of a total of 650 MPs. Each MP is elected using the ‘first past the post’ system. The Queen requests the person most likely to command the support of a majority in the Parliament to form a government. This usually means that the leader of the most successful political party (in terms of the number of elected MPs) becomes the Prime Minister of the UK. Although Acts passed by the UK Parliament may apply to Scotland, many do not. This is because of the continuing separation of Scots law.8 This means that many Acts passed by the UK Parliament are either matched by equivalent Acts which apply only to Scotland, or by legislation passed by the Scottish Parliament on devolved matters. A referendum on independence for Scotland was held on 18 September 2014. The question asked was ‘Should Scotland be an independent country?’. 55.3 % of the Scottish people voted no, and so Scotland remains part of the UK.9 It is possible that a second independence referendum will be held in the future, as this remains on the political agenda, but there are no firm plans as yet10. The UK (including Scotland) was, until recently, a member state of the EU. As part of the UK, this meant that Scotland was greatly impacted by EU legislation on a wide range of policy areas including agriculture, fisheries, health and business. Legislation passed by the Scottish Parliament required to comply with EU law, and all levels of Scottish courts were required to enforce it. However, a referendum was held on 23 June 2016 and 51.9 % of the participating UK electorate voted to leave the EU.11 This has become known as Brexit.  

1.1.8.

 

7 Scotland Act 1998, s29–30. 8 See Section 2. 9 Scottish Information Centre, The Scottish Parliament, Scottish Independence Refredenum 2014: Results. 10 There is an ongoing court action (Martin James Keating v The Advocate General for Scotland, the Lord Advocate and the Scottish Ministers) in relation to the Scottish Government’s power to hold an independence referendum, without the UK Government’s consent. 11 The Electoral Commission, Results and turnout at the EU referendum [website], 16 July 2019 (Last updated 9 August 2019), https://www.electoralcommission.org.uk/who-we-are-and-what-we-do/ elections-and-referendums/past-elections-and-referendums/eu-referendum/results-and-turnout-eureferendum, (accessed 14 August 2019).

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On 29 March 2017 the UK government invoked Article 50 of the Treaty on European Union,12 and consequently the UK was due to leave the EU on 29 March 2019. This was delayed until 31 October 201913 and then a further extension was granted. The UK formally left the EU on 31 January 2020. A year has been allowed for a transition period, which came to an end on 1 January 2021. During the transition period the UK had to continue to apply and implement EU law, as it fell within The EU-UK Withdrawal Agreement14. The European Union (Withdrawal) Act 2018 (UK)15 was passed on 26 June 2018. Thereafter the European Union (Withdrawal) Act 2020 (UK)16 gained Royal Assent on 23 January 2020. It repeals the European Communities Act 1972 (UK).17 The European Communities Act 1972 (UK)18 was the legislation that provided legal authority for EU law to have effect as national law in the UK. The European Union (Withdrawal) Act 2018 (UK)19 will also bring all EU laws into UK statute books, meaning that the EU laws and regulations made over the past 40 years will, at least initially, continue to apply. It gives Ministers power to make secondary legislation to adapt and remove laws that are no longer relevant. Section 1 of the European Union (Withdrawal) Act 2018 (UK)20 states that the European Communities Act 1972 (UK)21 is repealed on ‘exit day’, which is defined as 11.00pm on 31 October 2019.22 However, Section 1A of the European Union (Withdrawal) Act 2020 (UK)23 extends the period repealing the European Communities Act 1972 (UK)24 to the implementation period, being the transition or implementation period beginning with exit day and ending on IP completion day. IP completion day is later defined in section 39 of the European Union (Withdrawal) Act 2020 (UK)25 as 11.00pm on 31 December 2020.

12 Treaty on European Union, opened for signature 7 February 1992, [2012] OJ C 326/13 (entered into force 1 November 1993), http://data.europa.eu/eli/treaty/teu_2012/oj. 13 P. Barnes, ‘Brexit: What happens now?’, BBC News, 26 July 2019, https://www.bbc.co.uk/news/ukpolitics-46393399, (accessed 14 August 2019). 14 https://ec.europa.eu/info/european-union-and-united-kingdom-forging-new-partnership/eu-ukwithdrawal-agreement_en. 15 http://www.legislation.gov.uk/ukpga/2018/16. 16 https://www.legislation.gov.uk/ukpga/2020/1. 17 http://www.legislation.gov.uk/ukpga/1972/68. 18 http://www.legislation.gov.uk/ukpga/1972/68. 19 http://www.legislation.gov.uk/ukpga/2018/16. 20 http://www.legislation.gov.uk/ukpga/2018/16. 21 http://www.legislation.gov.uk/ukpga/1972/68. 22 European Union (Withdraw) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019 (SI2019/ 859). 23 https://www.legislation.gov.uk/ukpga/2020/1. 24 http://www.legislation.gov.uk/ukpga/1972/68. 25 https://www.legislation.gov.uk/ukpga/2020/1.

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1.2. The Legal System Scots Law 1.2.1. The legal system of Scotland, ‘Scots law’, is a hybrid system, combining elements of both civil and common law, with a variety of sources.26 Scots law is a distinct legal system from those used in the rest of the UK. 1.2.2. The roots of Scots law can be traced back to the 11th century, when the system of feudalism (a process involving the holding of land in exchange for service of labour) was introduced. The spread of feudalism throughout Scotland resulted in the development of early court systems. Roman law began to have an increasing influence within Scots law during the 15th century, based on a system of rights and obligations. Such basic principles are still applied in modern day courts in Scotland. During the 17th and 18th centuries, ‘institutional writers’ produced a number of academic writings on the principles of Scots law.27 Many of these principles had their basis in Roman law. These institutional writings are still authoritative today. From the 19th century onwards, Scots law has been increasingly influenced by both common law and statute law. The combination of each of these sources means that Scots law truly is a mixed system of law. The Courts 1.2.3. As well as a unique system of law, Scotland has its own judicial system (although the Supreme Court of the UK covers all three jurisdictions of the UK). 1.2.4. The Supreme Court of the UK is the highest civil court of appeal for Scotland. Below the Supreme Court sits the Court of Session, which is both a court of first instance (Outer House) and a court of appeal (Inner House). Judges who sit in the Court of Session are appointed as Senators of the College of Justice, which was established during the 16th century. There are currently 35 senators. These senators are known as Lords of Council and Session when sitting in the Court of Session. The Lord President is the head of the judiciary in Scotland and presiding judge and Senator of the College of Justice and Court of Session. The deputy to this position is known as the Lord Justice Clerk. The Court of Session has concurrent jurisdiction with the Sheriff Court (see 1.2.5. below) for any claim over £100,000. A Commercial Court also runs within the Court of Session, the purpose of which is to allow specialist judges to handle commercial cases quickly and flexibly. 1.2.5. Below the Court of Session lies the Sheriff Court. Thirty-nine Sheriff Courts sit locally across six Sheriffdoms (areas) in Scotland. At present, there are 142

26 See 1.2.2. below. 27 Stair, Vol.22, para. 437, (Online), (accessed 14 August 2019).

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permanent or resident sheriffs in Scotland, with an additional number of floating sheriffs who move between the Courts. There are also summary sheriffs who deal with certain types of civil and criminal business. A Sheriff Principal presides over each of Scotland’s six Sheriffdoms, whose responsibility it is to ensure the speedy and efficient disposal of court business. Any civil claim less than £100,000 in Scotland must be brought within the Sheriff Court. There is no upper financial limit on a claim within the Sheriff Court. European Courts 1.2.6. The European Court of Justice (‘ECJ’) is the highest court of the EU on matters of EU law. As part of the UK (which was, until recently, a member state of the EU), Scottish courts were able, whilst the UK was an EU member, to refer questions of EU law to the ECJ for clarification. For example, the Court of Session referred the question of whether minimum pricing of alcohol is contrary to European single market rules.28 Once a legal question is answered by the ECJ, it is for the referring national court to apply that ruling to the specific facts of the case before it. 1.2.7. As part of the UK (a member state of the Council of Europe), Scotland is bound by the European Convention on Human Rights.29 Individuals may make a case to the European Court of Human Rights if they believe that their rights under the Convention have been breached by a member state.30 In addition, member states (including Scotland as part of the UK) may make cases against other contracting states for alleged breaches of the Convention, although this practice is rare.31 Arbitration 1.2.8. Arbitration in Scotland is governed by the Arbitration (Scotland) Act 2010 (Scot) (‘2010 Act’).32 Prior to its codification in the 2010 Act, arbitration law in Scotland was based almost completely on common law. This has developed since 1695, with only marginal legislative input. 1.2.9. The 2010 Act is applicable to both domestic and international arbitrations. It incorporates the Scottish Arbitration Rules33 which apply to any arbitration

28 Scotch Whisky Association and Others v The Lord Advocate and The Advocate General for Scotland, ECJ (Second Chamber), EU:C:2015:845. 29 Formerly the Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213 UNTS 221 (entered into force 3 September 1953), https://treaties.un. org/Pages/showDetails.aspx?objid=080000028014a40b. 30 European Convention on Human Rights, Article 34. 31 European Convention on Human Rights, Article 33. 32 http://www.legislation.gov.uk/asp/2010/1. 33 Arbitration (Scotland) Act 2010 s7.

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seated in Scotland.34 ‘Mandatory’ and ‘default’ rules are provided for in the Rules.35 The ‘mandatory’ rules may not be disapplied. ‘Default’ rules are nonmandatory, and parties can agree to disapply them in full or in part. To the extent that court intervention is required, this is provided for by Rules of Court specific to arbitration.36 It is supported by the appointment of specialist arbitration judges. Court decisions issued have been supportive of arbitration as a process and recognised the court’s limited role. 1.2.10. International arbitration is supported in Scotland. The UK has ratified several international treaties relating to arbitration, namely the Convention on the Recognition and Enforcement of Foreign Arbitral Awards,37 the Convention on the Settlement of Investment Disputes between States and Nationals of Other States,38 and the Convention on the Execution of Foreign Arbitral Awards.39 As part of the UK, Scotland’s government and courts are bound by these treaties. Adjudication 1.2.11. Adjudication is widely used in Scotland. The Housing Grants, Construction and Regeneration Act 1996 (UK) (‘1996 Act’),40 which came into force on 1 May 1998, introduced a statutory right to adjudication as a means of dispute resolution for construction contracts throughout the United Kingdom.41 It was amended by the Local Democracy, Economic Development and Construction Act 2009 (UK)42 (which came into force in Scotland on 1 November 2011). The aim was to offer a quick and effective way to resolve disputes. Under the 1996 Act, the right to refer a dispute to adjudication applies to all construction contracts (as defined within the Act), whether wholly in writing, partly in writing or wholly oral.43

34 Arbitration (Scotland) Act 2010 s7. 35 Arbitration (Scotland) Act 2010 s8&9. 36 Court of Session Rules, chapter 100. 37 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (‘New York Convention’). 38 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966) (‘Washington Convention’). 39 Convention on the Execution of Foreign Arbitral Awards, opened for signature 26 September 1927, 92 LNTS 301 (entered into force 25 July 1929), https://treaties.un.org/Pages/LONViewDetails.aspx?src= LON&id=549&chapter=30&clang=_en (‘Geneva Convention 1927’). 40 http://www.legislation.gov.uk/ukpga/1996/53. 41 Housing Grants, Construction and Regeneration Act 1996 s108. 42 http://www.legislation.gov.uk/ukpga/2009/20. 43 Section 107 of the Housing Grants, Construction and Regeneration Act 1996 was repealed by the Local Democracy, Econoic Development and Construction Act 2009 and there is no longer a requirement for a construction contract to be an agreement in writing.

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The 1996 Act provides for a Scheme of adjudication provisions. If the provisions of a construction contract do not contain Act-compliant adjudication provisions, the statutory Scheme applies.44 In Scotland, this is the Scheme for Construction Contracts (Scotland) Regulations 1998 (Scot) SI 1998/687,45 as amended by the Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 (Scot) SI 2011/371.46

Mediation 1.2.13. Mediation is becoming increasingly popular amongst commercial parties in Scotland. Although the courts encourage the use of alternative dispute resolution, parties are not compelled to enter into mediation. The prevailing view in Scotland is that parties have a fundamental right to have their disputes addressed by the courts, should they wish. Expert Determination 1.2.14. Expert determination may be used as a method of alternative dispute resolution if it is contractually provided for, or if the disputing parties subsequently agree to it. Some standard form contracts, such as the Institute of Chemical Engineers (IChemE) Model Forms of Contract, specifically provide for the use of expert determination47. Unless specifically set out in the relevant contract, the procedure for expert determination is very flexible. The expert used may be chosen by the parties or appointed by an appropriate professional body. Unless the relevant contract states otherwise, the expert’s determination is not limited to the parties’ submissions or evidence. The expert may use their expert knowledge and conduct investigations. Generally speaking, the expert’s determination is final and binding, and there are very limited grounds for challenge. Dispute Boards 1.2.15. Dispute Boards are not widely used in Scotland, although they have been used on large-scale infrastructure projects. They are not provided for within the most commonly used standard forms of contract.

44 Housing Grants, Construction and Regeneration Act 1996 s108(5). 45 http://www.legislation.gov.uk/uksi/1998/687/made. 46 http://www.legislation.gov.uk/ssi/2011/371/made. 47 For example, Institution of Chemical Engineers, Lump Sum Contract, The Red Book 5th Edition, 2013.

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1.3. The Economy 1.3.1.

Scotland’s economy revolves around a range of sectors including services, manufacturing and energy. Each sector consists of key industries such as oil and gas, financial services, tourism, whisky and construction.

Gross Domestic Product 1.3.2. Gross domestic product (‘GDP’) is used to measure the state of an economy. The UK Office for National Statistics produces GDP statistics by measuring the value of goods and services produced by all sectors in the economy, the value of goods and services purchased by households and the government, the value of investment in buildings and machinery, and the value of all income generated in terms of profits and salaries. Scottish GDP is estimated to have grown by 0.2 % in real terms during the fourth quarter of 2019. This was more than GDP growth for the UK as a whole during the same period, which grew by 0.0 %. In cash terms, Scotland’s total GDP for 2019 was £168.1 billion. This figure increases to £177.0 billion once Scotland’s share in the UK’s offshore activity is taken into consideration.48  

 

Inflation 1.3.3. There are two main forms of measuring inflation: the Consumer Prices Index (‘CPI’) and the Retail Prices Index (‘RPI’). One of the key distinctions between each form of measurement is that the RPI includes housing costs such as mortgage interest payments, whereas the CPI does not. The Bank of England aims to keep inflation below 2 %. According to the CPI, inflation fell from 2.0 % in July 2019 to 1.1 % in July 2020.49  

 

 

Growth 1.3.4. The Scottish economy grew by 0.2 % during the fourth quarter of 2019.50 Output in the manufacturing sector fell by 1.5 % after there has been gradual growth in the manufacturing and mining sectors since 2017 after a significant output drop  

 

48 GDP Quarterly National Accounts Scotland, 2019 Quarter 4 (OCtober-December) (UK Office for National Statistics Publication for Scotland, 29 April 2020) (accessed online 26 August 2020) . 49 Consumer Price Inflation UK: July 2020, (UK Office for National Statistics, 19 August 2019) (accessed online 26 August 2020) . 50 See Section 1.3.2. above.

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following a dip in oil prices in 2014. Output in the production sector grew by 1.0 % and output in the construction sector dropped by 0.3 %. Output in the services sector, which has been estimated as accounting for nearly 75 % of the Scottish economy, grew by 0.5 %. Tourism remains an important part of the Scottish economy. In quarter 1 of 2020, the total number of international overnight tourism trips undertaken in Scotland reached 367,00051. The export of whisky produced £4.91 billion for 2019, which was a 4.4 % growth in value.52 In addition, the whisky industry sought to assist during COVID-1953 by assisting in the provision of hand-sanitiser54  

 

 

 

1.3.5.

 

COVID-19 1.3.6. On 31 December 2019, the World Health Organization’s (“WHO”) Country Office in the People’s Republic of China noted there was a “viral pneumonia” in Wuhan55. Subsequently, WHO reported that Chinese authorities determined the outbreak was due to a novel coronavirus56. It took until 11 February 2020 for WHO to announce that this was named COVID-1957. This has since caused a global pandemic, with the UK and Scottish Governments enforcing “lockdown” in March 202058. The effects of COVID-19 are still being felt in September 2020 and this is likely to continue for some time, with restrictions throughout the UK including the mandatory use of face masks and restrictions to social contact, ulti51 Q1 2020 Statistics Summary Publish July 2020 (accessed online 26 August 2020) . 52 Scotch Whisky Exports surge amidst backdrop of tariff uncertainty, (Scotch Whisky Association, 11 February 2020) (accessed online 26 August 2020) . 53 See Section 1.3.6 onwards. 54 Scotch Whisky industry working to meet hand-sanitiser demand, (Scotch Whisky Association, 20 March 2020) (accessed online 26 August 2020) . 55 World Health Organization Timeline: WHO’s COVID-19 response (accessed online on 26 August 2020) . 56 World Health Organization Timeline: WHO’s COVID-19 response (accessed online on 26 August 2020) . 57 World Health Organization Timeline: WHO’s COVID-19 response (accessed online on 26 August 2020) . 58 On 23 March 2020, Prime Minister Boris Johnson addressed the nation and enforced lockdown, (UK Government, 23 March 2020) (accessed online 26 August 2020) and on the same date, First Minister Nicola Sturgeon announced a lockdown in Scotland (Scottish Government, 23 March 2020) (accessed online 26 August 2020) .

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1.3.7.

mately affecting individuals attending work and workplaces. The restrictions differ between countries, along with local restrictions being enforced where larger numbers of COVID-19 are being identified. The Scottish Government has issued guidance for construction sites to operate59, supplemented by the Construction Re-Start Plan60. In Scotland, tax revenues were impacted by the initial effect of COVID-1961. This also affected Scotland’s notional onshore deficit, which rose by 0.6 % to 9.4 % of GDP62.  

 

Sustainability of Recovery 1.3.8. Scotland took some time to recover from the UK-wide recession that began in 2008. In addition, the effect of COVID-19 on the Scottish economy, and wider UK economy, will be drastic and felt for some years to come. Although there has been a boost in business confidence, overall business investment still remains weak. So far, the recovery has been primarily consumption-led. An increase in wage growth and household incomes will be needed to help sustain this recovery. The recovery will also depend upon trading conditions in other countries. The total value of international exports from Scotland in 2018 was £85.0 billion, with £18.7 billion coming from the manufacturing sector and £12.2 billion from the services sector. The top five export destinations in 2017 were the USA, France, Netherlands, Germany and Belgium. Europe acts as a key trading partner to Scotland. The challenges Europe face, Brexit and COVID-19 are likely to have an impact on the growth of the Scottish economy.

2. The Construction Industry 2.1. Size and Nature 2.1.1.

According to figures contained in the Scottish Construction Industry Strategy 2019–2022 the construction industry generates £21.5 billion (GDP) for the Scottish economy each year.63 The industry employs around 170,000 people

59 https://www.gov.scot/publications/coronavirus-covid-19-construction-sector-guidance/pages/ overview/. 60 https://www.cs-ic.org/library/construction-re-start-plan/. 61 Growth in Scotland’s Revenues, (Scottish Government, 26 August 2020) (accessed online 26 August 2020) . 62 Growth in Scotland’s Revenues, (Scottish Government, 26 August 2020) (accessed online 26 August 2020) . 63 See Section 1.3.

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(some 10 % of all Scottish jobs) in the construction sector itself and a further 60,000 self-employed workers.64 The Scottish real estate sector has had a £2.4bn valuation placed on its annual direct economic impact. The Fraser of Allander Institute found it directly supports 49,000 jobs and much of the construction industry. With additional spillover effects, that impact is calculated at £4.8 billion and 92,000 jobs in total.65  

2.1.2.

Building 2.1.3. The Scottish Government aims to build 50,000 affordable homes by 2021 and plans to invest £3 billion to help achieve this goal.66 2.1.4. In total, 21,805 new homes were built in Scotland for the year to end September 2019, an increase of 16 % compared to the same period in 201867. However, there is still a reduction in the number of homes being completed since the peak period of 2007, during which 25,741 homes were built.68 2.1.5. In recent years, the student accommodation market has been a growth area, with transactions topping £100 million in 2017.69 There has also been a lot of activity in the mixed use (hotel/office/retail) market; for example, the £850 million refurbishment of the St James’ Centre in Edinburgh city centre70 and construction of a £350 million new development comprising offices, hotels and leisure/retail facilities – also in Edinburgh city centre.71 A new hospital  

64 The Scottish Construction Industry Strategy 2019-2022, (Construction Scotland) (accessed online 4 September 2019) . 65 The Economic Contribution of the Commercial Property Sector, (Fraser of Allander Institute, March 2018) (accessed online 27 August 2019) . 66 The Affordable Housing Supply Programme was introduced by the Scottish Government in 2016. 67 Housing Statistics for Scotland Quarterly Update, (UK Office for National Statistics Publication for Scotland, 10 March 2020) (accessed online 26 August 2020) . 68 Homes for Scotland Response to the Smith Commission, 31 October 2014 (accessed online 27 August 2019) . 69 ‘Over £100m Transacted in Scotland’s Student Housing Building Sector in 2017’, (Scottish Construction Now, 14 March 2018) (accessed online 27 August 2019) . 70 ‘Edinburgh St James Quarter Finally Begins to Take Shape’, (The Scotsman, 31 December 2018) (accessed online 27   August 2019) . 71 ‘Construction starts on £350m Haymarket mixed-use development in Scottish capital’, (Scottish Business News, 6 March 2020) (accessed online 27   August 2019) .

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was completed in Glasgow in 2015 at a cost of £900 million,72 and £150 million was spent on a new hospital for sick children in Edinburgh.73 In 2017 it was announced that there would be £1 billion of construction projects taking place at Glasgow University, Edinburgh University, Glasgow Caledonian University, Strathclyde University, Queen Margaret University, Napier University and St Andrews University.74 Scotland has recently taken a new approach to the building of community spaces with the establishment of the hub-programme. It is based on a partnership between the public and private sectors to deliver new community facilities that are built by five hub companies spread across Scotland.75 Civil Engineering Projects 2.1.6. Recovery within the construction industry is being fuelled by government investment within large-scale infrastructure projects. Examples include the Queensferry Crossing, which was completed in August 2017 at a cost of over £1.3 billion;76 the Borders Railway project with a budget of £294 million;77 improvements to the M8, M73 and M74 motorways, with a project cost now estimated at £500 million;78 and the Aberdeen Western Peripheral Route/Balmedie to Tipperty project with a budget of £745 million.79 A roads contract worth £1.2 million was awarded to develop access to a new general hospital in the south of Scotland. The overall project had an estimated cost of £200 million.80 The Edinburgh Tram project, phase 1 of which is now complete, had

72 ‘South Glasgow University Hospital Campus is Handed Over’, (BBC News, 27 January 2015) (accessed online 27 August 2019) . 73 ‘Turf Cut on £150m Royal Hospital for Sick Children’, (Scottish Contruction Now, 27 March 2015) (accessed online 27 August 2019) . 74 ‘The £1bn Worth of Projects Set to Transform Scotland’s Unviersities Over the Next 10 Years’, (The Insider, 26 June 2017) (accessed online 27 August 2019) . 75 Management and Investments, Scottish Futures Trust (accessed online 27 August 2019) . 76 Forth Replacement Crossing, (Audit Scotland, August 2018) (accessed online 27 August 2019) . 77 Borders Railway: The Route and its Construction, (accessed online 27 August 2019) . 78 ‘Work to Start on £500m M8, M73 and M74 Motorway Upgrades’, (BBC News, 29 January 2014) (accessed online 27 August 2019) . 79 Aberdeen Western Peripheral Route / Balmedie to Tipperty, (Transport Scotland) (accessed online 27  August 2019) . 80 ‘Dumfries Hospital: Who Wants to Take on the £200m Scheme?’, (BBC News, 2 December 2013) (accessed online 27 August 2019) .

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a budget of £776 million and phase 2 of that project is currently under development.81 Renewable Energy 2.1.7. Onshore wind activity accounts for around 30 % of total Scottish low carbon and renewable turnover.82 A planning application has been submitted to build a 54-turbine project at the UK’s last aluminium smelter near Fort William, costing £170 million. The site will supply electricity for GFG Group’s Lochaber Smelter and power for Motherwell’s Dalzell steel mills.83 However, there was a local public inquiry in November 2020, due to the objection of Highland Council84. There are also plans for a £2 billion Neart na Gaoithe (‘NnG’) offshore wind farm to be built off the east coast of Scotland.85 2.1.8. Energy from waste is another growth area. Energy from residual waste (i.e. waste which cannot be reused, recycled or recovered) could ultimately contribute up to 31 % of Scotland’s renewable heat target and 4.3 % of Scotland’s renewable electricity target under the Climate Change (Scotland) Act 2009 (Scot)86.87 In 2019, construction of a £250 million Energy from Waste plant was completed in Glasgow.88 The centre is able to handle up to 200,000 tonnes of waste annually and is designed to prevent around 90 % of waste going to landfill. The electricity generated by the new plant is capable of powering 22,000 homes.89 A plant is  

 

 

 

 

81 ‘Edinburgh’s Trams Roll into Action’, (BBC News, 31 May 2014) (accessed online 27 August 2019) . 82 Pg.1, Onshore Wind Policy Statement, (Scottish Government, January 2017) (accessed online 1 September 2019) . 83 ‘Turbines Would Power Lochaber Smelter and Dalzell Plant’, (BBC News, 6 September 2017) (accessed online 1  September 2019) . 84 Inquiry date into major wind far in Badenock wilds is set, (Strathspey & Badenoch Herald, 21 May 2020) (accessed 26 August 2020) and Supoprting Scotland’s Growth, (Glenshero Wind Farm) (accessed 26 August 2020) . 85 ‘Neart na Gaoithe Offshore Wind Farm Improved Design Wins Scottish Government Consent’, (The Insider, 4 December 2018) (accessed online 1 September 2019) . 86 Climate Change (Scotland) Act 2009 . 87 Pg.9, Scotland’s Zero Wate Plan, (Scottish Government, 2010) (accessed online 1 September 2019) . 88 ‘Viridor cuts ribbon on Glasgow energy facility’, (Lets Recycle, 21 August 2019) (Accessed online 26 August 2020) . 89 Glasgow Recycling and Renewable Energy Centre Fully Operational (Glasgow City Council, 14 March 2019) (accessed online 26  August 2020) .

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also being built in Dundee at a cost of around £100 million and will process 110,000 tonnes per year and it will have a rated thermal input of 39.9MWth.90 This plant is due to be fully operational by the end of 2020 and, if planning permission is granted to allow an existing facility to remain in use, capacity at the site could almost double.91 Other plants are planned for various locations across Scotland. 2.1.9. Scotland was one of the first countries in the world to harness electricity from its waters. That legacy is still visible — Scotland’s ambitious hydro building programme in the 1950s and 1960s resulted in infrastructure which still produces electricity today. Scotland accounts for 88 % of hydro power in the UK.92 It also makes use of pumped hydro storage energy. Pumped storage schemes work by using electricity to pump water from a lower to a higher reservoir where it can be stored and then released when required to generate electricity as a conventional hydroelectric power station would. Scotland is currently home to two pumped hydro storage systems — Cruachan power station, which has a capacity of 440 MW, and Foyers, which has a capacity of 300 MW.93 2.1.10. The world’s first large-scale tidal energy farm was launched in the Pentland Firth, outside Inverness in the Scottish Highlands. The farm will have 269 turbines, bringing its capacity to 398MW, which is enough electricity to power 175,000 homes.94 2.1.11. 2019 was a record year for renewable electricity generation in Scotland with 30.5 TWh generated, 13.6 % up on 2018. Scotland made up over a quarter (25.3 %) of the UK’s renewable electricity generation in 2019. Scotland hit a new record high for quarterly renewable electricity generation in Q1 2020, with 11.6 TWh generated between January and March 2020. This is up 28 % on the same period in 2019 and is equivalent to about half of Scotland’s total electricity consumption. Compared to Q1 2019, onshore wind generation is up  

 

 

 

90 ‘Energy from Waste Facility Go Ahead’, (Dundee City Council, November 2017) (accessed online 4 September) . 91 Glasgow Recycling and Renewable Energy Centre Fully Operational’, (The Courier, 11 July 2020) (accessed online 26 August 2020) . 92 Scottish Energy Strategy: The Future of Energy in Scotland, January 2017 (accessed online 27 August 2019) . 93 Scottish Renewables Pumped Storage Position Paper, (Scottish Renewables, June 2014) (accessed online 26 August 2020) . 94 ‘World’s First Large-Scale Tidal Energy Farm Launches in Scotland’, (The Guardian, 12 September 2016) (accessed online 27 August 2019) .

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25 %, hydro generation is up 38 % and offshore wind generation increased by 54 %. The majority of Scotland’s renewable electricity generation continues to come from wind (22.3 TWh in 2019). Offshore wind grew substantially in 2019; 3.2 TWh was generated in 2019 via offshore wind, up from 1.4 TWh in 2018. This is due to the Beatrice wind farm off the Caithness coast becoming fully operational in May 2019.95  

 

 

Landfill Tax 2.1.12. Landfill taxation applies to the cost of the use of landfill sites in the UK, both economically and environmentally. It is seen as an additional cost to using landfill justified on the basis that the use of landfill is environmentally damaging and expensive to maintain. In the UK, landfill taxation is measured in pounds per tonne (‘£/t’). 2.1.13. Landfill taxation in the UK was introduced in 1996. Its introduction was in response to Council Directive 1999/31/EC of 26 April 1999 on the Landfill of Waste (‘Landfill Directive’).96 The Landfill Directive’s aim is stated as being ‘to prevent or reduce as far as possible the negative effects on the environment, in particular the pollution of surface water, groundwater, soil and air, and on the global environment, including the greenhouse effect, as well as any resulting risk to human health, from the landfilling of waste, during the whole lifecycle of the landfill’.97 The introduction of a landfill tax was seen as a way in which the UK Government could achieve the aims of the Landfill Directive. The statutory standard rate of Scottish Landfill Tax as set out in the 2020– 2021 Scottish Budget stands at £94.15/t.98 2.1.14. The Waste (Scotland) Regulations 2012 (Scot) SI 2012/14899 made several provisions related to waste. The provisions expand all waste producers’ (excluding householders) duties of care to include a requirement to segregate material for recycling.100 Waste producers are also required to store waste safely, only transfer waste to an authorised person with a transfer note, which must include a full description of the waste, and which must be retained for two years.101

95 https://scotland.shinyapps.io/Energy/?Section=RenLowCarbon&Subsection=RenElec&Chart= RenElecGen. 96 Council Directive 1999/31/EC of 26 April 1999 on the landfill of waste [1999] OJ L 182/1 . 97 Council Directive 1999/31/EC of 26 April 1999 on the landfill of waste [1999] OJ L 182/1 . Art 1. 98 Scottish Budget 2020-2021, (Scottish Government, Feburary 2020) (accessed online 26 August 2020) . 99 . 100 Waste (Scotland) Regulations 2012, Reg.2(3). 101 Duty of Care – A Code of Practice, (Natural Scotland, Scottish Government, 2012) (accessed online 5 September 2019) .

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Oil and Gas 2.1.15. Oil and gas remain important factors in the Scottish economy. In 2018, oil and gas production in Scotland (including Scottish adjacent waters) is estimated to have been 77.2 million tonnes of oil equivalent (‘mtoe’). Production in Scotland increased by 4.6 % compared to 2017 and accounted for 82 % of the UK total. The approximate sales value increased by 30.1 % compared to 2017, due to the increase in production over the year and a significant increase in prices throughout 2018.102 In 2018, oil and gas fields in Scotland accounted for 95 % of UK crude oil and natural gas liquids (‘NGL’) production, and 62 % of UK natural gas production.103  

 

 

 

 

2.2. Participants 2.2.1. 2.2.2.

2.2.3.

2.2.4.

The parties involved in a construction project can vary considerably depending on the nature and complexity of the project. The term ‘employer’ is generally used in Scotland to describe the party for whose benefit the work is being carried out. Other terms such as ‘the client’, ‘the owner’, ‘the authority’ or ‘the developer’ are sometimes used. An employer can either be a public or private sector body or in some instances a mixture of the two. A contractor is generally appointed by the employer to carry out the works once the nature and extent of the project has been determined. Most contractors are appointed, depending on the size and complexity of the project, through a tendering process, and formal public procurement rules apply where the employer is a public body. The contractor can then subcontract the work to subcontractors. The architect usually has overall responsibility for a building project from its conception to its conclusion and acts as agent for its client, who will usually be the employer. The scope of its authority depends upon the terms of appointment with the employer. In design and build contracts, the architect will

102 Scottish Government Oil and Gas Production Statistics 2018, (UK Office for National Statistics Publication for Scotland, 11 September 2019) (accessed online 26 August 2020) . 103 Paper 4/1 – Oil and Gas sector background information, (Just Transition Commission Scotland, 2019) (accessed online 26 August 2020) .  

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initially be in contract with the employer but will then be transferred across to the contractor by novation. In some contracts, the role of the architect during the work is undertaken by a contract administrator (‘CA’). In others, this role is undertaken by the project manager, who can have wide-ranging functions related to the administration of the contract. 2.2.5. Various engineers can be involved in a project, depending on its nature and complexity, ranging from a civil and structural engineer to a mechanical and electrical engineer. In contracts for the construction of infrastructure such as roads, tunnels, railways or bridges, a civil engineer normally undertakes design responsibility. 2.2.6. The quantity surveyor will generally be employed by the employer directly or through a project manager. The role of a quantity surveyor tends to be of a financial nature and can include, for example, acting as a cost consultant in preparing cost estimates, preparing bills of quantities, valuing work done for the purposes of both interim and final certificates, ascertaining direct loss and expense under the provisions of the building contract, and preparing a final account. 2.2.7. A clerk of works can also be employed by the employer or architect to act as a construction inspector, to oversee the execution of works and monitor compliance with the required contract standards. They used to be commonly used but fell out of favour. However, recent high-profile issues with defects in public buildings may see them return. 2.2.8. A principal designer is appointed in certain ‘notifiable’ projects and basically acts as a health and safety officer. The principal designer is responsible for advising and assisting the client with their duties; co-ordinating health and safety aspects of design work and co-operation with others involved with the project; facilitating good communication between the client, designers and contractors; and preparing the health and safety file. An explanation of projects that are ‘notifiable’ is outlined at Section 2.4. 2.2.9. Project Team Members Information/BIM Model Manager and a ‘built asset security manager’ may be appointed if building information modelling (‘BIM’) is used and the UK Construction Industry Council Protocol (the ‘CIC Protocol‘) is adhered to.104 2.2.10. Other specialists or experts may also be involved in the project, again depending on its nature, size and complexity. These may include an interior designer, space planner, legal adviser, ecologist, landscape designer, sustainability adviser, or fire engineer.

104 Building Information Modelling Protocol, Standard Protocol for Use in Projects Using Building Information Models, (Construction Industry Council, 2nd Edition, 2018) (accessed online 28 August 2019) .

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2.3. PFI/PPP 2.3.1.

2.3.2.

2.3.3.

2.3.4.

Public private partnership (‘PPP’) is the general term used for a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. A subset of a PPP is the ‘private finance initiative’ (‘PFI’), which uses private sector capacity and public resources to deliver public sector infrastructure and services according to a specification defined by the public sector. This form of financing became increasingly common in Scotland and the United Kingdom in the 1990s, but fell out of favour politically in the early 2000s, following the formation of a minority administration by the Scottish National Party in 2008. A distinct type of PPP project that has recently superseded the traditional PFI model is the ‘non-profit distributing’ (‘NPD’) model. It is this default model through which infrastructure projects in Scotland are now delivered. The structure of an NPD project is similar to a PPP project, save that the returns which the private sector (including the lenders) can expect to make are typically capped and any surpluses are reinvested in the public sector. The independent Scottish Futures Trust (SFT) was established by the Scottish Government to work with the public sector to deliver investment in infrastructure and has released standard form documentation for use on NPD projects in Scotland.105 The SFT has also established the hub-initiative in Scotland as an alternative procurement vehicle, where the public sector bodies in each of the distinct ‘hub’ territories across Scotland form a local joint venture company with a private sector partner (‘HubCo’) to support and deliver new community infrastructure projects through design and build or design, build, finance and maintain contracts. SFT was asked to examine new profit-sharing finance structures, such as the Welsh Government’s Mutual Investment Model (MIM), with a view to adding to the range of infrastructure investment approaches to help secure the investment required for the National Infrastructure Mission. In May 2019, SFT published its Options Appraisal106 recommending a Scottish version of MIM as the best value-for-money option. The MIM investment model includes the public sector as a co-investor and co-owner of up to 20 % of each project delivery company.  

105 Standard Form Project Agreement (NPD Model), (Scottish Futures Trust, Version 2, June 2012) (accessed online 28 August 2019) . 106 https://www.scottishfuturestrust.org.uk/storage/uploads/sftoptionsappraisalreportlowres.pdf.

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2.4. Work, Health and Safety 2.4.1.

2.4.2.

2.4.3.

2.4.4.

Health and safety at work law is generally the same across the whole of the UK, which has one of the lowest accident in the workplace rates in the world.107 In part this is because of the Health and Safety at Work etc. Act 1974 (UK) (‘HSWA 1974’),108 various other statutory materials and the common law, which make up a stringent regulatory regime. The HSWA 1974 imposes duties on employers (in the general sense, as opposed to the construction sense), employees, persons in control of premises, and designers and manufacturers of articles and substances. Section 2 sets out duties incumbent upon employers in respect of their own employees. Section 3 lists duties incumbent on employers and the self-employed to persons other than their employees. The primary duties that apply under ss 2–3 are to ensure, so far as reasonably practicable, the health, safety and welfare at work of employees, and to ensure that people not in their employment who may be affected by their work are not exposed to risks to their health or safety. There are additional specific duties which include, but are not limited to, the following: (a) to ensure the provision and maintenance of plants and systems of work that are, so far as is reasonably practicable, safe and without risks to health; (b) to provide safe systems for the use, storage and transport of articles and substances, so far as is reasonably practicable; (c) to provide such information, instruction, training and supervision as is necessary to ensure the health and safety at work of employees, so far as is reasonably practicable; (d) to maintain a safe place of work and provide safe access to and egress from it; and (e) to provide a working environment that is, so far as is reasonably practicable, safe and without risks to health, and adequate as regards facilities and arrangements for employees’ welfare at work. Section 4 imposes a duty on persons in control of, or concerned with, premises to ensure, so far as is reasonably practicable, the safety of persons on those premises.

107 Workplace Fatal Injuries in Great Britain 2020, Health and Safety Executive, (UK Office for National Statistics, 1 July 2020) (accessed online 26  August 2020) . 108 Health and Safety at Work etc. Act 1974 (accessed online 28 August 2019) .

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Section 7 imposes a duty on employees to take reasonable care for their own health and safety at work, as well as for other persons who might be affected by their acts or omissions. 2.4.6. Sections 19–21 deal with the enforcement of health and safety legislation. This is dealt with by inspectors appointed by enforcing authorities, including local government authorities and the Health and Safety Executive, which is the public watchdog for work-related health, safety and illness. 2.4.7. Section 33 lists criminal offences. Schedule 3A lists penalties, including fines and imprisonment. Section 37 allows for individuals within organisations, as well as the organisation itself, to be prosecuted. 2.4.8. The ‘six pack regulations’ are an additional six regulations that implement various European Directives on health and safety, and also clarify how employers must comply with their duties under the HSWA 1974. The ‘six pack regulations’ are: (a) The Management of Health and Safety at Work Regulations 1999 (UK) SI 1999/3242,109 which outlines what employers are required to do to manage health and safety under the HSWA 1974; (b) The Health and Safety (Display Screen Equipment) Regulations 1992 (UK) SI 1992/2792,110 which deals specifically with workers who operate computer screens, visual display units or CCTV monitors; (c) The Manual Handling Operations Regulations 1992 (UK) SI 1992/2793,111 which deals with lifting and moving equipment; (d) The Personal Protective Equipment at Work Regulations 1992 (UK) SI 1992/2966,112 which deals with the provision of protective equipment such as helmets and safety footwear; (e) The Provision and Use of Work Equipment Regulations 1998 (UK) SI 1998/ 2306,113 which deals with the use of equipment such as the provision of adequate training and lighting; and (f) The Workplace (Health, Safety and Welfare) Regulations 1992 (UK) SI 1992/3004,114 which covers basic welfare issues within the workplace, along with building fabric issues. 2.4.9. The HSWA 1974 and the ‘six pack regulations’ apply to all places of work. 2.4.10. The Construction (Design and Management) Regulations 2015 (UK) SI 2015/51 (‘CDMR 2015’)115 are tailored specifically to the construction industry and im-

109 110 111 112 113 114 115

. . . . . . .

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plement minimum health and safety requirements at temporary or mobile construction sites. These regulations give effect to the requirements of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and Repealing Directive 2004/18/EC.116 CDMR 2015 applies to projects with a construction phase that is likely to involve more than 30 days; or 500 ‘person days’ of construction work (e.g. 50 people working 10 days each).117 It places obligations on the employer, designers and contractors and introduces the new roles of ‘principal designer’ and ‘principal contractor’.118 The duties of the principal designer include planning, managing and coordinating health and safety in the preconstruction phase of the project, including identifying, eliminating or controlling foreseeable risks and ensuring designers carry out their duties; facilitating good communication between the client, designers and contractors; preparing the health and safety file; and liaising with the principal contractor to help in the planning, management, monitoring and coordination of the construction phase.119 The principal contractor is responsible for properly planning, managing and coordinating work during the construction phase so that the risks are properly controlled.120 Designers are required, in their design, to avoid foreseeable risk to the health and safety of persons carrying out construction work, cleaning structures, doing maintenance work and using a structure designed as a workplace.121 CDMR 2015 requires there to be a construction phase plan detailing how the construction phase will be managed and identifying health and safety risks arising.122 CDMR 2015 also requires a health and safety file to be handed over to the client at the end of the project containing relevant information in relation to the structure that will assist in relation to any future project.123  

2.4.12.

2.4.13.

2.4.14.

2.4.15.

2.4.16.

116 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC [2014] OJ L 94/65 . 117 CDMR 2015, Reg.6(1). 118 CDMR 2015, Reg.5. 119 CDMR 2015, Reg.11. 120 CDMR 2015, Reg.13–14. 121 CDMR 2015, Reg.9. 122 CDMR 2015, Reg.12(1)–(4). 123 CDMR 2015, Reg.12(5)–(10).

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2.4.17. Most health and safety law within Scotland and the UK is statute based, but the common law also applies in Scotland and places a duty on an employer to take reasonable care that employees are not exposed to unnecessary risk.124 2.4.18. The common law also places an obligation on employers (in the construction sense) to provide competent staff, adequate material, a proper system of work, effective supervision and a safe place of work.125 2.4.19. The above requirements are all as a result of EU law. There is not expected to be any relaxation of health and safety laws as a result of Brexit.

2.5. Protection of the Environment Climate Change 2.5.1. The Climate Change (Scotland) Act 2009 (Scot) (‘CCSA’)126 creates a statutory framework for the reduction of greenhouse gas emissions in Scotland and sets down ambitious emission reduction targets of 42 % by 2020,127 and 80 % by 2050.128 In pursuit of these targets, the CCSA also provides for the creation of annual emission reduction targets,129 and annual reports on whether these targets are met.130 The latest Scottish Greenhouse Gas Emissions Annual Target Report 2017 was published on 30 October 2019 and shows that emission reductions for 2017 missed the annual target set that year, however the fact that 80 % of Scotland’s net emission reduction was attributable to a reduction in the net emission of greenhouse gases meant that the ‘domestic effort target’ was met.131 2.5.2. The CCSA also imposes a duty on Scottish Ministers to lay before the Scottish Parliament a Report on Proposals and Policies setting out specific measures for reducing greenhouse gas emissions with a view to meeting the statutory targets.132 In fulfilment of this duty, Low Carbon Scotland: Meeting the Emis 

 

 

124 MacRoberts on Scottish Construction Contracts, (Wiley Blackwell, 3rd Edition, 2015), pg. 437; Longworth v Coppas International (UK) Ltd 1985 SC 42. 125 MacRoberts on Scottish Construction Contracts, (Wiley Blackwell, 3rd Edition, 2015), pg. 437; Wilsons and Clyde Coal Co. Ltd v English [1938] AC 57. 126 . 127 S. 2(1) CCSA. 128 S. 1(1) CCSA. 129 S. 3–7 CCSA. 130 S. 33(2) CCSA. 131 Pg. 6, The Scottish Greenhouse Gas Emissions Annual Target Report for 2017, (Scottish Government, October 2019) (accessed online 26 August 2020) . 132 S. 34 CCSA.

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sions Reduction Targets 2013–2027 was published in 2013.133 The report sets out specific areas for improvement, including energy supply;134 homes and communities;135 business and the public sector;136 transport;137 rural land use;138 and waste.139 Around 50 % of Scotland’s carbon emissions derive from buildings.140 As such, the construction industry has a significant role to play in working to achieve government targets in Scotland. Scotland’s Energy Efficiency Programme (‘SEEP’) focuses on reducing energy demand in all buildings across Scotland,141 establishing solutions for switching heating supplies from high to lower carbon or renewable sources for properties off the mains gas grid.It will also encourage appropriately sited, low-carbon district heating, where that is the most appropriate ‘low regrets’ heat decarbonisation technology.142 In addition to SEEP, action over the past decade has delivered staged improvements to energy standards within building regulations. This has resulted in emissions from new buildings built to current standards being, on  

133 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) . 134 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) ., pg. 92. 135 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) ., pg. 116. 136 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) ., pg. 141. 137 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) ., pg. 171. 138 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) ., pg. 208. 139 Scottish Government, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2013-2027 (2nd Report on Proposals and Policies, June 2013) ., pg. 196. 140 Pg. 3, Making Things Last: A Circular Economy Strategy for Scotland, (Natural Scotland, Scottish Government, 2016) . 141 Climate Change Plan: The Third Report on Proposals and Policies 2018-2032, (Scottish Government, February 2018) . 142 Climate Change Plan: The Third Report on Proposals and Policies 2018-2032, (Scottish Government, February 2018) ., pg. 88.

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aggregate, around 75 % lower than those built to standards in force in 1990, with corresponding reductions in energy demand.143 BREEAM is a sustainability assessment method for planning projects, infrastructure and buildings. It involves third-party certification of the assessment of a building’s environmental, social and economic sustainability performance, using standards developed by the Building Research Establishment (‘BRE’). The new construction assessment criteria and process focuses on the design of the building from concept stage right through to a fully constructed building. It requires evidence to support the design and construction decisions, agreed during the development of the project, and ensures they have been fully implemented.144 The New Construction standards are currently in use in over 69 countries.  

2.5.4.

Domestic 2.5.5. The Building (Scotland) Amendment Regulations 2010 (Scot) SI 2010/32145 introduced amended and improved energy standards for new homes, delivering a 30 % reduction in carbon dioxide emissions from new homes when compared with 2007.146 These amendments include improvements to the required minimum energy performance of building fabric, the introduction of random air-tightness testing and the requirement for an increased percentage of lower energy lighting. These amended standards also apply when new work is carried out to existing buildings.147 2.5.6. The Building (Scotland) Amendment Regulations 2011 (Scot) SI 2011/120148 amend schedule 5 of the principal Regulations to add a new building standard requiring that certain buildings must be designed and constructed to  

143 Pg. 85, Climate Change Plan: The Third Report on Proposals and Policies 2018-2032, (Scottish Government, February 2018) . 144 BREEAM UK New Construction, Technical Manual (BREEAM UK, 2018) . 145 The Building (Scotland) Amendment Regulations 2010 SI 2010/32 which amends the Building (Scotland) Regulations 2004 . 146 Pg. 1, Final Business and Regulatory Impact Assessment, Reducing Carbon Dioxide Emissions and Energy Demand – Review of the Building (Scotland) Regulations 2004, (Building Standards Division, Augsut 2014) (accessed online 30 August 2019) . 147 Para. 4.10–4.17, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2010–2022, (Scottish Government, 2011) (accessed online 5 September 2019) . 148 The Building (Scotland) Amendment Regulations 2011 SI 2011/120 which amends the Building (Scotland) Regulations 2004 .

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one of a number of specified levels of sustainability and must have a statement of sustainability attached to them.149 The Scottish Government has also introduced the Energy Efficiency Standard for Social Housing (the ‘EESSH‘). The EESSH sets a minimum energy efficiency rating which all landlords of applicable social housing must achieve by 31 December 2020.150

Non-Domestic 2.5.8. The Building (Scotland) Amendment Regulations 2010 (Scot) SI 2010/32151 also introduced amended and improved energy standards for new non-domestic buildings, delivering a 30 % reduction in carbon dioxide emissions from such buildings when compared with 2007.152 This has been achieved by setting an overall level for maximum carbon dioxide emissions which must be achieved in non-domestic buildings.153 Other measures introduced by the Building (Scotland) Amendment Regulations 2010 (Scot) SI 2010/32154 include improved cooling system efficiencies and increased provision for energy metering.155 The Building (Scotland) Amendment Regulations 2011 (Scot) SI 2010/32156 referred to above apply equally to non-domestic properties. 2.5.9. Under Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the Energy Performance of Buildings,157 all large public buildings within member states are required to be assessed on energy performance and their rating must be publicly displayed. Following assessment, advice is provided on how energy performance might be improved.158 As part of the  

149 The Building (Scotland) Amendment Regulations 2011 SI 2011/120, Reg.2(4). 150 The Energy Efficiency Standard for Social Housing, Scottish Government Guidance for Social Landlords (Scottish Government, February 2019) (accessed online 30 August 2019) . 151 See Section 2.5.5 above. 152 Pg.1, Final Business and Regulatory Impact Assessment, Reducing Carbon Dioxide Emissions and Energy Demand – Review of the Building (Scotland) Regulations 2004, (Building Standards Division, Augsut 2014) (accessed online 30 August 2019) . 153 The Building (Scotland) Amendment Regulations 2010 SI 2010/32, Reg.2(4). 154 . 155 Para. 5.18-5.19, Low Carbon Scotland: Meeting the Emissions Reduction Targets 2010-2022, (Scottish Government, 2011) (accessed online 5 September 2019) . 156 See Section 2.5.6. 157 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings [2010] OJ L 153/13 . 158 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings [2010] OJ L 153/13