Construction & Engineering Law 2018

The International Comparative Legal Guide to:

A practical cross-border insight into construction and engineering law

Published by Global Legal Group, with contributions from:

5th Edition

Construction & Engineering Law 2018

ICLGAbuka & Partners, Legal PractitionersAdvokatfirmaet Thommessen ASAleksey Pukha and PartnersAllen & GledhillAshurstClyde & CoCOMAD, S.C.DeaconsECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT AbogadosFALM – Sociedade de Advogados, RLGreenberg Traurig Grzesiak sp.k.Hamdan AlShamsi Lawyers & Legal ConsultantsHerbert Smith Freehills LLPKachwaha and PartnersKanagawa International Law OfficeKapellmann und Partner Rechtsanwälte mbB

Makarim & Taira S.Mäkitalo Rantanen & Co Ltd, Attorneys-at-LawMathesonMattos Filho, Veiga Filho, Marrey Jr e Quiroga AdvogadosMiller Thomson LLPMoravčević Vojnović i Partneri in cooperation with SchoenherrNorton Rose Fulbright South Africa Inc.Oles, Morrison, Rinker & Baker LLPOseko & Ouma Advocates, LLPSBH Law OfficeSimmons & Simmons LLPTrofin & Asociaţii SCAWintertons Legal PractitionersWong & Partners

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General Chapters:

The International Comparative Legal Guide to: Construction & Engineering Law 2018

Contributing EditorTim Reid, Ashurst

Sales DirectorFlorjan Osmani

Account DirectorOliver Smith

Sales Support ManagerToni Hayward

EditorSam Friend

Senior EditorsSuzie LevyCaroline Collingwood

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PublisherRory Smith

Published byGlobal Legal Group Ltd.59 Tanner StreetLondon SE1 3PL, UKTel: +44 20 7367 0720Fax: +44 20 7407 5255Email: [email protected]: www.glgroup.co.uk

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ISBN 978-1-912509-19-5ISSN 2054-7560

Strategic Partners

Country Question and Answer Chapters: 4 Australia Clyde & Co: Kon Nakousis & Teodor Lomaca 12

5 Belarus SBH Law Office: Ivan Martynov & Vitaly Tvardovskiy 22

6 Brazil Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados: Thiago Moreira & Eduardo Damião Gonçalves 30

7 Canada Miller Thomson LLP: William J. Kenny & Leanna Olson 39

8 England Ashurst: Tim Reid & Michael J. Smith 48

9 Finland Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law: Aimo Halonen & Juho Lönnblad 60

10 Germany Kapellmann und Partner Rechtsanwälte mbB: Dr. Christian Bönker & Prof. Dr. Martin Jung 65

11 Hong Kong Deacons: Kwok Kit Cheung 72

12 India Kachwaha and Partners: Sumeet Kachwaha & Dharmendra Rautray 78

13 Indonesia Makarim & Taira S.: Heru Mardijarto & Alexandra Gerungan 85

14 Ireland Matheson: Rhona Henry 93

15 Japan Kanagawa International Law Office: Hiroyuki Sakazaki & Hajime Kanagawa 103

16 Kenya Oseko & Ouma Advocates, LLP: Christine A. O. Oseko & Anaciata Mbula 111

17 Malaysia Wong & Partners: Janice Tay & Siaw Wan Lim 118

18 Mexico COMAD, S.C.: Roberto Hernández García 126

19 Nigeria Abuka & Partners, Legal Practitioners: Patrick Abuka 132

20 Norway Advokatfirmaet Thommessen AS: Jacob F. Bull & Henrik Møinichen 138

21 Poland Greenberg Traurig Grzesiak sp.k.: Agnieszka Stankiewicz & Barbara Pancer 146

22 Portugal FALM – Sociedade de Advogados, RL: António André Martins & Joana Maltez 152

23 Romania Trofin & Asociaţii SCA: Valentin Trofin & Oana Cuciureanu 157

24 Serbia Moravčević Vojnović i Partneri in cooperation with Schoenherr: Slaven Moravčević & Ivana Panić 167

25 Singapore Allen & Gledhill: Ho Chien Mien 175

26 South Africa Norton Rose Fulbright South Africa Inc.: Daniel McConnell & Emmanuel Tivana 182

27 Ukraine Aleksey Pukha and Partners: Aleksey Pukha & Anna Gadiatska 188

28 United Arab Emirates Hamdan AlShamsi Lawyers & Legal Consultants: Hamdan Al Shamsi & Omar Kamel 197

29 USA Oles, Morrison, Rinker & Baker LLP: Douglas Stuart Oles & Alix K. Town 203

30 Uruguay ECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT Abogados: José Luis Echevarría Petit 213

31 Zimbabwe Wintertons Legal Practitioners: Nikita Madya & Farai Chigavazira 219

1 More Thoughts on Contractual Interpretation – Tim Reid, Ashurst 1

2 Saudi PPP: Lessons Learned from the International Market – Richard Dyton & Simon Moore, Simmons & Simmons LLP 3

3 Interim Methods of Dispute Resolution – David Nitek & Nicholas Downing, Herbert Smith Freehills LLP 7

ICLG TO: CONSTRUCTION & ENGINEERING LAW 2018 1WWW.ICLG.COM© Published and reproduced with kind permission by Global Legal Group Ltd, London

Chapter 1

Ashurst Tim Reid

More Thoughts on Contractual Interpretation

■ Paragraph3.2.2.2oftheTRsrequiredthat“the design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement”.

■ Paragraph 3b.5.1 of the TRs provided that “the design of the structures … shall ensure a lifetime of 20 years in every aspect without planned replacement”.

Thecourthadtodecidewhetherclause8.1,readinconjunctionwiththeTRs,imposedastrictobligationonMTHtoachieveaservicelife of 20 years or whether the obligation was simply to designthefoundationsinaccordancewithJ101onthebasisofa20-yeardesignlife.

The Technology and Construction Court (First Instance) Decision

Edwards-StuartJintheTechnologyandConstructionCourtheldthatparagraph3.2.2.2oftheTRsrequiredMTHtoprovidefoundationswith a service life of 20 years. This was not inconsistent withMTH’s less onerous obligation to complywith J101, butwas, infact,inadditiontoit.Asthefoundationshadfailedandthereforedidnothaveaservicelifeof20years,MTHwereinbreachofclause8.1,eventhoughtheyhadcompliedwithJ101andthedesignwasnotnegligent.

The Court of Appeal Decision

In the leading judgment, Jackson LJ observed that while therehad been no negligence or want of professional skill on eitherside, someone nevertheless had to pick up the bill for repairingthedefective foundations. The court’s jobwas tomake senseofcontractualdocumentsof“multipleauthorship,whichcontainmuchloosewording”inordertoestablishwhoshouldbearthecosts.WhereasEdwards-StuartJhadapproachedtheconstructionofthecontractbystrictreferencetothedocumentsbeforehim,theCourtofAppealtookawiderapproachencompassingindustrybackgroundandcommercialconsiderations.IndoingsotheyrejectedEdwards-StuartJ’sinterpretationandheldthatthecontractdidnotincludeawarrantyfor20yearsofservicelife.JacksonLJdrewadistinctionbetween “design life” and “service life” and concluded that astructurewithadesignlifeof20yearswillnotinevitablyfunctionfor 20 years, even though it probably will. Compliance withJ101,evenitwereerror-free,wouldnotguaranteethefoundationswould last for20yearsand thepartieswouldnothave instructedcompliancewithJ101iftheirintentionwasthatthecontractshouldimposea“servicelife”obligation.Indeed,observedJacksonLJ,ifE.ONhadintendedsuchaguarantee,MTHwouldhavehadtomake

Introduction

Inpreviouseditionsofthisguide,wehavelookedattheSupremeCourt decisions in theMakdessi [2015] case on penalty clausesandWood v Capita[2017]whichconcernedindemnityprovisions.While neither case involved the construction industry, bothwererelevant because they concerned the interpretation of contractclauses.Constructioncontractsareoftencomplexandunwieldywithmanyconstituentpartsincludingtechnicaldocumentationaswellaslegalprovision.Asaresult,theriskofinconsistentorcontradictorydraftingcanbehigh.UKconstructionlawyerswerethereforeveryinterested in the outcome of a recent case,MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another[2017]UKSC59,inwhichtheSupremeCourtwasaskedto interpret the complex, and potentially conflicting, contractualarrangementsinplacefortheprocurementofthefoundationsoftwoadjacentoffshorewindfarmsintheSolwayFirth,UK.InHøjgaard, the foundation structures of the wind farms failedshortlyaftercompletionoftheprojectandthequestionbeforethecourtswaswhetherthecontractorwasliableforthisfailure.InthewordsoftheCourtofAppealjudge,JacksonLJ,thedecisionrestedon“howthecourtshouldconstruethesomewhatdiffusedocumentswhichconstituted,orwereincorporatedinto,the‘designandbuild’contractinthiscase”.

Background

In2006,E.ONClimateandRenewablesUKRobinRiggEastLtd(“E.ON”)engagedMTHøjgaardA/S(“MTH”)todesign,fabricateand install the foundations for60wind turbinegenerators for theRobinRiggoffshorewindfarmsintheSolwayFirth.The Technical Requirements (“TRs”) which formed part of theEmployer’sRequirementsincludedanobligationonMTHtodesignthe foundations in accordance with an international specification(“J101”).Shortlyafterinstallation,itwasdiscoveredthattherewasmovementinthegroundconnections,requiringsubstantialremedialworks.ThedefectswerecausedbyanerrorinJ101,unknownatthetimethecontractwasenteredinto.Aswellas theobligation todesign thefoundations inaccordancewith J101, the contract contained a number of other relevantobligations:■ Clause8.1(x)requiredMTHtocompletetheworks“so that

each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice”.

WWW.ICLG.COM2 ICLG TO: CONSTRUCTION & ENGINEERING LAW 2018© Published and reproduced with kind permission by Global Legal Group Ltd, London

Ashurst is a leading international law firm advising corporates, financial institutions and governments. With 25 offices in 15 countries, Ashurst offers a worldwide reach and the international insight of a global network, combined with local market knowledge. Our non-contentious construction group advises all parties involved in UK and international real estate transactions and clients, project sponsors and lenders involved in UK and international energy, infrastructure and transport projects. Our core disputes practice areas include general commercial disputes, construction and engineering disputes, energy, resources and infrastructure disputes, financial and regulatory disputes, real estate disputes and international arbitration.

Tim Reid is a partner in London and specialises in the resolution of disputes in the energy and construction and civil engineering sectors both in the UK and internationally. His current and recent cases cover a broad spectrum and include disputes arising from multi-million pound PFI projects in the UK and exploration for oil and gas reserves off the coast of Africa.

Tim has experience of all forms of dispute resolution. In addition to the successful conduct of High Court proceedings, Tim also has considerable experience of the successful conduct of adjudications, arbitrations (national and international) and a large number of mediations. As well as being a solicitor in England and Wales, Tim is admitted as a solicitor in Hong Kong.

Tim is recommended as a Leading Individual in The Legal 500 and ranked in the Chambers UK Guide for Construction.

Tim ReidAshurstBroadwalk House5 Appold StreetLondon EC2A 2HAUnited Kingdom

Tel: +44 207 859 1548Fax: +44 208 638 1112Email: [email protected]: www.ashurst.com

3.2.2.2, he viewed it as being “clear in its terms” and neitherimprobablenorunbusinesslike.InrespondingtoMTH’scontentionthatitwassignificantthattheobligationwas“tuckedaway”intheTRs rather than spelled out in the contract (a point that attractedsubstantial attention from lawyers commenting on the Court ofAppealdecision),Neuberger stated thathewas“unimpressed”asitwasclearfromthetermsofthecontractthattheprovisionsoftheTRswereintendedtobeofcontractualeffect.

Comment

The Supreme Court emphasised that this case was decided byreferencetoordinaryprinciplesofcontractualinterpretation.WhiletheresultmaybeconstruedasharshfromMTH’sperspective,thelanguagethepartiesusedwas,intheopinionoftheSupremeCourt,clearandhadtobegivenprimacy.Thiscaseisthelatestinastringofcases,includingWood v Capita,inwhich the SupremeCourt has given primacy to thewords thepartieshaveusedandnot to theirapparent intentions. While thisisamorestraightforwardapproach,itunderlinestheimportanceofcarefulandprecisedraftingnotonlyinrelationtoeachindividualclause,buttothecontractasawhole.

allowance for that in its tender and“theneed for suchallowanceshouldhavebeenclearlyflaggedupinthecontractdocuments”.TheCourtofAppealalsoheld that thecontractdidnotcontainafree-standingwarrantyastoquality.Althoughclause8.1(x)referredtotheworksbeing“fitforpurpose”,thiswasqualifiedbyreferencetothe“SpecificationusingGoodIndustryPractice”,whichrequiredMTHtoexerciseastandardofreasonableskillandcareonly.Therelevant extract of paragraph 3.2.2.2 and paragraph 3b.5.1 were,intheopinionofthecourt,inconsistentwiththeothercontractualprovisionsand“tooslenderathreaduponwhichtohangafindingthatMTHgaveawarrantyof20yearslifeforthefoundations”.The Court of Appeal acknowledged that a sufficiently clearlywordedwarranty could give rise to a service life obligation, buttherewasnosuchwarrantyinclause8.1.

The Supreme Court Decision

HavingfirstrefusedE.ONpermissiontoappeal,theSupremeCourtthen, forwhat is thought to be the first time in its history, did aU-turn.Itdidnotcommentonthereasonsforthechangeofheart.Ingivingjudgment,LordNeuberger(withwhomtheotherjudgesunanimously agreed), held that there were only two argumentsopentoMTHastowhyparagraph3.2.2.2shouldnotbegivenitsnatural effect. Thefirst argumentwas that suchan interpretationwouldresult inanobligationwhichwasinconsistentwithMTH’sobligation to comply with J101. The second argument was thatparagraph3.2.2.2was simply “too slender a thread”onwhich tohangsuchanimportantandpotentiallyonerousobligation.SettingasidethedecisionoftheCourtofAppeal,LordNeubergerheldinrelationtothefirstargumentthatratherthanconcludingthatthetwoprovisionswereinconsistent,thecorrectanalysis(byvirtueoftheopeningpartofsection3oftheTRswhichprovidedthattherequirements in section 3 were a minimum) was that “the morerigorousordemandingof thetwostandardsorrequirementsmustprevail,asthelessrigorouscanproperlybetreatedasaminimumrequirement”. The opening part of section 3 also requiredMTHto“identifyanyareaswheretheworksneedtobedesignedtoanyadditionalormorerigorousrequirementsorparameters”.Therefore,inLordNeuberger’s opinion, even if therewas an inconsistency,MTHwouldstillbeliableforfailingtocomplywiththerequiredcriteria,asithadadutytoidentifytheneedtoimproveonthedesign.Inrelationtothesecondargument,thatparagraph3.2.2.2wastooweakabasisonwhichtorestsuchanimportantobligation,MTHmadeanumberofcontentionstowhichLordNeubergerrespondedinthejudgment.Inrelationtotheparticularwordingofparagraph

Ashurst More Thoughts on Contractual Interpretation


Chapter 2

Simmons & Simmons LLP

Richard Dyton

Simon Moore

Saudi PPP: Lessons Learned from the International Market

toconsiderthelifecyclecostsandthelong-termperformanceoftheprojectthananumberofpartieswould,eachwithaninterestinonlyapartoftheproject.PPPshaveofcoursebeencriticisedforconcealingpublicborrowingand providing long-term guaranteed profits to companies in theprivate sector. Other more specific concerns include that theinitialcostsofanalysingthesuitabilityofaprojectforaPPPandnegotiatingthedocumentswillbehigh.Privatesectorfundingcostsmaywellbehigher,asgovernmentborrowingisperceivedtobelessofarisksolowerinterestrateswillapply.Althoughthegovernmentretainsmonitoring rights over the project in the long term, thereisinevitablyalossofgovernmentcontrolinthemanagementandoperationoftheproject.

Suitability of PPPs

The suitability of the PPP model for a particular infrastructureproject will be influenced by political interest in delivering therelevantinfrastructurequicklyandtheavailabilityofprivatesectorcapital(bothdebtandequity),bothofwhichseemprevalentinSaudiArabia.Inaddition,avalue-for-moneyanalysiswhichcomparesthecostsoftraditionalgovernmentcontractingagainstthecostsofusingaPPPoverthefulltermoftheprojectshouldbeconducted,andinsomejurisdictions,PPPlegislationrequiresthisfinancialanalysis.

Typical Contracting Structure

PPPscanconstituteavarietyofdifferentstructuresandpartnershiparrangements,butthetypicalcontractingstructureofaPPPprojectstarts with a ProjectAgreement between the government entity,or theAuthority as they are often referred to in the contractualdocuments, anda specialpurposevehicle,or “SPV”,madeupof

PPPsformavitalpartofSaudiArabia’s“2030Vision”,aplanfortheKingdom, released in2016byCrownPrinceMohammadbinSalman,whichaimstoincreasetheroleoftheprivatesectorintheeconomyand lessen thecountry’s futuredependenceonoil. Thegoal is to increase the percentage of private sector investment innationalGDP from40% in 2016 to 65% in 2030. TheNationalCenter for Privatisation & PPP or “NCP”, which was institutedbyaCouncilofMinistersDecisionin2017,istheinvestmentarmof theSaudigovernmentand responsible foractivating initiativesbetweenthepublicandprivatesectors.Theopportunitiesforlong-termforeigninvestmentintheKingdomaremany,withanextensiveschools PPP programme (covering 4,000 school PPPs) alreadyannounced.Although Saudi Arabia has seen limited full PPP contractscompleted so far, such as the Madinah Airport PPP, a 25-yearconcessionwhichachievedfinancialclosein2012,therehavebeenprojects with virtually all the same characteristics, including theMASICproject,which involves theDevelopment&ConstructionofResidentialBuildingsandSupportFacilities.Theprojectcoversan area of approximately700,000 squaremetres, accommodating2,500employeesworking in theFadhiliGasPlant in theEasternProvince, Saudi Arabia. Additionally, the East-West PipelinecompoundsprojecthasagainbeenprocuredbySaudiARAMCO.ThisarticleconsiderssomeofthekeyissuesrelatingtoPPPsfroma construction and engineering perspective, but also places theseissues in a broader context of factors to take into account whenundertakingPPPsinSaudiArabia.Forthepurposesofthisarticle,wedefinePPPasacontractualarrangement,usuallyofalong-termnature,betweenagovernmententityandaprivatesectorconsortiumforthefunding,buildingandoperationofpublicassetsorservicessuchasschools,hospitals,roadsorprisons.

Background

It isworth first recapping some of the recognised pros and consof PPPs in general. PPPs havemany advantages, including risktransferawayfromthepublicbodyandtheenablingofaprojectthatmightotherwisenotbepossiblewithpublicfunds. Theexpertiseoftheprivatesectorisutilisedwhereitmaynotbeavailablewithinthegovernment.Therearelikelytobecostsavingsasoneentityisresponsiblefortheproject,sothecostsinvolvedifthegovernmentwere to contract with a number of different parties are reduced.Theprivatesectorentityhasanincentivetoseethattheprojectisbuiltandthatperformancelevelsaresufficient toensurepaymentoftheunitarychargebythegovernmentundertherelevantProjectAgreement.Beingresponsiblefortheprojectfromdesign,throughconstructionandoperation,theprivatesectorentityismorelikely


Conflicts of Interest

AProjectSponsororitsaffiliatedcompanyoftentakesonaroleatcontractorlevel;forexample,wheretheEPCContractorisalsopartoftheSPV.Generallythiscanworktothebenefitoftheprojectasthe contractor is incentivised to perform, but conflicts of interestmayemerge.Asdiscussedabove,theSponsorsshouldwishtoseethemajorityofriskspasseddownthechain,butwhereaSponsorisalsoacontractor,itisimportanttoguardagainsttermsthataretoofavourabletothecontractor.TheEPCContractandothersub-contractswillneedtobe negotiated on an arm’s-length basiswith separate legal teamsrepresentingthedifferentparties.ThecontracttermsneedtobeonthisbasisasSponsorsmaytransfertheirinvestmentintheProjectCompanyortheProjectCompanymaywanttochangetoadifferentcontractor.TheSponsorsalsoneedtoprovetotheAuthorityandtheLendersthatthecontractsrepresentvalueformoney.Anotherconflictof interestcanarise inadisputescenario,whereperhapsconstructioncostshaverunoverandthereisaneedforacallonaguaranteeprovidedbyaProjectSponsorwhoisaffiliatedtotheEPCContractor.TheLenderswillusuallyrequireanindependentTechnical Advisor, separate from the Project Company and itsaffiliates, to be responsible for running the project and to assistinmanaging any conflicts such as these. TheTechnicalAdvisorwill act for theLenders but its authoritywill be accepted by theSponsorsforanytestingorverificationpurposesforthehandoverandoperationofthefacility.

Limitations on Liability and Liquidated Damages

WithintheEPCContract,certainliabilitiesarelikelytobecappedin linewithmarketpractice. Thiscanvarysignificantlybetweenjurisdictions and sectors. There is usually a sub-cap for delayliquidateddamages. LiquidateddamagesarenotusuallyimposedontheProjectCompanybecausetheProjectCompanywillneedtomeetdebtrepaymentstoLenders.Thelevelofliquidateddamagesat theEPC level should reflect thesedebt repaymentson thepartof theProjectCompany as if the construction completion date isnotmet,theregularpaymentsduetotheProjectCompanyfromtheAuthoritywillbepostponed.

Performance Bonds and Guarantees

If there is potential exposure due to limitations on liability orthe covenant strength or security package on offer from theEPC Contractor is a concern, the Sponsors and/or Lenders mayrequire additional security, such as performance bonds or parentcompanyguarantees. Performancebondscanbe“ondemand”or“conditional”. On demand bonds are still requested, where thebondsmanpaysanamountofmoneysetoutinthebondimmediatelyondemandwithoutneedingtosatisfyanypreconditionsincludingestablishingthecontractor‘sliability.Oftenthesearenotacceptablein themarketandconditionalbondswillbemoreappropriate forcontractorsandsub-contractors.Conditionalbondsrequirethattherecipientprovides evidence that the contractorhasnotperformedtheir obligations under the contract and that theyhave suffered alossasaconsequence.

privatesectorcompanies,fortheconstructionand/orrefurbishment,operationandmaintenanceof theprojectasset/facility. TheSPV,referredtoastheProjectCompanyinthedocuments,willthenenterintocontractswithanEngineering,ProcurementandConstructionContractor,or“EPCContractor”andanOperationandMaintenanceContractororFacilitiesManagementContractor.Thesecontractorsmay enter into an interface agreement to govern their liabilitiestoeachother.TheEPCContractorwillenterintoaseriesofsub-contractsforthedifferentelementsofthedesignandconstructionof the facility. TheProjectCompanyborrowsmost of the fundsrequiredforthedevelopmentandtheProjectSponsorsprovidetheequityinvestmentfortheprojectandformtheSPVtocarryouttheproject.

Contractor Covenant Strength

ThemostcurrentconcernforPPPprojectsinSaudiArabiaperhapscentresonthecovenantstrengthofEPCContractors,withanumberof significant contractor collapses occurring already, such as theSaudiBinladinGroup. The lessons learned from the collapse ofCarillionintheUKshouldbeappliedtoPPPprojectsinSaudi.Oneof the reasons thatCarillion, the second largest contractor in theUK,wentintoinsolvencywasbecauseitinvestedheavilyonhigh-volume, low-margin public sector contracts containing extremelyonerousrisktransferprovisionsandpriceswhichcouldbeupliftedonly with material change (which then did not happen). Thegovernment should be aware that a “cheapestwins” procurementstrategywillneverdeliverbestvalue toeither thegovernmentortheprivatesector.

Back-to-Back Liabilities

EPC and O&M (Operation and Maintenance) Contracts aretraditionally drafted, to the greatest extent possible, so that theobligations and liabilities from the Project Agreement that arerelevanttotheconstructionandO&MphaseswillbeplacedwithintheEPCandO&MContracts. Thisdraftingona“back-to-back”basiswill be sought by theLenders to the project, andEPC andO&MContractorswill thenwant to flowdown these obligationsto their own sub-contractors. Lenders will prefer to see sub-contractsundertakenbyasfewcompaniesaspossibletoavoidanygapsinresponsibilityforaspectsoftheproject.Inpractice,itcanbe difficult to achieve a full back-to-back position as contractorsand sub-contractors seek caps on their liabilities. Where EPCContractors are not familiarwith PPPmodels in early stage PPPmarkets,theymaybereluctanttoassumeafullpass-throughoftheconstructionrisksintheProjectAgreement,particularlyinrelationtoliquidateddamagesforconstructiondelay.TheEPCContractisoftendraftedasabespoke“pass-through”oftheconstruction-relatedobligationsintheProjectAgreement.Thisisthemosteffectivewayofensuringthatallrelevant(construction)risksintheProjectAgreementhavebeenpasseddowntotheEPCContractor,akeyissueforLenderswhowanttoensurethattheSPVretainsaslittleriskaspossible.AlesscommonapproachwouldbetouseaninternationalstandardformofcontractsuchasaFIDICorNECform.ThismaysuittheEPCContractorifitisfamiliarwithastandardsetoftermsandconditions,butitismorechallengingtoensureafullandtransparentpass-throughofallrelevantrisksintheProjectAgreementdowntotheEPCContractor,andwillbeofmoreconcerntoLenders.

Simmons & Simmons LLP Saudi PPP


calculated as the sum due to the EPC Contractor for the works,less the Project Company’s losses resulting from the terminationincluding the finance costs. Provisions are usually included thatentitle theEPCContractor toaperiodinwhichitmayattempt torectify a default following service of a termination notice by theProjectCompany,althoughdefaulteventsmaybespecifiedwhichhavebeenagreedtobenotcapableofrectification.

Compensation Payments

Interim payments are usually made under the EPC Contract inscheduledinstalmentsonaguaranteedmaximumpriceorfixedpricebasis.PaymentsfortheworkswillcomefromtheequityanddebtfundingintheProjectCompanyandtheProjectCompanywillbeatriskwheretheEPCContractorbecomesentitledtoadditionalsumsundertheEPCContractwhichtheProjectCompanyisnotentitledto under the ProjectAgreement (e.g. an EPC Contract variationwhichisnotagreedandimplementedundertheProjectAgreement).

AlthoughthepartieswillseektoensurethattheEPCContractor’sentitlementstoadditionaltimeorpaymentsareback-to-backwiththeProjectCompany’sentitlementsunder theProjectAgreement,disputes will often occur in relation to entitlement and amountswhichcanresultindelayedpaymentsundertheProjectAgreement,creatingafundinggap.TheProjectCompanywillseektoensurethat“equivalentprojectrelief”provisionsare(directlyorindirectly)includedintheEPCContract(i.e.theEPCContractorwillonlybeentitled topaymentwhen theProjectCompany receivespaymentundertheProjectAgreement).

In the UK, the Housing Grants, Construction and RegenerationAct 1996 disallows this type of provision, although “pay-when-certified” clauses are permitted in this type of design and buildcontract(butnotinthesub-contractsenteredintobythecontractor).Theserestrictionshave led toparallel loanagreements,where theEPCContractorloanstheamounttotheProjectCompanythatisduetotheEPCContractorandthenisrepaidtheamountwhenreceivedbytheProjectCompanyfromtheAuthority.

An alternative is a claw-back arrangement where the ProjectCompanywillmakeapaymenttotheEPCContractorbutcanclawbackanypartofthesumthatitdoesnotsubsequentlyreceivefromtheAuthority.IfagreateramountisreceivedfromtheAuthoritythanwas receivedby theEPCContractor, then any additional amountcan also be paid to theEPCContractor by the ProjectCompanyunderthisarrangement.Thisset-upcanoperatedownthechainsotheEPCContractorwilloperatetheclaw-backmechanismwithitssub-contractorstolessentherisksofafundinggapatthatleveltoo.

Bankability

PPP programmes in new markets will generally only generatetractioniftheriskprofileoftheseprojectsisbankable,i.e.theriskprofile is acceptable to senior funders. Some examples of theseissues are: (i) covenant strength of the government counterparty(doesthegovernmentcounterpartywhosignstheProjectAgreementhave the financial resources to meet the monthly availabilitypaymentsand thecompensationon terminationpayments (shouldtheyarise)); (ii)paymentof lender liabilitiesonearly termination(whether all outstanding amounts are payable under the fundingdocuments,includingswapbreakagecosts,payableindefinedearlyterminationscenariosundertheProjectAgreement–andwheretheyare not,what financial exposure is acceptable to senior funders);(iii)eventsoutsideprivatesectorcontrol(towhatextentaresenior

Direct Agreements and Collateral Warranties

The EPC Contractor will engage design consultants such as anarchitectandstructuralengineerandspecialistsub-contractors;fortelecoms,forexample.Eachofthekeyconsultantsandspecialistsub-contractors will be required to provide collateral warrantiesinfavouroftheProjectCompany.TheseprovideadirectrightofaccesstothesupplychainiftheEPCContractorfallsintofinancialdifficulty,andLenderswillnotprovidefundingforaprojectwithoutthem.

TheEPCContractoritselfwillenterintoadirectagreementwiththeProjectCompanyandtheLenders.DirectagreementsinfavouroftheLendersgivetheLendersarightto“stepin”tothekeyProjectAgreements(suchastheEPCContract)intheplaceoftheProjectCompany, if the Project Company has defaulted in some way.TheLenderswillarrangeforanewentitytotaketheplaceoftheProjectCompanyinordertoavoidterminationoftheproject,andtopreservetherevenuestreamundertherelevantProjectAgreement.

Fitness for Purpose

Fitness for purpose warranties are often expected of the ProjectCompany,whowillthenwishtopassthemdownthesupplychain.Adesign“fitnessforpurpose”obligation,withits impositionofahigherdutythanreasonableskillandcareanditslikelihoodtobeuninsurable,willwant to be avoided by the EPCContractor andits sub-contractors. A recent case in English law,whichmay berelevantdown the supplychain, illustrates the issuesarisingwithfitnessforpurposegenerally.InMT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59, thecourtenforcedafitnessforpurposeobligationeventhoughitwasonlysetoutinthetechnicalspecification.Thecontractorhaddesignedandbuiltthefoundationsinaccordancewithinternationalstandardsandwithoutnegligence,butanerrorintheinternationalstandardmeantthatdefectsemerged.Asaresult,thecontractorwasfoundtobeliablefordefectsinwindfarmturbinefoundations,withremedialworkscostingEUR26.25million.

EPCContractorsandtheirsub-contractorsshouldcarefullyconsiderwordingofthisnatureintheircontracts,evenifitisinthetechnicalrequirements.Typically,professionalindemnityinsurancepoliciesexcludecoverforstrictliability,suchasaguaranteeoffitnessforpurpose, so it could leave thecontractorexposed toanuninsuredliabilityforasignificantsum.

Termination Payments

ThepaymentsduetotheEPCContractorfollowingterminationwillvarydependingonthereasonfortermination.Whereterminationoccurs without contractor default; for example, a voluntarytermination by the Authority under the Project Agreement, thecompensation will usually be direct losses, costs, expenses,damages and liabilities reasonably incurred and notified to theProjectCompanybytheEPCContractorwithinaspecifiedperiod.TheEPCContractorwillseektoensurethattheirlossesofprofits,aswell as the costs of breaking the contract, are included. ThisissueshouldbecommerciallyagreedbetweentheEPCContractorandthecontractoratanearlystageoftherelevantproject,givenitscommercialsignificance.Forcontractordefault-basedtermination,suchasamaterialbreachof itsobligationsor failure tocompletetheworks by a longstop date, the sum payablewill generally be



We are a leading international law firm with fully integrated teams working across 22 offices in Europe, the Middle East and Asia. Our focus on a small number of sectors means we are able to understand and respond to our clients’ needs. Our industry sectors are: Asset Management & Investment Funds; Financial Institutions; Life Sciences; and Telecoms, Media & Technology (TMT). We also focus on the Energy & Infrastructure market, in particular through our international projects and construction teams. We have a track record for innovation and delivering value to clients through new ways of working.

Richard is Head of the International Projects Group and specialises in non-contentious construction law in the UK and internationally.

In addition to being a member of the Society of Construction Law, Richard is also an accredited adjudicator at the Institution of Civil Engineers. He holds an MSc in construction law and arbitration from King’s College, London. He is also one of the authors of the “Architect’s Legal Handbook”.

Richard acts on all stages throughout the construction process from the provision of building contracts, performance bonds and guarantees to insurance arrangements. He has experience in advising clients in a range of construction matters, including:

■ advising a Sponsor on EPC issues in a PPP project in KSA; and

■ advising Saudi investors on a major new build development.

Richard DytonSimmons & Simmons LLPCity Point, One Ropemaker StreetLondon, EC2Y 9SSUnited Kingdom

Tel: +44 20 7825 4203Email: [email protected]: www.simmons-simmons.com

Simon is a Partner in the Energy, Natural Resources and Infrastructure Group, and specialises in PPP projects in Europe and the Middle East.

Simon advises on complex concessions, EPC, O&M, outsourcing and joint venture agreements.

Simon MooreSimmons & Simmons LLPCity Point, One Ropemaker StreetLondon, EC2Y 9SSUnited Kingdom

Tel: +44 20 7825 3188Email: [email protected]: www.simmons-simmons.com

Conclusion

In SaudiArabia, the National Center for Privatisation& PPP or“NCP”istaskedtoenableprivatisationbyformulatingregulations,creating privatisation frameworks and preparing robust processesthat will serve as a blueprint for agencies and entities to follow,thatwilldriveforwardtheprivatisationandPPPprocess.ThereisclearlypoliticalsupportforPPPinSaudiArabia.Developersandfunderswill,asalways,wait tosee if thismanifests itself inPPPdealflowandPPPprojectsthatreachfinancialclose.TheplansintheKingdomcontinuetodevelopasApril2018sawtheofficiallaunchofthenation’sPrivatisationProgram,ledbytheNCP.TheProgramincludesdraftingapublic-privatepartnershiplawthatwillprotecttherightsofbothusersandinvestors.

AcknowledgmentTheco-authorswouldliketothankFleurLaventureandJoeSnapefortheirsignificantandvaluableassistanceinthepreparationofthischapter.

fundersprotectedwhereeventsoccurwhichareoutsideofSPVorsenior fundercontrole.g. change in law);and (iv) towhatextenthastheSPVretainedtherisksintheProjectAgreement(ratherthanpassingdowntheseriskstotheEPCorO&MContractor).

Dealflow and PPP Legislation

This isessential togeneratesustainedprivatesector interest. Ifabiddertakestheviewitwillwine.g.oneinthreebids,thensustaineddealflow (i.e. a steady flow of projects issued by government) isessentialtomaketheeconomicsofPPPworkfortheprivatesector.Submittingabidcanbeexpensive,andunlessbidderscanrecoversunkbidcoststhroughwinningprojects,economicallythisbecomesunsustainablefortheprivatesector.PPPlegislationitnotinitselfanissue,butenablingPPPlegislationwithoutdealflowwillnotinitselfgenerate a healthy and sustainable PPP market. Sector-specificstandardformPPPcontractscanalsobehelpfulinsustainingaPPPmarket,givingallpartiesconcernedcertaintyaroundtheriskprofileoftherelevantPPPsub-sectoranditsbankability.



Chapter 3

Herbert Smith Freehills LLP

David Nitek

Nicholas Downing

Interim Methods of Dispute Resolution

constructionprojects,particularlywheretheprojectinvolvespartiesfrom different jurisdictions. In comparison to NEC, FIDIC has,historically,beenamore“adversarial”formofcontract.NEC4 retains the emphasis on proactive management – indeed,NEC’sstatedaimwasthatthechangesinNEC4wouldbe“evolution not revolution” – but there is now a greater emphasis on disputeavoidance and provisions that are designed tomake the contractmore international innature. Theaim, itwouldappear, is to selltheNECmodel, sowidely adopted in theUK, to theworld. Asexplainedfurtherbelow,NECisthereforesteppingclosertosomeofthemoreinternationalelementsofFIDIC.FIDIC 2017, on the other hand, places a greater emphasis thanbefore on proactive project management and early resolution ofrisk. It frequently bolsters those projectmanagement provisionswithtimebarsthatgivethemrealteeth.FIDICisthereforesteppingclosertotheNECapproachofproactiveprojectmanagementfromcommencementtocompletion.However,thenewFIDICformsdonotcontainafundamentalreassessmentofriskallocationinitssuiteofcontracts,andso,inthatsense,itisnotregardedasacollaborativecontractinthesamewayasNEC.Inemergingmarkets,wherethefocusisonrisktransfertothesupplychain,therearesignificantheadwindsagainstthismoreprogressiveapproach. FIDIC is considering whether it can overcome theseissues through the use of its Golden Principles, a possible newapproachtosignifythatacontractdesignedforaparticularprojecthasFIDIC’ssealofapproval.We set out below some of the key changes inNEC4 and FIDIC2017;howconstructioncontractscanprovideavaluableframeworkfor managing claims and avoiding disputes; and whether theseformsofcontractarethefutureofcontracting.

Proactive Project Management

Proactive project management has, of course, many facets, buttherearetwoparticularfeaturesinNEC4andFIDIC2017thatareaddressedbelow:theearlyidentificationofrisk;andtheimportanceoftheprogrammetotheproperadministrationofthecontract.

Early warning

NEChasalwaysplacedgreatemphasisontheearlyidentificationbybothpartiesofrisks.Attheoutsetofaproject,NEC4(Clause15.2)requirestheProjectManagertoprepareafirstearlywarningregister(formerlyriskregister)withinoneweekofthestartofthecontract. The earlywarning register should identify anymatters

Introduction

It is inevitable that construction projectswill give rise to claims.“No battle plan survives first contact with the enemy”,toparaphrasenineteenth century Prussian military commander Helmuth vonMoltke,isaphrasethatisaptinaconstructioncontext.Contractorswill, inthecourseofperformingtheworks,encountereventsthataffect progress or cost, and no complex construction projectwaseverdeliveredexactlyasplannedinthebaselineprogramme.Forthis reason, construction contracts contain detailed provisionssettingoutwhetherthoseeventscarryanentitlementtoanextensionoftimeandadditionalcost,and,ifso,howtheclaimistobemadeandthenassessed.Thoseprovisionsareperhapsthemostimportant,andfrequentlydisputed,inanyconstructioncontract.At the same time, it is increasingly recognised that constructioncontracts have a role to play beyond simply apportioning risksbetween the parties once a risk event has been encountered.Construction contracts can become a management tool whichencouragesthepartiestoavoidclaimsinthefirstplaceand,ifclaimscannot be avoided, to resolve them without recourse to formaldisputeresolutionprocesses.These trends are reflected in the 2017 amendments to the NECandFIDICformsofcontract.InJune2017,NECupdateditssuiteof contracts, from NEC3 to NEC4. In December 2017, FIDICpublished updates to its Red (Construction), Yellow (Plant andDesign-Build)andSilver(EPC/TurnkeyProjects)books.Fundamentally,thephilosophyofthenewFIDICandNECstandardforms remains the same as their predecessors: FIDIC seeks toallocateriskstothepartyinthebestpositiontobearandmanagesuchrisk;whereasNEConlyallocatesriskstotheContractorwheretheriskcangenuinelybecontrolledbytheContractor,withallotherrisksremainingwiththeEmployer.TheNECapproachmeansthat,by comparison to FIDIC,more cost and programme contingencyshould sit with the Employer, but ensures that unnecessary riskpremiumsarenotpaidtotheContractor.Further,andwhileNEChasbeenattheforefrontofpromotingamoreproactiveapproachtoprojectmanagementandtheidentificationandmanagementofrisk,itisnowclearthatFIDICismovinginthisdirectionaswell.TheNECcontract iswidelyused in theUK,and is thepreferredcontract formanypubliclyprocuredworks. For example, itwasused for the London 2012 Olympics and Crossrail, and is beingused for HS2, the new high-speed rail line connecting LondonandBirmingham. It is also increasinglyused internationally; forexample,inAustralia,HongKongandSouthAfrica.The FIDIC forms of contract are perhaps the most widely usedof all standard form construction contracts in international


all relevant circumstances”,andtheabsenceofanadvancewarningadvicewould,presumably,beonesuchcircumstance.Further,andonanEnglishlawanalysis,ifcertaincostscouldhavebeenavoidediftheContractorhadmetitsobligationtoissueanadvancewarning,thenatribunalislikelytobeslowtoconcludethatthosecostsarerecoverable,sincetheywill,arguably,representafailuretomitigate.It is also worth noting that the requirement to provide advancewarningisamutualobligation.Therefore,iftheEmployerortheEngineer does not give advance warning advice where it wouldhavebeenpossible todo so, this couldbeconstruedas anactofpreventionorimpedimentbytheEmployer,entitlingtheContractorto additional time and cost. This could impact on the allocationofriskunderthecontract(particularlywheretheeventinquestionrelatestoanissuethatiswithintheContractor’scontrol),andmight,insomeinstances,resultinrisktransferringbacktotheEmployer.

The programme

TheprogrammehaslongbeenatthecentreofNEC.TheContractoris required to submit a programme to the Project Manager foracceptanceonaperiodicbasis(atintervalsspecifiedbytheparties;often28days),andallextensionsoftimeareassessedagainstthelatest accepted programme. In that way, extensions of time aregrounded in thecurrent realityof theprojectandcanbeassessedquickly, without the need to create a baseline against which toimpactparticulardelayevents.The payment provisions incentivise the Contractor to prepare acompliant baseline programme and identify it in the contract: byclause 50.5, if there is no baseline programme identified in thecontract, one quarter of the amounts due to the Contractor areretained until such time as the Contractor submits a programmeshowingtheinformationrequiredbythecontract.ItisalsointheContractor’sintereststokeepitsprogrammeinanacceptableformthroughouttheperformanceofthecontract:ifthereisnoacceptedprogramme,extensionsoftimearebasedontheProjectManager’sownassessmentoftheamountofworkremaining.Foritspart,theProjectManagerisincentivisedproperlytoreviewthe accepted programme since, if the Project Manager fails tonotify acceptance or non-acceptance within a prescribed period,theprogramme isdeemed tobe accepted, andwill then form thebasis againstwhichanyentitlements for compensationeventsareassessed.FIDIC 2017 has not gone so far as to require submission of arevisedprogrammewithinfixed intervals, insteadmaintaining theformulationfromthe1999formsthattheprogrammeisresubmittedwhenit“ceases to reflect actual progress or is otherwise inconsistent with the Contractor’s obligations”. This is,perhaps,unfortunate,sincetheFIDICformulationissowidethatstrictcompliancewouldbeachallenge–programmesmayceasetoreflectactualprogresson a daily basis and, arguably, a defined period for resubmissionwouldpromotemorecertaintyandinstilmorediscipline.(AlthoughtheEngineercannotify theContractor that theprogramme isoutof date, and the Contractor is then required to issue a revisedprogrammewithin14days(Clause8.3).)However,FIDIC2017containsenhancedprogrammerequirements:thereisanobligationtoprovidetheprogrammeinelectronicformat;thereisafullerandmoreprescriptivelistofwhatshouldbeincluded,including that all activities are “logically linked and showing the earliest and latest start and finish dates for each activity, the float (if any), and the critical path(s)”; and the supporting report thatis to accompany each programme ismore detailed, including theidentification of significant changes to the previous programmeand the Contractor’s proposals to overcome the effects of any

whichcoulddelaycompletionoftheworksorakeydate,orwhichcouldincreasecost.TheProjectManagerisalsorequiredtoinstructtheContractortoattendafirstearlywarningmeetingtodiscussthemattersidentifiedintheearlywarningregisterwithintwoweeksofthestartofthecontract.Then,throughouttheproject,assoonastheContractororProjectManageridentifiesanyothermatterwhichcoulddelaycompletionorincreasecost,anoticeisgiventotheotherparty(Clause15.1).BoththeContractorandProjectManagercantheninstructtheothertoattendanearlywarningmeetingatwhichthepartiesdiscusshowtoavoidor reduce theeffectsof the riskeventandagreeactions.Theearlywarningregistershouldbeupdatedthroughouttheprojecttoreflectrisksencounteredandthestepsagreedattheearlywarningmeeting.Thepartiesarethereforeencouragedtoapproachriskinaproactiveway.Theydonotwaituntilariskmaterialisesbeforetheydiscusshow to respond to it, since by that point it may be too late torespondeffectively.Rather,risksaretobeidentifiedattheearliestopportunity,wherepossiblebeforetheyhavearisen,sincetheywillbeeasiertomanageifthepartiesareforewarnedandhavepreparedaplanofhowtorespond.InNEC,theearlywarningmechanisminClause15ismorethanjustfinewords.IftheProjectManagerdecidesthattheContractorcouldhave given an earlywarning notice but did not, theContractor’sentitlementsareassessedonthebasisthatanoticehadbeengiven.Therefore,iftheEmployerorProjectManagercouldhavemitigatedthetimeorcostconsequencesofaneventhadtheyknownaboutitearlier,theContractor’sentitlementtoreliefwillreduceaccordingly.Inthisway,theregimehasrealteeth.Inthe2017forms,FIDIChas,forthefirsttime,introducedasimilarsystem. Sub-Clause 8.4 sets out an “AdvanceWarning” regimewhich obliges both parties to advise the other of “any known or probable future events or circumstances which may . . . increase the Contractor Price and/or delay execution of the Works or a Section”.TheEngineercanthenasktheContractor tosubmitaproposal to“avoid or minimise the effects of such event(s) or circumstance(s)”.Further, there are new provisions on “management meetings”(Sub-Clause 3.8), which can be called either by the Engineer orthe Contractor’s Representative with the wide-ranging brief ofdiscussing“arrangements for future work and/or other matters in connection with the execution of the Works”.As with NEC, the emphasis is on avoiding or minimising theeffectoffutureeventsorcircumstances–bothpartiesarethereforeencouragedtoapproachtheidentificationandmanagementofriskinaproactiveandcollaborativeway.However,unlikeearlywarningmeetingsinNEC4,themanagementmeetings inFIDIC2017arenotexpressly linked to theadvancedwarningprocess, albeit there is clearlya correlation. Indeed, theeffectiveuseofmanagementmeetingsrequiresthepartiestoadopta voluntary code of practice as there is no express duty on thepartiestoco-operateinsuchmeetingsinordertomanagerisksandtheirconsequences.Further,unlikeNEC4whereanearlywarningregisterismaintained,thereisnostandingagendaformanagementmeetingsinFIDIC2017,andthereisnoexpressobligationonthepartiestoimplementanydecisionstakenatamanagementmeeting.Further,unlikeinNEC,FIDIC2017providesnoexpresssanctionforfailingtogiveanadvancewarning.Onitsface,thismightbesaidtoremoveanyrealincentivetocomply.However,thefailuretoadvisethroughtheadvancewarningprocessincircumstanceswhereitwouldhavebeenpossible todoso, is, it is suggested,amatterthattheEngineeroratribunalisentitledtotakeintoaccountwhendecidingonaclaim.Inparticular,Sub-Clause3.7.2providesthat,inmakingadetermination,theEngineershalltake“due regard of

Herbert Smith Freehills LLP Interim Methods of Dispute Resolution


betweenthem“in an endeavour to reach agreement”onanyclaim.In essence, the Engineer has 42 days to facilitate an agreementbetween the parties, failing which the Engineer then makes adetermination.Ofcourse,thiscouldimposequiteaburdenontheEngineer–theEngineerisaskedtoactasquasi-mediatorforupto42days,andthen,ifhiseffortsareunsuccessful,makeaformaldetermination.Thiscouldproveverytimeconsuming,particularlyiftherearemultipleclaimsinparallel.Itcouldalsobequestionedhowwillingpartieswillbetoexplorecommercialcompromisesinfrontofthepersonwhowillthenbeaskedtodeterminethedisputeifnocompromiseis reached. Nevertheless, the principle that the parties should beencouragedtosettlebeforemakingclaimsistobewelcomed.Second, FIDIC2017 provides for dispute boards (nowknown asDisputeAvoidance/AdjudicationBoards,orDAABs)toplayamorepreventativeroleindisputeavoidance.FIDIChaslongadvocateddisputeboardsasameansofresolvingdisputes in a setting that is quick and (relative to arbitration orlitigation)informal.Indeed,disputeboardsareincreasinglyseenonlargeinternationalconstructionprojects,andinlargepartthisistheresultofFIDICchampioningtheiruse.InFIDIC2017,thedisputeboardprovisionshaveagreateremphasisondisputeavoidance. Inparticular, the remitof theDAABnowincludestheprovisiontothepartiesof“informal assistance”withaviewtoresolvingissuesbeforetheyescalateintoaformaldispute.Inessence,theprocessisthatthepartiescanjointlyrequestassistanceoraninformaldiscussiononanissuethatmayhavearisen,andtheDAABcan thenofferviewseitherat ameetingattendedbybothparties or on a site visit (Sub-Clause 21.3). The parties are notboundtoactuponanyadvicegivenbytheDAAB,andthatadvicewillnotbindthehandsoftheDAABinanyfuturereference,butitmaybesufficienttounlockanimpasseatanearlystage,andbeforetheparties’positionshavebecomeentrenched.FIDIC2017goesfurther,andprovidesthattheDAABcantaketheinitiativeandinvitethepartiestorequestassistancewithaparticularmatter. Allied to this, theRed,YellowandSilver books all nowprovide for standingDAABsappointed throughout the lifeof theproject.Thisisachangefromthe1999suite,wheretheSilverandYellowbooksprovidedforanad hocdisputeboardappointedonlyif a dispute arose. The requirement for standing boards is a keypartofthedisputeavoidanceethos–plainly,adisputeboardcannotperformapreventativefunctionifitisonlyappointedonceadisputehascrystallised.NEC4hastakenastepinthesamedirection.InpreviouseditionsoftheNECsuiteofcontracts,therewasprovisionforadjudication,aquick(28-to42-day)methodforresolvingdisputesonaninterimbasis. Adjudication is compulsory in the UK and certain otherjurisdictionsand,asadjudicationperforms(atleastinpart)thesamefunction as a dispute board, the contracts contained no provisionfor the typeofdisputeboard seen in theFIDIC forms. ThathaschangedinNEC4.NEC4 now contains a third dispute resolution option: in NEC3,therewasanoptionthatappliesiftheworkisbeingundertakenintheUKandissubjecttocompulsorystatutoryadjudication(underwhichbothpartieshavetherighttoreferdisputestoadjudicationatanytime,witheitherarbitrationorlitigationastheultimateforumofdispute resolution);andanoption thatapplies if theworksarenot subject to compulsory statutory adjudication (under whichthereisatiereddisputeresolutionprocess,startingwiththedisputebeing referred to senior executives, then to adjudicationand thentoarbitrationorlitigation).NEC4nowprovides,asathirdoption,a dispute avoidance board, which looks very similar to FIDIC’sDAABinanumberofrespects:itisastandingboardofbetweenone

delays.However,weanticipatethatContractorsmaybereluctanttodeclaretheirfloatforfearthattheEmployermaytrytosqueezetheprogrammeduringpre-contractualnegotiations.The refreshed emphasis in FIDIC 2017 appears to be on the useof theprogrammeasaprojectmanagement tool, likeNEC. It isdifficult to identifywhether a risk eventmay cause delay unlessthereisarobustprogrammewithaclearcriticalpathtocompletion.The express requirement to submit an electronic programme isalsowelcome,asitallowstheEngineerproperlytointerrogatetheprogrammessubmittedforacceptance,andprovidestheopportunityforanEmployertoformitsownviewonthepotentialimpactofariskevent.Moreover, the Engineer now has an express duty to review theprogrammeandidentifyanynon-compliancewiththecontracttermsandanymoredetailedprogrammingprovisionsintheEmployer’sRequirements.Thisreflectsthesignificancetotheprojectofhavinga robust, tested and compliant programme, not least because itallowsriskeventsandextensionsoftimetobeproperlyassessed.Itisalsoinbothparties’intereststoensurethattheprogrammeisrobust andup todate as it is akeypieceof information that canbeusedforevidentialpurposesinrelationtoanyfuturedisputeordisagreement.

Time Bar

Inmanycases,NEC4andFIDIC2017incentivisecompliancewiththevariousprojectmanagementproceduresbytheuseoftimebarprovisions.NEChaslongrequiredstrictadherencewithtimelimits,bothbytheContractorandbytheProjectManager.IfthereisacompensationeventthatentitlestheContractortoadditionaltimeand/ormoney,theContractormustinsomecasesgivenoticewithineightweeksofbecomingawarethattheeventhashappened.Otherwise,therighttomakeaclaimislost.Similarly,theProjectManagerisdeemedtohaveacceptedtheContractor’squotationforadditionaltimeandcostifitdoesnotmakeitsownassessmentwithinthetimerequired.FIDIC2017makessimilaruseoftimebarprovisions.Forexample,iftheEngineerdoesnotrespondtoaprogrammesubmissionortoadesignwithin21days,thereisadeemednoticeofno-objection.Similarly,ifthepartiesdonotnotifyclaimswithin28daysofthedateonwhichtheybecameaware,orshouldhavebecomeaware,ofthem,therighttoclaimislost.Thislattertimebaris,though,a“soft”timebar,sincethefailuretonotifyontimecanbedisregardedwhere latenotice is justified in thecircumstances. Further, if theEngineerconsidersthataclaimhasbeensubmittedoutoftime,ithas14daystogivenoticeofthesame,otherwisetheclaimnoticeis deemed valid. In this respect, therefore, FIDIC 2017 is lessstrict from a procedural perspective than FIDIC 1999,where therequirementtonotifywithin28dayswasabsolute.In general, however, the direction is the same – towards morerigorouscontractmanagement,withsanctionsformissingdeadlinesthatincentivisethepartiestocomply.

Dispute Avoidance

Allied to more proactive project management is an increasedemphasisondisputeavoidanceinbothNEC4andFIDIC2017.Theemphasisondisputeavoidance ismanifest inFIDIC2017 intwoprincipalways.First,Sub-Clause3.7.1providesthattheEngineershallconsultwithbothparties(eitherjointlyorseparately)andencouragediscussion



Of course, no form of contract is a panacea. Disputesmay stillarise no matter how robust the project management and disputeavoidanceprocesses.However,ifproperlyadministered,thescopefordisputesshouldreduce.Thekeyquestion ishowwidely theNEC4andFIDIC2017 typeofapproachwillbeusedinpractice.Thereare,here,anumberofconsiderations.First, both parties must be prepared and able to administer thecontracts inaccordancewith their terms. BothNEC4andFIDIC2017 place a significant administrative burden on the parties. Ifeitherpartycannotcopewiththatburden,itcouldveryquicklyfinditselfonthewrongsideoftimebarprovisionsand,potentially,loserights. Further, there is clearly scope for procedural disputes toarise,particularlyunderFIDIC2017.Thatproblemarisestoalesserextent in more traditional, adversarial forms of contract, whichtypicallyhavelessextensiveproceduralrequirementsandmakelessuseoftimebarprovisions.BothNEC4andFIDIC2017needtoberigorouslyimplemented.This may be a particular challenge in markets where process-intensive and collaborative contracts are not the norm, andparticularlyinemergingmarketswhereclientsarenotinterestedinadoptingamorecollaborativeformofcontract.NECcontractshavebeenwidelyusedintheUK(mostnotablyonpublicprojects)sincetheywerecommendedinthe1994LathamReport.Itisnowwellunderstoodby the industry,and thosewhouse itbuy intowhat itistryingtoachieve.Butthatunderstandingtakestimetodevelop.Second, there will also be a cost associated with an increasedadministrativeburden, andpartiesmayneed tobepersuaded thatthis cost is worthwhile. Demonstrating value for money is notnecessarily straightforward – if a dispute is resolved at an earlystage,youwillneverknowthecostandeffortinvolvedinfightingit.Over time,however,employersandcontractorscancomparehowdifferentformsofcontracthaveworkedondifferentprojects,andsocanstarttodevelopaviewofwhatworks.Finally,therewillbeparticularsectorsinwhichFIDICandNEC4mayfind it harder togain traction. In theoil andgas sector, forexample,neitherformis,intheauthors’experience,usedparticularlywidely,sinceoilcompaniesoftenusetheirownbespokeformsofconstructioncontract.Overall,therefore,NEC4andFIDIC2017representadrivetowardsproactive project management, regular engagement and disputeavoidance,witheachofthosefeaturesbeingcentrallyembeddedinthecontractterms.Thechangeisinternationalbutwillnothappeneverywhereovernight.Itdoes,though,seemtobethedirectionoftravel.

andthreemembers;itvisitssiteatintervalsspecifiedinthecontract;and itsaim is to“[assist] the Parties in resolving disputes before they become disputes”. Unlike a DAAB, the dispute avoidanceboard only has the power to make recommendations, which arenot expressed tobebinding, but thepartiesmustneverthelessgothroughthedisputeavoidanceboardbeforetheycanreferadisputetotheultimatetribunal,beitcourtsorarbitration.InsteppingtowardstheFIDICapproach,NEC4isperhapslookingtoan internationalmarketmore familiarwithdisputeboards thanwithadjudicationinlinewiththeUKmodel;and,moregenerally,at jurisdictions that do not provide for compulsory statutoryadjudication.Inbothcases,thetrendisanencouragingone:whilenot all disputes can be resolved informally, there is real value inidentifyingandgripping themearlyandhavingamechanismthatfacilitatesinputfromanindependentthirdpartywhocanprovideanobjectiveviewquicklyandwithouttheneedforformalproceedings.Ofcourse,contractingpartiescanalwayslookatalternativewaysofresolvingdisputeswithoutthecontractgivingthemchoices,butNEC4andFIDIC2017provideanexpressoptionand incentivisecompliance–inthecaseofNEC4,thepartiesmustusethedisputeavoidance board before resorting to formal proceedings,while inthecaseofFIDIC, theEngineerhasapositiveobligation to lookforways of agreeing claims. Moreover, contracting partiesmaybe reluctant to propose alternativemethods of resolving disputesbecausetheyareconcernedthattodosowouldappearweak.Bymakingthealternativescontractual,NEC4andFIDIC2017avoidthatimpression.

The Nature of Construction Contracts and Challenges

WehavegivenabovejustafewexamplesofhowNEC4andFIDIC2017 aremoving towards proactive project management and theavoidanceofdisputes.Whattheseexamplesillustrateisachangeinthenatureofconstructioncontracts. Nolongerdotheysimplyallocate risk and identify the forum for resolving any disputesthat may arise. Rather, they actively encourage the parties toadministerthecontractinawaythatreducesthescopeforcostly,time-consuminganddistractingdisputes. Andwheredisputesdoarise,theyprovidewaysofresolvingthemthatarequick,informalandflexible.Inshort,theyshowthevalueinhavingaconstructioncontractthatisnotconsultedonlyonceaproblemhasarisen.



Herbert Smith Freehills is one of the world’s leading professional services businesses, bringing together the best people across our 27 offices, to meet clients’ global legal service needs. The firm offers a top-tier seamless service across a single global platform and an unparalleled depth of expertise. It provides access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of industry sectors, including construction and infrastructure, energy, natural resources, technology and financial services.

The firm’s specialist construction and engineering team offers the full spectrum of legal services on all aspects of a project from procurement to completion and our projects group advises clients throughout every stage of a project’s life cycle. On large-scale, long-term infrastructure, mining, construction and engineering, and energy projects the firm offers innovative financing and bespoke contractual structures that allows clients to meet their projects’ objectives. Having acted for parties on all sides of projects and transactions, the firm provides a unique and broad perspective on deals and a strong understanding of the market overall.

David is a partner at Herbert Smith Freehills, specialising in the resolution of construction and engineering disputes through adjudication, dispute boards, litigation and arbitration. David advises both employers and contractors in a variety of sectors, with a particular focus on transport and other infrastructure projects. He has advised on disputes arising out of some of the UK’s largest infrastructure projects of recent years, and has extensive experience in the Middle East, having previously worked in the firm’s Dubai office. David’s practice also involves the management of claims, in particular the establishment of robust processes for reviewing and resolving claims without the need for formal dispute resolution proceedings. He has performed this role on a number of substantial projects, working alongside the project team and external consultants.

David NitekHerbert Smith Freehills LLPExchange House, Primrose StreetLondon, EC2A 2EGUnited Kingdom

Tel: +44 20 7466 2453Email: [email protected]: www.herbertsmithfreehills.com

Nicholas leads the non-contentious construction and engineering practice in London at Herbert Smith Freehills, having over 30 years’ experience of major construction and engineering projects in the energy, infrastructure and real estate sectors.

He is a member of the Construction and Engineering Committee for the City of London Law Society. He is a UK correspondent for the International Construction Law Review. Nicholas is recognised as being in the top tier of construction and engineering law practitioners in the latest editions of Chambers UK and The Legal 500. He regularly provides training to clients on NEC3/NEC4 and FIDIC.

Nicholas DowningHerbert Smith Freehills LLPExchange House, Primrose StreetLondon, EC2A 2EGUnited Kingdom

Tel: +44 20 7466 2741Email: [email protected]: www.herbertsmithfreehills.com



Chapter 4

Clyde & Co

Kon Nakousis

Teodor Lomaca

Australia

■ ABICMW-2008–MajorWorksContract (standardcontractfornon-housingwork–except forQLDwhereMW-12003isused);

■ ABICSW-2008–SimpleWorksContract (standardcontractfor non-housingwork – except forQLDwhere SW-C 2011isused);

■ ABIC BW-1 2002 – Basic Works Contract (works up toAU$50,000);and

■ ABICEW-12003–EarlyWorksContract.TheInternationalFederationofConsultingEngineersalsoproducesstandardformcontractsforcivilengineeringconstructionprojectsinternationally.There are a number of other standard forms available throughindustryassociations,suchastheMasterBuilders,alongwithpublicauthoritiesandgovernmentbodies(e.g.GC21).

1.2 Are there either any legally essential qualities needed to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any specific requirements which need to be included in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?

TherearethreeessentialqualitiestocreatealegallybindingcontractincommonlawjurisdictionssuchasAustralia:1. anagreement;2. consideration;and3. anintentiontoenterintolegalrelations.Foravalidagreement to form,anofferbyonepartyneeds tobeacceptedbytheother.Aninvitationtotenderisnotconsideredasanoffer;submittingatenderwill,however,beconsideredanoffer:Spencer v Harding [1870]LR5CP561.Theofferorpromisemustbesupportedbyconsideration:Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915]AC847at853.Thetermsoftheagreementmaybeexpressorimpliedandmaybepartlywrittenorpartlyoral;however,thetermsmustbesufficientlycertainintheiroperationtobeenforcedinacourtoflaw:Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd [1995]36NSWLR709.Certaincontractsfortheperformanceofdomesticbuildingworkmustbeinwriting.Questions of intention to enter legal relationsmay arise throughcontract negotiations; for example, a situation may arise wherethepartieshavesettledonkeytermsbuthavenotyetagreedtobeboundbythoseterms(Ratto v Trifid Pty Ltd [1987]),althoughinthecontextofconstructioncontracts,thisisunlikely.

1 Making Construction Projects

1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which place both design and construction obligations upon contractors? If so, please describe the types of contract. Please also describe any forms of design-only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.)

StandardsAustraliaproducesanumberofstandardformcontractsforuseinAustralia,whichinclude:■ AS4000-1997 –GeneralConditions ofContract: construct-

onlycontractformajorprojects;■ AS 2124-1992 – General Conditions of Contract: civil

engineering, building, electrical, mechanical engineeringcontract;

■ AS4902-2000–GeneralConditionsofContract forDesignandConstruct:imposesdesignandconstructobligationsonthecontractor;

■ AS4300-1995–GeneralConditionsofContract forDesignandConstruct:commercialdesignandconstructcontract;

■ AS4915-2002–ProjectManagement:GeneralConditions;■ AS 4916-2003 – Construction Management: General

Conditions;■ AS 4122-2010 – General Conditions of Contracts for

Consultants;■ AS 4916-2002 – Construction Management General

Conditions;and■ AS 4917-2003 –ConstructionManagementTradeContract:

GeneralConditions.In 2015, StandardsAustralia proposed to replaceAS 4000-1997andAS2124-1992withanewstandard,AS11000.However,afterconducting a process of stakeholder engagement, a decisionwasmadetocanceltheproject.BothAS4000-1997andAS2124-1992willcontinuetooperatewhilefurtherstakeholderconsultationtakesplace.TheAustralianBuildingIndustrycontractsuitealsoprovidesanumberofstandardformcontracts,including:


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the various schemes are funded by either a levy on building andconstructionwork(paidbythepersonforwhomtheworkisbeingperformed)oralevycalculatedonapercentageofwagespaidbytheemployer.(b) LabourThe Fair Work Act 2009 (Cth) (FWA) is the primary statuteregulatingtheemploymentofthemajorityofAustralianemployees(notethatitdoesnotapplytosomepublicsectoremployees).TheFWAandrelatedregulationsestablishminimumconditionsofemployment,andsetouttherightsofworkers(includingapprenticesandforeignworkers)andtheindustrialrelationsobligationsofmostemployers. Otheremploymentmatters suchashealthandsafety,longserviceleave,regulationofapprenticesandequalopportunityobligations are largely regulated by the States and Territories(although in some circumstances Federal legislationmay apply).ForeignworkersarerequiredtoholdavalidvisaallowingthemtoworkinAustralia.(c) TaxationTaxation is regulated by the Federal government. There are nospecific tax laws or regulations relating to construction workers.However,workerswhoarerequiredtoliveawayfromtheirnormalresidencemaybeentitledtoconcessionaltaxtreatmentintheformofalivingawayfromhomeallowance.Theallowanceisdesignedtocompensatetheworkerfortheadditionalexpensesincurred.(d) HealthandSafetyLegislation and regulations in each of the states and territoriesimpose rigorous obligations in relation to health and safety.Obligations are imposed on persons conducting a business orundertaking,officers,workersandothersincludingmembersofthepublicwhoenterthesite(dutyholders).Dutyholdersarerequiredtoensurethehealthandsafetyofworkersandotherpersons,sofarasreasonablypracticable.Thedutiesareconcurrentandoverlapping,meaningthatboththeemployerandcontractormayholdthesamedutyinrelationtothesamework.Legislationimposesconsultation,cooperation and coordination obligations on each of the dutyholders. Further, the duties are not transferable; a party cannotcontractoutoftheirobligations.Additionalobligationsareimposedonprincipalcontractorsinrelationtothemanagementofbuildingandconstructionwork.Key obligations exist in relation to providing a safe workplace,plantandequipment,systemsofwork,information,instructionandtrainingandsupervisionofworkers.Penaltiesforfailuretocomplywith work health and safety legislation can result in significantfinancial penalties for both the organisation and individuals.Officersofanorganisationwhofailtocomplywiththeirpersonalobligationsfacetheadditionalpenaltyofatermofimprisonment.Eachof theStatesandTerritoriesexcludingVictoriaandWesternAustraliaadoptedtheModelWorkHealthandSafetylegislationinan effort to develop a nationally consistent system of regulation.WesternAustralia is in the process of adopting the model laws.Victoriahaselectedtomaintainitscurrentsystemofregulation.

1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability is complete?

Retention amounts are common practice under Australianconstructioncontractstoensureproperperformanceofthecontract.Retention or security often takes the form of insurance bonds,retentionfundsandbankguarantees.Retentionfundsaregenerallyheld as a percentage of progress payments up to an upper limit(generallyapercentageofthecontractprice).

1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.

Preliminary agreements, such as a letter of intent or heads ofagreement,aresometimesusedtoenableprogressonaprojectwhilethefinal termsarebeingnegotiated. However,partiesneedtobeclearastotheintentionofthepreliminaryagreementandwhetherpartiesintendforittobelegallybinding:Masters v Cameron [1954]91CLR353;Malago Pty Ltd v AW Ellis EngineeringPty Ltd[2012]NSWCA227.To prevent a preliminary agreement from becoming a contract,partiesshouldincludetheterms‘subjecttocontract’.

1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors’ all-risk insurance?

Thereareno‘constructionindustry’-specificcompulsoryorstatutoryinsurances. Common insurances required under a constructioncontractinclude:■ professionalindemnityinsurance;■ publicliabilityinsurance(foron-andoff-sitework);■ constructionworksinsurance;■ transitinsurancesforthetransportofitemstobeusedonsite;■ propertyinsuranceforcompletedworks,suppliesonsiteand

plantandequipment;■ motorvehiclepropertyinsurance;and■ motorvehiclethird-partypropertydamageandpersonalinjury

insurance.General insurances required include workers compensationinsurance along with motor vehicle third-party personal injuryinsuranceforregisteredplantandmotorvehicles.

1.5 Are there any statutory requirements in relation to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety?

(a) GeneralRequirementsIneachoftheStatesandTerritories,domesticorresidentialbuildingworkoveracertainmonetaryvaluemustbeinwriting,signedbythepartiesandparticularisetheworktobeundertaken.Security of Payment Legislation (SOPA) operates in each of theStates and Territories, prohibiting ‘pay when paid’ provisions incontracts and requiring progress payments to bemade. Contractclauses purporting to include ‘pay when paid’ provisions arerenderedvoid.Portable long service schemes operate in each of the States andTerritorieswhereworkers continuously accrue long service leaveindependent of the employer they are engaged by. The schemeswere designed to prevent a situation where workers would loseany accrued entitlementwhen they changed employers. Each of

Clyde & Co Australia


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2 Supervising Construction Contracts

2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party? Does any such third party (e.g. an engineer or architect) have a duty to act impartially between contractor and employer? Is that duty absolute or is it only one which exists in certain situations? If so, please identify when the architect/engineer must act impartially.

Within Australia it is common for construction contracts to besupervisedbyathirdpartyonbehalfoftheemployer.Supervisorsareoftenknownasthe‘superintendent’or‘principalrepresentative’.Thesuperintendenthasanobligationtoactinafair,just,unbiasedand skilful manner when acting independently of the contractorand employer; this may be express or implied: Perini Corp v Commonwealth[1969]2NSWLR530.However, in practice, the role and responsibilities of thesuperintendentaredependentonthecontractdefiningtheirduties.Thecontractmayalsospecifythatthesuperintendentisanagentoftheemployerandthusimpartialityisnotrequired.

2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when paid” clause?

Employers are not entitled to pay contractors upon their ownpayment.Since2009,allAustralianjurisdictionshaveimplementedSOPA,rendering‘paywhenpaid’clausesorsimilarprovisionsvoid.

2.3 Are the parties permitted to agree in advance a fixed sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre-estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss suffered?

Partiesarepermittedtoagreeinadvanceonliquidateddamagesintheeventofparticularbreachessubject tosomerestrictions. Thepredominantrestrictionisthattheliquidateddamagescannotbeapenalty. Liquidateddamageswillbeconsideredapenalty if theyare‘extravagantandunconscionable’orasetamountthatdoesnotconsiderthedegreeofthebreach:Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited[1915]AC79.Most construction contracts calculate damages as an amount forevery day that a prerequisite is not met under the contract, andthereforeproportionatetothelosssuffered.Furtherliquidateddamageshavetobeagenuinepre-estimateofthecostofthelosswhenconsideringtheparties’knowledgeatthetimeof theagreement:Esanda Finance Corporation v Plessnig [1989]166CLR131.Liquidateddamagesarecommonlysoughtfordelaysincompletionofthecontractorforfailuretomeetpreviouslyagreedperformancestandards.

Apartymayhaveaccesstothesecuritywherepermittedunderthecontract.Generally,thesecuritymaybecalleduponifthecontractordefaultsundertheconstructionproject,torectifydefectsduringtheprojectorforthecostofrectificationofdefectsduringthedefectsliabilityperiod.Queenslandistheonlyjurisdictionthatregulatessecurityandsetslimitsontheamountofretentionmonies,includingtheamountsthatmaybedeductedfromprogresspayments tobeheld forsecurity:Part4AoftheQueensland Building and Construction Commission Act 1991(Qld).

1.7 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees?

Bank guarantees are often used as security under constructioncontracts, are typically unconditional, and can be called upon ondemand. Parent company guarantees are also common practicewhereby the parent company guarantees the performance of thesubsidiaries’ obligations under the contract. Alternatively, theparentcompanymaystepintotheshoesofthecontractortoperformitsobligationsunderthecontract.Oftenacontractwillimposeconditionsthatmustbefirstsatisfiedbeforeapartycancalluponaformofsecurity.Courtswillonlyrestrainabeneficiaryfromcallingonaperformanceguarantee in limited circumstances, such as where the contractbetweenthepartiesclearlyrestrictstherighttocallontheguarantee:Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd [2011]FCA1337.Queensland is the only jurisdiction that imposes conditionswhen calling on security:Queensland Building and Construction Commission Act 1991(Qld).

1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that until they have been paid they retain title and the right to remove goods and materials supplied from the site?

Contractclausespurportingtoretaintitleovergoodsuntilpaymentis made by the employer are common practice – seeAluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976]WLR676–however,ifthematerialsorgoodshavebeenfixedinpositionandincorporatedintotheprojectaspartofpermanentworks,titlerightsinrelationtothosegoodswilltransfertotheemployerrenderingtheclauseineffective:Otis Elevator Co Pty Ltd v Girvan (Qld) Pty Ltd (QSC23August1990).Retention of title clause gives rise to a ‘security interest’ asdefinedunder thePersonal Property Securities Register Act 2009(Cth),whichcreatedanationalschemeforregistrationofsecurityinterests.Inorderforthesecurityinteresttobeeffective,itneedstoberegistered.



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thatisnecessarytosecureperformanceofthecontract:Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd[1979]144CLR596.

■ Progress payments/certificates: If there are no amountsincluded in thecontract, thecontractorwillbeentitled tobepaid a reasonable amount for work done: Horton v Jones (No 2) [1939]39SR(NSW)305. TheSecurityofPaymentLegislation (SOPA) in eachAustralian jurisdiction providesforentitlementtoprogresspayments.

■ Good faith: This remains an unsettled area of Australianlaw. However, there is authority supporting the existenceof a duty of good faith in commercial contracts:Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service[2010]NSWCA268;Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd[2012]NSWCA184.

In addition, courts that are reluctant to imply any good faithduty inacontractmaybewilling to implyadutyofhonestyandreasonableness:Renard Constructions v Minister for Public Works(1992)26NSWLR234.

3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that concurrent delay?

A contractor’s entitlement will depend upon whether the delayeventsareactuallyconcurrent(e.g.eventsthatareindependentbutwhichoccuratthesametimeandaffectprogressatthesametime),oraredifferentdelayswithconcurrenteffects. Inpractice,actualconcurrentdelayswillrarelyariseinconstructionagreements.Ifacontractorandanemployerbothcauseddelay,eventsaretreatedassequentialdelayswithconcurrenteffects,andaprocessoffactualenquiryisrequiredtodeterminethetruecauseofthedelay.Ifthetrue cause of the delay is due to the employer, the contractor isusuallyentitledtoanextensionoftimeanddelaycosts.However,ifthetruecauseofthedelayisaresultofthecontractor,thecontractorisgenerallynotentitledtotimeormoney.Inthecaseofatrueconcurrentdelay,thepositioninAustraliaisnotsettled.ItislikelythatAustraliancourtswouldadopttheEnglishposition; that is, thecontractor is entitled toanextensionof timewhereabreachordelaycausedbytheemployerisnotthedominantcauseofdelay,butat leasthasequal‘causativepotency’with thedelaycausedby thecontractororanyothermattercausingdelay:Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd[1999]70ConLR32.Most Australian standard form contracts expressly provide thatan entitlement to delay costs flows from an entitlement to anextensionoftime.ConsistentwiththeEnglishposition,however,itislikelythattheAustraliancourtswouldrequirethecontractortodemonstrate a clear causal connectionbetween anydelay costs itincurredandthemattercausedbytheemployer.Thisusualposition,however,maybemodifiedbytheexpresstermsoftheconstructioncontractasagreedbetweentheparties.

3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own delays but the employer uses up that period by, for example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed after this float is used up?

Thegenerallyacceptedviewis that if there isaperiodof timeinthecontractor’sprogrammethatenablesittoaccommodatecertain

3 Common Issues on Construction Contracts

3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right?

Theemployerhaslimitedabilitytocompelthecontractortovarythescopeofworkunderacontractunlessthereisexpresscontractualprovision for this. That said, most construction contracts willfeatureanexpress right tovary thescopeofworksandmake theresultantalterationstothecontractsumandtimeforperformance.Incontractswhichincludeanexpressrighttovary,thatrightmustbeexercisedreasonably:CW Constructions Pty Ltd v Condux Corp Ltd (NSWSC,RogersCJCommD,13October1989,unreported).Inaddition,thereisnopowertovarythecontractafteracertificateofpracticalcompletionhasbeenissued;Jamieson Constructions Ltd v Christchurch City(HighCt(Christchurch),CookJ,8November1984,unreported).Inordertomaketheadjustmenttothecontractsumresultingfromany variation, the payment is usually calculated by reference toratesagreedunderthecontractortheactualcostsuncured,togetherwithanallowanceforprofitsandoverheads.Incontractswhichdonotprovideforagreedrates,variationsareusuallyclaimedbythecontractorata‘reasonablerate’,whichwillcommonlybeassessedbythecontractsuperintendent.

3.2 Can work be omitted from the contract? If it is omitted, can the employer do it himself or get a third party to do it?

Unless there is clearprovision for it in thecontract,workcannotbeomittedfromthecontract:Carr v JA Berriman Pty Ltd [1953]89CLR327.Incaseswhereworkispermittedtobeomittedfromthecontract,expressprovisionisarequirementtoallowtheworktobeeitherbecarriedoutby theemployer themselvesorcarriedoutbyanothercontract:Commissioner for Main Roads v Reed & Stuart Pty Ltd [1974]131CLR378.Ithaspreviouslybeenattemptedtoside-stepthisrestrictiononomissionandreallocationofworkbyseparatingout the omission of thework from the award of theworks to analternativecontractorbut this toohasbeenprohibited:Bethlehem Singapore Private Ltd v Barrier Reef Holdings Ltd (NSWSC,15,27October1987).

3.3 Are there terms which will/can be implied into a construction contract?

■ Statutory warranties: Consumer protection legislation andsaleofgoodslegislationinallAustralianjurisdictionsimposeswarrantiesregardingtitle,merchantablequalityandreasonablefitnessforpurposestandards.

■ Reasonableness:Itwillbeimpliedincontractsthateachpartywillactreasonablyintheperformanceofthecontract:Renard Constructions (ME) Pty Ltd v Minister for Public Works[1992]26NSWLR234.

■ Materials and workmanship:Itisimpliedthatworkswillbebuiltinaworkmanlikemannerwithpropermaterials:Young & Marten Ltd v McManus Childs Ltd[1969]1AC454.

■ Cooperation:A term will be implied that each party mustdoallthingsnecessarytoenabletheotherpartiestohavethebenefitofthecontractandbeabletoperformtheirobligations.Atermwhichwillalsobeimpliedisthateachpartywilldoall



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3.9 Who usually owns the intellectual property in relation to the design and operation of the property?

Section 35(2) of theCopyright Act 1968 (Cth) (Copyright Act)provides that, largely, the author of the work retains ownershipof copyright. In circumstances where the obligations of theauthor’s employment under either a contract of service (or evenapprenticeship) required the carrying out of the design work,section35(6)providesthattheownerofthecopyrightisinfacttheemployer.Itisimportanttonotethatapartydoesnotnecessarilyneedtobethecopyrightownerinordertomakeuseofthecopyrightmaterial.Certain associated rights can be licensed (either expressly orimpliedly)bytheownerofthecopyright.Forexample,thereisanimpliedlicenceinfavouroftheownersoflandtousearchitecturaldrawingsandplansforthepurposetheywerecontractedfor.Thisimplied licence also generates an implied consent in favour ofthe successors in title:Concrete Pty Ltd v Parramatta Design & Developments Pty ltd [2006]229CLR577.Exclusion or modification of these general rules is possible byagreement (section 35(3)), including byway of an assignment atlaw(section196(1)).

3.10 Is the contractor ever entitled to suspend works?

Thereisnocommonlawrighttosuspendworksforanyreason.Intheeventthatthereissuspensionwithoutsufficientlawfulcause,thesuspensioncanentitletheinnocentpartytoclaimthatthecontracthas been repudiated by the unlawful party and to terminate thecontractonthebasisofsaidrepudiation:Foranv Wight [1989]168CLR385.Alimitedrighttosuspendtheworkwithoutterminatingthecontractisprovidedforinthestandardformcontracts,orincaseswheretheemployerdirectssuspensionoftheworksasaresultofdefault.InallAustralianjurisdictions,aclaimantunder theSOPAlegislationhas a statutory right to suspend works in circumstances wheremoneyisdueandpayableasaresultofanunpaidclaim.

3.11 On what grounds can a contract be terminated? Are there any grounds which automatically or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly?

Three circumstances give rise to a right to terminate a contractat common law: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd[2007]233CLR115.Theseare:■ wherethetermbreachedisa‘condition’oranessentialterm

ofthecontract;■ wherethetermbreachedis‘intermediate’innaturebutitisa

seriousbreachwithseriousconsequences;and■ repudiation.

The right to terminate on any of these grounds exists regardlessofanyterminationprovisionsembodiedinthecontract,unlesstheterminationclauseexpresslyexcludes thecommonlawrightsandis a ‘code’ or complete statement of circumstances in which thecontractcanbeterminated.Repudiationoccurswhenonepartyevincesaclearintentiontonolongerbeboundbythecontractoronlytoperformthecontractinsuchawaythatitissubstantiallyinconsistentwiththefundamentalobligations of that party: Shevill v Builders Licensing Board[1982]149CLR620. The required intentionwill bedetermined

risks(e.g.inclementweatherorindustrialactivity),this‘float’timeisabufferandriskmanagementtoolforthebenefitofthecontractor.Insituationswhereacontractprovidesthatanextensionoftimeorvariationwillbegrantedonlyifthedelayaffectstheachievementof completion by the contract completion date, then the effect isthatthefloathastobeusedpriortoanextensionoftimebeingdue.Australiancourtsarereluctanttoimplyanobligationoneithertheprincipalorthecontractortopreservethefloatand/orachievethetargetcompletiondate.Thisobligationwouldariseonlyifitwereexpressedasatermofthecontract:Glenlion Construction Limited v The Guinness Trust[1987]39BLR89.UnderthedraftingofmanyoftheAustralianstandardformcontracts,thecontractorowns thefloat. Accordingly, thecontractorwillbeentitledtoanextensionoftimefortheeffectofariskeventcausedbytheprincipal(e.g.thevariation)onthetargetdateforcompletion,eventhoughthismaynotdelayachievementofcompletionbeyondthecontractualdateforcompletion.

3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims against each other? How long is that period and from what date does time start to run?

Thetimelimitforbringingaclaimforbreachofcontractis,generallyspeaking,sixyears,suchperiodbeginningonthedateofthebreach(e.g. section14Limitations Act 1969 (NSW)) (Limitations Act).Thetimelimitisextendedto12yearsincircumstanceswherethecontractismadeunderadeed(e.g.section16LimitationsAct).Themajority of the standard form construction contracts containprovisionsrelatingtoa‘finalcertificate’(Final Certificate). TheFinalCertificateistobeissuedatthecompletionofaprojectanddealswithallclaimswhicharisefromorinrelationtothecontract.TheFinalCertificate isalsooftenused,withsomeexceptions,asevidence of compliance with the contract and some claims maybe extinguished depending on the express wording of the FinalCertificate.

3.7 Who normally bears the risk of unforeseen ground conditions?

Exceptforwherethematterisaddressedexpressly,thecontractorwillbeartheriskwherethecompletionoftheprojectismademoreproblematic byunexpectedground conditions:Pearce v Hereford Corporation [1968]LGR747;Thiess Services Pty Ltd v Mirvac Queensland Pty Ltd [2006]QCA50.Several of the Australian standard form contracts enable theemployerandcontractortosharetheriskbetweenthem.Intheseprovisions,whereconditionsaresuchthattheywouldnothavebeenforeseenwhentheprojectwastenderedfor,thecontractorwillbeabletoclaimanextensionoftimewheredelaysoccurandalsoclaimfortheextracostsincurredinordertobringtheprojecttocompletionthathavearisenasaresultoftheunanticipatedconditions.In circumstanceswheremisleading or deceptive informationwasprovided by a party prior to contract, the Australian Consumer Law(schedule2iftheCompetition and Consumer Act 2010 (Cth))(Australian Consumer Law)mayprovidearemedy.

3.8 Who usually bears the risk of a change in law affecting the completion of the works?

ThemajorityofAustralianstandardformcontractsmayallocatetheriskofachangeinlawtotheemployer.



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obligationswillbedischarged:Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] 149CLR 337. While the commonlawpositionisthatlossresultingfromafrustratingeventlieswhereitfalls,someAustralianjurisdictionshavealteredthispositionwithlegislation.

3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against the original contracts in relation to defects in the building?

Thepositionatcommonlawis that there isnoentitlementforanindividualtoclaimthebenefitofaconstructioncontractiftheyarenotinfactapartytothatcontract.Thisstancehasbeenmodifiedby legislation in theNorthernTerritory,Queensland andWesternAustralia.Therefore,theoriginalbuildingcontractcannotbeenforcedbyanysubsequentowner.Itisthecase,however,thatasubsequentbuildingownermay be owed a duty of care by the builder to avoid pureeconomic loss (which includes defective work and/or materials).Generally speaking, the courtswill not foist such a tortious dutyof care in circumstanceswhere the injured partywas reasonablycapable of taking steps to protect themselves, for example, bycontrolling the physical events which lead to the loss, obtainingcontractual warranties in respect of the standard of work andmaterialsusedornotably,obtaininginsuranceagainsttheeconomiclosswhichhadbeensuffered:Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004]216CLR515;Brookfield Multiplex Limited v Owners Corporation Strata Plan61288[2014]254CLR185.

3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off?

The existence of a right to set-off turns on the provisions of theindividual contract in question. The terms of contract mustdemonstrateaclearintentiontoallowanemployertowithholdanymoniesfromacertifiedamountunderthecontractforanysuchrightto be rightfully and lawfully exercised:Leighton Contractors Pty Ltd v East Gippsland Catchment Management Authority [2000]VSC26.

3.15 Do parties to construction contracts owe a duty of care to each other either in contract or under any other legal doctrine?

Thereareanumberofimplieddutiesowedtoanemployerunderacontract,additionaltothosedutiesexpresslystatedinthecontract.Theseimplieddutiesare:1. to carry out and completework in a careful and competent

manner, inaccordancewith the lawandwithina reasonabletime;

2. to ensure that any materials supplied are of a good andacceptablequalityandreasonablyfitforthepurposeforwhichtheyarerequired;and

3. to ensure that any dwelling constructed is reasonablyfit forhabitation.

Inadditiontoanycontractualobligations,adutyofcaretopreventpersonalinjury,topreventdamagetopropertyand,insomecases,toavoidpureeconomiclossmaybeowed.

objectivelybutcanbeestablishedbytheparties’words,conductoractualinabilitytoperform:Sunbird Plaza Pty Ltd v Maloney[1988]166CLR245.Inordertoterminatethecontract,theinnocentpartymustaccepttherepudiation.Inthecaseofconstructioncontracts,repudiation notably gives the contractor an opportunity to seekdamagesforlossofbargain,oralternatively,recoveronaquantum meruitbasis.Both parties are discharged from the obligation of furtherperformance following termination of the contract although allaccrued rights and obligations remain: Southern Han Breakfast Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd[2016]HCA52.Separately, express rights of termination may also be providedfor in thecontract,detailingwhichbreachesareofsuchaseriousnatureastoentitlethepartytoterminatethecontractorotherwise,providing a cure regime, for example, when a contractor is nolongerincompliancewiththecontractprogramme.Inthesecases,eitherpartymayissueashowcausenotice,whichwouldspecifyadeadlinebywhichthebreachmustberectified.In addition, the contractmaymake provision for termination forconveniencewithoutdefaultofeitherparty.Relianceonsuchclausesmaydependontherightbeingexercisedingoodfaith,butthiswillturn on the terms of the contract itself:Apple Communications v Optus Mobile [2001] NSWSC 365; Sundararajah v Teachers Federation Health Ltd[2009]NSWSC1443.

3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue successfully that a contract which has become uneconomic is grounds for a claim for force majeure?

Althoughadoctrineof force majeuredoesnotexist inAustralianlaw, the incorporationofa force majeure clause inaconstructioncontractisoftenseen.Theclausemakesprovisionfortheallocationof risk in circumstances where the performance of the contractbecomesimpossibleduetosuperveningeventsbeyondthecontrolof the parties. It can be said that reliance on such clauses ismorefrequentandextensivethanonthecommonlawdoctrineoffrustration.Theeffectofa force majeure clause isnormally that theaffectedparty’s obligations to perform the contract will be suspended intheeventofaforce majeureevent.Theclausealsooftenprovidesthateitherpartymayacquiretherighttoterminatethecontractincircumstanceswheretheeffectsoftheforce majeureeventcontinueforapre-establishedduration.Thefactthatthecontracthasbecomemore expensive (or impractical) to perform is usually not in andofitselfaforce majeureevent:Gardiner v Agricultural and Rural Finance Pty Ltd[2007]NSWCA235.Afrustratedcontract,ontheotherhand,isacontractwhich,followingitsformation,andwithoutdefaultbyeitherparty,isincapableofbeingperformeddue to anunforeseen event, resulting in the obligationsunderthecontractbeingradicallydifferentfromthosecontemplatedby the parties at the time of contracting: Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982]149CLR337. Theestablishmentoffrustrationofcontractisnotwithoutitschallenges,andwillnotbefoundincircumstanceswheretheoccurrenceoftheparticulareventwasforeseenbythepartiesormadeprovisionforin a force majeure clause:Davis Contractors Limited v Fareham Urban District Council[1956]AC969.Theeffectof frustrationofacontract isnot that thecontractwillbevoidfromitscommencement,butinsteadwillbeautomaticallyterminated at the point of the frustrating event and all future



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3.18 Where the construction contract involves an element of design and/or the contract is one for design only, are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in respect of his work?

In the absence of any express modification in the contract, atcommon law, a designermust exercise reasonable care and skillinundertakinganydesignduties:Voli v Inglewood Shire Council[1963]110CLR74. Thestandardappliedis thatofareasonablycompetent person exercising that particular skill:Mutual Life & Citizens’ Assurance Co Ltd v Evatt[1970]122CLR628.ProfessionalStandardsActsoperate in allAustralian jurisdictionsandpermitthelimitationofliabilityofprofessionalsunderapprovedschemes.Proportionate liability legislation also exists in all Australianjurisdictions, facilitating limitation of the liability of a party toreflecttheirproportionoftheresponsibility,incircumstanceswheretheir negligence has caused economic loss, combined with theactionsofotherparties.

4 Dispute Resolution

4.1 How are disputes generally resolved?

Intheconstructionindustry,disputesareoftenresolvedinaccordancewithpre-agreedprocesses.Constructioncontractsgenerallyprovideforasequenceddisputeresolutionprocess.Thisprocessvariesfromcontracttocontract,butwillusuallymandatesomecombinationofthe following steps: a conferencebetween the parties;mediation;arbitration;andexpertdetermination.Usually,thesestepsaretaken,orrequiredtobetaken,beforethepartieslitigateincourt. Thesedisputeresolutionclausesaregenerallyenforceableprovidedtheyaredraftedwithsufficientclarityandcertainty.Evenifthecontractdoes not require the parties to engage in these dispute resolutionprocesses,partiesoftenopttoengageintheseprocessestoavoidthecostandhassleofcourtproceedings.Withrespecttocourtproceedings,buildingandconstructiondisputesaregenerallyresolvedinStateandTerritorycourts.Thelitigant’schoice of court is generally determined by the availability of theremedy being sought (for example, the amount of compensationsought).In addition to the above processes, each State and Territory haslegislatedtocreatea‘securityofpayment’regime.Itiscommonforpartiestomakeuseoftheseregimestoresolve(atleasttemporarily)payment disputes. These statutory regimes allow persons whoprovide constructionwork (and/or related goods and services) torecover staged payments (known as ‘progress payments’). Thesecurityof payment regimesweredesigned to ensure that partieswhoperformconstructionworkhaveanenforceablerighttointerimpayment despite clauses in construction contracts that purport tolimitorblocktheabilityofpartiestorecoverpayments.Ifthepartiesdisagree on the right to, or quantum of, a progress payment, thesecurityofpayment regimesallows foranexpeditedadjudicationprocess whereby an independent adjudicator determines theentitlementto,andquantumof,theprogresspaymentdue.

Where the contractor or subcontractor has acted negligently, thelawundoubtedlypermitsthepersonsinjuredorwhosepropertyhasbeendamagedtoholdthosecontractorsliable,evenincaseswherethere have been subsequent post-completion failures or accidentswhich have been caused by that same negligence. A contractor,underexpressterms,willordinarilyindemnifytheemployerforanyclaimsforpersonalinjuryorpropertydamagewhichariseasaresultofthecontractorcarryingoutthework.Theimpositionofatortiousduty of care to avoid pure economic law is, however, less easilyascertained.Onthewhole,thecourtsarelesslikelytoimposesuchadutyofcarewheretheinjuredpartywaseasilycapableoftakingthenecessarystepstoeithercontroltheeventswhichgaverisetothe loss or by obtaining contractual warranties in respect of thestandardofworkandmaterialsusedor,notably,obtaininginsuranceagainsttheeconomiclosswhichhadbeensuffered:Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004]216CLR515;Brookfield Multiplex Limited v Owners Corporation Strata Plan61288[2014]254CLR185.

3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that ambiguity is interpreted?

Theobjectiveintentofthepartiesisusedtosettleanyambiguityinacontract.Thismeansthatthetermsofthecontractareinterpretedin the way that a reasonable person would take them to mean.Ordinarily, this involves consideration of the actual text of thecontractbutalsothecontextwithinwhichthepartiescametoagreethe contract, including their knowledge at the time and the driveandobjectiveformakingtheagreement:Neweyv Westpac Banking Corporation [2014] NSWCA319; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015]256CLR104.Thecourtshavetakentoconsideringthesurroundingcircumstancesinordertounravelanyambiguity.But,itshouldbenotedthatthisdoes not extend to considering the parties’ subjective intentionsat the timeof contract andevidenceof this, orpriornegotiationsbetweenthepartiesisinadmissible.ThereisuncertaintyinAustralianlawastowhethercourtscanhaveregard to the factualmatrixwhere the terms of a clause discloseno apparent ambiguity: Western Export Services Inc v Jireh International Pty Ltd [2011]282ALR604;Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd[2014]WASCA164(S).

3.17 Are there any terms in a construction contract which are unenforceable?

Perquestion2.3above,penaltiesareunenforceable.Whiletherearenootherspecificprovisionsinacontractwhichareunenforceable, it is possible that the contract as awholemay bedetermined by a court to be unconscionable under theAustralianConsumerLaw.There may also be circumstances where contractual provisionswhichattempttocontractoutofcertainlegislativerequirementsareheldtobeunenforceable.Forexample,section44oftheSecurity of Payment Act 2009(Act)providesthatitisprohibitedforapartyto attempt to ‘contract out’ of compliance with theAct and theprovisions will be deemed void which are inconsistent with theActorhave‘theeffectofexcluding,modifyingor restricting’ theoperationoftheAct.Otherstateshavesimilarlywordedprovisionsintheirequivalentlegislation.



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International Commercial Arbitration. International commercialarbitrationinAustraliaisgovernedbytheInternational Arbitration Act 1974 (Cth) (IAA). The IAA adopts the 1985 UNCITRALModelLaw.TheIAAisapplicabletoallinternationalcommercialarbitrationsconductedwithinAustralia,exceptinsofarasthepartiescontractoutoftheIAAandchooseanalternative(forexample,thedomesticcommercialarbitrationprocedure).

4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement.

Yes. The enforcement of international arbitration awards inAustralia is subject to the legislative framework of the 1958New York Convention on the Recognition and Enforcement ofArbitrationAwards,whichwasenactedaslawinAustraliabytheIAA.TheIAAalsoprovidesthattheUNCITRALModelLawonInternationalCommercialArbitrationhaseffectinAustralia.The IAA provides a relatively simple and succinct process ofrecognition and enforcement of international awards. The basicstructureoftheIAAisthatinternationalarbitrationawardstowhichtheActappliesarepresumedtobeenforceableinAustraliaunlessoneofthedefencesprescribedbytheIAAapplies.Thegroundsforrefusingenforcementofaforeignarbitralawardarelistedinsection8oftheIAAandarelargelybasedonArticle5oftheNewYorkConvention.OneminordifferenceisthatthepublicpolicygroundisfurtherelaboratedonintheIAA.UndertheIAA,anawardisdeemedtobecontrarytopublicpolicyif:■ themakingoftheawardwasinducedoraffectedbyfraudor

corruption;or■ abreachoftherulesofnaturaljusticeoccurredinconnection

withthemakingoftheaward.

4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction?

Yes,butonlyifcertainfurtherconditionsaresatisfied.InAustralia,therearetwowaystoenforceaforeignjudgment:(1)pursuanttothe common law; and (2) pursuant to theForeign Judgments Act 1991 (Cth).Enforcement at common lawTherecognitionorenforcementofaforeignjudgmentatcommonlaw depends on the theory of obligation (i.e. that there is anobligationonthepartofthejudgmentdebtortopayasumofmoneytothejudgmentcreditorandthattheforeignjudgmentisevidenceofthatobligation).However,theobligationisnotenforceablebecause oftheforeignjudgment–theobligationisstrictlyonlyenforceablewhen adjudged to be enforceable by a court in the forum, andaccordingly,reducedtotheformofajudgmentoftheforumcourt.ForanAustraliancourttoacceptthatajudgmentmadeinaforeigncountrycreatesanobligationonthepartofthejudgmentdebtorthattheforumcourtispreparedtorecogniseandenforce,thejudgmentmustsatisfythefollowingfourconditions:1. theforeigncourtmusthave‘internationaljurisdiction’(e.g.the

judgmentdebtorwaspresent intheforeignplaceat thetimetheywereservedwiththeinitiatingprocessfortheproceedingsintheforeigncourt,orthejudgmentdebtorsubmittedtothejurisdictionoftheforeigncourt);

2. thejudgmentmustbefinalandconclusive;3. thejudgmentmustbeforafixedsum;and4. thepartiesmustbeidentical.

4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general procedures.

Yes. EachStateandTerritoryhasa‘securityofpayment’regimewhich is a legislative regime designed to resolve, on an interimbasis, disputesoverprogresspayments in relation to constructionwork.Ingeneral,theregimesconferastatutoryrighttoprogresspaymentsonpersonswhohaveundertakentocarryoutconstructionwork(orproviderelatedgoodsandservices)underaconstructioncontract.Thelegislationalsoprovidesforanexpeditedadjudicationprocessto resolve disputes regarding entitlement to, and quantum of,progresspayments.In general, a person who has carried out construction workwill serve a ‘payment claim’ on the recipient of thatwork. Therecipientoftheworkthenmustserveareplyknownasa‘paymentschedule’within a designated period. If no payment schedule isprovided, the claimant can take steps to enforce the paymentclaim via adjudication or via the courts. If a payment scheduleisprovided,butproposedtopayanamount that is less thanwhatwasclaimedin thepaymentclaim, theclaimanthas theoptionoftakingthemattertoadjudicationtoberesolvedbyanadjudicator.Tocommenceadjudication,theclaimantmustprepareandserveanadjudication application on the respondent and on an ‘authorisednominating authority’. The authorised nominating authority thennominatesanadjudicatortodeterminetheadjudicationapplication.Therespondentmayprovidean‘adjudicationresponse’inreplytotheadjudicationapplication.Thenominatedadjudicatormustthendetermine theclaimant’sentitlement to theprogresspayment, theduedateforpayment,theinterestrateonunpaidamountsandtheparties’liabilityfortheadjudicator’sfeesandexpenses.Oncetheadjudicatorissuestheirdetermination,andiftherespondentfailstopaytheamountdeterminedbytheadjudicator,theclaimantcantakestepstoenforcetheadjudicator’sdeterminationincourt.Thevariousstagesoftheadjudicationprocessareverycondensed,andtheentireprocess(fromthepaymentclaimtotheadjudicator’sdetermination) may occur in a matter of weeks. The variousdeadlines for each step of the process are strictly enforced andlatenesscanbefataltoaparty’sposition.

4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how arbitration works in your jurisdiction.

Yes. Standard form construction contracts in Australia oftenpossess arbitration clauses. Arbitration is often used where thedispute involves technical or commercial questions and it is afairlycommondispute resolutionprocesswithin thebuildingandconstructionindustry.Partiestoaconstructioncontractwilloftenpre-agree on the arbitration body, or the process of nominatingthe arbitrator. In the construction industry,most arbitrations arecommenced pursuant to arbitration clauses. The outcome of thearbitration process is generally intended to be final and binding,subjecttolimitedreviewbythecourts.Arbitrationproceedingsaregenerallyprivate;however, theremayonlyexist limited rightsofconfidentialityinrelationtothedocumentsandmaterialsproducedforthearbitration.InAustralia, international arbitration and domestic arbitration aregovernedbyseparatelegislativeschemes.ThelawandprocedureofdomesticarbitrationisgovernedlargelybytheuniformCommercial Arbitration Acts ineachStateandTerritory.TheseActshavebeenreformed so that they alignwith theUNCITRALModelLawon



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First instanceIngeneral,proceedingsareusuallycommencedbywayofawrittenapplication(or‘originatingprocess’)whichisfiledinthecourtandservedonthedefendant.Thedefendantmaythenfileandservearesponse. These documents serve to set out the nature and factsof the dispute and to narrow the relevant issues for the court’sdetermination.Partiesarethenrequiredtoprepareandservetheirevidence. Thismay involve seekinganorder fordiscovery fromthecourt. Partieswill thencompile legalsubmissionswhichwillbefiledwiththecourtandservedontheotherparty.Thedatesforthesestepscanbeagreedbythepartiesormandatedbythecourt.Proceedingsculminatewithatrialbeforeoneormorejudges,whothenproceedtowriteandissueajudgmentwhichdecidestheissuesbetween the parties. The timebetween the trial and the handingdownofthejudgmentcanvarygreatly(fromdaystomonths).Proceedings can vary in total duration (from months to years)dependingonarangeoffactorssuchasthecomplexityoftheissues,thevolumeofevidence required tobepreparedandadduced, theoccurrenceofinterlocutorydisputes,thepreparednessofthepartiesandthenatureandcomplexityofthetrial.SomeAustralianStatecourts have special building and construction lists (for instance,theTechnologyandConstructionListintheEquityDivisionoftheNewSouthWalesSupremeCourt),whichseekstofacilitatequickerresolutionsofsuchdisputes.AppealInsomecircumstances,apartymayhavearighttoappealadecisionof a court. In other circumstances, the partywill be required toobtainleave(permission)oftheappellantcourttoappealadecisionof a lowercourt. Theavailabilityand scopeof aparty’s right toappealwilldependonanumberoffactorsincludingthenatureoftheproceedingsandtherulesofrelevantcourts.Generally,apartyonlyhasashortperiod(generallywithin28days)inwhichtolodgeanappeal.Theprocesstomakeanappealvariesdependingontherelevantcourtrules,butitofteninvolvesfilinganoticeofappeal.Ifapartyfailstomakeanappealintime,theymaylosetheirabilitytomakeanappeal.Thetimebetweenthelodgingoftheappealandthedecisionoftheappellantcourtvariesgreatlydependingon thecomplexityof thematter.However,giventheappellantcourt’sroleisgenerallymorelimited(especiallyinrelationtofact-finding)thanthecourtoffirstinstance. Thus an appeal court is generally able tohanddownajudgmentfasterthanacourtoffirstinstance.

However,theforeignjudgmentwillnotbeenforcedatcommonlawwhentheforeignjudgmentwasobtainedbyfraud,whentherewasadenialofnaturaljustice,whereenforcementwouldbecontrarytopublicpolicyorwherethejudgmentispenalorfinancialinnature.Further, someAustralian courts can use their inherent equitablejurisdiction to give effect to foreign judgmentswithout requiringthattheforeignjudgmentbemadeajudgmentoftheforumcourt.Enforcement pursuant to the Foreign Judgments Act 1991 (Cth)The Foreign Judgments Act 1991 (Cth) allows registration ofjudgments from both superior and inferior courts of proclaimedplaces. A judgment creditor is able to apply for registration ofa foreign judgment in the SupremeCourt of a State orTerritory.In order for a foreign judgment to be registered, the followingrequirementsmustbesatisfied:1. theapplicationforregistrationoftheforeignjudgmentmustbe

madewithinsixyearsofthedateofjudgmentor(wheretherehavebeenproceedingsbywayofappealagainstthejudgment)thedateofthelastjudgmentinthoseproceedings;

2. the foreign judgment must be an ‘enforceable moneyjudgment’;

3. theenforceablemoneyjudgmentmustbefinalandconclusive;and

4. theenforceablemoneyjudgmentmustbegivenbyacourtofacountrytowhichtheActextends.

Oncetheserequirementshavebeensatisfied,thecourtmustorderregistrationoftheforeignjudgment.OnregistrationintheSupremeCourt,aforeignjudgmenthasthesameforceandeffectasajudgmentofthatcourtandisdeemedtobemadeonthedateofregistration(which is taken to be the date of the court’s order). The foreignjudgmentcanbeenforcedbyallthenormalprocessesofexecutionavailableinthatcourt.Notethereareanumberofgroundsonwhichajudgmentdebtorcanapplytohavetheregistrationoftheforeignjudgmentsetaside.

4.6 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal.

Theprocess,rightsofappealanddurationofproceedingscanvarygreatlybasedonthenatureoftheproceedingsandtheparticularcourtthat theproceedingsarebrought in. Disputes in theconstructionindustry are generally resolved in State orTerritory courts ratherthanFederalcourts.



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Clyde & Co is an international law firm with a pioneering heritage and a resolute focus on its core sectors of aviation, energy, healthcare, infrastructure, industrials, insurance, marine, professional practices, shipping and trade. With over 2,000 lawyers operating from 46 offices and associated offices across six continents, the firm advises corporations, financial institutions, private individuals, and governments on a wide range of contentious and transactional matters. Clyde & Co has a particularly strong track record in complex cross-jurisdictional disputes and an outstanding reputation in international arbitration.

We are distinguished by our focus on insurance, with over 340 partners and over 1,000 lawyers specialising either wholly or materially in this sector alone. The firm offers insurers and reinsurers the opportunity to source legal advice from one law firm across many jurisdictions and across a wide spectrum of business lines, including: aviation & aerospace; construction & engineering; corporate insurance services; employment practices liability; energy; financial institutions and D&O; marine; mining, industrials & power; personal injury (including disease, EL/PL, motor, clinical negligence, catastrophic loss, and fraud); product liability & recall; professional indemnity; property; reinsurance; and specialty (including accident & health, bloodstock, contingency, cyber, fine art, kidnap & ransom, political risk & trade credit, product recall, specie & jewellers’ block and surety).

We are frequently recognised for our leading insurance expertise. For example, we were named “Insurance Law Firm of the Year” at the Reactions London Market Awards in 2013 and 2012, and we have been recognised as “Insurance & Reinsurance Law Firm of the Year” by Who’s Who Legal for the last four years (2015, 2014, 2013 and 2012) and UK Insurance Firm of the Year 2015 by The Legal 500. The firm was named “Firm of the Year” in 2016 by The Lawyer.

Kon specialises in construction and engineering law with a focus on infrastructure, building, rail, energy and resources and acts for some of the leading participants in those sectors. Kon has an acute understanding of the array of complex technical, legal and commercial issues that underpin successful project delivery.

He is experienced in providing strategic advice to market participants on the structuring, negotiation, drafting and administration of contracts across a broad range of projects across Australia, including residential and commercial developments, roads, bridges, airports, sporting facilities, and process and power plants.

Kon also has extensive experience in dispute resolution including expert determination, litigation and arbitration. Having previously worked at another leading Australian law firm, Kon is recognised as a rising star, particularly due to his track record in negotiating early and cost-effective resolution of major disputes, utilising alternative dispute resolution mechanisms where necessary. Doyles recently named Kon as a ‘Leading Construction & Infrastructure Litigation Lawyer – Australia’ in its 2017 guide. He was previously listed as a ‘Recommended Construction & Infrastructure Lawyer – Sydney’ in its 2016 guide.

Kon NakousisClyde & CoL15, 333 George Street Sydney, NSW, 2000Australia

Tel: +61 2 9210 4416Fax: +61 2 9210 4599 Email: [email protected]: www.clydeco.com

Teodor is an experienced front-end construction lawyer, with significant expertise in public-private partnerships, drafting and negotiating commercial agreements, identifying suitable project delivery methods, conducting extensive risk analysis and undertaking general contract administration. He has acted for both government and contractors throughout the life cycle of a project, and has a strong understanding of differing stakeholder imperatives.

Teodor currently advises a diverse range of clients on D&C, O&M, CM, procurement and JV/alliance agreements, as well as subcontractor management.

Teodor LomacaClyde & CoL15, 333 George Street Sydney, NSW, 2000Australia

Tel: +61 2 9210 4931Fax: +61 2 9210 4599 Email: [email protected]: www.clydeco.com



Chapter 5

SBH Law Office

Ivan Martynov

Vitaly Tvardovskiy

Belarus


Belarusian contract law does follow the continental doctrine ofofferandacceptance;howeverthisisoflittlepracticalimportancedue to the requirement for construction-related contracts to bewrittendocumentssignedbybothparties(seebelow).Courtswillpresumethatofferandacceptancehaveoccurredoncethereissucha document. Intention to create legal relations is also presumedprovided the “material conditions” requirements are met (seebelow).However,therearecertainspecificpre-conditionswhichaffectthevalidityandenforceabilityofconstructioncontract.Suchpre-conditionscanbegroupedasfollows:1. Requirementsofform.2. Requirementsofcontent.3. Compliancerequirementsfortheemployerandthecontractor.4. Tenderingrequirements.Requirements of formAll types of construction contracts mentioned in response toquestion1.1mustbeinwriting.Contractsforconstructionworks,aswellascontractsfordesignandsurveyworks,mustbeexecutedas “one document”,meaning that theymust exist as a documentsignedbybothparties.Thismeansthatconstructioncontractsmadebycorrespondenceoranyotherexchangeofdocumentssignedbyoneofthepartieswillrun afoul of this requirement. Where this occurs, the contract isnot invalidated,but thepartiesmaynotrelyonwitnesstestimonyto prove the existence of such a contract and the content of itsconditions.Requirements of contentAsmentionedabove,contractsmustinclude“materialconditions”asprovidedbythe law. If thisrequirement isnotmet, thecourtsmaynotenforceaconstructioncontract.Lately,thepracticeofthecourts has becomemoreflexible in this respect and the courts inmanycasesconsiderwhetheracontractlackingmaterialconditionsisexecutoryorexecuted.Ifthelackofspecificmaterialconditionsdoes not per se limit the court’s ability to enforce an executedcontract,inmanycasesthecourtswillconsidertherespectiveclaimforenforcementonitsmerits.



Belarusian law provides for several types of construction-relatedcontracts.Themaintypesare:1. contractsforconstructionworks;2. contracts for design and survey works and contracts for

designers’supervision;3. engineering services contracts, where the following sub-

typesexist:a. contracts for technical supervision services, which are

largelysimilartoquantitysurveyorservices,astheyaretermedinotherjurisdictions;and

b. other engineering services, including general sitemanagement;and

4. pooled investment real estate development (“dolevoye stroitelstvo”)contracts,wherethedeveloperraisesfundsfromapoolofinvestorssubjecttotheundertakingtoprovideeachinvestorwithaspecificpartoftheproperty.Thedeveloperthencontractswiththedesigners,theconstructioncontractors,et al.

A specific contract form is provided by the law only for pooledinvestmentinresidentialandrelatedproperties.Forothertypesofconstruction-relatedactivities,nospecificformsassuchareprescribed;however,strongrequirementsexistforso-called “material conditions”, which the contracts must contain,ofteninspecificforms,underthepainofnullityofthecontract.Yes, a single contract may contain both design and constructionobligations.Yes, it ispossible for theemployer tosignageneralconstructioncontract and a contract for engineering services for the generalmanagementofconstructionactivitiesandtherebyappointageneralcontractor and an engineering company who will be completelyresponsible for the eventual delivery of the project. However,pleasenotethatcertainkeyfunctionswill,inanyevent,remainwiththeemployer.


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The law does provide for mandatory insurance for industrialaccidents and work-related medical conditions for employees.Companies which operate equipment and facilities which areclassedaspresentinganindustrialhazardarerequiredtoinsurerisksrelatedtotheoperationofsuch.


Formostprojects, theemployer is required tofirst commissiona“pre-investmentstudy”,which isdirectedat theevaluationof thearchitectural,engineeringandfinancialfeasibilityoftheprojectandtheassessmentofitsenvironmentalimpact.Adecisiontoproceedwiththeprojectmustbetakenwithregardtothestudy.Anothergeneralrequirementistheattestationofcompaniesinvolvedin construction activities. This includes the employer, designers,all contractors andproviders of engineering services. Attestationinvolves verification of compliance with multiple requirements,includingthequalificationofemployees,healthandsafety,aswellasqualitymanagementpolicies,certificationofworksandservices,financial standing, availability of necessary equipment, staff, etc.Employers may be exempted from attestation if they retain anengineering company for “comprehensive management” of theconstructionproject.Notethat,startingfrom23February2018,employersareexemptedfromattestationinregardtocertainrefurbishmentworksandcapitalmaintenance works. Furthermore, the list of what qualifies as“constructionactivities”andthusentailstheneedforattestationisalsosubstantiallyreduced.Priortothestartofanyconstructionproject,theemployermusttakeoutconstructionanddesignpermitsinrespectofthatproject.Pleasenotethat,priortothe23February2018,twotypesofconstructionpermitswererequired:thepermittoconstruct;andthepermitfortheperformanceofconstructionandinstallationworks.Thelatterwasissuedafter theemployerhasentered intoaconstructioncontractandthedesigndevelopment(StageAdesign)wascompleted.Onlyaftertheissuanceofthatlatterpermittheactualconstructionworkscouldbegin. After thesaiddate, thisrequirementdoesnotapply.Inordertobeginconstructionworks,theemployermustnowonlynotifytherelevantgovernmentauthoritytobegintheconstructionworks, provided that Stage A design has passed mandatorygovernmentreview.Furthermore, starting from 23 February 2018, no constructionpermits are required for certain refurbishment works as well ascapitalmaintenanceworks.Health and safety, as well as other labour-related requirements(durationofaworkingday, lengthof restperiods, lifeandhealthinsurance, protective equipment andmeasures andwages) are allregulatedinaccordancewithexistinglabourlawsandconstructionregulations.Thecontractorisvicariouslyliableforitsemployees.Contractors,aswithallothercompanies,arerequiredtowithholdfromtheemployees’wagesandpaythefollowing:■ incometaxat13%ofthewagespaidandmostfringebenefits

providedtoemployees;and■ a social securitycontributionof1%of thewagespaidand

mostfringebenefitsprovidedtoemployees.Beyondthat,contractors,againaswithallcompanies,arerequiredto pay (without withholding) an employers’ social securitycontribution, which is, in most cases, equal to 34% of the totalpayrollandtotalfringebenefitsprovidedtoemployees.

The list of material conditions in construction contracts is verywide: scope of work; starting and completion dates; pricing;payment;procedureforthecertificationofworks;andevenspecificrequirements for how the details of the parties are given in thecontract.Compliance requirements for the employer and the contractorThe law sets certain pre-conditions which the employer and thecontractormustsatisfypriortoenteringintoaconstructioncontract.For the employer, these pre-conditions include, among others:possessionofconstructionanddesignpermits;specificevidenceofrights to the land; design documentationwhere the contract doesnot provide that this should be developed by the contractor; andcompliance with licensing requirements when these exist for theemployer,et al.Forthecontractor,thesepre-conditionsareasfollows:compliancewith licensing(attestation) requirements for thecontractorand itspersonnel.Wherethesepre-conditionsarenotobserved, thecontractmaybeinvalidatedasacontractmadeinviolationofthelawuponaclaimfromapartywithlocus standi.Similarpre-conditionsexist fordesignanddesigners’ supervisioncontracts.Tendering requirementsAvastmajorityofprojects,whichwerestartedbefore23February2018,weresubjecttomandatorytendering.Startingfromthesaiddate,theserulesapplyonlytoprojectswhicharefundedfromtheRepublicanorlocalbudgets,orwhicharefundedbyloanssecuredby guarantees from the Republican or local government entities.Furthermore, even if suchgovernment-fundedor funding securedby the government is present, mandatory tendering rules do notapplytoemergencyrepairorrecoverywork.


ThereisnolegalconceptofanLoI.Whilesuchlettersmaybesentbyemployerstocontractors,theydonothaveanylegalsignificance.


Yes,aconstructioncontractor,uponcompletionofconstructionofresidentialandvarioustypesofsocialorcommunityproperties,isrequiredtoprovidetheemployerwithasecurityfortheperformanceofthecontractor’sobligationsofrectificationofdefects.Onesuchpossible type of security is insurance of the contractor’s liability.Otherwise, the law does not have any insurance requirements.However, contractors may voluntarily insure constructions risks.Thepoliciesusedbymost insurancecompaniesare largelybasedonMunichRerules.Theaverageinsurancepremiumrangesfrom0.1%to0.4%ofthevalueinsured.Othervoluntarilyusedinsurancetypesintheindustryincludeinsuranceofliabilityfordamagecausedbydefectiveworkandservicesandgeneralcivilliabilityinsurance.

SBH Law Office Belarus


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company to supervise the construction process and/or as a sitesupervisor (technical supervisor). As mentioned above (seequestion1.6), inmostcasesanengineeringcompanyisappointedfor“comprehensivemanagement”oftheconstructionprojectwhenthe employer does not have the attestation for the constructionactivity.There are no direct legal provisions which require the technicalsupervisortoactimpartially.However,intheeventofanunjustifiedsuspension, theparties to the constructioncontract are entitled toclaimanyresultingdamagesandlossestothemfromtheengineeringcompany and the specific person who gave the instructions tosuspendtheworks.


“Paywhenpaid”clausesarenotrecognisedbyBelarusianlaw.


Yes, this is possible, subject to certain conditions. First, theseamounts are not treated as “liquidated damages”, but rather ascontractualpenalties. Theparties to thecontract can foreseeanypenaltiesinafixedamount,whichmustbepaidincaseofadefaultordefectiveperformanceofanobligation,inparticularinthecaseofadelayinperformance.However,incontractualpracticedelaysarenormallysubjecttopenaltiesestimatedasapercentageofthetotalvalueof theworkspaidona“perdayofdelay”basis. However,fixedpenaltiesarewidelyusedtodeteracontractpartyfromothertypesofbreachofcontract.Thepartyentitledtosuchpenaltiesisnotrequiredtoprovethedamagescaused,sosuchpenaltiescanbeunrelatedtotheamountoflosses.Importantly,thedefaultpositionunderthelawisthatdamagesmaybe recovered only in the amount exceeding the above penalties;however,thiscanbechangedbycontract.However,courtsmayandoftendoreducetheamountofpenaltieswhichtheyconsiderexcessive.



AccordingtotheCivilCode,theemployerhastherighttodemandamendmentstothedesignandestimatedocumentationwhensuchamendmentswillnotentailadditionalcostsforthecontractor. Atthesametime,inaccordancewithArticle699oftheCivilCode,thecontractor isentitled todemanda reviewof theestimates incasethecostofactualworkexceedsthevaluesprovidedintheestimatesby10%ormore,duetoreasonsoutsideofthecontractor’scontrol.


This practice recently began to take hold, and contractors areacceptingretentionconditionsforprojectstheyfindattractive.Thelegaltreatmentofsuchconditionsbythecourtsisinconsistent.The lawdirectlyprovidesforasimilarmeasure,but theretentionmoneyinthiscaseisheldinaseparatebankaccountofthecontractor.Under this rule, the contractor in a project for construction ofresidentialandvarioustypesofsocialorcommunitypropertiesmustprovidetheemployerwithoneofthefollowing:■ areserveof1.5%ofthecostoftheworksactuallyperformed

for the duration of thewarranty period in a separate bankaccount.Regulartransfersfromthisaccountarenotpermittedandthefundsmayonlybeusedinthemannerprovidedforinthelaw;

■ abankguarantee;or■ insuranceforhisliabilityfordefaultordefectiveperformance

ofhisdutiesinthecourseofthewarrantyperiod.The funds reserved in the separate account may be used by thecontractoronlytofinancetheworksneededfortherectificationofdefectivework.Thelawalsoprovidesascheduleforthereleaseofthereservedfundsandthetreatmentofthefundsintheeventofthecontractor’sinsolvency.


Performancebondsprovidedintheformofbankand/orcompanyguarantees are permissible, but rarely used except in particularlymassiveprojects.Thisisbecausefewcontractorscanaffordsuchsecurities,mostlydueto thehighcostoffunds. Thelawdirectlyprovides for bank guarantees for some types of projects (see theanswer to question 1.6 above). No particular restrictions on thenatureofbondsandguaranteesexist.


Yes, the Civil Code and the Rules for the Conclusion andPerformanceofConstructionContractsspecificallyprovideforsucharight.



Yes, it is common for the employer to appoint an engineering



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claimsconcerndefectsinbuildings,isolatedpremisesandparkingplaces,theprescriptionperiodisthreeyears.Prescriptionperiodsstart running from the date when the party entitled to claim haslearnedorshouldhavelearnedoftheeventsgivingcausetoaclaim(violationoftherespectiveparty’srights).Wherethelawand/orthecontractprovidesforawarrantytermandtheemployerhasnotifiedthecontractoraboutdefectswithinthisterm,theprescriptionperiodstartsfromthedatewhenthisnoticewasmade.


The general rule is (applicable not only to unforeseen groundconditions) that if the contractor discovers that additional worknotprovidedforinthedesigndocumentation(thiswouldnormallyincludedesignsolutionsbasedongeodeticandgeologicaldata)isnecessary,hemustimmediatelygivenoticetotheemployer.Iftheemployer does not respondwith instructionswithin 10 days (thecontract may provide for a different time period), the contractormustsuspendworkandwillbeentitledtoaclaimforcostsbecauseofthedelay.Theemployerwillnotbeliableforcostsifheprovesthattheadditionalworkwasnotnecessary.Ifthecontractordoesnotfollowtheaboveprocedure,hewillnotbeentitledtoaclaimforcostsunlessheprovesthatimmediateactionswerenecessarytopreventthedemiseofordamagetotheproject.Otherwise,prior totheemployertakingover, thecontractorbearsthe risks of damage to or demise of the project, unless this wascausedbymaterialsandcomponentsprovidedbytheemployer,orwherethisresultedfromincorrectinstructionsbytheemployerandthecontractorgavetheemployernoticeoftherespectiverisks.


Generally,wherechangesinthelawmakeitimpossibletocompletetheprojectasdesigned,thisriskisbornebytheemployer,exceptwherethecontractprovidesforbothdesignandconstruction.Thisissubjecttothefrustration,force majeureand“materialchangeofcircumstances”doctrinesasdescribedbelow.Wherechangesin lawmakeit impossibletocompletetheprojectaltogether,theriskisbornebytheemployerandthecontractormustbecompensatedfortheworkperformed.Where changes in law make it substantially more expensive tocompletetheprojectasdesigned,differentsituationsarepossible:1. Where thecontract iscost-plusoraunitpricecontract, the

risksarebornebytheemployer.2. Wherethecontractisfixed-price,onlycertainrisksareborne

bytheemployer:a. changesintaxlaw;andb. changes in certain regulatory indices and values,which

thecontractorusedtocalculateitsprice.


Intellectual property rights to the design and operation of thepropertytraditionallybelongtotheauthorofthecreativework.Thecontractor,engineerordesignercanbetheauthoroftheconstructionprojectasthecasemaybe.Employersmustrequirethecontractorsto assign to the employers the ownership and/or financial rightspertaining to the relevant intellectual property rights under thespecialagreementorspecialclausesintheconstructionagreement.

Any other variations must agreed by the parties as a writtenaddendumtotheoriginalcontract.Failuretodothiswillbetreatedasabreachofthe“writtenform”requirement(seetheresponsetoquestion1.2fortheconsequencesofthis).


Yes, where the contract directly provides for this. Where thecontractdoesnotprovideso,anomissioncanonlyhappenbywayofawrittenaddendumtothecontract.Workomittedinaccordancewiththecontractmaybedonebytheemployerpersonallyorhecanretainanothercontractortoperformit.


RelevantprovisionsoftheCivilCodeandmandatoryrequirementsof theRules for theConclusionandPerformanceofConstructionContracts, as well as certain other statutes and regulatoryinstruments,arealwaysimpliedinaconstructioncontract.Unlessthepartiesagreeotherwise,dispositivetermscontainedintheaboveregulationsarealsoimplied.


Thecourtswouldconsidersuchsituationsonacase-by-casebasis.They would consider such factors as: the nature of each event;whetherthetwoeventsareinterconnected(didonecausetheotheror prevent the other from ending?); whether the contractor gavenotice to the employer of the obstacles to due performance; andwhethereachpartytooksufficienteffortstomitigatethesituation.


Belarusian law does not expressly provide for the concept of aprogramme and, as explained above, only variations which donotentailanadditionalcostforthecontractormaybeunilaterallyinitiated by the employer. Therefore, this situation is difficultto envisage in the context of Belarusian law. If the contractorexperiencesdelayduetodelaysbytheemployer(e.g.latedeliveryofmaterialsbytheemployer),thecontractormaybeentitledtoanextensionoftime.


Yes,therearesuchlimits.Firstofallthereisastandardprescriptionperiodofthreeyearsforalltypesofclaims.Forclaimsrelatedtothequalityofconstructionworks,theperiodisoneyear.However,ifthe



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■ the MCC arose due to reasons which the interested partycouldnotovercomebyactingreasonablyandingoodfaith;

■ performanceofthecontractinaccordancewithitsconditionswould substantially deprive the interested party of thebenefitsitcouldotherwisereasonablyanticipateasaresultofperformancenotundertheMCC;and

■ theMCCisnottheinterestedparty’srisk.Inexceptionalsituations,thecourtsmaychangethecontractratherthanterminatingit.However,theMCCruleisrarelyappliedbyBelarusiancourtsandtheapplicationofthatruleisdecidedonacase-by-casebasis.


Thisisonlypossibleifsuchbenefittoathirdpartyisspecificallymentionedinthecontractinrespectoftheparticularparty.Thesubsequentownercanclaimdamagesonlyunderthecontracton the basis of which he acquired the property. For example, abuyerofapropertyunderasalescontractmayhaveaclaimagainstthesellerfordefectsintheproperty.


Yes,set-offispossible.Set-offmayoccurinrespectofdebtswhichare due orwhich are duewhen they are claimed or thematurityofwhichisnotdefined.Set-offisnotpossibleinrespectofdebtsforsomeactivities(whicharenormallynotrelatedtoconstructionactivity) andwhen theprescriptionperiod forwhichhas expired,if P1 or P2 specifically mentioned it. Contracts may also limitrightsofset-off.Furthermore,insolvencylawcontainssubstantiallimitationstotherightofset-off.


A duty of care is a common law doctrine which does not haveexactcounterpartsinthelawoftheRepublicofBelarus.However,accordingtoArticle705oftheCivilCode,iffortheperformanceof the contract any obstacles were found, the employer and thecontractor should take all reasonable actions to eliminate theseobstacles.Ifanyexpensesareincurredbyoneofthepartiesforthepurposeofelimination,theobstaclesshouldbecompensatedbytheotherpartyifthisisspecificallymentionedinthecontract.TherulesoftheCivilCodeonworkproductioncontracts(amoregeneralcontractcategorytowhichconstructioncontractsbelong),alsoprovidethattheworkresultmustbefitforitspurposedefinedinthecontract,orifnosuchpurposeisdefined,forpurposesforwhichsuchaworkresultwouldnormallybeused.Furthermore, the contractor is liable to the employer for anydetrimentcausedtothepropertyofthelatter,whichwasprovidedtothecontractorfortheperformanceofthecontract.Thereisalsosomeregulationforcompensationofdamageswhichshouldbementioned.


Yes,heis.Therearethreedifferentsituationswhenthismayoccur(allaredescribedhere ingeneral terms, thoughthe lawsets themoutingreaterdetail):1. Thecontractordiscoversthat,duetoomissionsinthedesign

documentation,certainadditionalcostsmaybeincurred.2. There are factors outside of the contractor’s controlwhich

maynegativelyimpacttheresultofthework.3. Theemployer isnotperforminghisduties(e.g.deliveryof

materials, transfer of design documentation) on which theresultoftheworkdepends,oritisobviousthattheemployerwilldelaysuchperformance.

Ineachofthesecases,thecontractorisrequiredtogivenoticetotheemployerandawaithisinstructions.


In general terms, contracts may be terminated on the followinggrounds:1. Material breach by one of the parties (the law describes

severalsituationsinwhichmaterialbreachescanbedeemedtoexist).

2. Failurebyoneofthepartiestoprovideperformanceonwhichtheperformanceoftheotherpartyisbased(called“reciprocalperformance”).

3. Terminationfor“goodreasons”bytheemployer.Contractsmay provide for additional grounds. Thosementionedabovedonotneed tobesetout inacontract inorder toentitleapartytotermination.


In Belarusian law, force majeure is termed “circumstances ofinsurmountableforce”.Thelawdoesnotclearlydefinethemeaningofthistermbutprovidesthatentitiesactinginan“entrepreneurialcapacity” are exempted from liability for default if the default iscausedbysuchcircumstances.Therefore,force majeurenormallyprovidesdefencetoapartydefaultingonthecontract.However, most contracts contain a “loss of interest” clauseincorporated into the force majeure section,wherebyanyparty tothecontractmay terminate it,where force majeure lasts formorethanacertainprescribedtimeperiod.Belarusian law also provides for a “material change ofcircumstances” (“MCC”), describing it as follows: “a change ofcircumstancesismaterial,ifitissuchthathadthepartiesbeenabletoreasonablyforeseeit,theywouldnothaveenteredintoacontractorwouldhaveenteredintoitonsignificantlydifferentconditions”.WherethepartiesareunabletorenegotiatethecontractinlightoftheMCC,anyoneofthemmayapplytothecourtwithaclaimtohave thecontract terminatedor changed. Termination is allowedbythecourtif:■ atthetimeofenteringintothecontract,thepartieshadrelied

ontheassumptionthattheMCCinquestionwouldnotoccur;



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othercontractualmatters,partieshaveachoiceofarbitrationorstateeconomiccourts.Most construction contracts have amicable resolution clauses,wherebyattemptsatresolutionbynegotiationsisrequiredpriortofilingalawsuit.Furthermore,theCodeofCommercialProcedurerequiresthat,priortofilingasuit,theaggrievedpartymustsendaclaim(“pretenziya”)to theotherparty, setting forth themeritsof theclaim,enclosingevidence,citingrelevantlegalauthoritiestosupporttheclaimand,wheretheclaimisfordamagesorpenalties,providingacalculationoftherespectiveamount.Unlessthecontractprovidesforashorter term,courtproceedingsmaybecommencedonlyupontheexpirationof30daysafter theotherpartyhasreceivedtheclaim.Importantly,thelawsuitmaynotgobeyondthesubstanceoftheclaim.


No,thereisnoequivalenttoadjudicationinBelarus.


Usually,constructioncontractsforahightotalcontractvaluecontainarbitrationclauses.ArbitrationinBelarusisprimarilyregulatedbytheLawoftheRepublicofBelarus“Oninternationalcommercialarbitration”(hereinafter–“ICAAct”),dated9July1999,theLawoftheRepublicofBelarus“Onarbitrationcourts”dated18July2011and theCivilandEconomicProceduralCodesof theRepublicofBelarus(hereinafter–“CPC”and“EPC”).TheICAActisbasedontheUNCITRALModelLawoninternationalcommercialarbitration1985 in its primary form, without the changes and amendmentsadoptedin2006.In order to initiate arbitration, a party should submit the requestfor arbitration to the arbitral institution based on the arbitrationclause. Further process is regulated by the relevant rules of thearbitration institute. The main arbitration institute in Belarus isthe international arbitration court at the Belarusian chamber forcommerceandindustry;however,severalspecialisedconstructionarbitrationcourtsalsoexist.


According toArticle 245 of theEPC, foreign arbitral awards arerecognisedandenforcedbythenationalcourtsifsuchrecognitionandenforcementisstipulatedbylegislationorbyaninternationaltreaty,oronthebasisofthereciprocityprinciple.BelarusratifiedtheNewYorkConventionontheRecognitionandEnforcementofForeignArbitralAwardson13September1960,anditcameintoforceon13February1961.According toArticle 45 of the ICAAct, international arbitrationawards(regardlessofthecountryinwhichtheyweremade)shallberecognisedandenforcedinaccordancewiththeeconomicprocedurallegislationoftheRepublicofBelarusanditsinternationaltreaties.The procedure of recognition and enforcement of ForeignArbitralAwardsissetforthinChapter28oftheEPCandAnnex4oftheCPC.

Contractorsandemployersareliabletoeachotherforanydamagecaused not just by breach of obligations, but also under the civildelictdoctrine.Constructionsitesandequipmentareconsideredhazardousobjects.UnderBelarusianlaw,beforetheemployertakesovertheproject,thecontractoris,subjecttocertainexceptions,consideredtobeincontrolofthesiteandthereforebydefaultliabletoallotherpersonsonthesitefordamageincurredbythemordamagecausedtotheirproperty.TheCivilCodealsocontainsprovisionsagainst“abuseofrights”,i.e.exerciseofrights,whichisprejudicialtoothers.Inconstructioncontracts, this will apply to almost any interaction between theparties, but it is hard to envisage how a Belarusian court wouldaward damages based on an abuse of rights by any party to aconstructioncontract. Thecourtwouldrather refuse toenforcearightwhichisexercisedinanabusivemanner.


The initial position is that contracts are interpreted in keepingwiththeliteralmeaningofwordsandphrasesusedinthem.Ifthecontentofthecontractcannotbethusdetermined,thecourtsmustdetermine the “true will of the parties, taking into considerationthe goal of the contract”. For this, the courts will consider “allrelevant circumstances”, including preparatory documentation forthecontract,negotiationmaterial,regularpracticeofthepartiesandtheirsubsequentbehaviour.


Whenever a construction contract purports to deprive or limita rightwhich is provided in the lawwithout thewording “unlessotherwiseprovided in a contract”orvice versa, i.e. it attempts tostateotherwiseanimperativeprovisionofthelaw,thesetermswillbeunenforceable.Onenotableexampleisthatthelawprovidesforaminimumthresholdofpenaltiesonbothparties:onthecontractorforlatedelivery;andontheemployerforlatepayment.Itisimpossibleto set lower penalties in the contract. Another notable examplediscussedaboveare“paywhenpaid”clauses.However,thisisnotlimitedtotheexamplesprovided.


In the absence of any contractual provisions which imposeadditionalduties,adesigner’sliabilityislimitedtocorrespondenceof thedesignto theassignmentof theclient, theclient’sneedsofwhichthedesignerisawareandthecomplianceofthedesignwiththeapplicableregulations.



Wheredisputesareconcernedwithrightstorealestate,Belarusianstate economic courts have exclusive jurisdiction. However, for



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Ajudgmententersintoforceaftertheexpirationof15daysfromthedateofitsadoption,unlessappealed.Onthebasisofthejudgmentafter its entry into force, the court issues a writ to the claimant,exceptinthecaseofimmediateexecution,whenthewritisissuedimmediatelyafterthedecision.Afirstinstancejudgmentcanalsobeappealedtotheappellatecourtwithin15daysfromthedateof thejudgmentof thefirst instancecourt,andconsideredwithin15days.Thejudgmentoftheappellatecourtmaybeappealedtothecourtofcassationwithinonemonthfromthedateofthejudgmentoftheappellatecourt,andconsideredwithinonemonth.Thedecisionofthecourtofcassationmaybesubjecttoreviewviaasupervisionprocedurewithinaperiodnotexceedingoneyearfromthedatewhenthecassationjudgmententeredintoforce.

Under the procedural law of Belarus, grounds for refusal in therecognitionandenforcementofforeignarbitralawardsaresimilartothosespecifiedinArticle5oftheNewYorkConvention.


Unless regarding an international agreement whereby Belarusrecognises and agrees to enforce the judgment of foreign courts,aBelarusiancourtwill,generally,recogniseandenforceaforeignjudgmenton thebasisofreciprocity. Thegeneralposition is thatreciprocityispresumedbythecourtunlessapartytoadisputeshowsotherwise.ABelarusiancourtisentitledtorefuseenforcementofaforeignforanumberofreasons,mostofthem,procedural.Onenotableexceptionisthe“publicpolicy”doctrine.Itshouldbenotedthat,inBelarus,thisdoctrineisnotyetveryclear.


Construction cases are considered by the economic court of firstinstancewithinaperiodofnotmorethantwomonthsfromthedateofthecourt’sjudgmentontheappointmentofthecasefortrial.Inexceptional cases, taking into account the particular complexityof thecase, the termof theproceedingsmaybeextended to fourmonths,andcasesinvolvingforeignpersonsoutsidetheRepublicofBelarusbyuptooneyear.



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SBH Law Office is a full-service law firm with offices in Belarus and Ukraine. We advise our clients in all areas of business, corporate and financial law, with an emphasis on mergers and acquisitions, inbound foreign investment, insurance, banking, arbitration and litigation, real estate and construction.

For over 25 years, since the emergence of the new Eastern European independent states, our lawyers and attorneys have been providing foreign and Belarusian companies and entrepreneurs, as well as sovereign states, with detailed and ground-breaking advice, working on cases and transactions which have shaped Belarusian law and business practice. We also provide transnational legal services through our strategic alliance with leading firms in the Baltic region and our office in Ukraine.

We are also well-known for our pro bono work with government bodies, charities, cultural and sports institutions.

Ivan Martynov received his law degree in 2003 from the European Humanities University in Minsk. He also has a GDL from Nottingham Law School. Prior to joining SBH, Ivan was a founding partner of a construction and inbound investment law firm, which merged with SBH in 2016. He has been practising law for over 13 years.

Currently, he is a Partner in the Construction and Investments Practice at SBH Law Office. Ivan specialises in construction and inbound investment law, real estate law as well as tax. Ivan is a native speaker of Belarusian and Russian, is fluent in English and Lithuanian and a confident French speaker.

Ivan is a member of a working group for the reform of construction and inbound investment law organised by the Ministry of Architecture and Construction.

Ivan MartynovSBH Law OfficeKrasnoarmeiskaya 20A/1, offices 26–27Minsk 220030Belarus

Tel: +375 17 327 53 77Email: [email protected]: www.sbh-partners.com

Vitaly Tvardovskiy is an Associate at SBH Law Office. He has been a practising lawyer since 2014. Vitaly specialises in real estate and construction, foreign investment, contract, corporate, labour and migration law. Recently, he has participated in many projects related to obtaining all the necessary permissions for construction activity in Belarus for foreign companies, involving the attraction of investments into the country amounting to more than USD 1 billion. He also provides legal support for the establishment, restructuring and liquidation of legal entities and representative offices for both residents and non-residents of the Republic of Belarus.

Vitaly Tvardovskiy SBH Law OfficeKrasnoarmeiskaya 20A/1, offices 26–27Minsk 220030Belarus

Tel: +375 17 327 53 77Email: [email protected]: www.sbh-partners.com



Chapter 6

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados

Thiago Moreira

Eduardo Damião Gonçalves

Brazil

iscompleted,theprojectissubmittedtoabiddingprocessinvolvingseveral contractors. The selected contractorwill be in charge todetail the basic design provided by the employer and, once it isapprovedbytheemployer(orbytheemployer’stechnicaladvisor/engineer), the selected contractor shall perform the constructionservicesinaccordancewithsuchdetaileddesign.Alliance AgreementThisisaco-operativemethodofcontractingwhichstillrepresentsaverysmallportionoftheprojectsdevelopedinBrazil,bymeansofwhichthepartiesworktogetherandaligntheircommercialinterestsinordertosharetherisksandrewardsresultingfromthecontract.Itisalsocommontoestablishinthecontractthegoalstobeachievedby the parties in exchange for bonuses and with penalties forunderachievement.


In order to create a legally binding contract underBrazilian law:(i) thecontractingpartiesshallhavefullcapacityandauthoritytocontract; (ii) the object of the contract shall be lawful, possible,determinedordeterminable;and(iii)theformalitiesrequiredbylaw,ifany,mustbeobserved.Eventhoughthereisnorequirementforthecontracttobeevidencedinwriting,itishighlyrecommendabletodosoaswellastoprovideforbalancedconsideration.


Letters of intent are commonly used in construction projects inBrazil.Suchinstrumentscanbebindingornon-binding,dependingonthetypeofworks,projectdeadlines,risksinvolved,etc.Inmostcases, the purpose of the letter of intent is tomake possible thecommencementofcertainactivitiesrelatedtotheworksandeventhemobilisationofsomecontractors’resourcesbeforethedetaileddesign is totally concluded and/or approved by the parties. Anincomplete binding letter of intentmay face enforceability issuesinBraziliancourts.



MostoftheprojectsdevelopedinBrazilusetailor-madecontracts(i.e.contractsspecificallydraftedforaparticularproject)ratherthanstandardforms.Notwithstandingthat,itisbecomingmoreusualtousecontractsbasedoninternationalstandardformssuchasFIDIC(Fédération Internationale des Ingénieurs-Conseils)andNEC(NewEngineeringContract)wheneveraforeignplayerisinvolved(e.g.asponsor,partnerorlender).Suchprojects,however,stillrepresentaverysmallpercentageoftheprojectsdevelopedinBrazil.The most common contractual structures used in Brazil are thefollowing:Engineering, Procurement and Construction(EPC)AnEPCcontractprovidesforasinglepointofresponsibility.Theemployer hires a contractor to provide the design, all necessarymaterials and equipment and the construction services for theproject.Inlargeprojectsinvolvingconstructionanderectionworks,aswellasequipmentsupply(suchaspowerplantsandfactories),the contractor can be hired to provide its services on a turn-keybasis, in which case it becomes responsible for taking over theprojectinordertoallowtheemployertobereadytooperateituponcompletionoftheworksbythecontractor.Engineering, Procurement and Construction Management (EPCM)Thistypeofcontractreflectsthearrangementknownasmanagementcontracting, in which the contractor acting as an agent of theemployer enters into separate contractswith different contractorswho provide the materials, equipment and construction servicesnecessaryfortheproject.Design-Bid-Build (DBB)In this typeofprocurement, theemployercontracts adesigner toprovidethebasicdesignoftheprojectand,oncesuchbasicdesign


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(a) General RequirementsEngineers and agronomist engineers must be registered beforethe Regional Council of Engineering and Agronomy (CREA)and architectures and urban planners must be registered beforetheCouncil ofArchitecture andUrbanism (CAU). Any servicesrelatedtosuchprofessionalscanonlybeperformedbyindividualsduly registered with CREA or CAU. Without these registries,professionals may suffer sanctions, both of a civil and criminalnature,whichmayaffecttheregulardevelopmentoftheproject.

Furthertothat,inconstructionprojectsthestandardsandregulationsissued by the Brazilian Standards Association (ABNT) shall beobserved.Specificstandardsapplicabletocertainindustriesarealsocommonpractice.(b) LabourInBrazil,employees’basiclabourrightsaresetforthintheFederalConstitution, which also establishes theminimum conditions thatmust be compliedwith in employment relationships. The labourrightsandminimumconditionsarealsotreatedinfederallawsandmost of them are restated in the Consolidation of Labour Laws(CLT).Therearealsomandatoryregulations,establishedbymeansofcollectivebargainingagreementsexecutedbetweenoneormoreemployers’ unions representing the companies, and one or moretrade unions representing employees. The relationship betweenthe contracting party and contractor, however, is governed by theBrazilianCivilCode.

Hiring service providers through an intermediary company ispossible.Recently,changesinthelawregardingoutsourcing(LawNo.6,019/1974)wereenactedbytheBrazilianCongress,inorderto reduce the unemployment rates and labour disputes relatedtooutsourcing. After the changes that tookplace, outsourcing isallowedinanyactivityofthecompanies,includingcore-business.(c) Tax(c.1) EmployeesIngeneralterms,salariespaidtoemployeesofBraziliancompaniesaresubjecttowithholdingofSocialSecurityTaxatthemaximumrateofelevenpercent(11%)uptoamaximumofsixhundredandeightReais and forty-four cents (R$ 608.44), and towithholdingof IncomeTax(WTH)atprogressive rates ranging fromzeropercent(0%)uptotwenty-seven-and-a-halfpercent(27.5%),asperthetablebelow(applicableasfromApril2015):

Monthly Tax Basis (R$) Tax Rate (%) Portion to be Deducted (R$)Upto1,903.98 - -From1,903.99to2,826.65 7.5 142.80

From2,826.66to3,751.05 15.0 354.80

From3,751.06to4,664.68 22.5 636.13

Over4,664.68 27.5 869.36

Inadditiontotheabove,BraziliancompaniesaresubjecttoSocialSecurityTaxatanapproximateglobalrateoftwenty-eightpercent(28%)onpayroll.Thelegaltaxpayerofsuchtaxesistheemployer,differently from the ones mentioned above, in which case theemployerisonlyresponsibleforthewithholding.


Brazilian rules contemplate mandatory insurance and the mostimportantarethosedescribedinArticle20ofDecree-LawNo.73/66(regulatedbyDecreeNo.61,867/67),namely:(i)bodilyinjuryandphysical damage to passengers in commercial flights; (ii) civilliabilityforaircraftownersandforaircarriers;(iii)civilliabilityforrealestatecontractorsofurbanzoneconstructionswithrespect tobodilyinjuryandphysicaldamageinjuriesandpropertydamages;(iv)assetsencumberedasguaranteesofloansorfinancingsgrantedby public financing institutions; (v) guarantee of compliancewith the obligations of the real estate developer and constructor;(vi) guarantee of payment incumbent upon the borrower relatedto construction, including real estate obligations; (vii) buildingsdivided into autonomous units; (viii) fire and transportation ofgoods pertaining to entities located in or transported throughoutBrazil; (ix) export credit, whenever deemed convenient by theNationalCounsel ofPrivate Insurance–CNSP; (x) bodily injuryandphysicaldamagecausedbyroadwayautomotivevehiclesandvessels,orbytheircargo,toindividualsregardlessofwhethertheyarebeingtransportedornot;and(xi)civilliabilityofland,maritime,riverandlaketransportersfordamagescausedtothecargo.Inaddition to themandatory insurancesset forthbyArticle20ofDecree-LawNo.73/66,therearespecificlawsfortheconstructionmarketthatalsorefertocertainaforementionedinsurancecoverage,suchas:(i)Article13ofLawNo.4,591/64,whichestablishesthatall units of residential buildings shall be insured against fire andother casualties that may cause full or partial destruction of thebuilding;(ii)Articles1and2ofLawNo.4,864/65,whichestablishthat thebuyerofafinanced realestatebuildingwithamaximumvalue corresponding to three hundred (300) times the minimumwage inBrazilmust purchase life insurance (“seguro de vida de renda temporária”);and(iii)Paragraph1ofSectionIIofArticle56ofLawNo.8,666/93,whichdeterminestheobligationtopurchaseaperformancebondforpublicservicesandconstructionswheneverthesameisrequestedintheinvitationtobid.Notwithstanding the above-mentioned mandatory insurancecoveragedirectlyandindirectlyrelatedtotheconstructionmarket,contractors and related service providers usually purchase thefollowingcoverage,whichmaybepartofoneormore insurancepolicies:(a) engineeringrisks;(b) property;(c) thirdparties’civilliability;(d) automobileliability;(e) employer’scivilliability;(f) bodily injury and physical damage and life coverage for

constructors’employees;(g) coverageforthetransportationofequipmenttobeusedinthe

constructionworks;(h) performancebond;and(i) environmentalrisks.Despite there being nomarket practice, we advise companies toseektheassistanceofaninsurancebrokerwhoisabletoassessallrisks inherent to a given project and determine themost suitablecoverageforeachtypeofproject.

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados Brazil


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(d.4) Programme for Medical Control of Occupational Health (Programa de Controle Médico de Saúde Ocupacional – PCMSO)

TheProgrammeforMedicalControlofOccupationalHealthaimstopromoteandmaintainthehealthofemployees,emphasisingtheclinical and pathological aspects instrumental in addressing therelationshipbetweenhealthandwork,frombothanindividualandcollectiveperspective.(d.5) Personal Protective Equipment (Equipamentos de

Proteção Individual – EPI)Thecompanyshallprovideitsemployeeswithpersonalprotectiveequipment, aiming to neutralise/reduce the exposure to chemical,physicaland/orbiologicalagents.(d.6) Environment Risk Prevention Programme (Programas de

Prevenção de Riscos Ambientais – PPRA)The environment risk prevention programme aims to provideconsultingservicesintheassessmentandcontrolofenvironmentalrisks,suchasnoise,heat,chemicalagents,etc.


Theemployerisallowedtoretainpartofthepurchasepricetobereleasedeitherinwholeorinpartwhentheworksaresubstantiallycompleteand/oranyagreeddefectsliabilityperiodhasexpiredaslongastheretentionissupportedbyaclauseinthecontract.Theretentionrightismeanttoprotecttheemployeragainstpotentialbreaches by the contractor; nevertheless, it may not be abusive,otherwiseitmightbechallengedbythecontractor.The Brazilian Civil Code establishes that private contracts aregovernedby theprincipleofgood faithandpacta sunt servanda,whichmeans that contracts are lawswith binding force betweenparties, and requires that every contracting party must keep hispromise and fulfil his obligation. Therefore, the amount of theretentionandtheconditionsforitsreleaseshallbeagreeduponbythepartiestothecontract.


In Brazil, it is common for construction contracts to provide fora performance bond and/or a parent company guarantee in orderto guarantee the fulfilment of the contractor’s obligations underthe construction contract. Theperformancebondmaybe abankguarantee or an insurance bond. The parent company guaranteeis often requestedwhen the contractor is not in a good financialstanding and/or does not have sufficient assets to guarantee apossibledefault.Although, in theory, performance bonds are not “on demand”guarantees in Brazil, as they are an accessory of the principalobligation, in practice bank guaranteeswork as if theywere “ondemand”,giventhatlocalbankswillrarelychallengeorevendiscusstheirforeclosurebytheemployer.However,consideringthecurrentcrisisscenarioinBrazil,thetrendisthatperformancebondsareusedmoreoftenthanbankguarantees,becausetheircostismuchlower.

It is important to clarify that there is an alternative to the SocialSecurityTaxonpayrollformostconstructioncompanies,whichisthepaymentof four-and-a-halfpercent (4.5%)ongross revenue.Such alternative is notmandatory; however, itmay represent taxsavingsforcompanieswithhighpayrollexpenses.(c.2) Self-Employed Sub-Contractors (Individuals)Thepaymentof incomebyBraziliancompanies toself-employedindividualsisalsosubjecttoWTHasindicatedabove.Pleasenote,however, that payments to self-employed individuals are subjecttowithholdingofSocialSecurityTaxata rateofelevenpercent(11%) (considering the offset authorised by law of nine per cent(9%)subjectedtoamaximumamountofonethousandonehundredandsixReaisandtwenty-sixcents(R$1,106.26)).Inthiscase,Braziliancompaniespayingfeestoself-employedsub-contractorsarealsosubjecttoSocialSecurityTaxatarateoftwentypercent(20%)onthesepayments.The alternative reported above also applies here, and insteadof contributing twenty per cent (20%) over the payroll, someconstructioncompaniesmaycontributearateoffour-and-a-halfpercent(4.5%)ongrossrevenue.Braziliancompaniesarealsoobligatedtowithholdelevenpercent(11%) of payments made to other companies that render certainservices.Incase the rendererof theservice is subjected to thepaymentofSocialSecurityTaxongrossrevenue,thewithholdingshallbemadeatarateofthree-and-a-halfpercent(3.5%).(d) Health and SafetyInBrazil,healthandsafetyareincludedamongthemainconcernsin a construction contract and are regulated by: (i) the FederalConstitution, which establishes the employee’s rights andincludes, among others, the reduction of risks inherent to worksthrough compliance with health, hygiene and safety rules; (ii)the Consolidation of Labour Laws (CLT); (iii) AdministrativeRulings (Ordinance No. 3,214/78 of theMinistry of Labour andEmployment); (iv) rules and standards issued byABNT; and (v)InternationalLabourOrganizationConventions.The Ministry of Labour and Employment enacted NormativeResolutions regardinghealthandsafetystandardswhichestablishrulesthatmustbecompliedwithbythecontractoranditsemployees.Themostimportantpointsare:(d.1) Previous InspectionThecompanymustrequestapreviousinspectionbytheMinistryofLabourandEmploymentbeforestartingitsactivities.(d.2) Specialised Work Safety and Medicine Service (Serviços

Especializados em Engenharia de Segurança e em Medicina do Trabalho – SESMET)

Companies hiring more than fifty (50) employees must have aSpecialisedWorkSafetyandMedicineService,aimingtopromotetheprotectionofhealthandsafetyintheworkplace.The sizing of SESMET will vary in accordance with the riskof a company’s business (established by law) and the number ofemployeesofacompany.(d.3) Accident Prevention Commission (Comissão Interna de

Prevenção de Acidentes – CIPA)Companieshiringmorethantwenty(20)employeesmusthaveanAccident Prevention Commission (CIPA), aiming to prevent anoccupationalaccidentordisease.Thesizeof theCIPAwillvary inaccordancewith thenumberofemployeesofacompany.

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tothesub-contractorshallonlyoccuruponreceiptbythecontractorofthepaymentsmadebythefinalclient(i.e.theemployer).Although the inclusion of this clause is not uncommon, suchprovisionmaybechallengedasbeingabusiveifthesub-contractorhas fully and duly performed its contractual obligations – i.e. hassupplied thegoodsandservicescontracted–without receiving therelatedpayments.The inclusion of a “pay when paid” clause is not possible incontracts entered into with public/governmental entities (PublicContracts).However,aprivatecontractormayincludea“paywhenpaid”provisioninthesub-contractsrelatedtoaPublicContractaslongas therelevantPublicContractallowsasub-contractingpartoftheworks.


Brazilian lawallows theparties to agree in advanceonapenaltyamounttobepaidbythedefaultingpartyintheeventofabreachof the contract. Unlike common law, the Brazilian legal systemaccepts contractual penalty clauses,whichmaybedue for delay/breach(penaltyfordelay)inperformingaspecificobligationorascompensation (compensation penalty) in case the entirety of thecontractisbreached.The amount of the penalty clause does not necessarily need torepresent a genuinepre-estimateof loss; however, in any case, itmust be limited to the value of the breached obligation andmayeven be lowered in court should it be deemedpatently excessivevis-à-vis thecommittedbreachor if themainobligationhasbeenpartiallyperformed.Boththepenaltyfordelayandthecompensationpenaltymayhaveasimilarfunctiontoliquidateddamages(pre-determineddamages),whereby the creditor may collect the penalties irrespectively ofhavingincurredactualdamagesandthepartiesmayagreethatnofurtherdamageswillbedueinthiscase.Thepartiesmay,however,agreethatthecontractualpenaltydoesnotpreventtheclaimingofadditional indemnification for damages arising out of the breach.In such case, the amount of damages specified in the contract isdeemedtobetheminimumamountofindemnificationdue.Ifthedamages exceed this minimum amount, it is possible to recoveradditional indemnification from the breaching party. In additionto this, according to theBrazilianCivilCode, theparty towhichthe penalties for delay are owed also has the right to require theperformanceofthedelayedobligation.



Inprivatecontracts,variationsontheworksusuallymaybeorderedbytheemployeratanytimepriortotakingovertheworks.Generally,constructioncontractsinclude“changeorderprovisions”whereby the parties shall discuss the impact of the respective


TheBrazilianCivilCodedoesprovidefor thepossibilityofsaleswithretentionoftitle.However,retentionoftitlelegalprovisionsareonlyapplicabletogoodswhicharecapableofbeingidentifiedanddifferentiatedofitspeers(e.g.equipmentwhichcanbeidentifiedthroughserialnumber,vehicles).Inthissense,materialsandgoodssuppliedintheworksarenormallynot comprised in the scope of application of the Brazilian CivilCodewithregardstoretentionoftitle.Notwithstanding,scholars,aswellaspartsofrelevantcaselaw,understandthatthecontractormayretainthetitleinrelationtogoodsandsuppliesused,aswellas theright toremoveanygoodsandmaterialssuppliedfromthesite,provided that: (i) thecontractorhasacredit rightagainst theemployer; (ii) there is a link between the credit and the goods/materialsretained;(iii)theretentionorthepossessionofthegoods/materialsislawful;and(iv)thepartiesdidnotagreeotherwiseinthecontract. Such situationmaybealtered incase theemployerissubjecttoajudicialrecoveryprocedure(recuperação judicial).



In Brazil, it is common that, under construction contracts, theemployerhiresathirdpartytosupervisetheprogressofworksonhisbehalf.However,inBrazil,suchthirdpartydoesnothaveadutytoactimpartiallybetweencontractorandemployer. Ifthepartiesintendtohaveathirdpartytoactimpartiallybetweenthecontractorandtheemployer,thepartiesshouldhireanindependentengineerorarchitect,orevenanexpert,asthecasemaybe,toexecutethisspecifictask.Anexampleofthisisdisputeboards,whichemergedin the United States in the 1960s, and which are gaining moreimportanceinBrazilianconstructioncontracts.Adisputeboardisacommitteecomposedbyexperiencedandimpartialprofessionals(inmostcases,theyareengineers),hiredbeforethecommencementof the construction project tomonitor the progress of theworks,encouragingthepartiestoavoiddisputesandassisttheminsolvingthosethatcannotbeavoided.Theadvantageofthedisputeboardsisthattheycanbeappointedatthecommencementoftheproject,taking responsibility to conduct regular visits to the site and tobe directly involved in the works from the beginning, makingrecommendationsandinfluencingthebehaviouroftheparties.


The“paywhenpaid”clauseiscommonlyfoundinsub-contracts,andpurportstoindicatethatthepaymentstobemadebythecontractor

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The consequences arising from a delay caused by concurrenteventsmaybecontractuallyagreedby theparties in thecontract.Otherwise, in principle, each party will be responsible for theconsequencesoftheportionofthedelayithascaused.Considering that the contractor’s fault contributed to the delay,theemployershallnotberequiredtopaythetotalcostsrelatedtotheconcurrentdelayandthecontractorshallnotbeentitled toanextensionoftimewithrespecttothewholeperiodofthedelay.Thepurposeistoavoidanyimbalanceandtoproportionallycompensatetheemployer’sdelaywiththecontractor’sconcurrentdelay.


Unlessotherwiseprovidedinthecontract,thefloatbelongstothecontractor andas longas thefixedmilestonesof theworks’ timeschedulearenotdelayed,theemployershouldnotinterferewithit.Generally,variationsaresubjecttonegotiationbythepartieswithrespecttotheirimpactoncostsandtime,independentlyofanyfloatexistinginthetimescheduleincludedinthecontract.


Brazilianlawestablishesadifferentstatuteoflimitationsdependingonthecase.Thegeneralruleprovidesfora10-yearperiod,usuallycountedfromthedateoftheillicitactorviolation,fortheplaintifftofileitsclaim.TheBrazilianCivilCodealsostatessomespecificcases inwhich the statute of limitations ranges from one to fiveyears,countedfromthedateofcertaineventsdescribedinit.The Brazilian Civil Code also establishes that for constructionscomprisingsubstantialequipmentorbuildings,thecontractorshallbeliableforthesoundnessandsafetyoftheworksperformedduringfiveyearscountedfromtheissuanceof thetaking-overcertificatefortheworks.Suchfive-yearwarrantyperiodmaynotbereducedbythepartiesinthecontract.Incaseadefectisfoundduringsuchperiod, the plaintiffmay be required to file the claimwithin 180daysfromthedateitbecomesawareofthedefect.Certainscholarsandpartsofcaselawmaintainthatsuchtermmaybeextendedupto10years.


The allocation of the risk of unforeseen ground conditions willdependonthetypeofconstructioncontract.Usually,inEPClump-sum contracts the rule is that such risk lies with the contractor.However,underBrazilian law, the risk is shifted to the employerwhen such unforeseen ground conditions are an extraordinarysuperveningeventthatplacesanexcessivelyonerousobligationonthecontractor.

variation and, in case of material changes, negotiate a priceadjustmentand/oranextensionoftime.In case the contract does not provide for such variations’provisions, theBrazilianCivilCodewill apply and the employerwillberesponsibleforpayingtheadditionalcostsarisingfromthevariationsrequestedbyhim.Notwithstanding,incasethevariationsrequestedbytheemployeraredisproportionaltothedesignalreadyapproved,thecontractorhastherighttorefusethevariation,eveniftheemployeragreestopaytheadditionalcosts.Additionally,variationstoreducethescopeofworkareonlyallowedifexpresslyprovidedforinthecontractand/oragreedbetweentheparties,otherwise theemployermayberequiredto indemnify thecontractorforthelossesanddamagesarisingfromsuchreduction.With respect to Public Contracts, the employer (i.e. the public/governmentalentity)mayunilaterallyvarytheworkswhenever itisnecessary to: (i)modify thedesignor theprojectspecificationstobetterachievethetechnicalaimsof theproject;or(ii) increaseor reduce the scope of the works. In both cases, the contractoris obliged to accept such variations under the same contractualconditions,providedthatsuchincreasesorreductionstotheworks,servicesorpurchasesisnothigherthantwenty-fivepercent(25%)oftheoriginalprice.Thislimitmaybeincreasedtouptofiftypercent(50%)incaseofincreasesrelatedtorestorationofbuildingsorequipment.Inallcases,theeconomicandfinancialbalanceoftheagreementshallbeensured.The same limits related to increases or reductions of the worksapply to contracts entered into by state-owned companies andmixedcapitalcompanies.However,FederalLawNo.13,303/2016provides that these modifications can only be implemented bymeansofnegotiationbetweentheparties. Therefore,state-ownedcompaniesandmixed-capitalcompaniescannotincreaseorreducethescopeoftheworkswithouttheprivateparty’sconsent.


Pleaseseeouranswertoquestion3.1aboveregardingthereductionofthescopeofworkbytheemployer.Incaseofreductionofthecontractor’sscopeofwork,theemployermayperformsuchworksbyhimselforcontractathirdpartytodoit.WithrespecttoPublicContracts,publictenderscompriseasuccessionofstepsprovidedforintheapplicablelawsthatdonotadmitdiscretionontheirfulfilment,exceptinspecificcasescontemplatedbythelawbasedonconvenience andopportunityof thegovernment; in suchcases the tendermaybewaived. Therefore, it isunlikely that thepublicemployerwouldreducethescopeofaPublicContracttoenterintoanotheroneinordertoperformpartofthescopeofthePublicContract inplace. Nevertheless, there isnoexpressprohibitionofsuch practice. Therefore, if the work is completely omitted, theemployermaydoithimselforgetathirdpartytodoit.


In theabsenceofaspecificcontractualobligationto thecontrary,allapplicablelegalprovisionswhicharenotexpresslystatedinthecontractshallapplytothecontract(e.g.five-yearguarantee,time-bar, force majeure, limitation of liability with respect to indirectdamages and termination). The partiesmay expresslywaive theapplication of certain legal provisions as long as they are notconsideredmandatoryortobeofpublicpolicy.



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Theconceptofforce majeureisknownandenforceableinBrazil.According to the Brazilian Civil Code, force majeure shall beconsideredas“thenecessaryevent,whoseeffectswereimpossibleto avoid or impair”. The affected party shall not be responsiblefor losses resulting from force majeure events, unless suchresponsibilitywasexpresslystatedinthecontract.Thus, underBrazilian law, force majeure is a legal exemption ofperformanceandliabilityduringitsoccurrence.Therefore,underacontractualrelationship,thepartyaffectedbyaforce majeure eventshallnotbeheldliablefordamagesarisingfromit,providedthat:(i)suchpartysubmitsenoughevidenceoftheevent;and(ii)sucheventwasunforeseeableandbeyondtheparty’scontrol.Although,inprinciple,eachpartyshallbeartheirrespectiveexpensesandcostsresultingfromaforce majeureevent,itiscommoninEPCcontractstoallocatetheforce majeureriskstotheemployer.Thepartiesmayagreeuponacontractualdefinitionofforce majeure andevenwaivetheapplicationtothecontractoftheconceptofforce majeureestablishedintheBrazilianCivilCode. It iscommontoexpresslyexcludefromtheconceptofforce majeure eventssuchas:(i)changesaffectingtheeconomicbalanceofthecontract,evenifthecontractbecomesuneconomic;(ii)labourormaterialsshortage;and(iii)strikesrestrictedtothecontractor’semployees.


According to theBrazilianCivilCode,aparty that isnotapartytoacontractisentitledtoclaimthebenefitofanyrightundersaidcontractaslongasthecontractwasexecutedforitsbenefit.Brazilianlawprovidesforafive-yearguaranteewithrespecttothesoundnessandsafetyoftheproject.Therefore,asubsequentownerofabuildingmaybringaclaimagainstthecontractorincaseofanydefectinthebuildingduringthisperiodoftime.


The set-off of credits is permitted by the Brazilian Civil Code,provided that debts have the same legal nature, are clear anddefined,overdueandoffungiblegoods.Therefore,inthisparticularexample,itismostlikelytobepossible.


TheconceptofdutyofcareisnotapplicableunderBrazilianlaw.Thepartiesareliabletoeachotherinaccordancewiththetermsofthecontractandtheprovisionsoftheapplicablelaw.

Thepurposesofsuchlegalprovisionareclearlyto:(i)preventtheunjustenrichmentoftheemployersinceheisthebeneficiaryoftheworks;and(ii) indicate that theemployer,as thefinalbeneficiaryof the work, shall bear bad ground conditions whenever suchconditions are unforeseeable and make the performance of theworksexcessivelyoneroustothecontractor.AlthoughBrazilian lawprovides that in such extraordinary casestheriskofunforeseengroundconditionslieswiththeemployer,thepartiescanalteritcontractually.


Theemployernormallybears the riskofachange in law,mainlywithrespecttoataxburdenandtechnicalmattersexceptifprovidedotherwiseinthecontract.


Generally,thecontractestablisheswhichpartyownstheintellectualproperty rights in relation to the design and operation of theproperty.Inmostcases,thedesignerorthecontractor,asthecasemaybe,grants to theemployeraperpetual licence for theuseofthe intellectual property related to the design or operation of theproperty.


In the absence of contractual provisions to the contrary, thecontractormaysuspendtheworkswithoutpayinganindemnitytotheemployerdueto:(i)employer’sfault(suchasdelayinobtainingthe applicable licencesor authorisations); (ii) occurrenceof force majeure events; (iii) changes resulting fromunforeseeable events(suchasgeological,hydraulicorsimilarevents),whichaffect theeconomicbalanceof thecontractresultinginexcessivelyonerousobligations on the contractor; and (iv) disproportional changeordersrequestedbytheemployerwithrespecttotheprojectalreadyapproved,eveniftheemployeragreestopaytheadditionalcosts.


Incasethecontractdoesnotprovideforthecasesinwhichitcouldbeterminatedbytheparties,Brazilianlawprovidesthatitmaybeterminated in the following events: (i) fundamental breach; and/or (ii) occurrence of an extraordinary supervening event, whichwasunforeseeabletothepartiesandresultsinexcessivelyonerousobligationson theparty claiming the termination. In suchcases,theclaimantmustrequesttheterminationfromtherelevantcourtorarbitraltribunal,asthecasemaybe.Thepartiesareallowed toprovide in thecontract the terminationeventsthatshallapply,andeventheterminationattheconvenienceof eitherorbothof them. Themost common terminationeventsare:(i)bankruptcyorinsolvency;(ii)breachnotremediedwithinaspecifiedperiod;(iii)delaysintheworksattributabletocontractor;and(iv)force majeureeventscontinuingforadeterminedperiodoftimeagreedinthecontract.



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first law allowing and regulating the use of dispute review andadjudication boards in public procurement contracts executed bytheMunicipality.


Yes, construction contracts normally provide for an arbitrationclause.Insum,Brazilianarbitrationisregulatedbyfederallaw(LawNo.9,307/96, as amended byLawNo. 13,129/15,which is based ontheUNCITRALModelLawand the1958NewYorkConventionon the Recognition and Enforcement of ForeignArbitralAwards(NewYorkConvention)).Therefore,someimportantprinciplesandfeaturesmaybeapplied,suchasdueprocess,therighttobeheard,impartialityandindependenceofarbitrators,kompetenz-kompetenz andseparabilityofthearbitrationagreement,amongmanyothers.Any party that can enter into a contract is permitted to submitdisputestoarbitration. However,thedisputemustrelatetorightsandassetsthatcanbefreelytransferredbytheparties.Domestic awards – those rendered insideBrazilian territory – areconsideredasfinaljudgmentsanddonotrequireanyconfirmationbycourtsforthepurposesofenforcement.Foreignawards,ontheotherhand, are subject to recognition proceedings within the SuperiorCourtofJustice(STJ),inaccordancewiththeNewYorkConvention.Partiesareallowedtochooseanarbitralinstitutiontoadministerthecase,thelanguage,thelawapplicabletothedisputeandthenumberofarbitratorstoconstitutethetribunal,aswellasotherproceduralaspectsrelatedtothearbitration.


There is no legal concept that determines what internationalarbitration means. Foreign arbitral awards (understood as thoserendered outside Brazil) do require recognition in order to beenforcedinBrazil.However,itisfairtosaythatBraziliancourtstendtobefriendlyintheenforcementofarbitralawards.TheSuperiorCourtofJusticehasexclusivejurisdictiontorecogniseforeignarbitralawards,whichmustbemadethrougharecognitionproceedingsubjecttoSTJ’sInternalRules,andinaccordancewithsomerequirements,suchasauthenticationbyaBrazilianconsulateandaswornPortuguesetranslation.Thedefendantcanobject.Thegroundsforopposingenforcementofaforeignarbitralawardare,however,limitedtothoseprovidedforintheNewYorkConvention,theBrazilianArbitrationLawandSTJ’sInternalRules,whicharethefollowing:(i)incapacityoftheparties;(ii)invalidityofthearbitrationagreementaccordingtothelawchosenbythepartiesor,failinganyindicationthereto,thelawof the place of the arbitration; (iii) absence of proper notice andother impediments topresentingaproperdefence; (iv) theawardisrenderedoutsidethescopeof thearbitrationagreement;(v) thearbitrationproceedingswereconductedcontrary to thearbitrationagreement;(vi)theawardisnotyetbinding,oritwasannulledorsuspendedbythecourtsofthecountryoftheseatofthearbitration;or(vii)theawardisnotcontrarytoBrazilianpublicpolicy,humandignityorsovereignty.Thepartiesmayonlystarttheenforcementproceedings in thecourtswhere thedefendant is locatedafter theawardisrecognised.Oncerecognitionisgranted,thecreditormayfileforenforcementbeforeafederalcourt.


Ambiguity is settledbygeneral rulesof interpretationof the law,which are provided by the Brazilian Civil Code, such as: (i) allcontracts must be interpreted in accordance with good faith andcustomaryrulesoftheplaceofexecution;and(ii)declarationsmustbeinterpretedintherealsenseoftheintentionofthepartiesratherthanbytheliteralwordingofthedocuments.


Contractualprovisionscontrarytopublicpolicyormandatorylawwillbeunenforceable.However,suchassessmentcanonlybedoneonacase-by-casebasis.


Thedesignercanbecontractedtoprovidedesignserviceseither(i)without any interference in the performance of theworks, or (ii)with the additional incumbency to supervise the works and givedirectionstothecontractor.Inthefirstcase,theresponsibilityofthedesignerislimitedtothesoundnessandsafetyoftheworksrelatedtotheprojectforafive-yearperiodcountedfromtheissuanceofthetaking-overcertificatefortheworks. Withrespecttothesecondcase,inadditiontotheabove, thedesigner isalso responsible for thedamagescaused tothe employer for any omission related to the supervision of theperformanceoftheworks.Please also note that, under Brazilian law, the employer isnot allowed to modify the design without the approval of thedesigner, except if the change is not relevant or if it is requiredduetosuperveningeventsortechnicalreasonsmakingtheprojectinconvenientorexcessivelyonerous.Inthecasethatthedesignischangedwithout thedesigner’sapproval, thedesignerwillnotbeliableforanydamagesresultingfromsuchchange.



Ifnoamicablesettlementisreached,disputesareusuallyresolvedbyarbitration.Ifnoarbitrationclauseisprovidedforinthecontracts,thedisputesareresolvedthroughcourtlitigation.


BrazilianlawdoesnotprovideforstatutoryadjudicationasintheUK. However, the inclusion of dispute boards in constructioncontracts hasbecomemoreusual in thepast fewyears,which inpractice creates a contractual adjudicationmechanism for certainprojects. Recently, the Municipality of São Paulo passed the



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losses and damages caused to the plaintiff; and (b) enforcementprocedure–bywhichtheplaintiffusesthecontractasatitle(título extrajudicial) to enforce compliance with a specific contractualobligationorpaymentofaspecificamountofmoney.Intheordinaryprocedure,alawsuitshouldnormallycomplywiththe following steps: (i)written statementsof theplaintiff and thedefendants; (ii) mediation or preliminary conciliatory hearing;(iii)takingofevidence;(iv)finalstatements;and(v)firstinstancejudgment.Priortojudgment,onlyafewdecisionscanbeappealed.However,allfirstinstancejudgmentsaresubjecttoappeal.Thecourtofappealsisentitledtoreanalysefactsandlegalargumentsoftheparties,thereforeconfirming,annullingormodifyingthejudgment/decision. Thecourtofappeals’decisioncanalsobesubmittedtothe Superior Court of Justice in case of violation or incongruentapplicationofanyfederallaw,ortotheFederalSupremeCourtincaseofviolationofanyconstitutionalright.Enforcementproceedingsendbysatisfactionofthedebt/obligationorbywithdrawalbymeansofaspecificmotioncalled“embargos”.Embargos follows the same steps and procedural rules of anordinaryprocedure.In terms of the timing of civil court procedures, this depends onthecomplexityof the caseand thecourts inwhich the lawsuit isbeingprocessed.Afairassessmentwouldbebetweenfiveand10years if the case goes to the higher courts. In the courts of firstinstance, ordinary procedures take one to five years and in thecourtsofappealsanothersixmonthstothreeyears,dependingonthejurisdictionwherethelawsuitisfiled.


EnforcingaforeignjudgmentisonlypossibleaftersuchjudgmentisrecognisedbytheSuperiorCourtofJustice.Therefore,apartyseekingtoenforceaforeigncourtjudgmentmustfulfilsomelegalprocedural requirements, described in question 4.4 above, whichinclude, among other requirements contained in STJ’s InternalRulesandtheCodeofCivilProcedure:toprovethatthedecisionisprotectedbyres judicata;toindicatethejurisdictionoftheauthoritythatgrantedthedecision;andtopresentthesworntranslationofthedecisionintoPortuguese.Furthertothat,foreignjudgmentsmustnotviolatepublicpolicy,humandignityorBrazil’ssovereignty.


There are different court proceedings in Brazil. In a privatecontractualrelationship,twoproceedingscouldbeused:(a)ordinaryprocedure–bywhichapartyrequestsadeclarationorrecognitionofa rightandseeks tohold theotherparty liable tocomplywitha contractual obligation, pay a certain amount or indemnify for



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Mattos Filho is structured to provide services to clients in different legal areas in a coordinated and integrated manner, working in multidisciplinary teams whenever necessary. This work dynamic allows the firm to deliver tailor-made solutions to their clients, thereby enhancing the understanding of their business and making them a valuable partner. Mattos Filho is a leader in more than 30 different practice areas and works continuously to ensure that all these practices are benchmarks for the market. Creation of industry groups and market niches, combined with their comprehensive knowledge of the market and their clients’ business needs, are examples of their efforts to keep them at the forefront in providing legal services. They represent domestic and foreign companies, financial institutions, investors, multilateral agencies, investment funds, pension funds, insurers and reinsurers and non-profit organisations.

Thiago Moreira concentrates his practice on construction contracts (onshore and offshore), equipment supply contracts, contracts typical to the oil and gas industry (e.g. charter agreements, O&M agreements, FPSOs, DPUs and platform construction contracts, and gas supply contracts), take or pay contracts, contracts related to the hotel industry (e.g. construction of hotels, built to suit, hotel management agreements and franchising), as well as project development and infrastructure-related transactions. His experience includes advice to owners and contractors on the preparation, negotiation, pre-litigation and arbitration involving complex contracts, including construction and supply contracts. He has substantial experience in sectors such as energy, ports, airports, subways, railways, shipbuilding, oil and gas and hotel construction/management. Prior to joining Mattos Filho, Mr. Moreira worked for the Inter-American Investment Corporation (IDB Group) in Washington, D.C. He is a member of the Society of Construction Law in London and is currently the Co-Vice Chair of the Project Execution Subcommittee of the International Construction Projects Committee of the International Bar Association – IBA.

Thiago MoreiraMattos Filho, Veiga Filho, Marrey Jr e Quiroga AdvogadosPraia do Flamengo, 200Rio de Janeiro – RJ, 22210-901Brazil

Tel: +55 21 3231 8115Email: [email protected]: www.mattosfilho.com.br

Eduardo Damião Gonçalves has experience as both a counsel and arbitrator in a wide variety of domestic and international arbitrations, having been involved in disputes administered under the International Chamber of Commerce (ICC), the United Nations Commission on International Trade Law (UNCITRAL) and Brazilian domestic rules. His practice involves complex arbitration disputes in a wide variety of industries, such as construction, insurance, information technology, telecommunications, energy, and oil and gas, among others. Mr. Gonçalves was also Chairman of the Brazilian Arbitration Committee (CBar) and currently serves as a Vice-Chair of the Americas Initiative of the Institute for Transnational Arbitration (ITA), and is a member of the ICC Latin American arbitration group, the ICC Arbitration Commission and the Board of the Federation of International Arbitration Advocacy (FIAA). Mr. Gonçalves has also been a frequent Lecturer in Law at the Fundação Getulio Vargas (FGV) and other universities in São Paulo and was a visiting scholar at Boston University School of Law. He was also named among the top 45 arbitration experts under the age of 45 by Global Arbitration Review (GAR) in 2011.

Eduardo Damião GonçalvesMattos Filho, Veiga Filho, Marrey Jr e Quiroga AdvogadosAlameda Joaquim Eugênio de Lima, 477São Paulo – SP, 01403-001Brazil

Tel: +55 11 3147 7608Fax: +55 11 3147 7770Email: [email protected]: www.mattosfilho.com.br



Chapter 7

Miller Thomson LLP

William J. Kenny

Leanna Olson

Canada

The RoyalArchitectural Institute of Canada and theAssociationofConsultingEngineersofCanadahavedevelopedstandardformcontracts for situations where an owner retains an architect orengineerfordesignonly.


MostprovincesinCanadarequiretheelementsofoffer,acceptanceand consideration aswell as capacity of the parties to enter intocontractualarrangements.Contractsneednotbeinwriting,thoughmostconstructioncontractsareandshouldbe.Agreementsthatinvolveasaleoflandmustbeinwritingtocomplywith theStatute of Frauds. Inaddition,acontractmaybe foundinvalidorvoidforuncertaintyifitlacksoneofthefollowingthreebasiccomponents:parties;price;andproduct.TheprovinceofQuébecisgovernedbycivillaw.TheCivilCodeofQuébecprovidesthat“[a]contractisformedbythesoleexchangeof consents between persons having capacity to contract, unless,in addition, the law requires a particular form to be respectedas a necessary condition of its formation, or unless the partiessubjecttheformationofthecontracttoasolemnform”.Thereisno particular form required for construction contracts. However,therearelawsgoverningpublicbodiesthatrequirethemtofollowcertainformalities;forexample,requiringthepublicbodytolaunchatenderingprocess.


Lettersofintentareusedandmaybeenforceableiftheymeettherequirementsofacontractdetailedabove.However,iftheletterofintentisinsubstancean“agreementtoagree”,itisnotenforceable.Intheconstructioncontext,lettersofintentareoftenusedtoallowcontractors tocommenceperformanceofa limitedscopeofworkpriortothecompletednegotiationandexecutionofamorefulsomeconstructioncontract.



There are a variety of project deliverymethods and constructioncontracts in Canada. In Design Bid Build contracts, the ownercontracts with an architect/engineer for design work beforecontractingwithageneralcontractorforconstruction.DesignBuildcontractsinvolvetheownercontractingwithonepartytodesignandbuildtheproject.InConstructionManagementcontracts,theownerretains a construction manager to work with a design team andeitherhelpstheownerretainsubcontractorsorretainsthemdirectly.Engineering Procurement and Construction contracts are usedfor largeprojectsandinvolvetheownercontractingwithasinglepartytodelivertheentireproject.InEngineeringProcurementandConstructionManagementcontracts,theownerretainsacontractortoperformengineering,procurementandconstructionmanagementservices. The contractor is usually retained before constructionstarts through project close-out, and sometimes through thewarrantyperiod.PublicPrivatePartnershipsinvolveapartnershipbetween a public owner and a private contractor to construct aproject. Thismay involvevariousdeliverymethodsandservicesincludingdesigning,building,financing,transferring,operatingandmaintainingtheproject.Partiesoftenusestandardformcontractswhichhavebeendevelopedby industry associations and include the Canadian ConstructionDocument Committee (CCDC), the Canadian ConstructionAssociation,andotherlocalorganisationssuchastheConstructionOwnersAssociationofAlberta.CCDChasrecentlyreleasedaformofIntegratedProductDelivery(IPD)contract.IPDcontractsaresingle,multipartycontractsthatoften involve multiple trades in addition to the contractor andconsultant. IPD contracts are relatively new to Canada, but arebecomingincreasinglypopular.


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Employers are required towithhold and remit to the governmentincometax,employmentinsurancepremiumsandCanadaPensionPlancontributionsonbehalfofemployees.


Most provinces have lien legislation which requires a certainpercentageofthevalueoftheworktobeheldback(typically10%,butthisdiffersbetweenprovinces).Outsideoflienlegislation,anyright to holdback funds is amatter of contract. The partiesmayagreetodifferentamountsofholdbackfordifferentpurposes.Forexample, owners may contract to hold back certain amounts inrelationtodeficiencies. Typically,astatutoryholdbackcannotbeappliedtodeficiencies.In some provinces, such asAlberta, only the owner is statutorilyrequiredtoholdback10%ofthetotalvalueoftheworkrendered.However,partieslowerdownthecontractualchainmayagreethatone party may hold back a certain amount of money from eachpayment. However, legislation in other jurisdictions, such asOntario andBritishColumbia, requires the owner, the contractorandeachsubcontractortoholdback10%.Typically, the owner is required to hold back the applicablepercentageoffundsforaspecificperiodoftimeaftertheworkontheproject iscomplete/substantiallycompleteor, ifacertificateofsubstantialperformanceisissued.Assumingnoliensarefiled,theholdbackcanbereleased.Insomeprovinces,theamountthatmustberetainedisreducedtoanamountforfinishingthework.Somelienlegislationprovidesforearlierandprogressivereleaseofholdbacks.InQuébec,theCivilCodeprovidesthatasubcontractororsuppliermay register a lien (construction hypothec) for improvements toland,eventhoughtheyhavenocontractwiththeowner.However,thelienislimitedtotheworkdoneafterthesubcontractororsupplierprovideswrittennoticeoftheircontracttotheowner.Consequently,the ownermay deduct from the price of the contract an amountsufficienttopaytheirclaims.Thedeductionisvaliduntilsuchtimeasthecontractorgivestheownerareleasefromsuchclaims.Onlargeprojects,financialsecuritymayreplacethelienholdbacksuchthatfundscanbeadvancedwithoutdeduction.Someprovinces,suchasSaskatchewan,providefortheearlyreleaseoftheholdbackonlargeprojectsoflongduration.Ontario recently passed legislation creating new rules governingholdback.Itallowsforpaymentofholdbacksonanannual,phasedor segmentedbasis. Partiesmay retainholdbacks in the formofa letterof creditor repaymentbond rather than incash. Releaseof holdbacks is nowmandatory once all conditions are satisfied.However, holdbacks may be withheld if the payer publishes therequisite notice in accordancewith the regulations. If the payerfails to do so, there is no right of set-off against the holdbacks.Contractors and subcontractors who are not paid holdbacks mayrefusetopayrelatedholdbackstoitssubcontractors,providedthatnoticeisgivenandthematterisreferredtotheadjudicativeprocesssetoutinthelegislation.


Suretiesissueperformancebondsonsomeprojects.Thebondsare


Thethreemostcommontypesofinsurancepoliciesinclude:1. Builder’s Risk/Course of Construction policies for physical

loss or damage to property in the course of construction,installation or repair. These are typically obtained by theownerorcontractor.

2. Wrap-up Liability policies, naming all or most of theparticipantsintheproject.Thesearetypicallyobtainedbytheownerorcontractor.

3. ErrorsandOmissionsProfessionalLiabilitypoliciesfordesignprofessionals’negligence.Thesearetypicallyobtainedbytheengineersandarchitects.

Othertypesofinsurancecommoninconstructioncontractsinclude:GeneralLiabilityInsurance;AutomobileLiabilityInsurance;Toolsand Equipment Insurance; and Subcontractor Default Insurance.If the construction project has environmental risks, supplementalpolicesmayberequiredtocoverthem.Some provinces in Canada have legislation requiring new homewarranty insurance. Also, each province has a statute regardingworkers’compensation,inwhichtheemployerpaysapremiumandemployeesareinsuredforthereplacementofwagesintheeventofinjury.Thestatuteabrogatesaworker’srighttosuetheemployer,other employees, and other employers and their employees inindustries to which the legislation applies. Employers’ Liabilityinsuranceisnecessarytocoveranyonecomingtositenotcoveredbyworkers’compensation.


Construction projects, and those working on them, must complywithapplicablelocallegislation.Provincialemploymentlegislationgenerallysetsvariousminimumstandardsthatemployersmustmeet(e.g.hoursofwork,minimumwages,vacation,etc.).Eachprovince also has occupational health and safety legislationwhichimposesadutyonemployerstoensurethehealthandsafetyofworkersengagedintheworkandthoseattheworksite.Workersareobligatedtotakereasonablecaretoprotecttheirownhealthandsafetyandthatofotherworkersonsite,andtocooperatewiththeemployertoensurethesame.In many provinces, occupational health and safety legislationrequiresthataprimecontractororprincipalcontractbedesignated(otherwiseitwillbetheowner).Thedesignatedpartyisresponsibleforensuringthathealthandsafetyrequirementsarecompliedwith.TheCriminal Code of Canada also imposes criminal liability onorganisations and individuals thatdonot take reasonable steps topreventworkersfrombeinginjuredorkilledonthejob.The federal government has jurisdiction over criminalmatters. Italso has exclusive jurisdiction over certain specific industries suchas aviation and interprovincial transportation. Federal labour andemploymentlegislationappliestoconstructionprojectsundertakenintheseindustries,suchasairports,inter-provincialpipelines,railwaysandhighways.

Miller Thomson LLP Canada


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Anownermayretainanengineer,architectorengineeringfirmtoactasaconsultant.Thecontractwillsetouttheroleoftheconsultant.A consultant owes a duty of care to the owner in administeringthe contract or authorising any alterations or additions to theproject. However,aconsultantalsohasaduty tobeanimpartialadjudicatorwhendisputesarisebetweentheownerandcontractor.Forexample,inaCCDC2contract,theconsultanthastheauthoritytoresolvemattersinregardstocontractinterpretation,performanceofthework,oranyothermattersinwhichagreementisnecessarybut cannot be reached. The consultant’s role as a first arbitercannotbebiasedbyitsroleasarepresentativeoftheowner.Theconsultanthasadutytoadjudicatethedisputeinafair,unbiased,andprofessionallycompetentmanner.In all provinces, architects and engineers must also follow theirrespectivecodesofethics.Sometimescontractsincludeasupplementaryconditionforawaiverofclaimsagainst theconsultant’s interpretationsandfindingsinadisputeresolutionprocess.InQuébec, if an architect or engineer supervised thework and alossassociatedwiththeworkoccurswithinfiveyearsaftertheworkwas completed, the liability of the supervisor is presumed. Thesupervisorwillhavetoprovethatthedefectisnotduetoitsownactstoberelievedfromliability.


A construction contract may include a “pay when paid” clause.Thevalidityofa“paywhenpaid”clause,bywhichthecontractordoesnothavetopayasubcontractoruntil theownerhaspaidthecontractor,hasbeenrecognisedinQuébecbytheCourtofAppeal.However,thecontractormaybefoundtohaveadutytocollecttheamountsowing.Someclauseshavebeeninterpretedtobeconditionprecedentstothelegalentitlementtopayment,whereasothershavebeeninterpretedasanintentiontoaddressthetimingofthepaymentintheclause,nottheactualrighttopayment.Further, a “paywhen paid” clause does not forfeit lien rights ofsubcontractors,andlienlegislationtypicallygrantssubcontractorstheabilitytoobtaininformationaboutthestatusofpaymentontheproject.In Ontario, the newConstruction Act creates a prompt paymentregimewithstrict timelinesforpayment, inforceasof1October2019.Theregimerequiresacontractortopayasubcontractorwithinsevendaysofpaymentbytheowner,andrequiresacontractor toprovidenoticeofnon-paymenttosubcontractorswithinsevendaysof receiving notice of the same from the owner. Otherwise, thecontractormust pay a subcontractorwithin 35 days of receipt of

typically a standard form involving three parties: the surety; thecontractor;andtheowner.Thesuretyandcontractorguaranteetotheownerthatthelosseventwillnotoccur.Typically,theownerwillnotbeabletodrawonthebondunlessthecontractorisindefault,andtheownerisnotindefault.Thesuretycanthenrecoverfromthecontractoraftermakingpaymentonthebondforthebenefitoftheowner.TheSupremeCourt ofCanada recently held that the trustee of alabour and materials payment bond had a duty to disclose theexistenceofthebondtopotentialbeneficiaries,markingashiftinthelaw.Trusteesshouldnowbeawarethattheymayhaveadutytoinformpotentialbeneficiariesoftheexistenceofabond.Alternatively,ownersmayrequestlettersofcredittobeissuedbya lenderonbehalfof thecontractor. Lettersofcreditareflexiblesecuritythatownersmaycalluponatanytime.Unlikeperformancebonds, where the surety issuing the bondwill review and assessanyallegeddefaultbeforeresponding,lettersofcreditarepayableimmediatelyondemandandwithoutfurthersubstantiation,makingthemusefulsecurityforowners.Parentcompaniesmaygiveaguaranteetoensuretheperformanceofasubsidiary.Eachbondandguaranteeislimitedtothewordingof theparticular instrument. Provincial legislationoftenprovidesthatapersonprovidingaguaranteemustdosointhepresenceofanotarypublicoralawyer.


Some construction contracts include retention of title rights inrelation togoodsand suppliesused in thework. Somecontractswillexplicitlyprovide for theprecise timewhen titlepasses (e.g.upondeliveryofgoods,oroncethesupplierispaid).UnderprovincialPersonalPropertySecuritylegislation,ifapartytoacontracthasanattached/perfectedasecurityinterest,itmayretaintitlerightsinrelationtothatgood.Ifthecontractorholdsasecurityinterestinthegoods/materialssupplied,itmaybeentitledtoseizeandsellthepropertytodischargethedebtowed.InQuébec,asupplierofmaterialscouldbenefitfromareservationofownershipinrespectofthematerialsifitisstipulatedinacontractandifithasbeenpublishedintheregisterofpersonalandmovablerealrights. Then, thesupplierofmaterialsmaytakethepropertybackorforcethebuyerortheownertopaythesaleprice. If thematerialshavebeenintegratedintothework,thesellercanforcetheownertopay,butmaynottakethemback.Unpaidcontractorsandsuppliersmayalsomakeuseofprovincialbuilders’ lien legislation, which entitles them to register a lienagainst the project lands (within a prescribed time) in relation tounpaidgoodswhichhavebeenfurnishedtotheprojectsite,andthencalluponthoselandsassecurityforunpaidamounts.Provinciallienlegislationalsoincludestrustprovisionsasanadditionalremedytounpaidcontractors.However,theextensivenessofthetrustcreatedvariesfromprovincetoprovince.Incertaincircumstances,unpaidcontractorswhohavenotyetdeliveredgoodsormaterialscanalsoassertapossessorylienoversuchmaterials.



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Courtsmay imply terms into a contract in order to establish thenatureandscopeofthecontractualagreement.Thisisdoneinthefollowingcircumstances:whenthecontractisofakindinwhichtheimpliedtermhashistoricallybeenfound;whenthetermisnecessarygiventhesurroundingcircumstances(e.g.togivebusinessefficacyto the transaction);when there is a termof art used or notoriousbusinesscustomthatcanbesaidtogoverntherelationshipbetweentheparties (so longas it isnotcontrary toanexpresscontractualprovision);theimpliedtermisconsistentwiththeparties’presumedintentions (so long as it is not contrary to an express contractualprovision); orwhen a statute implies a term (e.g. Sale ofGoodslegislationmayincludeimpliedtermsthatthesellerhastherighttosellthegoods,andthatthegoodsarereasonablyfitfortheirpurposeifthebuyermakesknownthepurpose).Thereisageneraldutyofhonestyincontractualperformancewhichisimpliedintocontractsandrequiresthatpartiesnotlieormisleadeachotheronmatterslinkedtotheperformanceofthecontract.TheprincipleofgoodfaithiscodifiedintheQuébecCivilCode.


Where both the contractor and owner contribute to the delay, orwherethereareconcurrentdelayevents,eachcausedbyadifferentparty,faultwillgenerallybedividedandapportionedbasedontheextenttowhicheachdelaycausedanyresultinglosses.Constructioncontractsgenerallycontaindelayprovisions.Somelimittheremediesavailableasaresultofdelay.Whereactsoromissionsoftheownerarethecauseofthedelay,delayprovisionsmayprovideforareasonableextensiontothecontracttime,andthereimbursementof thecontractor’s reasonablecosts incurredasa result. Notice inwritingofthedelaybythecontractorisnormallyrequired.Insituationsofconcurrentdelay, thecontractbetween thepartiesshouldfirstbeexaminedtodeterminewhetheritprovidesananswerastohowtheallocationofliabilityforanyconcurrentdelayshouldbeconsidered.Otherwise, courts may apportion the various causes of delaybetweenthepartiesbasedontheapplicablecontributorynegligencelegislation or by analogy to such legalisation. If the court findsthere is contributorynegligenceon thepart of the contractor andtheowner,whichcontributorynegligenceaffectedthecriticalpathtoprojectcompletion, thecourtwillapportion thedelaydamagesbetweentheownerandcontractor.Intheeventthatthecontractorwouldnothavebeenabletoperformthecontractduetoitsownactofdelay,regardlessoftheexistenceofanowner-causeddelay,thecontractorwillbeheldliablefordelaydamages.


Whereacontractspecifiesacontract time,or timeforsubstantialperformance of the work, the contractor may, regardless of the

asubcontractor’s invoice. Afailureonthepartofacontractor togivetherequirednoticeofnon-paymenttoasubcontractorcould,presumably,precludethatcontractorfromrelyingona“paywhenpaid”clauseinthesubcontractasabasisfornon-paymentofthatsubcontractorwithin35days.


Constructioncontractsmayprovidefor liquidateddamages in theeventofcertainactsofdefault,suchasdelaysincompletion,bythecontractor.Liquidateddamagesmustbeagenuinepre-estimateoflossarisingfromthedelay(e.g.lostrentforanapartmentcomplex).Unreasonable amounts for liquidateddamages (typically assessedatthetimetheamountwasnegotiated)areinterpretedasapenaltyandareunenforceable.Sections1622to1625oftheQuébecCivilCodeaddresspenalclauses,andgrantcourtsthepowertoreducetheamountofapenaltyiftheclauseisabusive.



ConstructioncontractsinCanadagenerallycontaincontractchangeprovisions which allow the owner to vary the scope or time tocompletethecontract.Iftherearenosuchprovisionsandthereisachange,acourtwilllooktotheconductofthepartiestodeterminewhethertheyhaveagreedtoachangetothecontract.Generally,achangeinscopemustremainwithintheoverallcontemplatedscopeoftheprojectandcannotextendtosomethingwhollydifferent.Evenwhereformalchangeprovisionsexist, if thechangeprocesshasnotbeen followed, thecourtsmay look to theconductof theparties to determinewhether the contract changeprovisions havebeenwaived,andwhethertherehasbeenachangetothecontract.Contracts often have notice requirements for claims, such thatcontractorswillberequiredtomakeaclaiminacertaintimeperiodorrisklosingtheirentitlementtorecoveramountsforit.


Workcanbeomittedfromthecontractifthechangeprovisionsinthecontractallowfor it. Most template formsallowforchangesupon appropriate notice provisions beingmet. If the owner hastheability toremoveworkfromacontractor, theownermayfindanothercontractortoperformtheworkordoithimself.Absentcontractualprovisionthatworkmayberemoved,anownercouldfaceaclaimincontractforlostrevenuesorlostprofitsifitself-performsorawardstheworktoanothercontractor.



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aprovisionwhichidentifieswhichpartywillberesponsibleifthereisachangeinlaw.Thesechangesmayinclude:environmentallawchanges;zoningchanges;orbuildingcodechanges.Ideally,theriskisplacedonthepersonwhoisresponsiblefortheparticularportionof the risk (e.g. contractors typicallybear the riskof a change inbuildingcode).


Unlesschangedbythecontract,thedesignerretainstheintellectualproperty in the design. The owner typically retains copies ofdrawings, blueprints,models or otherwork, but cannot use themforotherprojectswithouttheconsentofthedesignerofthework,or unless it obtains a licence from the designer to use thework.Ownersoften require the right touse the intellectualproperty forthepurposeofoperatingormaintaining theproject,andwillalsorequireanassignmentofanyintellectualpropertyresultingfromtheusebythedesignerofanyoftheowner’sconfidentialinformationinthedesignprocess.Otherintellectualpropertyissuesmayariseinconstructionprojects;forexamplewithpatentedproducts,processes,devicesordesigns.If the owner does not obtain the intellectual property rights, theownerwillneedtoobtainalicencetousetheintellectualproperty,andpotentiallytohaveothersmaintaintheequipment.


Construction contracts often contain provisions allowing thecontractora right to suspend thework if, forexample, theownerhasnotpaid,or if thework is suspended foracertainnumberofdays (not as a result of the contractor). If the contract does nothaveaclauseregardingsuspension,thecourtswillconsiderwhetherthe owner is in default of its obligations under the contract to asubstantialdegreeinordertodeterminewhetherthecontractorhadtherighttosuspendthework.If the contract has a force majeure provision, a party may haveadditionalrightstosuspendtheworkifaneventqualifiesasaneventofforce majeure(seealsoquestion3.12).


Construction contracts often provide for termination where, forexample, the other party is bankrupt or insolvent, the work issuspendedordelayedforaperiodoftime,ortheotherpartyfailstoperformcertainobligationsunderthecontract. Theseterminationfor causeprovisions typically contemplatenotice and aperiodoftimeforthepartyindefaulttocureitsbreach.Thecontractmayalsoincludeaterminationforconvenienceclausewhichmaypermitoneorbothpartiestoterminatethecontract“atwill”,andsetoutthecompensationtobepaidupontermination.Under the common law, certain terms of the contract which areessential or sufficiently importantmay be found to be conditionswhich, if breached, allow the innocent party to terminate thecontract.Absent termination provisions in the contract, the common lawdoctrineof repudiationwill applywhereonepartyunequivocallyindicatesitsintentionnottobeboundbythetermsofthecontract.

existenceof afloat,makeuseof the entire timeperiodup to thespecifiedcontract time toperform thework. Theownermaynotinterferewith thecontractor’s timeforsubstantialperformanceofthework. Where theobligation toperformacontract isat large,thecontractorisobligatedtocompletetheworkwithinareasonabletimeandtheownerisnotentitledtopreventtimelycompletionofthecontract.ThejurisprudenceinCanadadoesnotestablishwhoownsthefloat.However, courts have held that, in the event of an owner-causeddelaywhichconsumesthefloatbutwhichdoesnotdelaythedateofcompletion,thecontractorwillnotbeentitledtodamagesonthataccount. If,ontheotherhand, theowner-causeddelayconsumesthe float, and thereafter there is a contractor-caused delaywhichdelaysthedateofcompletion,thecontractormaybeentitledtoanextensionoftimeequaltothedurationofthefloat.Thecontractorhasadutytomitigateanyowner-causeddelay.


Every province has limitation legislationwhich governs the timelimitsforbringinganaction.Atwo-yearbasiclimitationperiodistypical andanactionmustbecommencedwithin twoyears fromwhenthepartykneworoughttohaveknownabouttheharm,whichisanobjectiveassessment.Eachprovincealsohasanultimatelimitationperiodwhichvariesin length (e.g.10years inAlbertaand15years inOntario). Theultimate limitation period starts from the date when the act oromissionoccurred,notwhenthedamagemayhavebeendiscovered.InQuébec,anactionmustbebroughtwithinthreeyears,andstartstorunfromthetimewhenthecauseofactionisknown(forinstance,whenthecontractualamountsareowed).Foranongoingcontract,thestartingpointiswhentheworkiscompleted.Wheretherightofactionarisesfromamaterialinjuryappearingprogressivelyortardily,theperiodrunsfromthedaytheinjuryappearsforthefirsttime.Contractsoftencontainclausesprovidingthatthecontractormustgivenoticetotheownerifitintendstobringaclaim.Limitation periodsmay be extended by contract, butmay not beshorted unless the applicable provincial limitation legislationexpresslypermitsit.


Which partywill bear the risk of concealed or unknown groundconditions depends on the contract. Absent contractual termsprovidingforcompensationorextratimeonaccountofmateriallydifferent subsurface conditions, the contractor may be at risk.Manycontractsprovidefortestingaheadoftime,orcontainasiteinspection clause which requires the contractor to declare itselfsatisfiedofthegroundconditionsbasedontheinformationavailable.However,wherethereisahiddenriskknowntotheownerbutnotthecontractor,theownermaybeliabletothecontractorregardlessoftheexistenceofasiteinspectionclauseorcontractualprovision.


Absentacontractualprovision,acontractorwilloftenbeartheriskforachangeoflaw.However,constructioncontractsofteninclude



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partymaybenefitfromcontractualprovisionstowhichtheywerenotacontractingpartyunderacommonlawprincipledexceptiontothethirdpartybeneficiaryrule.Courtsrequireclearlanguagetofindthatpartiesintendedtoassumeliabilitytoathirdparty.Athirdpartymaybringaclaimofnegligenceagainstcontractors,designers,andengineersinvolvedintheconstructionofabuilding.Thesepeopleoweadutytousereasonablecaretopreventdamagetopartieswhotheyshouldreasonablyexpecttobeaffectedbytheirwork.Thisdutyisowedtosubsequentbuildingpurchasersifitisforeseeablethatafailuretomeetthereasonablecarestandardwouldresultindefectsthatcreaterealandsubstantialdangertohealthandsafety.Most provinces have legislation regulating warranties on newlybuilt homes, under which subsequent owners may have a claim.Warrantycoveragevariesacrossprovinces.


Canadianlawrecogniseslegalandequitablesetoff,andconstructioncontractsmayprovideforcontractualset-offinspecificsituations.Intheabsenceofacontractualrightofset-off,partiestoacontractmay,incertaincircumstances,beentitledtolegalorequitableset-off.Legal set-off requires two conditions be fulfilled: first, that bothobligations be debts which are for liquidated sums or moneydemands that canbe ascertainedwith certainty; and, second, thatbothdebtsbemutualcross-obligations.Therighttolegalset-offissubjecttostatutorylimitationperiodsinCanada.Equitableset-offcanbedistinguishedfromlegalset-offonthebasisthat it applies in the absence of mutuality, and where the cross-obligationsarenotforliquidatedsumsormoneydemands.Whileequitableset-off isnotsubject tostatutory limitationperiods,andtheclaimandcross-claimneednotariseoutofthesamecontract,the party relying on the set-off must show an equitable groundwhichgoestotheveryrootoftheotherparty’sclaim.


Each party to a construction contract owes a duty of care to oneanother.Acontractmaybeconstructedtolimitorexcludeaparty’scontractualortortiousliability.Ifthecontractspecifiesalimitationclauseforliabilityforaspecificmatterortypeofconduct,apartycannotsueintorttocircumventthecontractualclause.Apartymaybringanactionundereithercontractor tort,butmaynot recoverdamagesunderboth.Ifacontractdoesnotspecifyastandardofcare,thepartiesareheldtoareasonablestandardofcareofanordinarypersonwithsimilarexpertise.Forexample,anengineer,contractororsubcontractorwillbeheldtothestandardofcareofapersonwithsimilarknowledgeandexpertise.


If the languageof thewritten contract is clear andunambiguous,then no extrinsic evidence may be admitted to alter, vary, orinterpretinanyway,thewordsusedinthecontract.Construction

Insuchacase,theinnocentpartymayelecttoacceptthebreach,andbringthecontracttoanend,oraffirmthecontract,inwhichcasethecontractcontinues.Whetheritacceptstherepudiationoraffirmsthecontract,theinnocentpartymaysueforbreachofcontract.InQuébec, twokindsofresiliation/terminationmayoccur:1) theownermayunilaterallyterminatethecontracteventhoughtheworkor provisionof service is already inprogress, as long as hepaystothecontractorinproportionoftheagreedprice,theactualcostsand expenses, the value of thework performed before the noticeof terminationand, as thecasemaybe, thevalueof thepropertyfurnished;or2)anypartymayterminatethecontractifthecontractorfailstoproperlyperformtheworkorcomplytoasubstantialdegreewiththecontract.Insuchcase,theownermayfinishtheworkitselforwithanothercontractor,solongasterminationwasinaccordancewiththetermsofthecontract.


Both force majeure and frustration are known. Contracts maycontainforce majeureclausesthatdefineforce majeureevents;forexample tornadoes, fires, labour strikes, acts of war, etc. In theclause,thepartiesmayagreetonoticeprovisions,andthat,ifsuchaneventoccurs,neitherpartyisatfaultnorentitledtodamages.Theforce majeure eventmay suspend obligations under the contract,andmayleadtocontracttermination.Typically,thepartieswillnotbepermitted to relyonanuneconomicalcontractasagroundforforce majeure.Intheabsenceofacontractualterm,thereisnorighttoclaimforce majeure.In Québec, if a contract stipulates which party will assume therisk of force majeure, the clause supersedeswhat is provided bytheCivilCode.TheCivilCodeprovidesthatadebtorisreleasedwherehecannotperformanobligationbyreasonofaforce majeureeventwhichoccurredbeforehewasindefault.Ifthedebtorwasindefault,adebtorisnonethelessreleasedifthecreditorcouldnotinanycasebenefitfromtheperformanceoftheobligationbyreasonofthatforce majeureevent.Frustrationmayoccurifcircumstanceschangesuchthatitbecomesimpossibleforonepartytofulfilitsobligationsunderthecontract.If sucha changeoccurs, performancewill no longerbe required,though it isnotnecessarily thecase thatallobligationsunder thecontractwill come toanend. Thepartiesmayaddresseventsoffrustration, and allocate responsibility to the party in the bestpositiontomanagetheriskoftheevent.Frustrationonlyservestoendacontractinwhole;itcannotbeusedtosuspendperformanceortopartiallyterminateacontract.


InQuébec, thesubsequentownercanbenefit fromlegalwarrantyobligations resulting from a contract to which theywere not thecontractingparty.Athirdpartyisnotnormallyentitledtoclaimarightorbenefitunderacontracttowhichitisnotapartyatcommonlaw.However,Courtshaverecognisedexceptionstothisdoctrine,includingagency,trust,andassignment.Iftheserecognisedexceptionsdonotapply,athird



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ensuringthatplansandspecificationsaregenerallycompliedwith,itisusuallynotresponsibleforcarryingoutthework.Therefore,thedesigner’sobligationsdonotprovideanabsoluteguaranteeofperfectcompliancewiththedesign,norsupervisionofeverysinglethingthatisdoneontheproject;however,designersareexpectedtosupervisecriticalstagesofthework.



Disputeresolutionprovisionsinconstructioncontractsvary.Oftenthere is a tiered process where disputes are resolved first by theconsultant, then negotiation, then mediation and/or arbitration.These stages could be mandatory and have timelines in whichtheymustbemetbeforemovingtothenextstage.Wherethereisamandatory arbitration clause, the courtwill refrain from takingjurisdiction over the dispute. In some provinces, one partymayapply to the court for summary judgmentof amatterwhichmayotherwisebearbitrable,iftheissuescanbedeterminedbywayofsummaryjudgment.Ifthepartiesdonotcontractintothealternativedisputeresolutionmethodsdescribedabove, theycanhavetheirdisputeresolvedbythecourt.


Theadjudicationofconstructionlitigationvariesfromprovincetoprovinceandgenerallytherearenospecificadjudicativeprocessesin Canada focused on construction. In Ontario, a specialisedconstruction liencourthasbeencreatedwhich isadministeredbycasemanagementmasters,but this courtonlyhas jurisdiction forprojectswithintheCityofToronto.


Many construction contracts have arbitration clauses but not all.They may be mandatory or permissive. If the clause is merelypermissive, in order to proceedwith arbitration, the partiesmustsubsequentlyagreetoarbitrate.Arbitrationclausesvaryincomplexityandmayrangefromasimpleagreement to arbitrate, or set out details such as the number ofarbitrators,theselectionprocess,theseatandanyrulesthatapplytothearbitration.Ifthepartiessetoutarbitrationrules,thoserulestypicallyprovidetheframeworkforthearbitration.Otherwise,thepartiesmayagreetotheprocedureatthestartofthearbitrationorthearbitratorwilldeterminetheprocess(e.g.documentexchange,witnesses,timing,etc.). Thearbitrationhearingsalsodependonthetypeofdisputebeingheard.InQuébec,ifthereisnospecificproceduretofollowstipulated in the contract, the rules codified in theCode ofCivilProcedure(CCP)willapply.Each province has arbitration legislation, but the legislation doesnot set out the detail of the arbitration procedure. That detail isinsteadsetoutintherulesofarbitrationthepartiesmaychoose,asmentionedabove.

contractsusuallycontaininterpretationprovisions,suchaspriorityprovisions,whichclarifywhichdocumenthaspriorityintheeventofaconflictbetweenterms.Courtspreferacommon-senseapproachtodeterminetheintentionsofthepartiesovertheapplicationoftechnicalrulesofconstruction.Courtswillthusconsidertheordinaryandgrammaticalmeaningofthewords,inlightofthesurroundingcircumstancesatthetimethecontractwasenteredinto.Where a term of a contract is found to be ambiguous, extrinsicevidence regarding theparties’objective intentions,andobjectiveevidence of the factual matrix underlying the negotiation of thecontract, but without reference to the subjective intention of theparties,maybe admitted to interpret the contract and resolve theambiguity.Asaninterpretivetooloflastresort,thecourtmayapplythedoctrineofcontra proferentem, and interpret ambiguous contractual termsagainstthedrafter.


Courtswillgenerallyupholdtherightoffreedomofcontract–onlyinrarecircumstanceswilltheyrelieveapartyfromitsbargain.Asageneralrule,atermofacontractwillbeunenforceablewhereitisunconscionable,orwhereitiscontrarytopublicpolicyorstatute(e.g.annualratesofinterestover60%willnotbeenforceable,andterms of contracts that purport to contract out of provincial lienlegislationmaybevoid).Exclusionof liabilityclausesmaybe found tobeunconscionableincertaincircumstances,suchaswherethereisapowerimbalancebetween the parties. While exclusion of liability clauses aregenerallyenforceable,theyarestrictlyinterpreted(seealsoquestion2.3).InQuébec,somewarrantiesarecreatedbystatute,and, therefore,cannot be voided by contractual provisions (for instance, thewarrantyintheCivilCodeforthelossoftheworkthatoccurswithinfiveyears after thework is completed). Also, anabusiveclause,whichisexcessivelyandunreasonablydetrimentaltotheadheringparty,inacontractofadhesionmaybereduced.


Aprofessionaldesignermayhavespecificobligationstotheclientexpressedinthecontract.However,thecontractmayalsoincludeexclusionclauseswhich limit the liabilityof thedesigner. In theabsenceofthepartiesprovidingfortheobligationsintheircontract,undertortlaw,adesignerhasadutytoactwiththereasonableskill,careanddiligenceexpectedofadesignerofordinarycompetence.Unlessthecontractprovidesotherwise,adesigneristypicallyliableifthedesignwasdefectiveduetonegligence.Thestandardofcareforadesignprofessionalisnotaguaranteethattheworkwillbetotheowner’scompletesatisfactionnorthattheworkbesuccessful,solongastheworkwasdonecompetentlyandnon-negligently.Thedesignermayhaveadutytoensuretheprojectisconstructedinaccordancewithitsplans,andsatisfiesthenecessaryspecifications,buildingcodes,andbylaws.Theseobligationsaretypicallyknownasfieldreviewservices. Although thedesigner is responsible for



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documents, conduct discovery/questioning, and retain experts.SomeRules of Court havemechanisms to encourage settlement,likemediation,andrulesrelatingtosettlementofferswhichimposeenhancedcostconsequencesifarejectedoffertosettleisbetterthanthefinalawardbyacourt.Thetimingofcourtproceedingsvaries.Large,complexcasesmaytakeseveralyearstogettotrial.Ifanappealispossible,onepartymay appeal the decision to the provincialCourt ofAppeal. ThedecisionofaCourtofAppealmayalsobeappealedtotheSupremeCourtofCanada;however,thepartyseekingtoappealwillneedtoseekleaveofthecourtbeforehavingtheirappealheard.Simplercasesmayberesolvedsummarilywhichallowsforafasterdecision.Iftheclaimisbelowathresholdamount,eachprovincehas a small claims court which has a simplified procedure andshortertimeframeinwhichatrialofthematterisheard.Decisionsfromsmallclaimsandprovincialcourtscanalsobeappealed.The CCP of Québec codifies the obligation for the parties toconsider private prevention and resolution processes beforereferring their dispute to the courts. The CCP also codifies thatthe courts are to facilitate conciliationwhen required, the partiesrequest it, circumstances permit, or if a settlement conference isheld.Thepartiesmayagreetosettletheirdisputethroughaprivatedisputeresolutionprocessorjudicialconciliationandtheymayalsootherwiseterminatetheproceedingatanytime.TheCCPprovidesrules for settlement conferences before a judge, mediation andarbitration.

AcknowledgmentTheauthorswouldliketothankalllawyersandstudentsfromacrossthecountryatMillerThomsonwhoprovidedassistanceinpreparingthis chapter,with special thanks to Fergus Schappert,AndréanneSansoucy,NickWillisandHaleyEdmonds.Fergus Schappert practises construction law and commerciallitigation in Edmonton,Alberta (Tel: +1 780 429 9737 / Email:[email protected]).AndréanneSansoucyhasexpertiseinQuébecconstructionlawandtheQuébecCivilCode(Tel:+15148715455/Email:[email protected]).NickWillis practises construction law and commercial litigationin Edmonton,Alberta (Tel: +1 780 429 9459 / Email: [email protected]).HaleyEdmondspractisesconstructionlawandcommerciallitigationinEdmonton,Alberta(Tel:+17804299410/Email:[email protected]).

Partiesthus,attimes,choosetoadoptthird-partyrules(oravariationofthem),suchastheCCDCRulesforArbitrationofConstructionDisputes or the UNCITRALArbitration Rules. Canadian courtswillassistintheenforcementofarbitralawards.


Yes,in1986,CanadaratifiedtheUNConventionontheRecognitionandEnforcementofForeignArbitralAwardsandeachprovincehasenabling legislation for theNewYorkConvention aswell as theModelLawonInternationalCommercialArbitration.OtherthantheprovisionsofArticleVoftheNewYorkConvention,onerecentobstacletoenforcementisthatthearbitralawardmustbebroughtforenforcementwithintheapplicableprovinciallimitationperiod(seequestion3.6).


A judgment of a foreign court may be upheld in Canada. Aprerequisitetoenforcementisthattheforeigncourthadarealandsubstantialconnectionwiththepartiesorsubjectofthedispute,oranotherbasisofjurisdictionwassatisfied.Thereneednotbearealandsubstantialconnectionbetweenthedisputeorthedefendantandtheprovinceinwhichrecognitionandenforcementisbeingsought.Thejudgmentmustalsobefinalandconclusive.CanadiancourtswillonlyenforceaforeignjudgmentthatisfairanddoesnotoffendCanadianpublicpolicy.Several provinces have statutes that govern the reciprocalenforcementof judgments thatmayallowaparty to apply to thecourts for an order registering the foreign judgment. However,recognisedreciprocaljurisdictionsmayvaryacrossprovinces.


The process is governed by theRules ofCourt of each provincewhich set out the requirements to, inter alia, start a proceeding,respond, bring third-party claims and cross claims, exchange



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Miller Thomson LLP, one of Canada’s leading national law firms, is dedicated to the Canadian market. We have close to 550 lawyers in 12 offices nationally, and the broadest geographic reach of any Canadian law firm. Miller Thomson is uniquely positioned to provide ‘on the ground’ insight and knowledge from the country’s key economic hubs, and under both the common law and civil law systems in Canada. We are able to consistently deliver the highest quality advice, advocacy and expertise required by Canadian or international clients doing business in Canada.

Our Construction and Infrastructure industry group includes lawyers who are available and experienced to assist with a variety of legal needs. We represent domestic and foreign owners, developers, engineers, architects, contractors, and subcontractors in the project development process and in dispute resolution. Our expertise extends from simple to complex projects involving a variety of delivery models.

Bill Kenny is a Partner in the Edmonton and Calgary offices of Miller Thomson. As general counsel, Bill practices civil and regulatory litigation, construction law, transportation, insurance and corporate commercial law.

Bill has written many articles and participated in seminars dealing with litigation, construction law and directors’ liability. He has appeared before all levels of court in Alberta, Saskatchewan and the Northwest Territories, as well as before numerous agencies, boards and tribunals. He has appeared as counsel before international commercial arbitration panels in London and Paris. Bill has acted for construction contractors, consulting engineers and owners, with experience in all forms of claim related events and forms of dispute resolution as well as the preparation of contract documents. He has also been appointed as arbitrator and mediator in many commercial disputes.

William J. KennyMiller Thomson LLP3000, 700 – 9th Avenue SWCalgary, AlbertaCanada

Tel: +1 403 298 2404 / +1 780 429 9784Fax: +1 403 262 0007Email: [email protected]: www.millerthomson.com/en

Leanna Olson advises clients on litigation and construction law matters. Her practice focuses on the construction industry, including residential, commercial, infrastructure and industrial projects.

Leanna helps clients at the initial stage of projects by reviewing contracts, contract negotiations, and drafting custom-built contracts. When disputes arise, Leanna assists with reviewing and advising on the issues and helps navigate through negotiation, mediation, arbitration or litigation, as necessary.

Leanna has worked on various lien claims, deficiency claims, negligence claims and contract disputes. She has experience in small claims trials, questionings, negotiations, mediations and large litigation matters.

Leanna OlsonMiller Thomson LLP3000, 700 – 9th Avenue SWCalgary, AlbertaCanada

Tel: +1 403 298 2417Fax: +1 403 262 0007Email: [email protected]: www.millerthomson.com/en



Chapter 8

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Tim Reid

Michael J. Smith

England

■ “construction management”,wheretheemployerappointsthe professional team (responsible for designing theworksandmonitoringthemanagementoftheworks),anumberoftradecontractors(eachresponsibleforpackagesoftheworks)andaconstructionmanager (whomanagesandadministerstheindividualtradecontractsontheemployer’sbehalf).

Developers often use bespoke contracts when appointingconsultants. However, certainprojectsmayuseoneof anumberof industry model forms of consultant agreement published byvariousprofessionalbodies (forexample, theRoyal InstitutionofChartered Surveyors, theRoyal Institute of BritishArchitects, ortheAssociationofConsultingEngineers). Typically, the industrymodelformsareconsideredtobeconsultant-friendly,whereasthebespoke forms used by developers and favoured by funders andpurchasers/tenantstendtobemoreemployer-friendly.NECTheNEC4EngineeringandConstructionContract(“NEC4 ECC”),released in June 2017, can be used for design and build projectsor construct only. It adopts a different approach in its structure,terminologyandcontractingphilosophytootherformsofcontract.The NEC4 implements a collaborative process (founded on theprincipleof“mutualtrustandco-operation”),withastrongfocusoncontractadministrationandprogramme.NEC also publish a number of other construction contractsincludingastandardformforconsultantservicescalledtheNEC4ProfessionalServicesContract,whichadoptsasimilarcollaborativecontractingphilosophy.FIDICThethreemostcommonlyuseddesignandconstructFIDICforms(originally published in 1999 and second editions released inDecember2017)primarilydifferinassigningresponsibilityforthedesignoftheworksandintheirallocationofrisk:a) theRedBook–ConditionsofContractforConstructionfor

BuildingandEngineeringWorksDesignedbytheEmployer,alsoknownastheConstructionContract;

b) the Yellow Book – Conditions of Contract for Plant andDesign-Build for Electrical andMechanical Plant, and forBuildingandEngineeringWorks,DesignedbytheContractor,alsoknownasthePlantandDesignBuildContract;and

c) the SilverBook –Conditions ofContract forEngineering,ProcurementandConstruction/TurnkeyProjects,alsoknownastheEPC/TurnkeyContract.

FIDICalsopublishestheWhiteBook–ConsultantModelServicesAgreement,whichisacommonlyusedstandardformforconsultantservices(includingdesign-onlyobligations).



ThestandardformsmostwidelyusedinEnglandarepublishedbythe JointContractsTribunal (“JCT”),NewEngineeringContract(“NEC”) and International Federation of Consulting Engineers(“FIDIC”). Someplacebothdesignandconstructionobligationsupon contractors. These forms are the focus of the discussionbelow, but this list is not exhaustive. Other organisations alsopublishstandardformsforuseonconstructionprojectsinEngland,suchastheInstitutionofChemicalEngineers(“IChemE”),whichspecialisesincontractsfortheprocurementofprocessplants.JCTThe most common standard forms of building contract forconstructionprojectsintheUKrealestatesectorarethosepublishedbytheJointContractsTribunal(“JCT”). TheJCTalsopublishesstandard forms of collateral warranty and sub-contracts that arecommonlyusedforconstructionprojectsinEnglandandWales.The JCT publishes a wide range of construction contracts. Thedifferent contracts published by the JCT reflect the nature of theprojects under construction, the particular procurement routecontemplated, and the way in which the price of the work iscalculatedandthecontractorispaid.The JCT suite of contracts includes standard forms tailoredspecificallyfor:■ “traditional” procurement,where responsibility for design

and construction are kept distinct, with an employer-appointeddesign teamproducing thedesign, inaccordancewithwhichtheseparatelyappointedcontractorconstructstheworks;

■ “design and build” procurement, where the contractordesigns (or assumes responsibility for the design team’sdesign) and constructs the works to meet the employer’srequirements;and


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essentialtermsandisexpressedtoterminateupontheexecutionofaformalcontract.Thisiscommonlyfollowedbytheexecutionofadetailedformalcontract,whichisoftenbasedonastandardform.Currently, we are seeing an increasing amount of two-stagetendering, involving “ECI” (Early Contractor Involvement). ECIinvolvesappointingthecontractoratanearlystageintheproject,theideabeingthatcollaborationandcommunicationbetweenallthoseinvolvedattheoutsetwillbenefitprojectoutcomeinthelongrun.NEC4ECCprovidesforECIinitsoptionalclauses,andenvisagesatwo-stagecontract:atstage1thecontractorparticipatesindesigndevelopment and planning; and at stage 2 detailed design andconstructiontakesplace.WhereECIisused,theemployer/developeristypicallyfreeattheendofstage1tochoosenottoproceedtostage2withthecontractor,withoutincurringfinancialpenalty.


Typically, a domestic construction contract will require thefollowinginsurances:■ insuranceoftheworks(usuallyreferredtoas“Construction

All-Risks”insurance)–takenoutbyeithertheemployerorthecontractorcoveringlossordamagetotheworkexecutedand site materials up to practical completion in the jointnamesofbothpartiestothecontract;

■ public liability insurance – covering claims in relation todeathor injury to thirdpartiesordamagetopropertyotherthantheconstructionworks;

■ employer’s liability insurance – required by statute(Employer’sLiability(CompulsoryInsurance)Act1969)tobetakenoutbythecontractortocoverthehealthandsafetyofitsemployees;and

■ professional indemnity insurance (“PII”)– tocoverdesignliabilityandtobetakenoutbyanypartycarryingoutdesign(including the contractor where it is undertaking somedesign under the contract). PII policies cover the insuredagainstclaimsforbreachofprofessionalduty(professionalnegligence). Theyareusuallyrequiredtobeinplacefromcommencement of the work/services until 12 years afterpracticalcompletion.


(i) General requirements The main statutory requirements originate from the

Construction Act, which gives parties to constructioncontracts a number of statutory entitlements, dealt withelsewhereinthisguide.

(ii) Labour (i.e. the legal status of those working on site as employees or self-employed sub-contractors)

In terms of labour, individuals are legally protected fromdirectandindirectage,sex,disabilityandracediscriminationintheworkplaceundertheEqualityAct2010.Therearealsogenericobligationsonemployerstoensurethatemployees’personaldetailsareprotected.

FIDICisduetolaunchasecondeditionofitsYellowBooklaterin2017,withsecondeditionsoftheRedBookandtheSilverBooktofollow.Management contractingManagement contracting arrangements are sometimes used inEnglandforlarge-scaleEngineering,ProcurementandConstructionManagement(“EPCM”)projects. TheseareusuallybespokeandheavilynegotiatedcontractsasthereiscurrentlynostandardformEPCM contract used in England. It is not uncommon, however,toseepartiesstartingwithastandardformconsultancyagreement,andmakingsubstantialamendmentstoreflecttheuniqueroleoftheManagingContractor.


The Housing Grants, Construction and Regeneration Act 1996(the “Construction Act”) applies to all “construction contracts”(contractsforthecarryingoutof,orforarrangingforthecarryingout of, “construction operations”) in England and Wales. TheConstructionActwas amended inOctober 2011byPart 8 of theLocal Democracy, Economic Development and ConstructionAct2009(the“LDEDC Act”)whichprovidedthatitisnownolongernecessaryforaconstructioncontracttobeinwriting.Thismeansthat there are now no legally essential qualities required underEnglishlawtocreatealegallybindingconstructioncontractotherthantheusualEnglishlawprinciplesofcontractformation,whichrequiresanintentiontocreatelegalrelationsandthekeyelementsofoffer,acceptance,considerationandcertaintyofterms.However, certain compulsory payment provisions (aimed atsecuringtheflowofcashdowntheconstructionsupplychain)arerequired tobe included inall“constructioncontracts” (asdefinedundertheConstructionAct)andallcontractingpartiesaregivenastatutoryrighttoreferdisputestoadjudication.Ifthepartiesfailtoincludeintheirconstructioncontractstherequiredprovisionsastopaymentand/oradjudication,thestatutorySchemeforConstructionContracts SI 1998 No. 649 (the “Scheme”) applies, which willimplytherelevantprovisionsintotheconstructioncontract.Notwithstanding the above, any contractual provisions as toadjudicationmustbe inwritingtobeeffective. Otherwise,undertheConstructionAct,theadjudicationprovisionsoftheSchemewillbeimpliedintotheconstructioncontract.


Yes, inEnglandtheLetterof Intent (“LOI”) is recognisedby thecourtsasacontractingdevicethatmayamounttoeithera legallybinding contract or a non-binding arrangement, depending onwhethertheLOIcontainsthelegallyessentialqualitiesforcontractformationdescribedinquestion1.2.Ifused,theLOIusuallyformsthefirstpartofatwo-stagecontractingframework. The LOI is seen as an interim measure outlining

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PerformancebondsandcompanyguaranteesarecommontoolsinEngland for securing the contractor’s performance and providingtheemployerwithredresswherethecontractorfailstoperformitsobligations.Performance bondsThe two types of performancebondmost frequently encounteredare:■ conditional performance bonds: where the bondsman

onlybecomes liable to theemployeronproofofbreachoftheunderlyingcontract,oronproofofbothbreachandlossresultingfromthebreach;and

■ unconditional or on-demand performance bonds:wherethebondsmanisliabletotheemployerwhenthedemandismadeinaccordancewiththebond,withouttheneedforproofofbreachorlossresultingfromthebreach.Thisissubjectto the very limited exceptions of fraud in the request forpayment,andwheretheunderlyingcontractcontainsaclearprohibitiononmakingdemandsincertaincircumstancesandademandismadeinsuchcircumstances.

Company guaranteesUnderacompanyguarantee,aparentorothergroupcompanyofthecontractorguarantees theperformanceof thecontractorunder theconstructioncontract.The company guarantee is usually in the nature of a “see to it”guarantee,whereby the guarantor guarantees to the employer thepunctualperformancebythecontractorof theprimaryobligation.Breach by the contractor of the primary obligation automaticallyputstheguarantorinbreachandtriggersaclaimfordamages.Thereisnoliabilityunderaguaranteeunlessanduntilthecontractorfailstoperformtheprimaryobligation;itisthereforeasecondaryobligation. If the contractor’s primary obligation under theconstructioncontractisdischargedorbecomesvoid,theguaranteefallsaway.Thishighlightsanimportantdistinctioninthenatureofacompanyguaranteeandanon-demandperformancebond:theemployerundersuch a bondmust be paid onpresentationof the demand even ifthere is agenuinedisputebetween theparties to the constructioncontractastowhetherthesuminquestionisdue.Underaguarantee,theguarantorisonlyliabletopayiftherehasbeenabreachoftheunderlyingcontractandpaymentisactuallydue;thedefenceswhichareavailabletoatraditionalguarantorunderthecompanyguaranteearenotavailabletotheguarantorunderanon-demandperformancebond.


Intheabsenceofanyexpresscontractualtermstothecontrary,thegeneralcommon lawpositionbetweenacontractorandemployeris thatproperty inmaterialson the sitewillpass to theemployerwhentheyareincorporatedoraffixedtotheworks,whetherornotthey have been paid for; until they are incorporated/affixed into

(iii) Tax (i.e. payment of income tax of employees) Withregardtotax,theConstructionIndustryScheme(“CIS”)

isa taxdeductionschemewhichapplies topaymentsmadeby a contractor to a sub-contractor. Contractors deductmoneyfromasub-contractor’spaymentsandpassitdirectlyto HM Revenue and Customs. The deductions count asadvance payments towards the sub-contractor’s tax andNational Insurance. The term “contractor” under the CISincludesconstructioncompaniesandbuildingfirmsbutmayalsobegovernmentdepartments, localauthoritiesandotherbusinesses who procure construction work (i.e., employerspaying a main contractor). There are various obligations(includingastoregistration,verificationandsubmittingonlinereturns)onbothpayersandpayeesintheconstructionindustry.UnderstandingtheCISandcomplyingwithitsrequirementsisessentialforthoseinvolvedinconstructionprojectsastheconsequencesofnon-compliancecanbesevere.

(iv) Health and safety Health and safety is covered by the Construction (Design

andManagement)Regulations2015(“CDM”)whichplacesformalobligationsuponallclients,contractorsanddesigners(known as duty-holders) in an effort to reduce deaths andinjuries on construction sites. The CDM Regulations putemphasisonsafetythroughoutthelifetimeofabuilding,frominception through to demolition, with a focus on effectiveimplementationbyplacingobligationsonduty-holders thatfocusontheremovalofriskratherthantheincorporationandmanagementofriskthereafter.


Retaining part of the purchase price from payments due to thecontractor is a common practice. The retention will usually bea deduction from periodic payments to the contractor (often bywithholding a percentage of each payment to the contractor untiltherequiredamount,typically3–5%ofthecontractprice,hasbeenretained).Itisrelativelystandardforhalfoftheretainedamounttobereleasedatpracticalcompletionandtheremainderattheexpiryofthedefectsliabilityperiodorissueofthefinalcertificateunderthecontract.Retention provisions may make the employer a trustee and thecontractor a beneficiary of a trust for the retained amounts, as isthe case in the JCT standard forms. Contractors concernedwithpreserving their rights to these sumsmay apply to the courts foramandatoryinjunctiontosetasideretainedamountsinaseparatebank account, thereby protecting their entitlement to the retainedamountsinthecaseofemployerinsolvency.TheConstructionActrequires“constructioncontracts”(asdefinedunder the Construction Act) to provide an adequate mechanismfor determiningwhen payments become due and a final date forpayment. Hence, in terms of retained amounts, a constructioncontract must provide a mechanism for ascertaining the date forrepayment under that contract andmust not make the release ofretentions under a sub-contract conditional upon the performanceof obligations under a separate contract (such as the release ofretentionsunderaheadcontract).The issue of retention is a topical one at present in the UK.Perceivedproblemswiththepractice–forexample,theeconomicimpactoncontractorsbecauseofmoniesremovedfromcashflow,or lost altogether in the event of client insolvency – prompted agovernment review. The Department for Business, Energy andIndustrial Strategy is currently looking at the costs, benefits andimpactsfortheconstructionsectorandconstructionsectorclients.

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Someofthecommonlyusedstandardformconstructioncontractsincludeamechanismforenablinganengineer,architectorprojectmanager to suspend work under the contract on behalf of theemployer.Forexample,theFIDICRedandYellowBooksenabletheengineertoinstructthecontractortosuspendprogressofpartorallof theworks(witharesultingentitlementfor thecontractor toclaimforsuchsuspensionunderthecontracttotheextentthatthecauseofthesuspensionisnottheresponsibilityofthecontractor).Similarly,theNEC4ECCenablestheprojectmanagertoinstructthecontractortostopornottostartanyworkunderthecontract.English courts recognise a duty on the engineer/architect to actfairly, independently and honestly in the administration of thecontract.Thisextendstodutiesthatrequiretheengineer/architecttouseitsprofessionalskillandjudgmenttoformaviewormakeadecisionwhereitholdstheinterestsoftheemployerandcontractorinbalance.Thestandardformsusuallydealwiththisbymakingadistinctionbetweenwhentheengineer/architectisactingasagentfor,andintheinterestof,theemployerandwhentheengineer/architectisrequiredtomakeadeterminationunderthecontract.Under the new FIDIC Red and Yellow Books, the engineer isdeemed to act for the employer in exercising the duties assignedtoitunderthecontract,exceptincircumstanceswherethecontractexpresslyrecognisestheneedforadeterminationbytheengineer.Insuchcircumstances,theengineeris“toactneutrallybetweentheparties” when agreeing or determining any matter that has beenreferredtohim.Thecircumstancesinwhichtheengineermustactneutrallyandmakea“fairdetermination”includewheretheengineerisdeterminingtheemployer’sentitlementtopaymentfromthecontractor,determiningthe contractor’s entitlement to extensions of time, and makingvaluationsandadjustmentstothecontractprice(thesearetypicallythedeterminationsthattriggertheimpartialityrequirementsundercommonlyusedconstructionstandardformsinEngland).


Under theConstructionAct,aprovisionmakingpaymentunderaconstruction contract conditional on the payer receiving paymentfroma thirdperson is ineffective,unless that thirdperson,oranyotherperson,paymentbywhomisunder thecontract (directlyorindirectly)aconditionofpaymentbythatthirdperson,isinsolvent(asdefinedbytheConstructionAct).Wheretherelevantprovisionisineffective,indefaultoftheparties’agreementofothertermsofpayment,thepaymentprovisionsoftheSchemewillapply.


Yes, liquidated damages clauses (“LD clauses”) are a commonlyusedriskallocationtoolinconstructioncontractsinEngland.Theyare recognisedasaneffectivemethodofavoiding theuncertainty

theworks,propertyremainswiththecontractor,eveniftheyhavebeendelivered to the site (Elwes v Maw (1802)3East 38). Thecontractorisnotpermittedtoreclaimorremovethematerialsoncethe materials have been affixed to the property, even where theemployerorathirdpartyhassubsequentlyseveredthemfromtheproperty(Lyde v Russell(1830)1B&Ad394).Employers also often include transfer of title clauses in theircontracts,statingthattitleinmaterials,andpossiblyalsoplantandequipment,has,orisdeemedtohave,passedtothemnotwithstandingthecommonlawposition.Clausesprovidingfortitleingoodsandmaterials topass to theemployerprior to their incorporation intotheworks aremore commonplace than retentionof title rights infavourofcontractors,whichpermitcontractorstoclaimthatuntiltheyhavebeenpaidtheyretaintitle,andtherighttoremovegoodsandmaterialssuppliedfromthesite.IntheJCTformsofcontract,titletomaterialsonsitewhicharenotyetincorporatedintotheworkspassestotheemployeronpayment,whilst theNEC4 form provides that title passeswhen the goodsarriveonsite(or,inthecaseofoff-sitematerials,aremarkedfortheworks),sothattheemployercanassertwhatevertitlethecontractorhastothematerialsoncebroughtwithinthesite.However,thecourtshaveheldthatclauseswhichstatethatpropertyinunfixedmaterialswillpasstotheemployeroncetheirvaluehasbeen included in an interimcertificate forwhicha contractorhasreceivedpayment,were not sufficient to transfer to the employerpropertyinasub-contractor’smaterialswhenthepropertyinthemhadnotpassedfromthesub-contractor to thecontractor(Dawber Williamson v Humberside CC(1979)14BLR70).



It is common for constructioncontracts tobe administeredbyanarchitect or contract administrator under traditional procurementandforanemployer’sagenttoundertakeasimilarrolefordesignandbuildcontracts.Adutyisusuallyimpliedonthepartoftheprofessionalconsultantresponsible for issuing certificates in accordance with a buildingcontract toact impartiallybetween theemployerand thebuildingcontractor. For example, it has been implied on architects (seeSutcliffe v Thackrah(1974)AC727)andinrelationtootherformsofcontractandconsultants(forexample,onaprojectmanagerunderanNECcontractinCostain Ltd v Bechtel Ltd(2005)EWHC1018(TCC)).Thepreciseroleanddutiesofthedecision-makerwillbedeterminedbythetermsofthecontractunderwhichheisrequiredtoact:Scheldebouw BV v St James Homes (GrosvenorDock)Ltd(2006)EWHC89 (TCC). Theconsultantmaybe required toactinrelationtoanumberofmatterswhereitsprofessionalopinionisrequired,including,forexample,paymenttothebuildingcontractor,aswell as certificationof theworks. Theduty to act impartiallydoesnotinhibittheconsultant’sdutytoactwithreasonableskillandcare. Oftenprofessionalappointmentscontainanexpressdutyofimpartiality,asdootherdocumentsrelatingtotheprojectwheretheissuingofacertificatetriggersaneventfurtherupthecontractualchain.

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variation(particularlyomissionsofamajorpartoftheworks–seethecommentsbelowinrelationtoomittingwork).Thecontractordoesnotusuallyhaveacontractualentitlementtoanextensionoftime or additional payment if a variation is necessary due to thecontractor’sdefault.


It is usual in England for the variation provisions to give theemployer a right to order part of thework to be omitted (with amechanismforaconsequentadjustmenttothecontractprice).Theposition at common law is that, absent expresswords to thecontraryintheconstructioncontract,theemployermay:■ only omitworkwhich it is intended should not be carried

out at all (see, for example,Carr v Berriman (JA) Pty Ltd(1953)27A.L.J.273(Aus),asappliedinAmec Building Ltd v Cadmus Investment Co Ltd(1996)51ConL.R.105);

■ not,andthearchitect/engineermaynot,omitpartoftheworkfromthecontractandhaveitorsimilarworkdonebyanothercontractor,ordotheomittedworkitself;and

■ notbyvirtueoftheomissionallowtheremovalofallofthework from the contractor’s scope: seeAbbey Developments Ltd v PP Brickwork Ltd (2003) CILL 2033 as consideredand applied in Trustees of Stratfield Saye Estate v AHL Construction(2004)EWHC3286(TCC).Theemployermaynotchangethefundamentalnatureoftheworkbyanomission.


Termsmaybeimpliedbystatute,bycertaintypesofconduct,orbyoperationofaprincipleofcommonlawtocertaintypesofcontract.UndertheConstructionAct,thereareanumberoftermswhichwillbe implied intoaconstructioncontractwhere thecontractdoesnotcomply with certain requirements of the ConstructionAct. Theseinclude:■ Section108–Righttoreferdisputestoadjudication.■ Section109–Entitlementtostagepayments.■ Section110–Datesforpayment.■ Section111–Requirementtopaynotifiedsum.■ Section113–Prohibitionofconditionalpaymentprovisions.


(a) TheEnglishcourtsinrecentyearshavefollowedtheapproachofMr.JusticeDysoninHenry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd(1999)70ConLR32,QBD(TCC). Theeffectof that approachhasbeen that, ifthecontractissilentastothecontractor’sentitlementtoanextension of timewhere there is concurrency between anyemployer-risk event and a contractor-risk event, both ofwhichimpactupontheprogrammefortheWorks(i.e.causethedelay),thecontractorisentitledtoanextensionoftimefortheentireperiod.

(b) In terms of a contractor’s entitlement to costs caused by aconcurrentdelay, it isunlikely that thesameapproachwillapply toclaimsof lossandexpense,unless thewordingofthecontractexpresslypermitsit.Thereseemstobeamuch

andexpenseofproving thenatureandextentofdamagesufferedas a result of a breach by the contractor (often of a time-relatedobligation,suchaslatecompletion).TheconsiderableadvantagesofLDclauseswillbelostiftheclauseisnotlegallyenforceable.Ultimately,suchaprovisioncanbeeithera legitimateLDclause, inwhichcase itwillbeenforceable,orapenalty,inwhichcase,asamatterofpublicpolicy,itwillnot.TheprinciplesadoptedbyEnglishcourtsindeterminingifanLDclause amounts to a penalty were recently restated inCavendish Square Holding BV v Makdessi (2015) UKSC 67. Followingthis Supreme Court decision, the test for determining whethera clause is a penaltywill bewhether it imposes on the contract-breaker consequences which are “out of all proportion to anylegitimate interestof the innocentparty”. Therefore, thefact thataclausedoesnotcontainagenuinepre-estimateof lossdoesnotautomaticallymeanitisapenalty.Aslongasalegitimatebusinessinterest isservedandprotectedbytheclauseandtheprovision isnot“extravagant,exorbitantorunconscionable”,itwillbeupheld.



At common law, subject to the inclusion of express provisions(seebelow), theemployer isnotgenerallyentitledtovaryoralterpreviously described work and materials as of right without thecontractor’sagreement.Thegeneralruleisthat,ifacontractorhasbeenrequestedtocarryoutworkthatisavariationtothecontract,hewillbeentitledtorecoverpaymentforitiftheemployerhasexpresslyorimpliedlyrequestedtheworkknowingittobeavariation.A consultant appointed by the employer has no implied authorityto order additionalwork or promise to pay for it. In the absenceofexpressprovisions,inordertorecoverpaymentforadditionalorvariedwork,acontractorwouldneedtoshowthatithadaseparatecontractwiththeemployerthatitshouldcarryouttheadditionalorvariedworkwhich ithaddoneon theconsultant’s instructionsandbepaidforit.Asaresult,expressprovisionsastovariationofworkareacommonfeatureofconstructioncontracts.Variationsareofteninstructedbytheemployer’scontractadministrator,withtheextentofauthorityto order additionalworks dependingon the termsof the contractadministrator’sappointment.If the additional or varied work is so peculiar, unexpected anddifferentfromwhatanypersonreckonedorcalculatedupon,itmaynotfallwithinthecontractatallandthecontractorwillbeentitledtopaymentforthevariedworkonaquantum meruitbasis:Thorn v London Corp(1876)1App.Cas.120.Contractual provisions that allow an employer to varywork (forexample,byomittingwork)oftendonotallowthecontractortobedeprivedofitsopportunitytocarryouttheworkand,usuallywherethe employer engages another contractor to carry out work thatwouldotherwisehavebeencarriedoutby theoriginalcontractor,thiswillconstituteabreachofcontract.Typically, the contractor will be entitled to claim an extensionof time,and/or its lossandexpense ifavariation is instructedbythe employer (subject to the contractor being able to show thattheemployerhasagreed topayfor thework inquestionand thattheworkisoutsidethescopeofworkagreedtobecarriedoutforthecontract sum). Contractorsmay try to restrict theextentofa

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TheJCTstandardforms(otherthantheMajorProjectConstructionContract) are silent on the issue, thereby adopting the commonlaw position of the contractor bearing the risk of encounteringunforeseengroundconditions. TheFIDICSilverBook takes thisastepfurtherandexpresslyallocatesallsuchrisktothecontractor.The NEC4 ECC is, in comparison, relatively favourable to thecontractor, allowing recovery where the contractor encounters“physical conditions” within the site which are not weatherconditions,which “an experienced contractorwould have judgedatthecontractdatetohavesuchasmallchanceofoccurringthatitwouldhavebeenunreasonabletohaveallowedforthem”.


Ifthecontractissilentontheissue,thecontractorbearstheriskofchangesinlawimpactingtheworkunderthecontract.The standard form construction contracts will often address thisissueexpressly.TheFIDICRed,YellowandSilverBookspassboththe time and cost risk to the employer, allowing an extension oftime and an adjustment to the contract price to take into accounttheimpactofanychangeinlawinthecountryinwhichthesiteislocated.Thebasedateusedfordeterminingthisadjustmentis28dayspriortothesubmissionofthetenderforthework.TheFIDICchangeinlawprovisionsdo,however,enablethepassingonofcostsavingstotheemployertotheextentthatachangeinlawresultsinacostsavingtothecontractor.TheNEC4optionalchangeinlawclausepassesthetimeandcostriskofachangeinlawtotheemployer,totheextentsuchchangesimpactthecontractor’scostsandabilitytocompletetheworksontime.LiketheFIDICprovision,theNEC4changeinlawclauseisreciprocal,allowingtheemployertobenefitfromachangeinlawwhichreducesthecontractor’scostsundertheconstructioncontract.Thepositioninrespectofriskallocationforchangesinlawunderthe main JCT forms of contract is that the contractor can claimanextensionof time to theextent that itnotifies theemployerofthedelayresultingfromthechangeinlawtogetherwithsufficientsupportinginformation.Theriskofdelayisthereforepassedtotheemployer,whiletheriskofadditionalcostarisingfromthechangeinlawremainswiththecontractor.


The authors of the copyright material created in respect of thedesign and operation of a property are typically the employer’sdesign consultants, orwhere a contractor has carried out design,the contractor or a combination of these. Such consultants and/orcontractorswilltypicallyowntheintellectualpropertyrightsinrelationtotheproject.Owners or authors of copyright material are rarely willing toassignownershipof thematerialonUKconstructionprojects, soemployersgenerally seek to ensure that they aregranted royalty-free, irrevocable licences to use and reproduce all copyright inany drawings and other documents produced by any consultantsor contractors, togetherwith the right to transfer the licence andgrant sub-licences in appropriate circumstances (i.e. in favour ofpurchasers, tenants, funders and any other third parties with aninterestintheprojectwhomayneedtousethecopyrightmaterialrelatingtothedesignand/oroperationoftheproject).

higher test of causation applied to a contractor’s costs incomparisontoextensionsoftime(andinthisrespecthemayfailthe“butfor”testofcausation).

Wherethepartieshavemadeadequatecontractualprovisionfortheallocationoftherisksassociatedwithconcurrentdelay,thecourtswillupholdthatprovision(North Midland Building Limited v Cyden Homes Limited(2017)EWHC2414(TCC)).


Thequestion of “ownership” of float is amatter of debate underEnglish law, particularly where delays occur which cause aprogrammed float to be absorbed in whole or in part withoutnecessarily causing any delays to the works or to the followingactivities.Theissuehasbeenconsideredatlengthbycommentatorsandauthorswithoutanyclearconsensusemerging.The judgment ofMr. Justice Lloyd inRoyal Brompton Hospital National Service Trust v Hammond & Ors (No.9) (2002)EWHC 2037 (TCC) does provide authority for the courts givingconsideration,inrespectofJCTcontracts,towhatwouldbefairandreasonableinthecircumstancesanddeterminingthatthecontractorshould not be deprived of the float where the employer’s delayoccurspriortothecontractor’s. However,thepreferredviewandbetterargumentunderEnglishlawisthatthefloattimenecessarilybelongstotheprojectandthereforethatwhicheverpartycomestoutilisethefloatfirstshouldhavethebenefitofit.Thisisparticularlythe casewhere the programme is not a contract document. Thecontractor’sobligationistocarryoutandcompletetheworkbythecompletiondate,ratherthanbyanyspecificactivitydate.


Limitationperiodsare imposedby theLimitationAct1980. Thelimitationperiod foranormalcontractualclaim is sixyears fromaccrualofthecauseofaction(thedateofbreachofcontract),butifthecontractwascreatedbydeed,thelimitationperiodis12yearsfromthebreachofcontract.


Thepositionunderthecommonlawisthatifthecontractissilentontheissue,thecontractorbearstheriskofencounteringunforeseengroundconditionsincarryingouttheworkunderthecontract.Althoughmuchwilldependontheriskprofileoftheconstructionarrangement between the parties, the common compromise isreflectedinanumberofthestandardforms.Thisapproachvariesthepositionatcommonlawsothatrisklieswiththecontractorunlessa physical condition is encountered on site,which at the date oftendercouldnotreasonablyhavebeenforeseenbyanexperiencedcontractorpossessingalltheinformationhehad/couldhaveobtainedbyvisualinspectionofthesiteorbyreasonableenquiry.ThistypeofwordingisusedintheIChemERedBook(lumpsumcontract)andisalsoanaptsummaryof thepositionadoptedbytheFIDICRedBookandYellowBookandtheJCTMajorProjectConstructionContract.

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obligations and potentially terminate if the force majeure eventcontinuesforacertainamountof time. Given that theremedyissevere, such clauses are often the subject of heavy negotiation,and the fact that a contract has become uneconomic will not beagroundforaclaimfor force majeure. InThames Valley Power Limited v Total Gas & Power Ltd (2005)EWHC2208, thecourtdrew a distinction between inability and inconvenience, and heldthat inconveniencewas not enough for a force majeure clause tosucceed.

TheconceptoffrustrationexistsinEnglishlawasanexceptiontothe general rule that if performance of a contract becomesmoredifficultorevenimpossible,thepartythatfailstoperformisliableindamages(Paradine v Jane(1647)Aleyn26).“Frustration”allowsthecontracttobeautomaticallydischargedwhenafrustratingeventoccurs.

Afrustratingeventisonewhich:■ occursaftercontractformation;■ issofundamentalastoberegardedbythelawbothasstriking

at therootof thecontractandasentirelybeyondwhatwascontemplatedbythepartieswhentheyenteredthecontract;

■ isnotduetothefaultofeitherparty;and■ renders furtherperformance impossible, illegal ormakes it

radicallydifferent from that contemplatedby theparties atthetimeofthecontract.


Thirdpartiestakinganinterestinanewdevelopmentcannotnowrelywithanydegreeofcertaintyonhavingaremedyintortintheeventthatadefectisdiscovered.

In order to avoid developers having to give long-termwarrantiesin respect of latent defects in a building, it has been the practiceof developers to impose on their contractors and consultants anobligation to provide interested third parties with contractualwarranties in respectof thework that theyhavecarriedout, thuscreatingprivity of contract between the various interestedpartiesandthoseresponsiblefordesignandconstruction.Suchwarrantiesruninparallelto,orarestatedtobe,“collateral”tothemaincontractor appointment. The form which these contractual or collateralwarranties can take varies considerably, some amounting to littlemorethanaone-pagelettercreatingadutyofcareinfavourofendusers, and others being significantlymore complex, dealingwithmattersbeyondsimplythecontractor’sorconsultant’sdutyofcaretothebeneficiary.

However,developers,contractors,consultants,funders,purchasersandtenantsarenowsometimesdispensingwiththeuseofdeedsofcollateralwarranty,as in theirplace,equivalentprotectioncanbecreatedthroughtheuseoftherightscreatedbytheContracts(RightsofThirdParties)Act1999(the“C(ROTP) Act”).The C(ROTP) Act reformed the doctrine of privity of contract.Historically,underEnglish law,acontractcouldnotconfer rightsor imposeobligationsonanyoneother than the signatories to thecontract,irrespectiveofanycontraryintentionoftheparties.TheC(ROTP) Act sets out various circumstances in which a thirdparty isentitled toenforceacontractdirectlyagainst the relevantcontractingpartyinhisownnameandwithouthavingto“join”theothercontractingpartyintheaction.


TheConstructionActprovidesforarighttosuspendperformancefornon-paymentsothat:■ thecontractormayeithersuspendperformanceofallof its

work/obligationsorjustsome;■ thedefaultingpayerisliabletopaythecontractorareasonable

amountinrespectofcostsandexpensesreasonablyincurredbythecontractorasaresultofexercisinghisrighttosuspend;and

■ thecontractorwillbeentitledtoanextensionoftimeforthedelaycausedasaconsequenceofthesuspensionandnotjustfortheperiodduringwhichhesuspendsperformance.

Thecontractor’srighttosuspendworkfornon-paymentissometimesexpresslyincludedinUKconstructioncontracts,althoughtherightwillinmostcasesbeimpliedintotheconstructioncontractbytheConstructionAct.


Apartymayhaveexpress terminationrightsunderaconstructioncontract, and/or it may have termination rights at law. It willgenerally be preferable to terminate using an express contractualterminationright,andrightstoterminateatlawaregenerallymorerestrictivethantheircontractualcounterparts.Apartywilloftenhavecontractualrightsofterminationdetailedintheconstructioncontract,which itcanexerciseon theoccurrenceofcertainevents(e.g.bankruptcyorinsolvencyoftheotherparty).TheJCTStandardBuildingContract2016,forexample,givestheemployerterminationrightsontheoccurrenceofcertaineventsofdefaultbythecontractor(suchassuspendingthecarryingoutoftheworkswithoutreasonablecause),orintheeventoftheinsolvencyofthecontractor.Thecontractoralsohasterminationrightsintheevent of certain defaults by the employer (such as failure to payby thefinaldate theamountproperlydue),or in theeventof theemployer’s insolvency. Both parties have rights of terminationfor force majeure. Similarly, the FIDIC Red andYellow Bookscontainexpressprovisionsdealing, forexample,with terminationbytheemployer.Theysetoutthecircumstancesthatmayleadtoatermination,eitherasaresultofadefaultbythecontractororforconvenience (i.e.without default by the contractor), anddescribetheproceduresthatmustbefollowedandthefinancialarrangementsthatwillapplywhenthisoccurs.If it does not have express contractual termination rights, or theexpresscontractualterminationrightsdonotapply,thenapartymayhavegroundstoterminateacontractatlawforrepudiatorybreachofcontract(whichoccurswhereapartyfailstoperformaconditionof thecontractorwhereapartyrefusesoutright toperformallorsubstantiallyallofitsobligationsunderacontract).


Force majeure is not an English law concept but force majeure clauses are often included in a construction contract to allow apartywhocannotperformtheconstructioncontracttosuspendits

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doesnotoperatebydeductinganamountfromthepropervalueoftheworks,butcomprisesadeterminationthatthepropervalueoftheworkisworthlessthanP2isclaiming.IfP1canestablishitsclaiminfact,thecourtsmustapplyP1’scommonlawrightofset-off.InGilbert-Ash,theHouseofLordsalsoheldgenerallythatpartiestoconstructioncontractsareentitledtoincorporateintoaconstructioncontractanyrightsofset-offtheyplease:thereisnothingtopreventparties to construction contracts from extinguishing, curtailingor enlarging the ordinary rights of set-off, provided they do soexpresslyorbyclearimplication.


Partiestoconstructioncontractsmayoweadutyofcaretoeachothereitherintort,bystatuteorasatermoftheconstructioncontract.Forexample,acontractorwillhaveadutyofcareunderstatute(sections1and2oftheOccupiersLiabilityAct1957asaffirmedinNabarro v Cope & Co(1938)4AllE.R.565)tomakeitsconstructionsitereasonablysafeifitknowsthattheemployerisgoingtowalkaboutonsite.a) Contract Construction contracts usually impose an obligation on

the contractor, professional consultant or sub-contractorto exercise reasonable care and skill. However, a higherstandardofcareisoftennegotiatedbetweenthepartiestoaconstructioncontract.

Intheabsenceofanexpressterminaconstructioncontractas toadutyofcare,contractual termscanalsobe implied.Section 13 of theSupply ofGoods andServicesAct 1982implies into a contract for services a term requiring theexerciseofreasonablecareandskill.Inaddition,contractualterms can also be implied by the courts to give effect tothe presumed intention of the parties. The position of theEnglish courts in this respect was most recently stated inthe SupremeCourt decision,Marks & Spencer plc v BNP Paribas Securities Services Trust Co. (Jersey) Ltd (2015)3WLR1843.

b) Tort Where there is no contract between two parties, parties

involved in a constructionprojectmaybe able to bring anactionintortfornegligencewherethedutytotakereasonablecarehasbeenbreached.Inordertosucceedinanactionfornegligence,theclaimantmustbeabletoestablish:■ thatthedefendantowedadutytotheclaimant;■ thatthedefendantbreachedthedutyowedtotheclaimant;

and■ thatthedefendant’sbreachofdutycausedtheclaimantto

sufferrecoverableloss.


Whereatermofanycontractisopentomorethanoneinterpretation,thereareambiguitiesinthelanguageorthereappearstobeuncleardrafting, the English courts sometimes employ certain “rules ofthumb”inanattempttodojusticebetweentheparties.However,theseprinciples are justpointers and thecourtwillonly resort toapplying them if themeaning cannot be found using the generalrules of contractual interpretation. The most recent restatementof theapproach takenby theEnglishcourts is tobe found in theSupremeCourtdecision,Wood v Capita Insurance Services Limited

Athirdpartywillhaverightstoenforceacontractualtermeither:■ ifthecontractexpresslyprovidesforthistooccur;or■ if the term inquestionconfers abenefiton the thirdparty,

unlessitisclear,onatrueconstructionofthecontract,thatthiswasnotintended.

Provisions of the C(ROTP) Act can be used to grant rights tothirdpartieswithouthavingtoprocuretheexecutionofindividualcollateral warranties. The third party has to be identified inthe construction contract byname, as amember of a class, or asansweringaparticulardescription,andassuchthethirdpartydoesnothavetobeinexistenceatthedateoftheconstructioncontract.Undersection2oftheC(ROTP)Act,whereathirdpartyhasarightunder theC(ROTP)Act to enforce a term of the contract, undercertain circumstances the parties to the contract are prohibitedfromagreeingtorescindorvarythecontractinawaythatwouldextinguishoralterthethirdparty’srightswithoutobtainingthethirdparty’sconsent.Inordertoprovideforthird-partyrights,theunderlyingconstructioncontractwillneedtoincorporateprovisionsstatingwhenandhowtherelevantrightsaretovestinthethirdparty,andamemorandumsettingouthowtherightsenforceablebythethirdpartyshouldbeincorporated,eitherexpresslyorbyreference.Conversely, construction contracts can expressly limit third-partyrights,orexcludetheuseofthird-partyrightsaltogether.


IfP1owesaliquidatedandundisputeddebttoP2andvice versa,thelawrecognisesandallowstheset-offofthesemutualdebts.Where that is not the case, butP1owesmoney toP2but, at thesame time, has a sufficiently related cross-claim against P2, it iswithin thediscretionof thecourts toset-offagainst thesumsduetoP2thesumsP2owestoP1.Thistypeofset-offisanequitableremedy;however,whatconstitutesasufficientlyrelatedcross-claimis unclear. The Court ofAppeal inGeldof Metaalconstructie v Simon Carves Ltd(2010)EWCACiv667concludedthatequitableset-offwillbeappliedwhenacross-claimissocloselyconnectedwithP1’sdemandsthatitmaybemanifestlyunjusttoallowP2toenforcepaymentof thesumit isowedbyP1without takingP1’scross-claimintoaccount.FollowingthecaseofSafeway Stores Limited v Interserve Project Services Limited(2005)EWHC3085(TCC),collateralwarrantiesandthird-partyrightsschedulescommonlyprovidethatanyset-offrightsthatthewarrantorhaspursuanttotheunderlyingcontracttowhichtheparticularwarrantyand/orthird-partyrightsarecollateral,are excluded from its rights in defence of liability as against thebeneficiary of the warranty, as the warrantor could otherwiseraise equitable rights of set-off directly against the beneficiary.Beneficiaries are typically unwilling to bear the risk of paymentdisputes relating to set-offunder theunderlyingcontractbetweenP1andP2.Inadditiontotheequitablerightofset-offdescribedabove,itshouldbenotedthatconstructioncontractsarenodifferentfromanyothercontractinthatthecommonlawrulesofset-offwillapplytothem.Thecommonlawrightofset-offwasdefinedbytheHouseofLordsinGilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd (1974)AC689asbeingwhen,forexample,P1claimsthattherearedefectsinworkcarriedoutbyP2suchthattheworkitselfisworthless than theamountP2hasclaimedfor it. Common lawset-off

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purpose.Notwithstandingtheusualimpliedtermofreasonableskillandcare,ontheparticularfactsofthecase,thecourtfoundthattherewasacommonintentionofthepartiesthatthestructuralengineerwoulddesignawarehousewhichwouldbefitfor thepurposeforwhich itwas required. The court implied into the agreement an“absolutewarranty” that the designwould be fit for its intendedpurpose.Thehigherstandardoffitnessforpurposeisanabsoluteobligation;negligence does not have to be proved and the “state of the art”defence is not available. Thus, even if the state of technicalknowledgeacrosstheconstructionindustryissuchthataparticulardesignfaultwouldremainundetectedbyothercompetentdesigners,theparticulardesignerisstillliable.Itisimportanttodistinguishbetweendesign,goodsandmaterialsand thecompletedworks. The statutory implied termsunder theSupplyofGoodsandServicesAct1982providethatmaterialsmustbe:a) reasonably fit for the purpose forwhich theywill be used

(provideditisthecontractorwhospecifiesthemsothattheemployerisrelyingonhis“skillandjudgment”);and

b) ofgoodquality(whichmakesthecontractorliableforlatentdefectsinmaterialsevenwheretheemployerhaschosenthematerials/supplierandtherehasbeennolackofcareonthepartofthecontractor)(Young & Marten v McManus Childs HL(1969)1AC454).

AlineofcasesfromGreaves & Co (Contractors) Ltd v Baynham Meikle & Partners(1975)1.W.L.R.1095toBaylis Farms Limited v RB Dymott Builders Limited (2010)EWHC3886 (QB) containstrongobitercommentsinfavourofafitnessforpurposeobligationin relation to the design of an entire structure of other types ofdevelopment,providedthat:a) thereisanobligationonacontractortodesignandbuild,or

tosupplyanderect/install;b) the particular purpose of the completed structure is made

known;c) the contractor holds himself out as being competent to

completetheworksandassumesresponsibilityforthem;d) the employer relieson the contractor’s skill and judgment;

ande) therearenoexpresstermsoftheconstructioncontractand/

or particular circumstances precluding the implied term offitnessforpurpose.

Therationalebehind this lineofcasesappears tobeprimarilybyanalogywithsaleofgoodsandhouse-buildinglaws(whereEnglishlaw provides that there is an implied term that the completeddwellingswillbereasonablyfitforthepurposeforwhichtheyarerequired (Miller v Cannon Hill Estates Ltd (1931)2KB113andtheDefectivePremisesAct1972, section1(1))), andon thebasisthatacontractorresponsiblefordesignandconstructionshouldnotbeprovidingdifferentlevelsofwarrantyforthedifferentbuildingelementsoftheproject.Many legal commentators, therefore, start from the position that,in a design and build contract, there is an implied term that thecompletedworkswillbe reasonablyfit for thepurpose forwhichtheyarerequired,unlesseither:a) thereisaprovisioninthecontracttonegatethatimplication;

orb) it can be shown that the employer did not rely on the

contractor’sskillandcare.Thus,incircumstanceswheretheemployerhasrelieduponadesignandbuildcontractor’sskillandjudgment,itislikelythatthecourtswouldfindthecontractortobesubjecttoanimpliedwarrantyastothefitnessforpurposeofthefinishedproduct/building.

(2017) UKSC 24. The Supreme Court confirmed that the courtwilllooktoboththelanguageusedandthecommercialcontextinwhichitwasdraftedinordertoascertaintheobjectivemeaningoftheclauseinquestion.Theextenttowhicheachisusedwillvaryaccordingtothecircumstances.Asageneralrule,greateremphasisislikelytobegiventotextualanalysisincomplex,detailedcontractsdraftedbyexperiencedlawyers.Commercialcontextwilloftenbemore relevant where the agreement is more informal, or lackingin detail. That said, therewill always be exceptions: every casewillbedecidedonitsownfacts.Thefactthattheoutcomeofsuchanapproachmaybeaharshresultforoneofthepartiesisnottheconcernofthecourts.Astheyhaveindicatedinanumberofrecentcases,itisnottheplaceofthecourtstorescueapartythathasmadeabadbargain.


Examplesoftermsinconstructioncontractswhichareunenforceableinclude:■ A conditional payment provision under a construction

contract which makes payment conditional on the payerreceivingpaymentfromathirdparty.Thiswillbeineffectiveundersection113oftheConstructionAct,unlessthatthirdparty, or anyother personpayment bywhom is, under thecontract (directlyor indirectly), a conditionof paymentbythatthirdperson,isinsolvent.

■ Penaltyclauses.■ A provision which allocates liability for the costs of an

adjudication(section108A(2)ConstructionAct).Agreementastosuchcostscan,however,bereachedonceanadjudicationhascommenced.


For the design team, under the common law and statute (SupplyofGoodsandServicesAct1982, section13), the standardwhicheverydesignermustmeetisoneof“reasonableskillandcare”.Thisistakentomean“theordinaryskillofanordinarycompetentmanexercising thatparticularart”. Therefore,under thecommon lawandstatute,thedesignerwillbeliablefordefectsinhisdesignif:a) thedesigner’sconductfallsbelowthestandardoftheordinary

competentprofessional;and/orb) thereisnosubstantialbodyofopinionwithintheprofession

whichwouldsupportthecoursetakenbythedesigner.Bespoke forms of consultancy agreement and building contractwill often contain contractual provisions that seek to raise thestandardofcareindesign,forexample,tothatofanappropriatelyqualifiedconsultantholdinghimselfoutashavingthecompetence,experience and resources necessary for projects of similar scope,complexity,purposeandsize.It is also possible that the parties to a designer’s appointmentare found tohave actually intended thedesigner tobeobliged todesignabuilding(orpart thereof)which isfit for itspurpose. Ifso, anobligationas tofitness forpurposemaybe implied in fact(asopposedtoimpliedinlaw).ThiswasthecaseinGreaves & Co (Contractors) Ltd v Baynham Meikle & Partners(1975)1W.L.R.1095,wheretheCourtofAppealfoundthecontractortobeliabletoensure thatadefectivewarehousewouldbefit for its intended

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■ InternationalChamberofCommerce(“ICC”).■ CharteredInstituteofArbitrators.■ LondonCourtofInternationalArbitration(“LCIA”).■ InternationalCentreforDisputeResolution.Manyofthestandardformconstructioncontracts,suchastheJCT,provideforlitigationasthedefaultdisputeresolutionmechanismfordisputes.This,togetherwiththeincreasedpopularityoflitigationin the Technology and Construction Court (a specialist divisionof thenewBusinessandPropertyCourts),has led toadecline intheappealof arbitration forcertain typesofconstructiondispute.However,arbitrationcontinuestobethepreferredchoiceforlargeinternationalprojects.


The UK is a signatory to the New York Convention (the“Convention”) and has incorporated it into its legislation insections100–104oftheArbitrationAct1996.TheUKcourtswillrecogniseandenforceforeignawardsmadeintheterritoriesoftheothersignatorystates.Foreignarbitralawardswillbeenforcedinthesamewayasajudgmentororderofthenationalcourts.Post-Brexititispossiblethatarbitrationmaybecomeamoreattractivealternative to litigation in the English courts because it avoidsuncertaintyconcerningenforcement(seequestion4.5below).Thecourtswillrefusetoenforceanawardinlimitedcircumstances,suchasthosesetoutinArticleVoftheConvention.Theseincludeinstancesinwhich:■ a party to the arbitration agreement was under some

incapacity;■ thearbitrationagreementwasnotvalidunderitssubstantive

law;■ apartyagainstwhomitistobeenforcedwasnotgivenproper

noticeorwasunabletopresentitscase;■ thetribunallackedjurisdiction;■ therewasaproceduralirregularity;and/or■ itwouldbecontrarytopublicpolicytorecogniseorenforce

theaward.


It istheoriginoftheforeignjudgmentwhichdetermineswhetherthatjudgmentwillbeenforceableinEnglandandWales.Forexample:■ JudgmentsfromEUMemberStatesaregovernedbytheRecast

BrusselsRegulationonjurisdictionandtherecognitionandenforcement of judgments in civil and commercialmatters(Regulation (EU) 1215/2012), and the EEO Regulationcreating a European Enforcement Order for uncontestedclaims(whichdoesnotapplytoDenmark)(Regulation(EC)805/2004).Forproceedingsbegunbefore10January2015,theoriginalBrusselsRegulation(Regulation(EC)44/2001)continuestoapply.Atthetimeofwriting,theimplicationsofBrexiton theenforcementof judgments remainsuncertain.Becauseofitsreciprocalnature,theBrusselsregimecannotsimplybe retainedby importing itwholesale intoUK law.While the UK Government has stated its commitment toreplicating existing provisions as closely as possible, thiswouldbeoflimitedeffectas,whiletheEnglishcourtswould

In the UK, however, an express fitness for purpose warrantyas to design and/or the completed works can be difficult toobtain (primarily because it is commonly resisted by insurers),andwarranties as to the fitness of any designs for their intendedpurposes are expressly carved out of the JCT forms of contract.Instead, employers tend to incorporate intoconstructioncontractstheimpliedtermsofsatisfactoryqualityandfitnessforpurposeofgoodsandmaterialstoprovideanabsolutewarrantyinrelationtofitnessforpurposeofthevariouscomponentsofabuilding.Wheretherearespecificperformancerequirements,theachievementof which is commercially important to the employer, an expresswarrantythattheworkswillmeettheserequirementssoastobefitforaspecifiedpurposeisalsosometimessoughtbyemployers(see,forexample, therecentcaseofMT Højgaard A/S v E.On Climate & Renewables UK Robin Rigg East Limited and another (2017)UKSC59).



The most commonmethods of settling construction disputes areadjudication,litigationandarbitration.


AdjudicationisapopularprocessforresolvingdisputesintheUK.Itwasintroducedinordertoresolvedisputesmorequicklyforthebenefitofcontractorsandsub-contractorsthroughtheConstructionAct.Partiestoa“constructioncontract”can,subjecttoafewexceptions,referanydisputetoadjudicationatanytime.Theadjudicationprocessissignificantlyshorterthanarbitrationorlitigation. Following receipt of the referral to adjudication fromthereferringparty,therespondingpartytypicallyonlyhasbetweenseven and 14 days to respond, and the adjudicatorwill typicallyprovidehisdecisionwithin28daysofreceivingthatreferral(unlessthepartiesagreeotherwise).Thedecisionoftheadjudicatorisbindinguntilthedisputeisfinallydetermined by arbitration, litigation or subsequent agreement. Asuccessfulpartycanapplytothecourttoenforceanadjudicator’sdecision if the other party does not comply. The grounds fordisputing the validity of an adjudicator’s decision are extremelylimited.


Arbitrationisaprivatedisputeresolutionmethodwhich,intheUK,isgovernedbytheArbitrationAct1996.Anyarbitrator’sawardisbindingonthepartiesandisenforceableinthecourts.Unlike adjudication and litigation, the parties must agree torefer disputes between themselves to arbitration. The arbitrationagreement may be a separate agreement or, more commonly, aclausewithintheconstructioncontract.Parties can choose the particular rules for their own arbitration,or they can choose for it to be governed by one of a number oforganisations,suchasthe:

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■ Thevalueoftheclaimismorethan£250,000.■ Ithasaninternationalelement.■ Itiscomplex.■ Itinvolvesnovelpointsoflaw.■ It involves adjudications, including enforcements, and

arbitrations.Claimsfor less than£250,000shouldgenerallybecommencedinCountyCourtsorHighCourtsoutsideofLondon,wherethereisadesignatedTCCjudgeavailableunlesstheclaimsatisfiesoneoftheothercriteriaabove.Anotherexceptiontothisgeneralrulerelatesto public procurement cases,which shouldnormallybe issued intheHighCourtinLondonbecauseoftheexpertiseofthejudgesintheTCCthere.IfproceedingsarebroughtintheTCC,theprocedureissimilartotheprocedureintheotherUKcourts,viz.theclaimantservesaclaimformsupportedbyparticularsofclaimandthedefendantservesadefence togetherwith any counterclaim, eitherwithin 14 days ofservice of the particulars of claim, or within 28 days of serviceshould thedefendantfirst serveanacknowledgmentof serviceofthe particulars of claim. There then follows a casemanagementconference directed by the judge, disclosure by both parties ofdocumentsbothinsupportof,andtothedetrimentof,theirclaim,andahearing. The judge thengivesa judgmentandbothpartieshavetheopportunitytorequestpermissiontoappealthatjudgment.Thewholeprocesscantakemanymonthsorevenyears,dependingonthecomplexityofthecaseandwhetherthecasegoestoappeal.Itislikelytobeaconsiderablylongerprocessthanadjudication,butmaybesimilarinlengthtoarbitration.

AcknowledgmentTheauthorswouldliketothankMatthewBoolandBenPattonfortheirinvaluablecontributionstothischapter.MatthewandBenarepartnersintheConstructiondepartmentofAshurst’sLondonoffice(Email:[email protected];[email protected]).

continueastheydonow,thecourtsofotherEuropeanstateswould no longer be bound to respect and uphold Englishjurisdiction and judgments. A bilateral treatywith theEUcopying the provisions of the Recast Brussels Regulationwould be necessary to retain the equivalent of the currentarrangement.Certaintyintermsofenforcementwillonlybeachievedonceitisknownwhatanynegotiatedexitdeallookslike.

■ Judgments from Iceland, Norway and Switzerland aregoverned by the Lugano Convention on jurisdiction andthe recognition and enforcement of judgments in civil andcommercialmatters(L339/3)(the“Lugano Convention”).

■ Judgments from most Commonwealth countries aregovernedbyeithertheAdministrationofJusticeAct1920,the Civil Jurisdiction and Judgments Act 1982, or theForeignJudgments(ReciprocalEnforcement)Act1933.

■ For countries that do not have applicable treaties in placewiththeUK,orintheabsenceofanyapplicableUKstatute,the foreign judgmentmay be enforced under the commonlaw.


Litigation in relation to construction is usually dealtwith at firstinstance by theTechnology and Construction Court (“TCC”), inwhich thereareseveralfull-timespecialist judges inLondon,andfull- and part-time TCC judges sitting in various regional TCCcentresacrossthecountry.The guidelines as towhen a claim should be issued in theTCCinLondonare setout inThe Technology and Construction Court Guide (SecondEdition)publishedbythegovernmentandinWest Country Renovations Ltd v McDowell and another(2013)1WLR416,andinclude:

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Ashurst England

Michael J. Smith is a partner in the construction group in London. He specialises in the construction aspects of major infrastructure projects, domestic and international EPC contracting and all other areas of non-contentious construction and engineering law. His particular focus is the renewable energy sector, including energy from waste plants, solar energy and on and offshore wind farm development. He has extensive experience in the drafting and negotiation of PFI/PPP project documentation and bespoke EPC, DBFO and BOT documentation. Michael also has expertise in all major UK and international standard form construction and engineering contracts (and associated interface and security support instruments).

Michael is ranked in the Chambers UK Guide for Construction.

Michael J. SmithAshurstBroadwalk House5 Appold StreetLondon EC2A 2HAUnited Kingdom


Ashurst is a leading international law firm advising corporates, financial institutions and governments. With 25 offices in 15 countries, Ashurst offers a worldwide reach and the international insight of a global network, combined with local market knowledge. Our non-contentious construction group advises all parties involved in UK and international real estate transactions and clients, project sponsors and lenders involved in UK and international energy, infrastructure and transport projects. Our core disputes practice areas include general commercial disputes, construction and engineering disputes, energy, resources and infrastructure disputes, financial and regulatory disputes, real estate disputes and international arbitration.

Tim Reid is a partner in London and specialises in the resolution of disputes in the energy and construction and civil engineering sectors both in the UK and internationally. His current and recent cases cover a broad spectrum and include disputes arising from multi-million pound PFI projects in the UK and exploration for oil and gas reserves off the coast of Africa.

Tim has experience of all forms of dispute resolution. In addition to the successful conduct of High Court proceedings, Tim also has considerable experience of the successful conduct of adjudications, arbitrations (national and international) and a large number of mediations. As well as being a solicitor in England and Wales, Tim is admitted as a solicitor in Hong Kong.

Tim is recommended as a Leading Individual in The Legal 500 and ranked in the Chambers UK Guide for Construction.

Tim ReidAshurstBroadwalk House5 Appold StreetLondon EC2A 2HAUnited Kingdom



Chapter 9

Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law

Aimo Halonen

Juho Lönnblad

Finland


Under the ContractsAct (228/1929), which sets down the basicprinciplesofFinnishcontractlaw,acontractisconcludedwhenanoffertoconcludeacontractisaccepted.Constructionagreementsusually, and public procurement agreements always, come intoforce upon signature. The widespread application of the YSE1998General termsforbuildingcontracts (YSE1998conditions)significantlydiminishestheneedforcontractorstoseparatelyagreeoncontractualterms.


Pre-contractualagreementsusedinFinlandcantypicallybedividedinto binding pre-agreements and non-binding letters of intent.Despitethisgeneralrule,thebindingnatureofsuchinstrumentsisalwaysdeterminedonacase-by-casebasisdependingonthetermstherein.Pre-agreementsofanyformarenotverycommonbetweenemployersandemployees.


Employers carrying out construction work are responsible foracquiring statutory insurances, namely earnings-related pension,health insurance pension, unemployment insurance and accidentinsurance.TheYSE1998conditions require themaincontractor to takeoutinsurance for both the construction works and the materials andsuppliesacquiredfortheworksfortheirreacquisitionvalue.



ThestandardconstructioncontractscommonlyusedinFinlandareturnkey construction contracts, overall construction contracts anddividedconstructioncontracts. Lately, integratedprojectdeliveryand project alliance have grown increasingly popular in majorinfrastructureprojects,andthefirststandardisedmodelcontractsforprojectallianceswereintroducedin2018.Inaturnkeyconstructioncontract, a developer enters into an agreementwith a contractor,who takes full responsibility forboth thedesignandconstructionworkofaspecificproperty.In an overall construction contract, a developer enters into anagreementwith a single contractor. This contractor can,however,utiliseoneorseveralsubcontractorstofulfilitscontractualobligations.Designworkiscommonlyexcludedfromsuchconstructioncontracts.In a divided construction contract, a developer enters intoagreementswith onemain contractor and several subcontractors,whomayfurthersubcontracttheirworks.Designworkisusuallycarriedoutbyanexternalparty.A contract can also be set up with a so-called “managementcontract”, in which the main contractor is replaced by a projectmanagementorganisation. Suchprojectsarecommonlysplit intoseveralseparatecontractsandprojects.Inintegratedprojectdeliveryandprojectalliancecontracts,decision-makingpowerintheprojectislargelytransferredfromtheclienttoanad hocprojectmanagementorganisation,comprisingparticipantsfrom all participating (alliance) parties. An essential part of thecontract is an incentive mechanism, intended to give rewards orsanctionstoallparties,dependingonwhethertheprojectgoalsaremet.Themainlegalchallengesincurrentcontractmodelsarefoundinunclearorimbalancedriskallocationbetweentheparties.IntheFinnishjurisdiction,design-onlyagreementsmaybeperformedeitherbyonemaindesigner,orbyoneorseveralsub-designers.


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areintegratedintotheworks,titletosuchitemscommonlypassestotheemployeruponintegration.



Construction contracts are commonly supervised by a supervisorappointedbytheemployer.AccordingtotheLandUseandBuildingAct (132/1999), the employer is responsible for a constructionproject. Such responsibilityalso includesanobligation toensurethatworksareproperlysupervised.Thecontentofsupervisionorthequalificationrequirementsofthesupervisorarenotdefinedbylaw.However,theconstructionindustryorganisationshavesignedatreaty,whereacommonsetofrequirementsisagreedforsupervisors.There are no particular requirements of impartiality. The YSE1998conditions includeaprovisionwhereby the supervisormustbechangedifheisincompetentorunsuitabletotheextentthattheimplementationofbuildingworkissuffering.


Theuseofa“paywhenpaid”clauseispossiblebutnotcommon,ascontractorstendtoapplytheYSE1998conditionsandmilestonesareusuallyalignedwithpayments.If such clauses were to be applied, contractors should take intoconsideration the provisions in the Act on Payment Terms inCommercialAgreements (30/2013)asamendedbyAct385/2015.Saidactprovidesthatpaymenttimeispresumedtobe30daysincase a debtor is either a contracting authority or an entrepreneur.Whenadebtor is a contractingauthority, thepayment timeofaninvoicemayexceptionallyamounttoamaximumof60days.Ifadebtor is anentrepreneur, thepayment time shall exceed30daysonlyifthepartieshaveexpresslyagreedthereon.


Liquidated damages can be freely agreed upon. There are nolimitationsontheamountsofdamages,butexcessivedamagesmaybe deemed unfair and hence unenforceable. Contracting partiesmayalsoagreetofollowtheprovisionsforliquidateddamagessetoutintheYSE1998conditions.

Additional insurances are alsocommonly takenout, e.g.: loss-of-profitsinsurance;liabilityinsurance;orlegalexpensesinsurance.


WhenensuringthecompatibilityofconstructioncontractswiththeFinnish statutory requirements, key considerationswould includethefollowing:■ ComplyingwithFinnishlabourlawandapplicablecollective

agreements,aswellastheActontheContractor’sObligationsandLiabilitywhenWorksareContractedOut(1233/2006).

■ Complyingwiththerulesapplicabletoforeignemployees.■ ComplyingwithFinnishlawsconcerninglanduseandbuilding.■ Complying with Finnish laws concerning reporting

obligationstotheTaxAdministration.■ Observingrelevantsafetyrequirements.The reversed value added tax (VAT) rule, whereby the buyer isresponsible for the payment of VAT instead of the seller and isapplicabletocertainconstruction-relatedservices,isalsonoteworthy.


a) Milestonepaymentscanbewithhelduntilthecorrespondingworks are completed. Contracts commonly stipulate thatinvoicesshallnotbepaidbeforethecorrespondingmilestoneunderthecontractiscompletedandtheinvoiceisotherwiseconsideredfitforpayment.

b) TheYSE1998conditionsalsoprovide thatanemployer isentitledtowithholdasumcorrespondingtorepairworkforadefectforwhichacontractorisliableuntiladequaterepairhasbeeneffected.


Therearenoparticularrestrictionsonbondsandguaranteesandatypicalsecuritystructureisonewhereseparateperformancebondsare provided for the period of constructionwork and the defectsliabilityperiodoftheworks.


Title togoodsandsupplies typicallypasses to theemployeruponpaymentfortherespectiveitems.However,ifgoodsandsupplies

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According to theAct on Limitation of Debts by Lapse of Time(728/2003), the general limitation period for debts by lapse oftime is three years. However, for compensatory damages andindemnification, a limitation period of 10 years from the breachof contract or other grounds for compensation is applied. Thelimitationmaybeavoidedbymakinganappropriateclaim,baseduponwhichthelimitationiscutoff.The parties may also agree on shorter limitation periods forcommencingproceedingsunderacontract.


Under theYSE 1998 conditions, the risk for unforeseen groundconditions is borne by the employer. However, if the contractorhasneglectedtofamiliarisehimselfwiththeprojectsite,theriskofunforeseengroundconditionsmaytosomeextentbeattributedtothecontractor.


Theriskofachangeinlawisusuallybornebytheemployer.


According to the YSE 1998 conditions, both parties retain theintellectual property rights to their own designs. In design-onlycontracts, theKSE2013 conditions are typically applied. UndertheKSE2013conditions,intellectualpropertyrightsbelongtotheconsultant.


Unlessotherwiseagreedbyparties,acontractorshallnotsuspendhisworksatasite.IfthepartiesfollowtheYSE1998conditions,acontractoris,insteadofsuspendingworks,entitledtoclaim,fromtheemployer,liquidateddamagesasagreedand/oradditionalcoststhathavearisenduetoadelay.


Acontractcanbeterminatedbyacontractorifanemployerneglectshisobligationsunder thecontractor force majeuregroundsareathand(foralongorindefiniteperiod).Acontractcanbe terminatedbyanemployer ifacontractor is inbreachofcontract,acontractorisdeclaredbankruptorisotherwiseinasituationwherehecannotbeexpectedtofulfilhiscontractualobligations. In addition, a contract can be terminated due toforce majeure(foralongorindefiniteperiod)orinthecasethatacontractordieswhileaconstructionprojectisongoing.



Fundamentally, an employer is not able to vary the works tobe performed under a contract as contracts may not be alteredunilaterally. However, an employer is entitled to carry outmodifications,whichacontractor isobliged toperform,providedthat suchmodificationsdonot substantially alter the contentof acontractor’sperformance. Ifmodificationsgobeyondwhatcouldbereasonablyassumedbyacontractor,acontractorhastherighttorefusetocarryoutsuchmodifications.Moresubstantialalterationsareconsideredamendmentsoftheoriginalcontract.


Theemployerisentitledtoinstructsomeworkunderthecontracttobeomittedaslongassuchomissionsdonotsignificantlyalterthenatureoftheconstructioncontract.Thecontractorisnotentitledtounilaterallyomitanyworkwhichhasbeencontractuallyagreedon.


If thecontractingpartieshaveuseda setof termsandconditionsin their previous undertakings, such terms may be considered acommercialcustombetweenthepartiesandthusbedeemedimplied.ThestatusoftheYSE1998conditionsasimpliedtermsissomewhatambiguous. In some cases, they have been likened to a generalcommercialcustomandappliedtoconstructioncontractsasimpliedterms.


Under the YSE 1998 conditions, a contractor is not entitled toan extension of time for delays attributable to the contractor norcompensation of related costs; however, they are entitled to anextension of time for delays attributable to the employer andcompensation of related costs, provided that the contractor hasgivenadequatenotificationthereoftotheemployer.


Thisdependsontheprecisewordingoftheprogrammeandthefloat.Aslongasthedeadlinessetintheprogrammearemet,extensionoftimeisunlikely.

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PartiesusuallyrefertotheYSE1998conditions,whichprovidethatdisagreementsorambiguouscontracttermsshallbesettledthroughmutualnegotiationsbetweentheparties.Accordingtothegeneralprinciplesofcontractlaw,aclauseshallbeinterpretedtothedetrimentofitsauthor.


No,otherthanonthegroundssetoutintheContractsAct(228/1929)onwhichcontractsingeneralmaybeunenforceable.


Typically,indesign-onlycontracts,thedesigner’sliabilityfordefectsis limited to the totalamountofcompensationreceivedunder thecontract(KSE2013conditions).Otherwise,inregularconstructioncontracts,therearenosetlimitsfortheparties’liabilities.



Arbitrationiscommonlypreferredoverlitigationinconnectionwithinternationalorlargerconstructioncontracts.AccordingtotheYSE1998 conditions, unless otherwise contractually agreed, disputesbetweenpartiesareresolvedindistrictcourts.


There are no binding official adjudications processes in Finland.However, RIL Conciliation, which operates alongside RIL – theFinnishAssociationofCivilEngineers–isanorganisationfocusedonsolvingdisputesinconstructionprojects.RILConciliationandthe Consumer Disputes Board, a neutral and independent expertconciliationbodyforallconsumerissues,providesrecommendationsandstatementswhichthepartiesmaychoosetoabidebyordisregard.


Arbitrationclausesarecommonlyusedinconstructioncontractsasarbitrationprocessesareconsideredquickerandmoreconfidentialcomparedtocivilprocesses.Typically,theArbitrationRulesoftheFinlandChamberofCommerceareappliedtoarbitrationprocedures.ThepartiesmayalsoagreetoapplythearbitrationprocessrulessetoutintheArbitrationAct(967/1992).


Both a contractor and an employer are entitled to terminate acontractonforce majeuregrounds.Force majeure isathandifitisnecessarytointerruptthebuildingworkforalongandindefiniteperiodonaccountof exceptional circumstances referred to in theStateofDefenceAct(1083/1991)ortheReadinessAct(1552/2011)orsimilarforce majeure.Force majeuregroundsentitletheotherpartytocompensationforthe work which corresponds to the part of construction that hasalreadybeenperformed.Itisnotpossibleforacontractualpartytoclaimforce majeureinasituationwhereacontracthasbecomeuneconomical.


AccordingtotheCodeofRealEstate(540/1995),ifthebuyerhasacquiredrealestatetoserveasaresidenceorleisureresidenceforhimselforhisfamily,thebuyer,insteadoftheseller,hastherighttomakeclaimsbasedondefectsinqualityagainstamerchantwhodevelopsorsellsrealestateprofessionallyandwhohasconveyedtherealestatetotheselleroraprevioustitleholderforthepurposereferredtoabove;orabuildingelementdealer,developerorothermerchantwhoisresponsiblefordefectstotheselleroraprevioustitleholderbyvirtueof an agreementor theConsumerProtectionAct(38/1978).AccordingtotheHousingTransactionsAct(843/1994),ahousingcorporationhastherighttomakeanappealregardingthecontentsofacontractonconstructionorrepair,evenifitisnotpartytosaidcontract.Additionally,ifanyequipmentbelongingtoanapartmentisdefective, thebuyerof the apartmenthas, under theConsumerProtection Act (38/1978), the right to make claims against aneconomicoperatorwhohassurrenderedtheequipmentforresaleorhousingproductionatanearlierlevelinthesaleschain.


Set-offcanbeeitheravoluntaryoranobligatorylegalact.P1canunilaterally exercise its right for obligatory set-off if the claimsare (i)mutual, i.e.P1andP2haveclaimsagainst eachother, (ii)commensurable,and(iii)dueandrecoverable.


ThemutualdutyofcareofcontractingpartiesisconfirmedintheYSE1998andKSE2013conditions,aswellasFinnishcase-law.



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Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law is located in the centre of Helsinki. We are a mid-sized firm of 20 lawyers. Our firm specialises in construction and energy projects, including the related environmental and real estate matters. We offer a unique approach and concept tailored for project owners in construction projects. Our comprehensive legal project management approach significantly reduces the risk of cost overruns and disputes through preventive measures, a clear set of rules and defined processes for project issues. We have extensive experience and references in the largest and most complex construction projects in Finland. As a rule, we act as the advisor for the project owner.

Partner Aimo Halonen focuses on construction and energy sector projects, with a particular emphasis on advising property holders and project owners on complex contractual issues, legal project management and related matters in various real estate and construction projects. Mr. Halonen is a leading lawyer in the field with over 10 years of experience with the firm. He has advised, inter alia, the Finnish State’s real estate company, ministries, some of the largest cities in Finland, church parishes, listed companies and a range of energy utilities in their real estate projects and transactions, procurement processes, plant delivery contracts and project management. Mr. Halonen is also experienced in appeal procedures and disputes related to construction projects.

Aimo HalonenMäkitalo Rantanen & Co Ltd, Attorneys-at-LawEteläesplanadi 12 FI-00130 Helsinki Finland

Tel: +358 40 591 2470Email: [email protected]: www.makitalo.fi

Partner Juho Lönnblad is a well-known professional with 15 years of experience in the real estate and civil construction industry. Mr. Lönnblad focuses on construction and real estate projects. He puts particular emphasis on providing project owners with comprehensive legal project management support from the early development phases of a project until the final acceptance of a fully completed and operating building. He is also experienced in appeal procedures and disputes related to real estate and construction.

Juho LönnbladMäkitalo Rantanen & Co Ltd, Attorneys-at-LawEteläesplanadi 12 FI-00130 Helsinki Finland

Tel: +358 50 573 5373Email: [email protected]: www.makitalo.fi


ThefirstinstancesforcourtproceedingsinFinlandaretheDistrictCourts. The judgment of a District Court can, with certainrequirementsforleave,beappealedtoanAppealCourt.AnAppealCourtdecisioncanbefurtherappealedto theSupremeCourt,butonlyiftheSupremeCourtgrantsleaveforsuchappeal.LeavesforanappealtotheSupremeCourtareonlygrantedinspecialcases.Therearenosettimelimitsforcourtproceedingsandtheirdurationdependsonthenatureandscopeofeachcase. Onaverage, legalprocessescouldbesaidtotakeapproximatelytwoyearspercourtinstance.


Finland has ratified the 1958 Convention on the Recognitionand Enforcement of Foreign Arbitral Awards (the New YorkConvention),whichestablishesthegroundsandsetsthelimitsforalocalcourttorejectaforeignorinternationalarbitralaward.


AccordingtotheCouncilRegulation(EC)No44/2001onjurisdictionand the recognition and enforcement of judgments in civil andcommercial matters, a judgment given in an EU country is to berecognised without special proceedings, unless the recognition iscontested.



Chapter 10

Kapellmann und Partner Rechtsanwälte mbB

Dr. Christian Bönker

Prof. Dr. Martin Jung

Germany

fortheregistrationofaddedcostsoccasionedbychanges)maybeobserved. Special requirements imposed on the transparency oftender and contractual documentsmay further flow fromGWB’s(ActAgainst Restraints of Competition) formal rules for awardsgoverning public clients and the award rules; since vague tenderterms represent a common cause of disputes regarding deadlinesandcosts,theformalandcorrectassessmentandrepresentationoftheparties’ regulatory intent at the closing constitutes a principaltaskofthelawyerprovidingadvice.


Theletterofintentisnotfrequentlyfoundinprivatebuildinglaw.Instead,partiesrelyoncontractsproceedinginseparatestagesbystructuringthepertinentperformanceaspectsintheformofdistinctportionsthatmayevenbeusedinisolation.Inthecaseofaplanningcontract,thismayconcerntheassignmentoftheservicesmakingupthetender(performancestages6and7pursuanttotheFeeStructurefor Architects and Engineers (HOAI)) or object monitoring(performancestage8pursuanttoHOAI);forconstructioncontracts,occasionallytheclientmayalreadyworkwiththepotentialcontractorduringtheplanningstage,whilesimultaneouslyreservingtherighttoinvolvethirdpartiesintheproject’srealisation,whetherwhollyor inpart,undercertaincircumstances (theso-calledconstructionteamprocess).


The “classic” building insurance policies remain to this dayBuilder’sRiskandConstructionAll-Risk. For largerprojects,bycontrast,thetrendpointsinthedirectionofadequatelycoveringallrisks foreachparty involved in theprojectunder theumbrellaofprojectinsurance.Thiseliminatestheneed,inpossibledamagingevents,forsuingmultiplecontractualpartnerscoveredbydifferentinsurers.



Themostimportanttypesofconstructioncontractscontinuetobetheunitprice(volume-based,compensationbyunitprice)andtheflat rate (fixedcompensation regardlessofvolume) formats. Theexecution of the unit price contract is typically preceded by theclient’s execution planning,which in turn is created on the basisof a separate contract forwork and labourwith a planning firm.Aflat rate contract isusuallybasedon lowerdepthsofplanning,which is why the definition of performance interfaces betweenconstructionandplanningcontractsisanimportantissue,especiallywithmajorprojects.Inordertominimiseinterfacerisks,planningand construction services are combined in a uniform contractualdocument, especially in cases ofwhat are knownas total/generalcontractorawards.


Asarule,constructioncontractsmaybeenteredintoformlessly.Intheinterestofadequatedocumentationforthecontractualobligationsassumed,however,itisprudenttoputtheagreement,alongwithallpertinentannexes,inwriting(e.g.,intheformofspecificationsorplans)andauthenticateitbyhavingallpartiessignit.Increasingly,contractualdocumentsareexchangedelectronically–usingso-calledprojectdatarooms,forinstance.Insomeinstances,itmayhavetobe clarifiedhowselective statutorywritten-form requirements (as


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defects. In light of the contractor’s existing obligation to renderadvanceperformance, thepertinentcase lawhas tended to takeacriticalviewofthesecurityclausesusedinpartontheclient’sside.Thefeespaidtobanksorinsurersforguarantees(whichcontractorsnaturallyincludeintheircontractrates),too,occasionallypromptadeparturefromexcessivesecurityarrangements.


Asa rule,materialspermanentlybound toastructureorpropertyautomatically become the property of the purchaser. Accordingto the Civil Code, even items that have not been installed areprotectedagainstso-calledtortiousinterferenceifandtotheextentthat they passed into the developer’s property. For this reason,contractorsandsuppliersgenerallyarenotentitledtoremoveitemstheyintroducedonaccountofunpaidinvoices.Subjecttocertainconditions,however,provisionsundercopyrightlaw,forinstance,maylimittheavailabilitytotheclientofacompletedworkproduct.Thearchitect’scopyrightshouldbementionedfirstinthiscontext,andsuchlimitationsofusemayalsoconcerntheuseofpatentsandtrademarksinsomecases.



Construction supervision represents a critical service providedby architects and engineers, which specifically encompasses thedetermination of how far performance has progressed ahead ofbilling,qualitycontrolwithaview topossibledefects, follow-upmanagement regarding changed or added services as well as thepreparation and transaction of complex completion, acceptanceandcommissioningprocesses.Insofarassuchprocessesingeneralcontractorprojects are typically characterisedby the fact that thegeneral contractor bears responsibility first for coordinating andmonitoringanysubcontractorsituses,andthescopeofperformanceof service providers engaged is defined according to interfaceaspects, the assignment of work to individual trades may wellserve thepurposeofcontrollingahighnumberofcontractors (inthe double digits). For this reason, architectural and engineeringfirms can be set up quite differently when it comes to planningandmonitoring, and this is truenot leastof all because, inmanyinstances, technically sophisticatedaspects suchasfireprotectionor building automation systems are to be checked as specialisedfieldsinadditiontoconstruction-relatedworkinanarrowersense.Sincetheobjectmonitormaybeliable,alongwiththecontractor,fordefectsthatitcausedbyitselforwithothersasjointandseveraldebtors,theservicesinquestionentailsignificantpotentialliabilityforarchitectsandengineers.


Aside from the pertinent provisions of the new 2018 worksand construction contract law under the Civil Code (BGB) (§§631 et seqq. BGB) and the general terms and conditions to beagreed separately under theConstructionTendering andContractRegulations,PartB(VOB/B),thepartiestoaconstructioncontractmayincurlegalobligationsfromvariousprovisionsofemployment,taxandhealthprotectionlaw.Intheareaofemploymentandsocialinsurancelaw,questionsmayariseastothemandatorytransferofemployees,thelawonpostedworkersortheMinimum-WageAct.Fortaxpurposes,questionsofsalestaxplayanoutsizedrole–inadditiontothoseoftheso-calledconstructionwithholdingtax.Andsubject to the pertinent building codes, employment law and theconstruction-siteordinance,safetyandhealthprotectionmeasuresmustbetaken;thesafetyandhealthprotectioncoordinator(so-calledSiGeKo),tobeappointedundertheconstruction-siteordinance,istoestablishframeworkconditionsforthis.


Whetherandtowhatextenttheclientmaywithholdaportionoftheagreedfeeuntil theconstructionprojecthasbeenfullycompletedistobeestablishedindividuallyinconsiderationoftherestrictionsin place specifically for standard agreements. According to thepertinent case law, which increasingly favours contractors, theclientmust not hold an excessive amount of security despite thecontractor’s obligation to render advance performance, especiallyifsuchsecuritytakestheformofcashwithholdingscombinedwithsecuritybywayofperformanceordefectbonds.However,upto10%ofverifiedpaymentsonaccountmaybeacceptableeventoday,andparticularlyintheareasofconsumersanddevelopers.Adistinctionistobemadebetweenroutinesecuritywithholdingsandthosemadeonaccountofdefects;whileaso-calledpressurepremiummaybeassesseduntildefectshavebeenremoved,contractorsmayobjecttonon-transparentormateriallyunjustifieddeductions.


A distinction must be made between agreed security and thatpermittedbylaw.Tosecureitsclaimsforcompensationforworkperformed,thecontractormaydemandthattheclientfurnishsecuritybylawunderthepertinentrulesoftheCivilCode,withthequalityofsuchsecuritybeinglegislatedindetail;so-calledgroupguaranteesor lettersofcomfortprovidedbycorporateparentsdonot sufficeasarule.However,securityofthisnaturegainsinsignificanceifandtotheextentthatthecontractorisrequiredtofurnishsecurityfortheperformanceofitscontractualobligationsortheremovalof

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statutoryrighttogivedirections.Clientsarenowentitledtodirecttheperformanceofservicesthatwerenotpartoftheoriginalscopeof performance. Services that are required for the realisation ofthe contractual object of performancemay be demandedwithoutrestrictionsofanykind,§650b(1)sentence1no.2inconjunctionwithsentence2oftheCivilCode(BGB).Servicesthatamounttochanges to the original object of performancemay be demandedonlytotheextentthattheydonotimposeanunreasonableburdenonthecontractor,§650b(1)sentence1no.1inconjunctionwithsentence 2 BGB. In both cases, another limitation applies: bothsidesmustfirstendeavourfor30daystobringaboutanagreementabout the executionof and the price for the service requestedbytheclient. Onlyafter thisperiodhas lapsedmaytheclientdirecttheperformanceoftheserviceinquestion,§650b(2)BGB.Thetemplate provided by the Construction Tendering and ContractRegulations,PartB (VOB/B),whichwas frequently agreeduponpriorto1January2018,continuestobeanoption,thoughitsrightstogivedirectionsarenotawareofthe30-dayperiod.Overthecomingyears,thecourtswillhavetosettlethequestionwhetherthisoptionof giving directions unbound by any period will continue to beregardedaseffectiveforpurposesofgeneraltermsandconditions.


Withouttheclient’sconsent,thecontractorisnotentitledtorefuseperformanceof tasks assigned to it,whereas the client is entitledatanytimetorevoketheassignmentofcertaintasksgiventothecontractor.UnderGermanlaw,thiswouldbeconsideredapartialtermination of services already contracted out. In the event thatsuchpartialterminationiseffectedintheabsenceofcause,theclientmustcompensatethecontractorattheagreedrateevenforservicesthatwerenot rendered, suchpayment tobeadjustedonlybyanyexpendituresthecontractorsavedaswellasanyalternativegainfulactivity on its part, § 648 and § 8 (1)VOB/B. By contrast, thepossibilityofpartialterminationforcause,suchasfailuretoperformor remedydefectsdespitepriornotice, is subject to limitations inthatitmustrefertoadefinable(§648a(2)BGB)oraself-contained(§8(3)item1sentence2oftheVOB/B)portion.


Until31December2017, therewerenospecific legal regulationsfor construction contracts. For this reason, theVOB/B (standardcontractual termsfor theexecutionofconstructionservices)weredeveloped, which have served as standard terms and conditionsfor construction contracts for decades. They contain, and havecontained for some time, construction-specific rules, such as theclient’s right to give directions (§ 1 (3) and (4) VOB/B) or thecontractor’srighttopaymentsonaccount(§16(1)VOB/B),whichonlygraduallyfoundtheirwayintotheCivilCodeinrecentyears.Even today, they contain provisions on the consequences fromdisruptionstoandinterruptionsofconstructionwork(§§5and6oftheVOB/B),whichtheCivilCodedoesnotaddressspecificallyfortheconstructionarenatothisday.SincetheVOB/Bweredevelopedand are updated jointly by andwith equal input from client andcontractor groups, the legislature accords privileged status to theVOB/B,in§310(1)sentence3BGB,whenitcomestoareviewof individual provisions for compliance with the law governinggeneraltermsandconditions.


Within a contractual chain, the obligations assumed by thepartiesmust first be considered independently fromone another,which is why a subcontractor is entitled in legal relations withthe general contractor to be compensated for services renderedevenif thegeneralcontractordoesnotreceivepaymentfromtheclient. Provisions that deviate from this rulemay be negotiatedfor individual contracts on a case-by-case basis. In standardagreements, however, clauses of this nature may very well bedeemedviolationsoftheprovisionsontheeffectivenessofgeneraltermsandconditions.Therefore,generalcontractorsinparticularare well advised to consider availing themselves of legal rightstosecuritywithaviewtominimisinganyriskrelatedtoadvanceperformance.


Contractualpenaltiesshouldbeusedtoaddressinstancesinwhichbinding deadlines are missed. Although the occurrence, amountor proof of specific damages do notmatter to such extent, fixedpenalties that accrue as a flat rate by the daymay be applied onthe basis of contractual penalty clauses. The pertinent case lawprovides that such clauses be subjected to a critical examinationregarding specificity, the significance of culpability, daily ratesand caps, especially on the basis of aspects of general terms andconditions(AGB).Irrespectiveoftheeffectivenessofcontractualpenaltyclauses,theclaimantmayassertaclaimfordamagesinanamountexceedingthecontractualpenalty.If,intheeventofdefault,anelevatedliabilityrisklooms(e.g.,becauseconstructionworkisperformed on economically significant industrial manufacturingfacilities), the parties should illustrate conceivable scenarios in atransparent manner and provide for agreements limiting liabilityin consideration of the amount of available insurance coverage.Generallyspeaking,thequestionastofaultwillalmostinvariablybe a controversialone in casesofdelays,which iswhy, inmanyof thesecases, thecontractor’sclaimsforaddedcostsonaccountofthedurationofconstruction(whichinbuilding-relatedcasesareexorbitant)areopposedbytheclient’sclaimsrelatedtocontractualpenaltiesanddamagescausedbydelays.



When the new construction contract law came into effect on 1January2018,Germany joinedothernations ingrantingclients a

GermanyKapellmann und Partner Rechtsanwälte mbB


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associated with unforeseen ground conditions as a quintessentialclientrisk,whichiswhyclientshavefrequentlytriedtotransferittothecontractorinconstructioncontracts.Thelaw,however,hasfavoured a differentiated approach in recent years and no longerrecognises the risk’s assignment to the client as dogma. Instead,thecontractualprovisionsaretobeexaminedfordetailsaboutsoilconditions and any indication that, according to the contractualdocuments, even unanticipated deviations from such conditionshavebeenmovedintothecontractor’ssphereofrisk.Forpurposesofthetermsgoverninggeneraltermsandconditions,however,anywholesaleassignmentoftheriskofunforeseengroundconditionstothecontractorcontinuestobesubjecttostringentlimitations.


InconstructioncontractsplacedwithinthepurviewoftheVOB/B,the building performance must adhere to the technical norms inplaceatthetimeofacceptance(§13(1)sentence2VOB/B).TheCivil Code does not contain these specifications. Nevertheless,consideration should be given to the option of applying thecontractor’sobligationtoregisterconcernsabouttheperformancewithwhichitistaskedeveninconstellationsinwhichthelegal–andtechnical–requirementsundergochangesaftertheclosing.Ifthe contractor is required to meet the new, current requirementseither under theVOB/B, or at the client’s direction, it is entitledtoaclaimforadditionalcompensationwith respect to thealteredperformancesolongasthechangestothelegalortechnicalnormscouldnotbeforeseenatthetimeoftheclosing.


Thecopyrighttypicallyrestswithwhoeverrenderstheperformanceinquestion.However,protectionundercopyrightlawisnotavailabletoeachaspectofperformance.Instead,acertaindepthofcreationisneededtojustifysuchprotectionfortheworkinthefirstplace.Ifprotectionundercopyrightlawisavailable,onemustdifferentiateas follows: the “moral right” (Urheberpersönlichkeitsrecht)encompassestherightofpublication,therighttobecreditedasthecreatorandprotectionagainstthedefacementoftheworkproduct,all ofwhichcannotbe transferredas a rule. Bycontrast, “rightsof use and exploitation” (Nutzungs- und Verwertungsrechte)withrespecttothecopyrightmaybetransferredtotherecipient(here:theclient). Contracts typicallycontainspecificclauses to thateffect,lestitshouldbedeterminedbasedontheobjectofperformanceinquestionwhetherandtowhatextentrightsofuseandexploitationundercopyrightlawweretransferredtotheclient.


The contractor must complete its performance on or before theagreedcompletiondate.Evenifeitherthecontractorortheclientallowed for ample time, the contractor neednotwork faster thannecessaryinordertomeetthecompletiondate.Inotherwords,itmaytakebreaksoradjustthenumberofstaffassignedtotheproject.Bycontrast,settingspecificcontractualmilestonesfacilitatesmorenarrow requirements, though it is true irrespectiveof thenumberandnatureofagreeddeadlinesthatthecontractorisreleasedfromits obligation to render performance if and when the client failsto assistwith the contractor’s performance as required – e.g., byobtainingbuildingpermitsorconductingplanning.


Pursuant to§6 (2)of theVOB/B, thecontractor isentitled toanextension of the construction period if and to the extent that itfaces obstacles to its capacity for rendering performance due tocircumstancesfoundwithintheclient’ssphereofriskorresultingfromstrikeora lock-outorderedby theclient’s tradeassociationat thecontractor’sownplaceofoperationsorabusinessworkingdirectlyforit,orduetoforce majeureorothercircumstancesbeyondthecontractor’scontrol.Circumstanceswithintheclient’ssphereofriskincludeapprovalsandplanstobeobtained–butnotprovidedintime–bytheclient,alongwithdelaysinadvanceservicesowedbyothercontractorsengagedbytheclient.Suchrighttoanextensionof the constructionperiod exists even if the contractor’s inabilitytowork during the period of obstruction stems additionally fromfactorsattributable to thecontractor. In suchcases,however, thecontractormaynotdemandfinancialcompensationsincethatwouldrequirethattheobstacleoccurredthroughnofaultofthecontractor’sownandthatthecontractorisreadytorenderperformance(§642BGBand§6(6)VOB/B).


It is not unusual for contractors to build buffer periods into theirconstruction schedules, and they need not identify and use suchbufferperiodsforclients.Onlyonceithasbecomeclearattheendof theconstructionperiod that thecontractorno longerneeds thebufferperiodsaretheytobeusedfortheclient’sbenefit.Solongasthatisnotclear,however,theclient’sactionshavinganimpact(e.g.,directionsalteringperformance)mustbecompensatedforbyextensionsifandtotheextentthatservicesaddedintheprocesstakeadditionaltimetoorder,prepareforandexecute.


InGermany,claimslapseafterthreeyearsasarule(§195BGB).Unless another starting date has been specified, the period oflimitationcommencesupon the endof theyearduringwhich theclaimcameaboutandtheclientlearnsofthecircumstancesgivingrisetheretoaswellastheidentityoftheobligor–orwouldlearnthereofifnotforgrossnegligence.Specialrulesapplytowarrantiesunderserviceandconstructioncontracts.Theseclaimstypicallydonotexpireuntilfiveyearshavelapsedforobjectsofperformance,the realisation of which takes the form of rendering planning ormonitoring services (§634a (1) and (2)BGB). In§13 (4), theVOB/Bprovides differentwarranty periods for different types ofservices. Nevertheless, the four-year period specified therein istypicallyextendedtofiveyearsbywayofcontractualagreement.


As a rule, the parties to a construction contract regard the risk



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buildingsassertingclaims,includingbutnotlimitedtothoseunderwarranties, against the contractor. For this purpose, one mustdifferentiate as follows: with respect to contractual claims, suchrightsareavailableonlyiftheoriginalclienthasassignedthemtothepurchaseroruser,whereasthereareextra-contractualclaimsthatmaybeassertedagainstthebuildingcontractorincasesofviolationsofabsolutelegalinterests(e.g.,life,body,healthaswellaspropertyorpossession).


Set-offispossible(§§387et seqq.BGB).Itrequiresthattheclaimwhich is tobeadjusted isbothdueandundisputed. The rightofset-offmaybequalifiedbymutualagreement. However, the lawgoverning general terms and conditions permits such restrictionsonlysolongastherightofset-offisnotqualifiedwhenitcomestoundisputedoreffectivelyestablishedclaims.


Asarule,theparties’dutiesflowfromthecontractandapplicablelegalprovisions. Germanlawrecognisesdutiesofprotectionandcare already in the context of the run-up to the closing (§ 311BGB). The construction contract, moreover, imposes a “dutyof cooperation” on the parties,whichmeans that the parties to acontract,subject to theVOB/B,areboundbyaduty tocooperatewith one another throughout contractual performance. For thisreason,thereareobligationsanddutiesofcooperationandmutualinformation,withGermany’sFederalCourtofJusticestressingthatthedutyofcooperationisintendedtoprocure,amongotherthings,that differences of opinion in cases inwhich one or both partiesdeem a contractual amendment necessary are settled amicably(BGH,rulingdated28October1999–VIIZR393/98).


German law, too, is vulnerable to the possibility of contractualarrangementsrequiringinterpretation.Thepartiesmayspecifyhowtheywantprovisionsinneedofinterpretationtobeconstructed.IntheeventthatthecontractissubjecttotheVOB/B,§1(2)thereofstipulatesacertainorderforthecontractualbasesincasesofconflict.Asarule,however,boththeBGBandtheVOB/Bholdthatdetailedandspecificcontractualstipulationsaretoprevailovergeneralones,andmore recentprovisions are tobegivenpreferenceoverolderones. In addition, contractual provisions and specifications forperformancearetobeconstructedasacohesivewhole.


All obligations the parties addressed in the construction contractare enforceable, although there is an exception to the rule: thepertinentcaselawtreatstheclient’sactsofcooperationas“duties”(Obliegenheiten) that are not enforceable, rather than obligations(Pflichten) thatare. Forinstance, intheevent that theclientfailsto obtain building permits or conduct planning as required, the


The client may terminate the contract at any time and, thus,without cause (§ 648BGBand§ 8 (1)VOB/B). The contractoris not entitled to terminate without cause. However, by way ofcompensation for the right to terminate freely andwithout cause,theclientmustmakepaymenttothecontractorinthefullamount,suchpaymenttobeadjustedonlybyanyexpendituresthecontractorsaved as well as any alternative gainful activity on its part. Bycontrast,bothpartieshavearighttoterminateforcauseiftheotherpartyprovidessuchcause,inwhichcaseonlytheservicesrenderedto date are subject to compensation. Furthermore, the blamelesspartyisentitledtodamages.Ontheclient’sside,importantcausesfor termination include defective or delayed performance by thecontractor despite repeated notices as well as the contractor’sinsolvencyoranti-competitiveconduct. On thecontractor’sside,suchcausesare theclient’sdefault inpaymentor failure toassistdespiterepeatednotices.Since1January2018,§648aBGBsetsforththeseprinciplesforclientandcontractor,whereastheVOB/Bdifferentiatesbetweentheclient’srightofterminationunder§8(2),(3)and(4),andthatofthecontractorin§9.


German law recognises “force majeure” and “frustration ofperformance”. In terms of provisions specific to a constructioncontract,sucheventsinitiallygiverisetoaclaimforanextensionof theconstructionperiod. Incases inwhich thecontractcannotbeconsummatedbecauseperformanceisimpossibleforallpartiesinvolved objectively, or for the obligor subjectively, § 275 BGBappliestotheeffectthattheobligorisreleasedfromitsobligationtorenderperformance.Theclient’sassociatedclaimsfordamagesorthereimbursementofexpendituresaresubjecttoadifferentiatedregime,withthemereinefficiencyofacontractnotbeingequatedwith force majeure or frustration of performance. Instead, thiscaseisgovernedbytheconstructofthe“lapseofthebasisofthecontract” (Wegfall der Geschäftsgrundlage), § 313 BGB, whichappliestocasesinwhichcertainassumptionsthatbothpartiesregardasessential to thecontractareproved incorrect. If thisconditionispresent, the contract is tobe amended to approximatehow thepartieswouldhavewrittenitiftheyhadforeseensuchdevelopment.


Germanlawrecognisesagreementsforthebenefitofthirdparties,which a party purposely enters into with the goal of allowingthird parties to assert rights on the basis thereon. German lawadditionally recognisesagreements thatprovideprotectionfor thebenefitofthirdparties,underwhichthirdpartiesaretobeshieldedbywayofcontractualarrangements.However,thequestionposedhere likely is concernedwith thenotionof subsequentownersof



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experience.Atthistime,however,itisassumedthatclaimsbasedondefectsaswellasrightsofretentionmaybeaddressedaspartoftheproceedingsaswell.


The VOB/B, as the template for construction contracts, did anddoesnotprovideforanarbitrationclause.Only§18(2)entitlesthecontractorofagreementswithgovernmentagenciestoappealtothecompetent office for resolution in cases of differences of opinion.§18 (3)VOB/Ballows for the stipulationofextra-judicialdisputeresolutionmechanisms. As a result, clauses of this nature to dateare found in construction contracts only if either party or its legalcounseltookcaretoincludethem.NoclearfavouritehasemergedinGermanywhenitcomestothetypeofprocessagreedforconflictresolution. Inmany cases,mediation clauses from the associationof construction and real estate mediators (Verband der Bau- und Immobilienmediatoren) are incorporated (www.vdbauimm.de).Otherwise,adjudication,conciliationandarbitrationclausesareused.


GermanyisasignatoryoftheU.N.ConventionontheRecognitionand Enforcement of Foreign Arbitral Awards and the HagueConvention on Jurisdiction and Foreign Judgments in Civil andCommercialMatters,whichiswhyarbitralawardsarerecognisedinaccordancewiththeseconventions.Therecognitionofanarbitralaward’ssubstantiveforceoflawdependsonwhetheritisconsistentwith the fundamental principles of the German code of law; fornow, such arbitral awards are assumed to stand. As part of theenforcementofforeignarbitralawards,therefore,thepartyopposingenforcementmustpleadthereasonsandprovewhyrecognitionandenforcementaretobedenied.


TheoptiontoenforceforeignjudgmentsinGermanyisgovernedby § 328 of theCode ofCivil Procedure (ZPO) and in cases ofjudgments from signatories of the Brussels Convention onJurisdiction and the Enforcement of Judgments in Civil andCommercial Matters by the Brussels Convention. This meansthatthejudgmentsofforeigncourtsmaybeenforcedinGermanysubjecttocertainproceduralrequirements.ThisisnotthecaseiftheforeigncourtswouldnothavejurisdictionunderGermanlaw,thedefendantwasunabletoproperlydefenditself,thejudgmentisinconsistentwith certain other rulings, recognising the judgmentyieldsanoutcomethatispatentlyincompatiblewiththeprinciplesofGermanlaworreciprocityisnotguaranteed.


The parties to a construction contract must file their claims inregionalcourtsasarule;onlydisputesworthlessthanEUR5,000.00,

contractor may demand that it be compensated financially forthe resulting period of obstruction, and it may even terminatethe contract for cause following the lapse of the applicable legaldeadline. However, it cannot compel the client to obtain suchbuildingpermitsorconductsuchplanningbymeansoflegalaction.


Constructionandplanningcontractsareconsideredcontractsforworkandlabour,andthesameistrueforbuildingcontractorsresponsiblefor planning. The contractor owes successful performance andbearsliabilityfordefectsordelays.Untiltheobjectofperformancehasbeenrealised, it is required toexpend the requisite resources,whichiswhytheobligationtoremedydefectsexistsirrespectiveofculpability.Bycontrast,thecontractorisliablefordamagesonlyifitisculpableandthedefectcouldhavebeenavoidedbyapplyingthecustomarycare.Suchliabilityisunlimitedasaruleunlessthecontractprovidesforlimitationsthereof.However,thecontractor’sliabilityforintentionalmisconductandgrossnegligencecannotbequalifiedbywayofitsgeneraltermsandconditions.



Itispreferablethatconflictsbeprocessedandresolvedbywayofnegotiation.Ifthisapproachfails,thedispute’sresolutionrequiresthird-partysupport.Intheeventthatthepartiesdidnotalreadyagreetomeansofextra-judicialarbitrationwhenenteringintothecontractoratalaterpointintime,eitherofthemmayappealtoacivilcourt.Legalactioncontinues tobeby far themostprevalentmethodofprocessingconflicts,andyetpartiestoconstructioncontractshavebecomeconsciousoftheweaknessesoflegalproceedingswhenitcomestodisputeresolution,whichiswhythey–andthosehelpingthem to draft their contracts – frequently endeavour to includeclausesdesignedtopreventconflict,addressthemandresolvethemextra-judicially.Consequently,mediationandadjudicationareusedwithincreasingfrequency.


While the law does not provide for adjudication proceedings,thepartiesare free todoso,andanyadjudicationproceedingssoagreedaresubjecttotheapplicablerulesofprocedure.Whentheconstruction contract lawcame into effect on1 January2018, sodidtheconstructiondirectivethatspecifiesthetemporaryinjunctionproceedings for the construction contract. Pursuant to § 650 dBGB, a temporary injunction in disputes regarding the right togive directions under § 650b or the adjustment of compensationunder§650cdoesnot require thatspecialurgencybeestablishedas the reason otherwise mandated for seeking injunctive reliefonceconstructionworkhasensued. Thus,incasessuchasthese,temporaryandveryfastinjunctivereliefisavailabletobringaboutapreliminaryresolutionofthequestionindispute;afinalresolutionmay then be obtained in regular legal proceedings. Since theconstructiondirectiveisstillverymuchnew,thereislittlepractical



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onpointoflaw.TheFederalCourtofLawexclusivelylooksintotheproper applicationof the law, to theexclusionof a reviewofthefactsofthecase.Giventheneedforfrequentdiscoveryaswellas the complexity of relevant technical issues in many of thesecases, legal proceedings dealing with construction matters oftentakelongerthanothercivilcases,withlower-instanceproceedingstypicallylastingbetweenoneandfouryears,appellateproceedingsapprox. two years and cases adjudicated by the FederalCourt ofJustice(whereanappealonpointsoflawhasbeenadmittedoranobjectionagainstdenialofleavetofileappealhasprevailed)uptothreeyears.

whichdonottouchontheclient’srighttogivedirectionspursuantto§650bBGBortheamountoftheclaimforcompensationresultingfromadirectiongivenbytheclient(§650cBGB),maybebroughttodistrictcourts,§23no.1oftheCourtConstitutionAct(GVG)(§71(1)and(2)no.5GVG).Whereregionalcourtshavejurisdictionoverdisputesarisingfromconstructionorarchitecturalcontracts,orfromengineering contracts, construction divisions – specialised in theinterestofhigher-qualityjudgments–havebeensetuptodealwithbuildingservices(§72ano.2GVG).Here,Germanyrecognisestwoappellateinstances,withthehigherregionalcourtadjudicatingappealsbeforeGermany’sFederalCourtofLawexaminesappeals

Kapellmann is a legal partnership that combines a high level of specialisation and academic standard in advising its clients with the efficiency of a medium-sized company and individual client care. With about 130 lawyers, we work in six offices in Germany as well as in our EU office in Brussels.

“Steady, sound, excellent – this is how the firm’s reputation in its core fields can be described.” – JUVE German Commercial Law Firms 2017.

“Kapellmann und Partner in their present form are the result of an almost unparalleled success story.” – Kanzleien in Deutschland 2014.

Ranked as a “leading business law firm 2017”. – FOCUS-SPEZIAL Deutschlands Top-Anwälte 2017 (annual ranking of Germany’s leading lawyers by FOCUS magazine).

■ Studied law at Münster University, 1984 to 1990.

■ Research activity at Münster University in construction and environmental law (Prof. Dr Werner Hoppe), 1987 to 1991.

■ Ph.D. in environmental law, 1990 to 1991.

■ Legal clerkship with the Higher Regional Court of Hamburg, 1992 to 1994.

■ Lawyer (Rechtsanwalt) since 1994, at Kapellmann since 1995.

“Christian Bönker is widely respected as a master of complex construction matters with a particular focus on contract drafting and management.” – Who’s Who Legal Germany 2018.

One of the leading senior partners in private construction law; “competent and objective opponent”, competitor – JUVE German Commercial Law Firms 2016 and 2017.

Christian Bönker garners praise from one satisfied interviewee for his “strong competence in construction law”, as well as his ability to be “quick and secure in negotiations” – Chambers Europe 2018.

One of the most frequently recommended lawyers for construction law and public law – Handelsblatt/Best Lawyers® “Germany’s Best Law Firms and Lawyers 2017”.

Recommended lawyer for real estate law – Legal 500 Germany 2018.

Dr. Christian BönkerKapellmann und Partner Rechtsanwälte mbBAnna-Louisa-Karsch-Straße 210178 BerlinGermany

Tel: +49 30 3997 6941Fax: +49 30 3997 6991Email: [email protected]: www.kapellmann.de

■ Studied law at the Universities of Freiburg and Heidelberg, 1985 to 1992.

■ Ph.D. 1991 to 1992.

■ Chairman and board member of the association of construction and real estate mediators.

■ Chairman of the association for the certification of cooperative behaviour on construction sites.

Lawyer of the year for construction law (Berlin) – Handelsblatt/Best Lawyers® “Germany’s Best Law Firms and Lawyers 2017”.

Recommended for private construction law; “collegial, good knowledge”, competitor – JUVE German Commercial Law Firms 2017.

Prof. Dr. Jung provides comprehensive legal support for contract drafting and project execution in the construction and real estate sectors. Key practice areas include the legal project management JurProM® in construction and architects’ law and project support in the establishment and use of shopping centres as well as residential construction projects and infrastructure projects. In these areas he also acts as mediator and arbitrator as well as representing parties before the state courts.

Prof. Dr. Martin JungKapellmann und Partner Rechtsanwälte mbBAnna-Louisa-Karsch-Straße 210178 BerlinGermany

Tel: +49 30 3997 6942Fax: +49 30 3997 6991Email: [email protected]: www.kapellmann.de


Chapter 11

Deacons Kwok Kit Cheung

Hong Kong


Hong Kong is a common law jurisdiction. Offer, acceptance,considerationandintentiontocreatelegalrelationsareallessentialforestablishingalegallybindingcontract.There are no special requirements for construction contracts.They do not even need to be evidenced inwriting. In fact, it isnotuncommonforaformalconstructioncontractnottohavebeensignedevenaftercompletionoftheproject.


Yes.Itisstandardpracticetohavealetterofintentbeforesigningthe formal contract. It can be either legally binding, non-legallybindingorpartiallylegallybinding(e.g.acommitmenttopayactualcostsincurredintheeventthattheemployerdecidesnottoengagethe contractor to complete the project) depending on the precisewordingoftheletterofintent.Thecourtwilllookintothesubstanceoftheletterofintent,ratherthanitslabelindeterminingwhetheritislegallybindingontheparties.


It is compulsory for all employers in Hong Kong to take outemployees’ compensation insurance for their employees.Contractors and sub-contractors are therefore required by law totakeoutsuchinsurancefortheirworkers.Otherthanthat,thereisnostatutoryrequirementfortakingoutinsurance,althoughcontractorsinvariablytakeoutcontractors’all-riskinsurancefortheirprojects.



For private projects, the contracts mainly used are the StandardFormofBuildingContractpublishedbytheHongKongInstituteofArchitects,theHongKongInstituteofConstructionManagersandtheHongKongInstituteofSurveyors.Thereare“withquantities”and“withoutquantities”editions.Theformerisforusewhenbillsofquantitiesareused.Thelatterisforusewhenbillsofquantitiesarenotused.For public projects,GovernmentForms are used. The forms forbuildingandcivilengineeringworksareslightlydifferent.Inrecentyears, theGovernmenthasbeenpromoting theuseofNEC3andNEC4contractswhicharenowgenerallyusedinallpublicprojectsexceptthoseissuedbytheHousingAuthority.In addition, there are contracts which place both design andconstructionobligationsuponcontractors,especiallyforspecialisedprojectssuchastheconstructionofhospitals.One example of a design and build contract is the GovernmentStandardFormofContractfordesignandbuildprojects.IfNEC3isused,thereisnoseparateeditionfordesignandbuildprojectsandthesamestandardformwillbeused;thedesignobligationswillbesetoutintheWorksInformationofthecontractdocument.Ifitisadesign-onlycontract,wewillusuallycallitaconsultancyagreementwiththedesigner,whoisusuallyeitherthearchitectorengineer.EmployersinHongKongusuallyengageconsultantstoundertakethedesignofconstructionprojects.Design-onlycontractsarethereforecommoninHongKong.WedohavemanagementcontractingarrangementsinHongKong,althoughthisisnotcommon.Inrecentyears,sucharrangementsarecommoninnearbyMacauforcasinoprojects.


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Yes, almost invariably, construction contracts are supervised onbehalf of the employer by a third party, except for Governmentprojects,whereanin-housearchitectorengineermaybedesignatedby the employer. In the latter case, the contract should makethis known to the contractor and set out under what situationsthearchitectorengineer is required toact inaccordancewith theemployer’sinstructions,ratherthanimpartially.As mentioned above, whether the third party has a duty to actimpartially depends on the terms of the construction contract,althoughthethirdpartyisgenerallyrequiredtoactindependentlyandhonestly,whichmayoverlapwithactingimpartially,buttheyarenotsynonymous.Inothersituations,suchasissuinginstructionsonbehalfoftheemployer,thereisnodutyforthemtoactimpartially.In the following situations, the third party usually must actimpartially:■ certifyinginterimpayment;■ assessinganextensionoftimeforcompletionoftheproject;■ issuingacertificateofnon-completion;■ certifyingadateofpracticalcompletion;■ issuingacertificateofmakinggooddefects;■ assessingthevalueofvariations;■ assessinglossand/orexpense;and■ issuing a certificate of direct payment to a nominated sub-

contractor.


Yes,althoughusuallysuchclauseisfoundinthesub-contract,ratherthan themain contract; i.e. themain contractorwill pay the sub-contractorwhentheyhavethemselvesbeenpaidbytheemployer.It has been proposed by the Hong Kong Government to make“pay when paid” clauses invalid, following the models of otherjurisdictionssuchastheUKandAustralia.Itisexpectedthatthelegislationwillbepassedinthecomingyears.


Yes, this is done inpractically all construction contracts inHongKong.

Fortheownersoftheproject,thereisnorequirement,andindeedit is not common for them to take out insurance for contractors,unlessitisfittingoutorrenovationworksthataretobecarriedoutintheowner’sexistingbuilding,forwhichtheowneralreadyhasaninsurancepolicythatcoversthecontractor’sliability.


There are no statutory requirements in relation to constructioncontractsgenerally,althoughitiscommonforemployerstoprovidein the contract for their own specific requirements in relation tolabour,taxandhealthandsafetyfortheproject.HealthandsafetyoflabouraregenerallyprotectedbytheConstructionSites(Safety)RegulationsissuedundertheFactoriesandIndustrialUndertakingsOrdinance(Chapter59oftheLawsofHongKong).


Yes.Itislegallypermittedandindeeditisstandardpracticetohavearetention,whichwillusuallybereleasedinthefollowingmanner:halfuponpracticalorsubstantialcompletionoftheproject;andhalfuponexpiryof thedefects liabilityperiodor issueofacertificateof making good defects, whichever is later. For Governmentprojects,theretentionwillusuallybereleasedaftertheissueofthemaintenancecertificate.


It is common to require the contractor to procure a performancebondofusually5%or10%ofthecontractsum.Aparentcompanyguarantee is sometimes required, but this is not common. Thereareno restrictionson thenatureof suchbondsorguarantees. Inour experience, “defaultbonds”aremorecommon than“demandbonds”nowadays.Thereasonisthatbanksandinsurancecompanieschargehighpremiumsforprovidingdemandbonds.


Itisnotcommonforcontractorstohaveretentionoftitlerights.InHongKong,contractorshavelittlesayinmodifyingstandardtermsimposeduponthembyemployers.TheusualterminHongKongprovidesthatoncematerialsarriveonsite,theybecomethepropertyof theemployer,whetherpaid forornot. However, suppliersdousuallyhaveretentionoftitlerightsintheircontracts.

Deacons Hong Kong


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Anotherimportantimpliedtermfromthecontractor’sperspectiveisanimpliedpromisetopayforworkdone.Thisimpliedtermusuallyapplieswhentheformalitiesrequiredforissuinginstructionshavenot been complied with, but the works have nevertheless beencarriedoutbythecontractor.


Theanswertothisquestiondependsontheprecisewordingofthecontract.Analysisofsuchsituation,ascanbeseenfromcaselaw,canbecomplicated.Havingsaidthat,assumingthatstandardformsareused,itisgenerallybelievedthatthecontractorinsuchsituationisentitledtoanextensionoftime,butnotthecostsoccasionedbytheconcurrentdelay.


TheauthorisnotawareofanycaselawinthisregardinHongKong.If this question came before a Hong Kong Court or arbitrationtribunal, it is likely that theywould follow theEnglish authority,Ascon Contracting Ltd v Alfred McAlpine Construction Isle of Man Ltd(1999)66ConLR119,wheretheEnglishCourtrejectedtheargumentthatthefloatisownedbythecontractor.Therefore,thebetter view is that “float” is for thebenefit of all parties in aconstructionproject.


Yes.Forsimplecontractssignedunderhand,itissixyearsfromthedateofaccrualofthecauseofaction.Forcontractsexecutedunderseal,theperiodis12years.Foracontractor’sclaim,thedateofaccrualusuallystartstorunareasonabletimeaftertheexpiryofthePeriodofFinalMeasurement(whichisusuallyprescribedinthecontractasoneyearafterpracticalcompletionoftheproject)ortheissueofthefinalcertificatebythearchitect,whicheverisearlier.For an employer’s claim for defectiveworks, the date is usuallytakenasa reasonable timeafter theexpiryof thedefects liabilityperiod(whichisusuallyoneyearafterpracticalcompletion).Forlatent defects, the employermay have a longer limitation periodif its claim is in tort. It is either three years from the date thatthe employer had the knowledge required to bring an action fordamages, or six years from the date damagewas suffered by theemployer.Theaforesaidlimitationperiodsareinanyeventsubjecttothelongstopdateof15yearsfromthenegligentactoromission.Ifdeliberatefraud,concealmentormistakeisinvolved,theabove-mentioned periods of limitation shall not begin to run until theemployerhasdiscoveredit.

Aliquidateddamagesclausewillonlybeenforceableifitisnotapenalty, i.e. if it is agenuinepre-estimateof loss. Weareawarethat,inEngland,theSupremeCourthasrecentlyreformulatedthetesttobeappliedwhenacontractualclauseischallengedasbeingapenaltyclause.However,todate,HongKongCourtsstillfollowsthetestsetoutintheEnglishHouseofLordsjudgmentinDunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd[1914]UKHL1,i.e.thegenuinepre-estimateoflosstestisstillapplicable.



Yes.Theemployerisentitledtovarytheworkstobedoneunderthecontract.Therearelimitsonthatright,dependingonthetermsofthecontract.For private projects, theHongKong standard formof a buildingcontract(2005edition)defines“variation”asachangeinstructedbythearchitecttothedesign,qualityorquantityoftheworksandthensetsoutspecificchangeswhicharewithinthatdefinition.For Government projects, its standard form provides that thearchitectshallorderanyvariationtoanypartoftheworksthatmay,inhis opinion, benecessary for the completionof theworks andshallhavethepowertoorderanyvariationthatforanyotherreasonshall,inhisopinion,bedesirableforortoachievethesatisfactorycompletionandfunctioningoftheworks.Generally,asamatterofcommonlaw,thevariationorderedcannotchangethescopeoftheoriginalworkstoodrastically.Forexample,itmightnotbeavalidvariationifthearchitectorderstwobuildingstobebuilt,whentheoriginalcontractwasforonlyonebuilding.Somecontractsmayalsoprovidethatavariationorderisnotvalidunless it is issued in writing. However, this requirement maysometimesbewaivedbytheparties’conductduringthecourseoftheproject. Somecontractsmayalsoputa limiton thevalueofvariationworkswhichthearchitectmayorder,althoughthisisnotcommon.


Yestobothquestions. However,asamatterofcommonlawandsubjecttoexpresstermsintheconstructioncontract,theomissionmustbeordered ingoodfaithandnotwithaviewtodeprive thecontractor of the profit to which it would otherwise have beenentitledhadtheworksbeencarriedout.


Yes.Themostimportantimpliedterminconstructioncontractsisthat the employer impliedly agrees to do all that is necessary onhisparttobringaboutcompletionofthecontract.Itis,therefore,abreachof such implied term if theemployerhasdoneanythingwhich impedes the carrying out of theworks, e.g. by not givingpossession of the site to the contractor, unless there is expressprovisioninthecontracttodealwithsuchsituations.

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Iamnotawareofanycasewhereapartyhassuccessfullyarguedthatacontracthasbecomeuneconomic,asthegroundforclaimingforce majeure,althoughitseemsthatinararecase,acatastrophicchangeinpricesmayjustifyfrustrationofacontractatcommonlaw.


Yes. In 2016, theContracts (Rights ofThird Parties)Ordinancecame intoeffect,whichenablesaperson (thirdparty)who isnotaparty toacontract toenforcea termof that contract (includingatermexcludingorlimitingliability)if:(a)thecontractexpresslyprovides that the third partymay do so; or (b) the termpurportstoconferabenefitonthat thirdparty. TheOrdinanceappliesnotonlywherea thirdparty isnamed in thecontract,butalsowheretheyareexpresslyidentifiedasamemberofaclassorasansweringa particular description. In a construction contract, this couldbeachieved,forexample,bynamingthesecondorsubsequentownerof a building as the intended beneficiaries in the constructioncontract.Itis,however,possibleforthepartiestothecontracttocontractoutoftheOrdinancebyincludingaclauseinthecontracttotheeffectthatapplicationoftheOrdinanceisexpresslyexcludedandthatitdoesnotconferanyrightsenforceablebythirdparties.


Yes,unlessthereisexpressprovisioninthecontractthatpaymentisnotsubjecttoanyset-off,whichisveryunusualinHongKong.Infact,therightofset-offisregardedasanimportantcommonlawrightwhichcanonlybeexcludedbyclearlanguageinthecontract.Thereisadistinctionbetweenlegalandequitableset-off inHongKong. If themutual debts are both liquidated, i.e. ascertainablewithout involving any assessment by the court, the debts can besetoffagainsteachother,eveniftheyareunconnected,e.g.iftheyarose fromdifferentprojectsnotarisingoutof thesameseriesoftransactions. This is legal set-off. Anunliquidated claimcannotbesetoffagainstaliquidatedclaim,unlesstheclaimsarecloselyconnectedwitheachother;forexample,wheretheyariseoutofthesameconstructionprojectorsameseriesoftransactions.Thelatterisequitableset-off.


Acontractorusuallyonlyowesadutyofcaretotheemployerunderthe terms of the construction contract. In some circumstances, adutyofcaremayexistintort.However,thegeneralpositionisthatthelawdoesnotfavourconcurrentliabilityinbothcontractandtortinconstructioncontracts.


Yes. Thestartingpoint inconstruingacontract is thatwordsaregiventheirordinaryandnaturalmeaning,unlessthatwouldresult


Thecontractornormallybearstherisk.


Thecontractornormallybearstherisk.


It depends on the terms of the contract. Standard terms usuallyprovidethattheemployerownstheintellectualpropertyoratleasthas an irrevocable licence to use the design for the project uponpaymentofthedesignfees.


Yes, by relying on an express provision of the contract, e.g. inprivateprojectsub-contracts,ifthemaincontractorfailstopaythecertified sum to the sub-contractor and continues such failure forsevendaysafterthesub-contractorhasgivenwrittennoticeofthesametothemaincontractor,thesub-contractorcansuspendfurtherexecutionofthesub-contractworks.Apart from contractual rights to suspend works, it is generallyacceptedthatthecontractorhasnorighttosuspendworksfornon-paymentatcommonlaw.


An innocent party can terminate the contract if the other partyhascommittedarepudiatorybreach.Terminationonsuchgroundneednotbe setout expressly in thecontract. What constitutes arepudiatorybreachhasbeenexplainedindifferentwaysindifferentcourtjudgments.Fundamentally,itreferstotheconductofapartywhichevincesanintentiontonolongerbeboundbythetermsofthecontract.Inthecontextofconstructioncontracts,suchconductincludes the contractor abandoning the works or those situationswhere the cumulative effect of breaches is sufficiently serious tojustify the innocent party terminating the contract, e.g. persistentdelayinmakinginterimpaymentstothecontractor.In other cases, whether the breach is serious enough to justifythe innocent party terminating the contractmay be controversial.For the sake of clarity, modern construction contracts thereforeinvariablysetoutexpresslythecircumstancesinwhichtheinnocentpartywillbeentitledtoterminatethecontract.


Yes.Wedohavetheconceptofforce majeureandfrustration,whichwillexcusethepartiesfromfurtherperformanceofcontract.

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Yes.Asmentionedabove,thearbitrationclausewillusuallyrequirethepartiestofirstattempttoresolvetheirdisputesbymediationandifthatfails,eitherpartymaycommencearbitrationbyservinganoticeof arbitration on the other party. The procedures for conductingarbitrationshouldbesimilartothoseinotherjurisdictions.Partieswill usually instruct lawyers to represent them in arbitration andtheprocedurestendtoberelativelyformalandnotmuchdifferentfrom court procedures (although often simplified, with fewerinterlocutoryhearings).


Yes. Hong Kong is a party to the 1958 NewYork Conventionon theRecognition andEnforcement ofForeignArbitralAwards,byChina’s accession to theConvention. HongKongCourts arevery supportiveof arbitration and adopt an “enforcementbiased”approach in dealingwith applications to enforce foreign awards.EnforcementmayonlyberefusedifapartycanestablishoneofthegroundssetoutintheNewYorkConvention.Eveninsuchcase,theCourtretainsaresidualdiscretiontoenforcetheaward.


Certain foreign judgments can be enforced in Hong Kong byregistration pursuant to the Foreign Judgments (ReciprocalEnforcement)Ordinance. TheOrdinance contains a list of thosecountrieswhosejudgmentscanbeenforcedinHongKongundertheOrdinance. The current list includesAustralia,Austria,Belgium,Bermuda,Brunei,France,Germany, India, Israel, Italy,Malaysia,the Netherlands, New Zealand, Singapore and Sri Lanka. Sinceinclusion on the list is based on reciprocity (i.e. based on HongKong judgments being enforceable in those countries), followingthe handover of Hong Kong to China in 1997, Hong Kong’sDepartmentofJusticewrotetothecountrieslistedintheOrdinancefor confirmation that post-1997 they would continue to enforceHongKongjudgments.BruneiandBermudarepliedthattheywouldnot; theNetherlandsrepliedthatHongKongjudgmentswouldberecognised, but not enforced or executed; and no replies appearto have been received fromAustria or Sri Lanka. Accordingly,althoughthosefivecountriesarestilllistedintheOrdinance,thereissomedoubtaboutwhethertheycanstillbeenforcedinHongKongbyregistrationundertheOrdinance.At common law, foreign judgments of countries not listed in theForeignJudgments(ReciprocalEnforcement)OrdinancemaystillbeenforcedinHongKong,providedthatthefollowingrequirementsaresatisfied:(1) thejudgmentisforadebtoradefinitesumofmoney;(2) theproceedingsinwhichthejudgmentwasobtainedwerenot

opposedtonaturaljustice;(3) theforeignjudgmentwasnotobtainedbyfraud;(4) theforeignjudgmentwasrenderedbyacourtwithcompetent

jurisdiction;(5) theforeignjudgmentisfinalandconclusive;

inabsurdityorinconsistencywiththerestofthecontract.Wherethelanguageinthecontractisambiguous,thecourtwillascertainwhatareasonableperson(i.e.apersonwhohasallthebackgroundknowledge which would reasonably have been available to thepartiesinthesituationinwhichtheywereatthetimethecontractwasmade)wouldhaveunderstoodthepartiestohavemeant.Indoingso,thecourtmustconsiderallrelevantsurroundingcircumstances.Iftherearetwopossibleconstructions,thecourtisentitledtoprefertheonewhichisconsistentwithbusinesscommonsense.The contra proferentem rule will also be applied by the courtswhere there is doubt about the meaning of terms in a contract,namely the words will be construed against the person who putthemforward(i.e.thepersonwhorequiredthetermstobeincludedinthecontract). However,therearecasesintheUKholdingthatthe contra proferentem rule assumes less importance in moderncontracts. Whilst English cases are persuasive in Hong KongCourts,whethertheywillfollowsuitremainstobeseen.


It seldom happens. Parties sometimes argue that a liquidateddamages clause is unenforceable as a penalty. Please see theanswer to question 2.3 above for the criteria for setting aside aliquidateddamagesclause.However,itisquitedifficulttosetasidea liquidated damages clause. The current judicial attitude is thatparties toacommercialcontractshouldbefreetoagreewhatevertermstheywish.


Usually,thedesignerisonlyobligedtoexercisereasonableskillandcare,andcommensuratewiththesizeandnatureoftheprojecthehasundertakeninthecontract.Weseldomcomeacrossdesignersgivinganabsoluteguaranteeinrespectofthiswork.



They are mostly resolved by arbitration. However, a smallproportionofmaincontractsandsub-contracts(inparticularoflowtier)maynotcontainanarbitrationclause.Insuchcases,disputeswillberesolvedbywayofcourtproceedings.Some construction contracts provide for a multi-tiered disputeresolutionmechanism. Forexample, in theHongKongStandardFormofBuildingContractandGovernmentforms,thepartieshavetogothroughmediationfirstbeforecommencingarbitration.


No, but in the consultation paper for implementing security ofpaymentlegislationinHongKongin2015,statutoryadjudicationhasbeenproposedfor resolvingpaymentdisputes inconstructioncontracts.

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Deacons is Hong Kong’s own world-class law firm and provides an extensive range of legal and commercial services to local and international businesses. With 16 key service areas and three representative offices in Beijing, Shanghai and Guangzhou, Deacons is the largest independent local law firm with 50 partners, around 200 lawyers and lawyer equivalents, and approximately 700 employees overall.

Our principal legal services include Banking & Finance, Capital Markets, China Trade & Investment, Construction, Corporate M&A, Employment & Pensions, Insurance, Insolvency & Restructuring, Intellectual Property, Investment Funds, Litigation & Dispute Resolution, Real Estate, Regulatory, Private Clients and Tax.

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Kwok Kit has over 30 years of experience in dealing with a variety of private and government building projects in Hong Kong, some of which was gained when practising as a quantity surveyor. He also acts for developers, contractors and subcontractors in construction projects, in litigation, arbitration and mediation, and undertakes general advisory work in relation to construction contracts in Hong Kong, Macau and Mainland China. He conducts CIETAC arbitrations in Shenzhen, Shanghai and Beijing and acts as an arbitrator and mediator in construction and commercial disputes. He also handles cross-border disputes involving Hong Kong, Mainland China and other countries.

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theCourtofFinalAppeal.Ifleaveisgranted,thecasewillgototheCourtofFinalAppeal.ThetimefromcommencingproceedingstoobtainingajudgmentintheCourtofFirstInstancevariesalotdependingonhowvigorousthecaseisrunbytheparties.Theminimumtimeforastraightforwardandsmoothrunningcaseisoneyear,butthenormisthreeyears.ItmaytakeanotheroneyearfromtheCourtofFirstInstancetotheCourt ofAppeal and a further year to theCourt ofFinalAppeal,assumingthereisnoproceduraldelayintheprocess.

(6) theenforcementandrecognitionof theforeignjudgment isnotcontrarytopublicpolicy;and

(7) the foreign proceedingswere not brought in contraventionof an agreement under which the dispute in question wastobesettledotherwisethanbyproceedingsinthecourtsofthatcountryor(iftherewassuchcontravention)thepersonagainstwhom the judgmentwasgiveneither agreed to thebringingoftheforeignproceedingsorotherwisesubmittedtothejurisdictionoftheforeigncourt.


Legal proceedings are commenced in Hong Kong by issuing awrit of summons, either in theDistrictCourt (for claims of overHK$50,000, but nomore than HK$1million) or the High Court,Court of First Instance (for claims of overHK$1million). Thenthere follows the filing of pleadings (i.e. statement of claim;defenceandcounterclaim;andreplyanddefencetocounterclaim).This is followed by discovery of documents and exchange ofwitness statements and, in some cases, expert reports. Once anyinterlocutoryapplicationshavebeenresolvedandthepartieshavecompliedwithallcourtdirectionsmadeinrespectofthematter,atrialdatewillbefixedbytheCourt.Parties may appeal a judgment to the Court of Appeal withinprescribed time limits. If the losingparty isdissatisfiedwith theoutcomeoftheappeal,hemayapplyforleavetofurtherappealto

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Chapter 12

Kachwaha and Partners

Sumeet Kachwaha

Dharmendra Rautray

India


TheIndianlawofcontractsiscodified(IndianContractAct,1872–the“Act”).ItislargelybasedonEnglishCommonLaw.Foranybindingcontracttocomeintoexistence,thereshouldbeanagreementbetweentwoormorepartieswhoarecompetenttocontract,andthepartiesmusthaveenteredintotheagreementwiththeirfreeconsent,foralawfulconsiderationandalawfulobject.TheserequirementsaremandatedbytheAct(Section10thereof).Asallothercontracts,constructioncontractsmustalsosatisfytheaforesaidrequirementstobe legallyenforceable. Further, rudimentaryrequirementsofavalidoffer,followedbyanacceptanceofanoffer,withtheintentionof entering into a legally enforceable agreement not void in law,areotheressentialsofavalidcontractunder theAct. As theActprovides,contractsneednotbeevidencedinwriting,whichsimilarlyappliestoallconstructioncontracts.


ThelegalpositioninIndiaasregardsa“LetterofIntent”(“LOI”)iswellsettledandcanbeunderstoodwhilereferringtocommonlawprincipletotheeffectthatanagreementtoenterintoanagreementdoesnotcreateanylegalrelationbetweenparties,norisitlegallyenforceablebeforeacourtoflaw.ALOImerelyindicatesaparty’sintentiontoenterintoacontractwith the other party in future. Normally, it is an agreement to“enter into an agreement” which is neither enforceable nor doesit confer any rights upon the parties. However, some aspects ofaLOImaycontainbindingobligations,ifsospecificallyprovidedtherein. Thus, confidentiality, exclusivity of dealings, governinglaw/jurisdiction amongst others may create binding obligations.In certain circumstances, a LOI may be construed as a letter ofacceptanceof theoffer resulting inaconcludedcontractbetweentheparties.Itlargelydependsontheintentionofthepartiestobe



TheconstructionindustryinIndiadoesnotsubscribetoanystandardform of construction contract; however, some of the commonlyused forms include the suite of contracts published by FIDIC(InternationalFederationofConsultingEngineers),ICE(Institutionof Civil Engineers) and the model published by the IIA (IndianInstituteofArchitects).Governmentalconstructionauthorities,suchastheNationalHighwaysAuthorityofIndia(“NHAI”),employtheirownstandardformcontractaspertheirdepartmentalrequirements,particularly for public-private partnership projects. One standardFIDIC form extensively used in the Indian construction industryis the Plant and Design/Build Contract. Design-only contractsprevalentinIndiaarelargelyinspiredbytheFIDICConditionsofContractforPlantandDesign/Build(theFIDICYellowBook).Besides the NHAI, several government departments such as thePublicWorks Department, DelhiMetro Rail Corporation, IndianOil Corporation, National Building Construction Corporation,Central Public Works Department, etc. have their own standardformcontracts.Management contracts are executed in the form of Engineering,Procurement and Construction Management Contracts. As thenamesuggests,suchcontractsareexecutedbetweenemployersandcontractors,whereincontractorsarehiredtoholisticallymanagethecompletionofaconstructionprojectwhileoverseeingdevelopmentsregardingengineering,procurementandconstructionofaproject.


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CompensationAct,1923,requiresthatcompensationbepaidtoworkers if injured in the courseof employment. UndertheMinimumWagesAct,1948,theemployerisrequiredtopaytheminimumwageratesasmaybefixedbytherelevantgovernment.Further,thePaymentofWagesAct,1936,readwiththeAmendmentActof2017ensuresthattheemployeesreceive wages on time and without any unauthoriseddeductions.

(c) Tax:Apersonresponsibleforpayinganysumtoacontractorfor carrying out any work (including supply of labour forcarryingoutanywork)isrequiredto,atthetimeofpayment,deduct tax commonly known as Tax Deducted at Source(“TDS”) under Section 194C of the IncomeTaxAct. TheWorksContractTaxisapplicabletocontractsforlabour,workorservice.Priorto1July2017,theCentralGovernmentandStateGovernment leviedServiceTax andVAT respectivelyonworkscontracts.However,aftertheroll-outoftheGoodsand Services Tax (“GST”), works contracts (in relation toimmoveableproperty)aretreatedassupplyofservicesandatpresenttaxslabsrangefrom12%to18%.Inthefirstinstance,tax is payable by the person supplying the services/goods.TheBuildingandOtherConstructionWorkersWelfareCessAct,1996,whichappliesto10ormorebuildingworkersorotherconstructionwork,hasbeenenactedforthewelfareofconstructionworkers,includingregulatingtheworkers’safety,health,andotherserviceconditions.Acessof1%iscollectedfromtheemployeronthecostofconstructionincurred.

(d) Health and Safety: Social security legislations such as theEmployee’s Compensation Act, 2009, Employees’ StateInsuranceAct,1948,MaternityBenefitAct,1961,PaymentofGratuityAct, 1972, and theEmployees’ProvidentFundAct,1952mandatorilyapplytoallemployersandcontractorshiringlabourersorworkmenintheconstructionindustry.


Yes. Inconstructioncontracts,provision for retainingpartof thepurchaseprice for thegiven situations is fairly common. Partiesmayalsoagreetodepositthepurchasepriceinanescrowaccountto ensure a level playing field for both the employer and thecontractor. The contractmayprovide that the employer, prior tocompletionoftheworks,releasestheretentionmoneyprovidedthecontractorfurnishesanunconditionalbankguaranteeequivalenttotheretentionmoney.


Yes, performance bonds/performance guarantees are commonlyprovidedfor inconstructioncontracts inIndia toprovidesecurityagainstfailureofacontractortoperformitscontractualobligations.Similarly, an employer may require company guarantees fromparentcompaniesagainstthedutiesandobligationsofasubsidiarycompanyinvolvedinaconstructioncontract.Thenatureofrestrictionsthatmayapplytoaperformanceguaranteewill depend upon the wording of the terms of guarantee. Aperformanceguarantee,innature,isacontractbetweenanemployerandaguarantor,independentofthecontractbetweenanemployerandacontractor.Therefore,unlessotherwiseprovided,aguarantor

drawnfromthetermsoftheLOI,thenatureofthetransactionandotherrelevantcircumstances.IfpartieshaveactedonaLOI(asifthereisabindingobligation),itcanbeheldasconstitutingabindingcontractbetweenthem.InIndia,abindingcontractcanresultfromconductalone.


The standard type of insurance policy opted by the employer,contractororasub-contractorseparatelyorjointlyistheContractor’sAllRiskPolicy (“CARPolicy”). AllmajorconstructioncontractprojectsexpresslyprovideforputtinginplaceaCARpolicyduringthe construction stage. Federal legislation requires any businessincludingconstructionprojectsemployingmorethan10peopletoprocureregistrationundertheEmployees’StateInsuranceAct,1948(“ESIAct”).TheESIActmandateseveryemployertoprovideforitsworker’sinsurance. The saidAct covers both workers employed directlyunderanemployerandthroughacontractor.Theinsuranceprocuredbyanemployer/contractorunderthemandateoftheESIActcoverscontingencies such as maternity leave, sickness, temporary orpermanentphysicaldisablement,ordeathowingtothehazardsofemploymentwhichmayleadtolossofwagesandearningcapacityofanemployee.


Thefollowingaresomeof thestatutoryrequirementswhichmustbecompliedwith:(a) General requirements: As stated above, all construction

contractsmustsatisfytherequirementsoftheIndianContractAct,1872tobelegallyenforceable.Therearenostatutoryrequirementsspecificallyinrelationtoconstructioncontracts.

(b) Labour:Allemployersandcontractorsarerequiredtocomplywith the relevant labour legislations in force in Indiaor inthestate/cityconcerned. Theonusofcomplyingwithsuchlabourlawsfallsuponanemployeroracontractordependingonthelegislation.Labourersgettheirlegalrecognitionfromthe definition of theword “workman” under the IndustrialDisputesAct,1947(Federallegislation)whichentitlesthemtovariousstatutorybenefitsandfair treatmentat thehandsof their employer/contractor. Further, theContractLabour(RegulationandAbolition)Act,1970mustbecompliedwithbyanyprincipalemployer/contractorwhohires20ormorecontract labourers for an “establishment”. The said Actrequirestheprincipalemployertoregisteritsestablishmentin accordance with the Act, whereas all such contractorsmustobtainalicencefromtheauthorisedlicensingauthorityspecified in theAct. In order to regulate the condition ofservice of inter-state labourers, the Inter-State MigrantWorkmen (Regulation of Employment and Conditions ofService)Act,1979,requiresallcontractorswhoemployfiveormoreinter-statemigrantworkmentoregisterthemselves.It is aimed to protect and/or provide a migrant worker’sright to equal wages, displacement allowance, homejourney allowance,medical facilities, etc. TheWorkmen’s

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Yes.Stipulatingacertainamounttobepaidbyacontractortoitsemployerasliquidateddamagesispermissible.SuchdamagesaregovernedbySection74of the IndianContractAct,1872 (“Act”)whichprovidesthatifasumisnamedinthecontractastheamounttobepaidincaseofsuchbreachofcontract,thepartycomplainingof breach is entitled to receive the said amount, “whether or notactual loss is proved tohavebeencaused”. Section74hasbeenjudicially interpreted and the following principles have been laiddown:■ Onlyreasonablecompensationcanbeawardedasliquidated

damages.■ Notwithstandingaliquidateddamagesclause,thefactumof

damageorlosscausedmustbeproved(theburdenforwhichisontheClaimant).

■ Thecourtmustfindtheliquidateddamagestobeagenuinepre-estimateofthedamages.

■ Theexpression“whetherornotlossisproved”inSection74hasbeeninterpretedtomeanthatif thereisapossibilitytoproveactualdamageorloss,suchproofisrequired.Where,however, it is difficult or impossible to prove the actualdamageorloss,theliquidateddamagesamountnamedinthecontract, if it is found to be a genuine pre-estimate of thedamageorloss,canbeawarded.

■ Theproofoflossordamagemaybecircumstantialandthecourtdoesnotlookforarithmeticalexactitude.

■ Theamountnamedinacontractservesasaceilingoracaponthesumwhichcanbeawardedandnottheamountwhichwillmechanicallybeawarded.

Ifpartieshaveagreedtoagenuinepre-estimatedsumofmoneyasliquidateddamages, then they are deemed to have excluded theirrighttoclaimanunascertainedsumofmoneyasdamages.



Variationsintheworkstobeperformedunderaconstructioncontractmay bemade by an employer or an engineer employed for suchworks.Ifsuchvariationsaremade,acontractorisentitledtoseekadditionalpaymentsforthesamesofarassuchvariationshavebeenduly authorised by the employer/engineer-in-charge. However,suchvariationsmustnotbeofsuchanaturesoastosubstantiallyalterthecharacterofthecontractinquestionandmustbewithintheabilityofthecontractortoexecute.


Yes, works may be omitted from a construction contract by anemployeroranengineerifthereisanexpressterminthecontract

shallbeobligedtounconditionallyhonouraguaranteeasandwhencalleduponbytheemployer.Normally, construction contracts require the contractor to furnishanunconditionalperformancebankguaranteetoensuretimelyandsatisfactoryperformancebythecontractor.Theemployernormallyrequiresthecontractortokeeptheperformancebankguaranteevaliduntilthedefectliabilityperiodisoverorthecompletioncertificateisissued.Thebeneficiaryofthebankguarantee,i.e.theemployer,mustmakeademandforpaymentunderthebankguarantee,shouldaneedsoarise,beforetheexpiryofvalidityperiodstipulatedinthebankguarantee.Ademandmadebytheemployerforpaymentafterthevalidityperiodwillnotbehonouredbythebank.


Yesitispossible.Righttolienovergoodsarisesfromthecontractor’sright to be duly paid for the goods supplied to an employer. Theexistenceofrightoflienovergoods,andthescopeofsuchright,isdeterminedbyacontractualclause to thateffect. Lienovergoodswhose ownership passes over to an employer on delivery to, oraffixationon,aconstructionsitemayexistifcontractuallyprovidedfor. However,most construction contracts do not provide for thecontractor’stitlerightstothegoodsandsuppliesmadefortheworks.



Yes, construction contracts are commonly supervised by thirdpartiesinIndiawhomaybeappointedbyanemployerintheroleofeitheranarchitectoranengineer.Thescopeoftheirfunctionsanddutiesarecontractuallydefined.Whilsttheengineerorarchitectusuallyhaveacontractualdutytoactimpartiallybetweenthecontractorandemployer,inpracticeingovernmentcontracts,theengineerinparticularoftentoesthelineoftheemployer.


Yes.SuchclausesarevalidundertheIndianContractAct.



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It is for the parties to agree in the contract as towho shall bearthe risk of unforeseen ground conditions. Construction contractsgenerallyputalltheriskonthecontractor.


Mostconstructioncontractsprovideforrelevantstipulationsforachangeinlawcontingency.Generally,anemployerbearstheriskarisingout of a change in law, and anydelays resultingout of itcanbecondonedbygrantinganextensionoftimetothecontractor.Section 64Aof theSale ofGoodsAct, 1930provides that in theevent of increase or decrease in tax or imposition of new tax inrespect of goods after themaking of any contract for the sale orpurchaseofgoods,intheabsenceofanystipulationastopaymentofsuchtax,anyincreasewouldentitlethesellertoaddtheequivalentamountofthecontractpriceandthebuyerwouldbeliabletopaytheincreasedsumtotheseller.However,incaseofadecreaseintax, the buyerwouldbe entitled to deduct the equivalent amountofdecreasedsumfromthecontractpriceand thesellerwouldbeliabletopaythatsumtothebuyer.Theprovisionisapplicabletoanydutyofcustomsorexciseongoodsandtoanytaxonthesaleorpurchaseofgoods.


Generally,acontractforservicecontainsclausessoastoempoweranemployertoclaimownershipoverallintellectualpropertyasmaybecreatedbyanemployeeinthecourseofhisemployment.Indianlawalsoprovides for employment as an exception to an author’sownershipoverhisintellectualproperty.Therefore,inthecaseofconstruction contracts, ownership of intellectual property in theformofdesignofconcernedworksshouldvestwiththeemployer.


Acontractormay suspendperformanceof its obligationsunder aconstruction contract on grounds provided for in the contract inaccordancewithitsstatutoryrighttodosoundertheIndianContractAct,1872.Occasionswhenacontractormaysuspendperformanceincludenon-performanceof the obligationsor considerable delaybyanemployer,non-paymentofdues forworksperformed,non-fulfilmentofconditionsuponwhichtheperformanceiscontingent,force majeure,etc.


The IndianContractAct, 1872 (“Act”) allows a party to rescind/terminate a contract in the event of breach by the other party,includingrefusaltoperformordisablinghimselffromperforming(Section 39 of theAct). Over and beyond the statutory groundsof breach recognised in theAct, parties may choose to providecontractualstipulationsrecognisingeventswhichwouldamounttobreachof thecontract toentitle the injuredparty to terminate the

permittingomission. However,suchomissionsmustnotbemadetodeliberatelydepriveacontractorfromitsentitledshareofworks.Theemployercannotomittheworkonnon-bona fidegrounds(andhaveitcarriedoutbysomeoneelsewithoutthecontractor’sconsent).


Yes.Indianlawrecognisesuseofbothexpressandimpliedtermsinaconstructioncontract.Whileexpresstermsareeasilyidentifiable,implied terms must be read into a contract while examining theintention of the contracting parties. However, such terms mustnot offend the intended commercial purpose of the contract asunderstoodbetweentheparties.Whilethereisnoagreedsetoftermswhichcanbeimpliedinaconstructioncontract,certainobligationsareunderstoodasimpliedlybindingonboththeemployerandthecontractor. For example, a contractor is expected to perform itstaskswhile exercising a standard of care, andmust provide suchmaterialswhicharefittobeusedforthestipulatedworks.


TheIndianpositiononconcurrentdelayisnotcertain.Insituationswhere there are concurrent delays on the part of an employerand a contractor, an employer may rely upon them to substitutean extension of time for payment of anymonetary damages to acontractor, whereas a contractor may rely upon them to defendagainst imposition of liquidated damages upon itself by anemployer. Therefore, in cases of concurrent delays, a contractorwouldbeentitledtoanextensionoftimeandnottocompensationforanylossitmayhavesufferedduetothedelays(see:De Beers UK Ltd v. Atos Origin IT Services UK Ltd [2010] EWHC 3276(TCC)).Acontractorwouldbeentitledtoanextensionoftimefortheperiodofdelaycausedbytherelevanteventnotwithstandingtheconcurrenteffectoftheotherevent(see:Walter Lilly & Co Ltd v. Mackay,[2012]EWHC1773(TCC)).IndiancourtsusuallyrefertoandrelyuponEnglishcases.


Thefloatinaprogrammewouldbedealtwithona‘firstcomefirstserved’approach. However, theexistenceoffloatmaymeanthatthecontractorcannotclaimanextensionoftime,butitdoesnotstopthecontractorfromclaiminglossorexpenseduetovariation.


TheLimitationAct,1963(“Act”)governsatimeperiodforfilingacourtactionandalsoaclaimbeforethearbitraltribunal.AsperthesaidAct,thelimitationperiodforthepurposeofinitiatingasuitinrelationtoabreachofcontractisthreeyearsfromthedateonwhichthebreachoccursorthecauseofactionarises.



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Thedoctrineof“dutyofcare”originatesfromtortlawandrequiresapersontoexerciseastandardofcarewhileperforminganyactwhichcould foreseeably causeharm toothers. Thisduty extends to allsuchpersonswho,onareasonablecontemplation,canbeexpectedtobeaffectedby theactsofaperson. Therefore, thedoctrineof“duty of care” applies to all construction works performed by acontractor, and a liability for negligencemay arise for any harmcausedtopersonswhocouldforeseeablybeaffectedbyhisacts.


Any ambiguitymust be attempted to be resolved by resorting towellrecognisedrulesofcontractualinterpretation,suchastheruleof literal interpretation, harmonious construction, giving effect totheintentionoftheparties,andresortingtoaninterpretationwhichupholdsbusinessefficacyofthecontract.(Theseprinciplesaretobeappliedinthatorder.)Iftheambiguitysustainsontheapplicationofthesaidrules,resortmaybemadetotheruleofcontra proferentem.


The following terms or clauses shall be unenforceable in aconstructioncontract:(a) clausesempoweringanemployertounilaterallyterminatea

contractwithoutanyremedytoacontractor;(b) unilateral and substantial alteration of the character of a

contractbyadding/omittingobligationsofacontractor;(c) clause for paymentof anunreasonable sum in the formof

liquidateddamages;(d) clauseabsolutelyrestrictingapartyfromenforcinghisrights

underorinrespectofanycontract;(e) clausewhichlimitsthetimewithinwhichapartymayenforce

hisrights;and(f) any other clause which falls foul of the provisions of the

IndianContractAct,1872.


As regards a designer’s contractual liability, the same shall belimited to the obligations owed by the designer towards otherpartiestotheconstructioncontract,suchastheemployer.Duetotheapplicationofthedoctrineofprivityofcontract,thecontractualliabilityofthedesignerwouldnotextendtothirdparties.Asforadesigner’sliabilityintort law,pleaseseetheresponsetoquestion3.15above.Harmtothirdpartiesmusthavedirectlyarisenoutoftheimpugnednegligencetowardsthedesigninquestion,andmusthavebeenreasonablyforeseenasbeingcausedtopersonswhomayavailofthefacilitydesigned.

contract.Astatutoryorcommonlawgroundofbreachneednotbeexpresslyprovidedinacontract;however,otherinstancesofbreachshouldbespecifiedinthecontract.


The concept of a force majeure event is well recognised in theIndian legal system. The doctrine of frustration of contract isimbibedinSection56oftheIndianContractAct,1872(“Act”).Inaccordancethereof,acontractstandsfrustratediftheperformanceof an agreed set of obligations becomes impossible or unlawful,eitherbeforeor after theconclusionof a contract. Section56oftheAct thusrecognises force majeure (oractofGod)eventsasagroundforfrustrationofcontracts.FrustrationofacontractunderSection56of theAct results insuchacontractbecomingvoid inlaw,andthuscannotbeenforced.Therefore,afrustratedcontractstandsdischargedandrelievesthepartiesfromperformanceofallunderlyingobligations.However,anexceptiontoSection56statesthat if frustrationwaswithin the reasonable contemplationof thepromisor,orif thecontractisfrustratedduetoactsattributabletothepromisor,thepromiseeshallbeentitledtocompensationforanyloss it suffers due to non-performance of promisor’s obligationsunderthecontract.However, Section 56 does not apply to instances of mereinconvenience, economic unfeasibility, or if performance of thecontracthasbecomemoreburdensome,butwithoutimpossibility.


Third parties cannot bring claims or enforce terms of a contractagainst a party to a contract. This principle emanates fromthe doctrine of “privity of contract”, which confers rights andobligationsarisingoutofacontractonlyuponpartiestoacontract.Therefore,inthelandscapeofconstructionlaw,acontractorcannotbesubjectedtoclaimsfromthirdpartiestoaconstructioncontract.However, thirdpartiesareentitled toa remedyunder tort lawforinjury suffered due to negligent acts of a contract. Therefore, acontractormaybesubjectedtoclaimsundertortlawfornegligence.


Yes,partiesinaconstructioncontractcansetoff theirclaimsandduesagainsteachother.Thiscanbedoneeitherbywayofmutualnegotiationsandagreement,orthroughaproceedingbeforeacourtof lawor in an arbitrationproceeding. An instance for the latterwouldarisewherepartiesdisagreeupontheamountdue toeitherparty.Insuchcases,across-claimisfiledbythepartywhowishestosetoff itsclaimsagainst theamount itowesto theotherparty.Suchcrossclaimsmustbeforarecognisedsumandmustbebasedonalegitimateclaimagainsttheotherparty.



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The Arbitration and Conciliation Act, 1996 (“Arbitration Act”)recognisesandprovidesforenforcementofforeignarbitralawardsin India; vide Part II thereof. The saidAct gives effect to theConventionontheRecognitionandEnforcementofForeignArbitralAwards,1958(“NewYorkConvention”)andtheConventionontheExecutionofForeignArbitralAwards,1927(“GenevaConvention”)withaspecificreservationofprincipleofreciprocityunderSections44(b) and 53(c) of the Act. Under the New York Convention,IndianCourtsmay recognise and enforce foreign arbitral awardsifthecountryisasignatorytotheNewYorkConventionandiftheawardismadeintheterritoryofanothercontractingstatewhichisareciprocatingterritory.Section57oftheAct,enumeratesthepre-requisitestoenforceaforeignawardundertheGenevaConvention.IndiaisasignatorytotheNewYorkConvention,withreservationsthat there should be a valid agreement to arbitrate, and that suchagreementmustbeevidencedinwriting.Anotherreservationmadeby India is to theeffect that theNewYorkConventionwouldbeapplicable only to disputes and differences arising out of a legal“commercial”relationshipbetweentheparties,whethercontractualor not. TheActmandates an award to be rendered in a countrywhich is a signatory to the New York Convention, and whichhasbeendulynotified in theOfficialGazetteof India asbeing asignatorytotheNewYorkConvention.Thiscancausehardshipsaswhilstallimportantarbitrationseatsarerecognisedandnotified,theOfficialGazettehasnotnotifiedallcountrieswhicharesignatoriestotheConvention.Section48oftheActprovidesforconditionswhichmustbesatisfiedforenforcementofaforeignarbitralawardinIndiaundertheNewYorkConvention(theseareallasper theNewYorkConvention).The public policy ground is narrowly construed in India forenforcementofforeignawards.


TheprocedureforenforcementofforeignjudgmentsinIndiadifferson thebasisof reciprocatingandnon-reciprocating territories. Incase of “reciprocating territories”, judgments may be enforceddirectlyasadecreeandanexecutiondecreemaybeobtainedtothiseffect froman IndianCourt. On theotherhand, judgments from“non-reciprocating”territoriesarenotexecuteddirectlybyacourtoflaw.Afreshlawsuitneedstobefiledonthebasisoftheforeignjudgmentwithin threeyears of the judgment for its enforcement.ThissuitcanonlybedefendedonthegroundsspecifiedundertheCodeofCivilProcedure,1908 (“CPC”), i.e. dueprocessground.SubjecttotheexceptionsunderSections11and13oftheCPC,theseforeignjudgmentsoperateasres judicatainIndia.


Proceedingsbeforeacourtareinitiateduponthereceiptofaplaintbyoneoftheparties.Thecourtthenservessummonstotheopposite

Any guarantee given by a designer under a construction contractwouldhaverelevanceonlyagainstpotentialcontractualclaimsforadefect indesign;however,suchaguaranteewouldnotkeephisliabilityundertortlawatbay.



TherearemultifariouswaysofresolvingdisputesthatarerecognisedinIndia.Theseincluderesolvingdisputesbywayofcourtlitigation,arbitration, mediation, conciliation, dispute resolution boardsand judicial settlement. Arbitration is the most commonly usedmechanismtoresolveconstructioncontractdisputes.


Intheabsenceofastatutoryenactmenttoreferapaymentdisputetoadjudication,adjudicationprocessissubjecttoaparties’agreement.Generally, a clause containing the adjudication processwould bepartofthedisputeresolutionclausewhereinpartieswouldresolvedisputes in thefirst instance throughanadjudicatornamed in thecontract.Thecontractwouldstipulateatimeperiodwithinwhichthecontractormayreferadecisionoftheengineertotheadjudicator.Itwouldalsostipulatethetimelimitwithinwhichtheadjudicatormustgivehisdecision.Ifeitherpartyisaggrievedbythedecisionof theadjudicator, itmay refer thedispute to arbitrationwithinastipulatedtimeperiodfailingwhichtheadjudicator’sdecisionwillbefinalandbinding.


One of the widely accepted means of dispute resolution inconstruction disputes is arbitration. The Arbitration andConciliationAct, 1996 (“ArbitrationAct”) is the governing lawof arbitration in India. TheArbitrationAct is essentially basedon the UNCITRAL Model Law, 1985 and UNCITRAL ModelArbitrationRules, 1976. Broadly, theAct has twoparts. Part Iis anelaboratecodeproviding forall arbitrations seated in India(domesticorinternationalarbitrations).PartIIprovidesbasicallyforenforcementofforeignawards(seequestion4.4).Indiaisanarbitration-friendly jurisdiction with a pro-arbitrationAct and agood track record of enforcement for foreign awards. There is,however,aproblemofjudicialdelays.AnimportantfeatureoftheActistherequirementtoconcludeIndia-seatedarbitrationswithin12monthsofthetribunalenteringintothereference,i.e.onthedatethesolearbitratororallthearbitratorsreceivenoticeinwritingoftheirappointment.Partiesmayextendthestipulatedperiodbysixmonthsbyconsent.Thereafter,timecanonlybeextendedbycourtanduponterms.Thereiscurrentlyaproposedamendmenttothe12-monthtimeframe.Theproposalistocommencethe12-monthtimeperiodfromthecompletionofthepleadingsstage.Thiswouldprovide some relief to parties involved in sizeable constructionarbitrations.TheBillwasapprovedon7March2018bytheUnionCabinet. However, it is yet to be passed by both houses of theParliament.



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Kachwaha and Partners is a multi-discipline, full-service law firm having its offices in Delhi and Mumbai (Bombay) and associate lawyers in most major cities of India. The main office of the firm is in New Delhi, conveniently located next to the diplomatic mission area. It is easily accessible from all parts of Delhi, as well as its suburbs.

The partners and members of the firm are senior professionals with years of experience behind them. They bring the highest level of professional service to clients, along with the traditions of the profession, integrity and sound ethical practices.

Members of the firm are in tune with the work-culture of international law firms, as well as the expectations of large corporate clients. The firm has, amongst its clients, multinationals and leading Indian corporations.

Sumeet Kachwaha has approximately 39 years’ experience in the legal profession, mainly in corporate and commercial law. Mr. Kachwaha has held a Band One ranking in the Arbitration section of Chambers Asia since 2009. He also features in Who’s Who Legal in the Construction, Arbitration, Procurement, Government Contracts and Asset Recovery sections, and has a Band One ranking in the Dispute Resolution section of the The Legal 500Asia Pacific. He also features in GAR’s Who’s Who Legal Arbitration Section. He has handled some of the leading and landmark commercial litigations ever to come up before Indian courts.

Mr. Kachwaha has also been involved in the non-contentious side in several high-stake projects, especially in infrastructure, power, construction and telecoms. He has advised a wide range of clients (on the victims’ side) in relation to business crimes.

He has served as a Chair of the Dispute Resolution & Arbitration Committee of the Inter-Pacific Bar Association (three-year term). He is currently serving as the Vice-President of the Asian Pacific Regional Arbitration Group (APRAG), and is on the Advisory Board of the Kuala Lumpur Regional Centre.

Sumeet KachwahaKachwaha and Partners1/6, Shanti NiketanNew Delhi – 110021India

Tel: +91 11 4166 1333Fax: +91 11 2411 0763Email: [email protected]: www.kaplegal.com

Dharmendra Rautray completed his LL.M. in 1996 from the London School of Economics and was thereafter called to the England and Wales Bar in 2001. He is a member of Lincoln’s Inn. He has served as faculty for the CLE Programme conducted by the New York City Bar, New York. He successfully argued the Constitution Bench matter Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Services Inc. before the Supreme Court of India.

Mr. Rautray’s main areas of practice are construction arbitrations, litigation, contracts, business transactions and international trade.

Mr. Rautray has authored a full-length book on arbitration published by Wolters Kluwer (2008) and several articles published in leading international law journals. He is also a member of the IBA APAG Working Group on Initiatives for harmonising Arbitration Rules and Practices.

Dharmendra RautrayKachwaha and Partners1/6, Shanti NiketanNew Delhi – 110021India

Tel: +91 11 4166 1333Fax: +91 11 2411 0763Email: [email protected]: www.kaplegal.com

theSchedule,LimitationAct,1963).IfpartiesarenotsatisfiedwiththejudgmentofaHighCourt,aSpecialLeavePetition(“SLP”)maybefiledtotheSupremeCourtofIndiaagainstanysuchjudgmentwithinaperiodof90daysfromthedateoftheimpugnedjudgment(OrderXXI,Rule1,SupremeCourtRules,2013).Incaseofrefusalby a High Court to grant a certificate of appeal to prefer a SLPbeforetheSupremeCourt,anappealtotheSupremeCourtmaybepreferredwithin60daysoftheimpugnedorderoftheHighCourt(OrderXXI,SupremeCourtRules,2013).Adecisionfromthecourtoffirstinstancecanbeexpectedwithinaperiodofthreetofouryearsandwithinonetotwoyearsfromthefinalcourtofappeal.

party to file theirwritten statement. Issues are thereafter framedbythecourtandthecasepostedfor trial. Evidence-in-chief is intheformofswornaffidavitsandcross-examinationisconductedinfront of court-appointed commissioners. This is followed by thefilingofdocumentsandevidencebytheclaimantandtherespondentrespectively. On conclusion of arguments on merits, the courtreservesthemattertopronounceitsjudgmentonalaterdate.

Aclaimantmayrequestthecourtforasummaryjudgmentincaseof a certain debt and on lack of defence being available to therespondentwhereinajudgmentissoughtwithouttrial.PartiesmaypreferanappealtoaHighCourtwithinaperiodof90daysfromthedateoftheimpugnedjudgmentofalowercourt,orwithinaperiodof30daystoanyothercourtinIndia(DivisionIIof



Chapter 13

Makarim & Taira S.

Heru Mardijarto

Alexandra Gerungan

Indonesia

5. Umbrella/framework Acontractthatcouldbeintheformofaunitpricecontract

foracertainperiodforservicesorgoods,thevolumeand/orperiodofwhichhasnotyetbeendeterminedat thetimeofsigning.

FurtherexplanationontheabovetypesofcontractwillbeprovidedundertheupcomingPR16/2018’simplementingregulation.In addition, the Construction Law sets the minimum provisionswhichmustbe included inaconstructioncontract. Forexample,thecontractmustprovidetheidentitiesofbothparties,adescriptionandthevalueofthework,aforce majeureclause,etc.Pleaseseequestion 1.5 below for the minimum provisions that need to beincludedinaconstructioncontract.Regarding package contractors, in Indonesia it is common toestablishaconsortiumofseveralcontractorswithdifferentareasofexpertise,withthemaincontractorleadingtheothermembersoftheconsortiuminperformingthework.


Ingeneral,underArticle1320oftheIndonesianCivilCode(“ICC”),anagreementisvalidifitsatisfiesthefollowingfourrequirements:(i)theconsentoftheindividualswhoareboundthereby;(ii)theircapacitytoundertakeanobligation;(iii)aspecificsubjectmatter;and(iv)apermittedcause.In addition, the Construction Law requires a tender or selection,or electronic procurement to create a legally binding contract forconstructionfinancedfromthestatebudgetorfortheconstructionofapublicfacility.


It is common to have a letter of intent or memorandum ofunderstanding.



UnderIndonesianlaw,therearenostandardtypesofconstructioncontract.UnderLawNo.2of2017onConstructionServices(the“Construction Law”), aconstructionworkcontractcan takeanyform according to need, butmust be implemented in accordancewiththeprevailinglawsandregulations.Inpractice,internationalstandard forms of contract such as International Federation ofConsultingEngineers(“FIDIC”)contractsarecommonlyusedwithforeigncontractors.Itisworthnotingthat,underArticle27ofPresidentialRegulationNo. 16 of 2018 (“PR 16/2018”) onGovernment Procurement ofGoodsorServices,thereareseveraltypesofcontractrecognisedfortheprocurementofconstructionwork:1. Lumpsum Acontractwithafixedpriceandscopeofwork.Alltherisk

willbebornebytheserviceprovider,orientedintheexpenseandthepaymentisbasedontheprogressofthework.

2. Unitprice Acontract tocompleteall theworkwithinacertainperiod

whichisinput-based,withacertainunitpriceforeveryworkelementorunitwithcertaintechnicalspecifications,whichistemporaryandpaymentforwhichisbasedonthevolumeoftheresultofthework.Usuallyforthistypeofcontract,thevolumeorquantityofworksisstillanestimationatthetimeofthesigningofthecontract.

3. Combinationoflumpsumandunitprice4. Turnkey This is a contract inwhichprices arefixeduntil the entire

works are completed and thepayments aremadebasedontheresultsofjoinevaluationwhichshowthattheworkshavebeenconductedinaccordancewiththeagreedcriteria.


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Notethat,whilstwehaveaworkingknowledgeofIndonesiantaxationlaws,thisisnotanareawherewe,incommonwithnearlyallIndonesianlawfirms,claimspecialistexpertise.InIndonesia,taxationadvisoryservicestraditionallyfallwithinthescopeofworkoftheaccountingfirms.

(d) Healthandsafety The Construction Law imposes requirements related to

construction security, safety and continuity. The employerandcontractormustcomplywiththeConstructionSecurity,SafetyandContinuityStandards.Thesestandardscoverthefollowingareas:1. materials;2. equipment;3. securityandsafety;4. procedures;5. qualityofwork;6. maintenance;7. workerprotectionprogrammes;and8. protectionoftheenvironment.

Theabovestandardsareprovidedintherelevantregulations.Thestandards,especiallyformaterialsandequipment,maydependon the typeofconstructionwork tobeundertaken. For instance,fortheconstructionofabuilding(gedung),theIndonesianNationalStandards(Standar Nasional Indonesia/SNI)usuallyapply.


Thereisnorestrictionontheemployerretainingpartofthepaymentundertheconstructioncontractasaformofsecurity,providedthatitisagreedtobytheparties.However,inpractice,tosecureproperperformance by the contractor, the contractor prefers to providetheemployerbonds(e.g.AdvancePaymentSecurity,PerformanceSecurity,DefectNotificationPeriodSecurity).


Yes,itiscommoninIndonesiaforthecontractortoprovideseveralguarantees/bonds.Notethatforaconstructionprojectfinancedoutof the state budget, it ismandatory for the contractor to provideContractorBonds.The Contractor Bonds must be payable unconditionally in theamountoftheguaranteedvalueandwithinacertainperiodofreceiptoftherequestfromtheemployerregardingthecontractor’sdefault.BankIndonesiaCircularLetterNo.23/7/UKUTahun1991,dated18March1991,requiresaBankGuaranteetocontainthefollowing:1. Title:“BankGuarantee”.2. ThenameandaddressofthebankissuingtheBankGuarantee.3. TheissuancedateoftheBankGuarantee.4. Theunderlyingtransactionsecured.5. Theamountofmoneyguaranteed.6. ThebeginningandenddatesoftheBankGuarantee.7. Theenddateforsubmittingaclaim.


UndertheConstructionLaw,aconstructioncontractmustincludea provision on insurance cover to be obtained by the employer/contractor. Under the Indonesian law on social security, thecontractormustenrolitsworkersintheManpowerSocialSecurityProgramforConstructionWorkers. Inaddition to theManpowerSocialSecurityProgram,thepartiesarefreetodeterminethetypesofinsurancerequiredforaproject.Inpractice,theemployerusuallyrequires “ConstructionAllRisk/ErectionAllRisk” insurance and“ThirdPartyLiability”insurancewithboththecontractorandtheemployerastheinsuredparties.


(a) Generalrequirements Under the Construction Law, the standard clauses to be

includedinaconstructioncontractarethefollowing:■ Theidentitiesoftheparties.■ The details of the work to be performed, a clear

descriptionandscopeofwork, thevalueof thework,unitprices,etc.

■ Coverage period including a maintenance period forwhichthecontractorisresponsible.

■ Therightsandobligationsofbothparties.■ Construction workers (including the obligation to

employcertifiedconstructionworkers).■ Themethodofpayment.■ EventofDefaultprovisions.■ Disputesettlement.■ Terminationofcontractprovisions. ■ Force majeure.■ Buildingfailure.■ Workers’protection(workingsafetyandhealth).■ Protectionagainstthirdparties(includingtheobligations

ofthepartiesintheeventofalossoraccidentordeath).■ Environmental aspects (includes the obligation of the

partiestocomplywiththeenvironmentalrequirements).■ Collateralorguarantees.

(b) Labour Article47(1)eoftheConstructionLawrequirescontractors

andtheemployerstoonlyhireconstructionworkersholdingaWorkCompetenceCertificate(Sertifikat Kompetensi Kerja)in certain positions. According to the elucidation of thisArticle,thesepositionsare:(i)operators;(ii)techniciansoranalysts;and(iii)experts(ahli).

(c) Tax Tax issues do not have to be covered in the construction

contract. Employees in a construction project must payincometaxlikeallemployees.Usually,thecontractorwhohirestheworkerspaystheirincometax.

Makarim & Taira S. Indonesia


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is uncommon, the “paywhen paid” schememay be applied in aprojectaslongasitisagreedtobythepartiesundertheconstructioncontract.In project finance, the availability of the funds needed by theemployer to pay the contractor (financial close) is included asa condition precedent to the commencement date under theconstructioncontract.


The parties may agree in advance on a fixed sum (liquidateddamages)tobepaidbythecontractortotheemployerintheeventofaparticularbreach (e.g. latecompletionof theworks). UnderArticle1309ofICC,Indonesiancourtshavetheauthoritytoreducetheamountofliquidateddamagesifthecontracthasbeenpartiallyfulfilled.Moreover,Indonesiancourtshave,onoccasion,reducedtheamountofthedamagesbasedonconsiderationsofdecencyandgoodfaith.



TheConstructionLawdoesnotgivethecontractortherighttovarytheworkswithouttheconsentoftheemployer.Itthereforedependson theconstructioncontract. Ingeneral,anychangeoralterationmustbeagreedtobytheemployer,asitwillalsousuallyleadtoapriceadjustment.


TheConstructionLawimposesnorestrictionontheworkthatcanbeomitted from the contract. However, in Indonesia, a standardconstruction contract (FIDIC) only allows an omission if theemployerdoesnotneedthework,notiftheemployerwillhaveathirdpartyreplacethecontractortoperformwork.


Unless otherwise stated in the construction contract (except forprovisionsofIndonesianlawthatcannotbewaived(e.g.thedutytoactingoodfaith)),therightsandobligationsunderthelaw(statutoryrequirements)aredeemedimpliedinaconstructioncontract.

8. Astatementthatbankwillpaythebeneficiarywiththeconditionthatthebankwillfirstconfiscateandselltheprincipal’sassets(Article1831ofICC)orthebankwillreleaseitsrighttofirstclaimtheprincipal’sassetstobeconfiscatedandsold(Article1832of ICC)and thus immediatelypay thebeneficiary. Asguarantees/bondsforconstructionarepayableunconditionally,thebankusuallywaiveitsrightsunderArticle1831ofICC.


We understand that this relates to the security placed by thecontractorstomakesuretheemployermeetsitspaymentobligations.It is common in private projects for the contractor to require itsinvestmenttobesecuredbyalienovercollateral.Thelienmaybeafiduciarysecurity(formoveableobjects,e.g.,materialssupplied,etc.). If theconstructioncontractallowsthecontractor toplacealienonthegoodsandsuppliesusedintheworks,theconstructioncontractwillusuallyrequirethecontractortoprovidetheemployeralienwaiveruponthefulfilmentofthepaymentobligationbytheemployer.In addition, for goods or supplies that are not fixed to the land,underArticle1459oftheICC,ownershipofthegoodswillnotbetransferred if there isnohandover fromtheseller (or in thiscasethe contractor) to the buyer (or in this case the employer). Thecontractor may hold back the handover of the goods until thecontractorhasbeenpaid.



Yes, it is common for construction contracts to be supervised onbehalfoftheemployerbyathirdparty.Thisdutyisnotregulatedunder Indonesian law,but ideally, the third-party supervisormustactimpartially.In the event of a building failure, for example, an independentexpertevaluator(penilai ahli)willbeappointedbytheMinisterofPublicWorksandHousing(“MOPW”)toimpartiallyevaluatethebuildingfailure.Foryourinformation,priortotheusageofbuilding,theemployer/projectownermustobtainacertificateofworthiness(sertifikat laik fungsi) issuedbythelocalgovernment. Toobtainthiscertificate,usually the local government will appoint a third party to makeassessmentontheoperationalworthinessofsuchbuilding.


The Construction Law is silent on this scheme, but Indonesianlaw recognises the freedom of contract principle. Although it



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However, it isnotunusual for theemployerand thecontractor tosharetherisks,sothatintheeventofunforeseengroundconditions,thepartieswillagreeonhowtodealwiththeissue.


TheConstructionLawissilentonthisissue,soitisagreedbetweenthepartiesundertheconstructioncontract.Inpractice,thisriskisusuallybornebytheemployer.


TheConstructionLawissilentonthisissue,soitisagreedbetweenthe parties under the construction contract. Generally speaking,thosewhocreatetheintellectualpropertymaterialinrespectofthedesign and operation of a property typically own the intellectualproperty rights related to the project. These are usually theemployer’sdesignconsultantsor, if thecontractorhascreatedthedesign,thecontractor.Ifthecontractorownstheintellectualproperty,thecontractorwillprovidean irrevocableright touse the intellectualproperty to theemployer.


TheConstructionLawissilentonthisissue,soitisagreedbetweenthe parties under the construction contract. In most cases, theconstruction contract provides the contractor the right to suspendworks.


TheConstructionLawissilentonthismatter,soitisagreedbetweenthepartiesundertheconstructioncontract.Theconstructioncontractwillusuallyincludeclearprovisionsonterminationofthecontract.Typically,theemployerisentitledtoterminateforadefaultorthebankruptcyofthecontractor.Thecontractorcandosointheeventof thebankruptcyof theemployeror its failure tomakepaymentwithinaspecifiedperiod.


Yes, the concept of force majeure is known and commonly usedin Indonesia. For construction contracts, the Construction Lawprovidestwotypesofforce majeure:1. force majeureofanabsolutenature:asituationinwhichthe

partiescannotexercise their rightsandobligationsunder theconstructioncontract;and

2. force majeure of a relative nature: a situation in which thepartiescanstillexercisetheirrightsandobligationsundertheconstructioncontract.

The parties are free to determine under the construction contractwhicheventswilltriggeraforce majeurecondition.


Asageneralrule,underArticle24ofGovernmentRegulationNo.29of2000(subjecttotheupcomingimplementingregulationsforthe Construction Law), the party responsible for the delay mustprovidecompensationforthecostsincurredbecauseofaconcurrentdelay.TheConstructionLawissilentonwhoisresponsibleintheeventofconcurringcauses;itistobedeterminedonacase-by-casebasistakingintoaccounttherelevantprovisionsoftheconstructioncontract.Unlikeincommonlawsystems,Indonesianlawdoesnotsetprovisionsonthelawsofcausation.It is important to note that Indonesian courts have wide latitudeto interpret law and tomake rulings, and do not have to followprecedent. Eachcase is thereforedecidedbasedon thepresidingcourt’s interpretation of the law and determination of the facts.Caselawhaslittlelegaleffectandonlyafewcasesarepublished.Enforcementproceedingsarealsosubjecttothegeneraldiscretionofthecourtswithregardtotheawardofcosts.


The Construction Law is silent on this issue, so it is agreedbetweenthepartiesundertheconstructioncontract.Ingeneral,theentitlementtoanextensionoftimeforanyreasonusuallydependsontheagreementbetweentheparties.


UnderArticle 1967 of the ICC, all legal claims expire after 30years.However,forabuildingfailure,undertheConstructionLaw,the contractor’s period of liability is determined according to theanticipated lifetime of the planned construction, specified in theconstructioncontract.Ifthespecifiedtermismorethan10years,the contractor is liable for building failures occurring during theintervalbetweenthehandoverand10yearsafterthehandover.Theemployerwillbeliableforanybuildingfailurewhichoccursafterthespecifiedterm.


TheConstructionLawissilentonthisissue,soitdependsonthearrangement for the construction works agreed to by the partiesunder the construction contract. If the employer is responsiblefor a feasibility study of ground conditions (conducted beforeconstructioncommences),andifthatinformationisreliedonbythecontractorwithoutthecontractorhavinganyobligationtoverifytheaccuracyofthatinformation,theemployerisforunforeseengroundconditions.Itisalsopossibletohavethecontractorbeartheriskofanyunforeseengroundconditionsundertheconstructioncontract.



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Insofarasitrelatestoliabilityforadefectwhichleadstoabuildingfailure,ifitispurelycausedbythedesign(assumingthatthedesignwillnotchangeduringconstruction),thedesignermaybeheldliable.Anindependentexpertevaluator(penilai ahli)willbeappointedbytheMOPWtoevaluate thebuilding failureanddeterminewho isliableforthebuildingfailure.The designer’s period of liability is determined according to theanticipatedlifetimeoftheplannedconstruction,asspecifiedintheconstructioncontract.Ifthespecifiedtermismorethan10years,the designer is liable for building failures occurring during theintervalbetweenthehandoverand10yearsafterthehandover.



UnderIndonesianlaw,disputesarecommonlyresolvedoutofcourt(i.e.arbitrationandalternativedisputeresolution).Dependingonthecomplexityofthecase,courtlitigationcantakefromsixmonthstoapproximatelyoneyeartoobtainadistrictcourtruling(firstinstance)inIndonesia,andthelosingpartycanappealtotherelevanthighcourt.Highcourtproceedingscantakeanothersixmonths,andthelosingpartycanappealtotheSupremeCourt,whichcantakefromoneto threeyears torenderafinaldecision.IndonesianjudgesarenotboundbyearlierjudgmentsasIndonesianlawdoesnotrecognisebindingprecedentprinciples.Assuch,eachcasebeforetheIndonesiancourtsisdeterminedonthebasisofitsparticularfactsandmerits.The parties may agree to proceed to arbitration either before orduringadispute.Anarbitrationagreementwillprecludethepartiesfromsubmittingthedisputetocourt.Indeed,itisspecificallystatedthat the courtmust refuse to be involved in a disputewhere thepartieshavestipulatedarbitration. Inadditiontoarbitration,LawNo.30of1999onArbitrationandAlternativeDisputeResolution(“Arbitration Law”)alsoprovidesalternativedisputeresolutiontosettle disputes or divergent views throughout the court as agreedupon by parties, namely by means of consultation, negotiation,mediation,conciliationorevaluationexperts.


While adjudication is common to settle construction disputes,Indonesian Arbitration Law does not specify it as a disputesettlement alternative. Law No. 2 of 2017 on ConstructionServices (the new Indonesian Construction Law) provides for aDisputeBoard (Dewan Sengketa),which isa teamformedunderthe parties’ agreement to prevent and mediate a dispute arisingfrom the implementation of the construction contract. Thiswillbe specified further in a government regulation, but to date, thegovernment regulation has not yet been issued. We are awarethataDisputeAdjudicationBoard(“DAB”)isavailableinFIDICcontracts.


In the event of a building failure, third parties (even the generalpublic)affectedbyabuildingfailuremayclaimcompensationforlosses/damagecausedbythebuildingfailure.


Set-offarrangements( perjumpaan utang)areknowninIndonesia.UnderArticle 1425 of the ICC, if one party is simultaneously acreditor and a debtor to another party, the debt can be settled by“set-off”.


Thedutyofcareprinciple ismorecommonlyknown incommonlawjurisdictions,notincivillawjurisdictionssuchasIndonesia.InIndonesia,atortclaimmaybesubmittedwhenonepartyunlawfullyviolatesanotherparty’srightstherebycausingtheotherparty(theaggrieved party) to suffer damages which the aggrieved partymay claim. A tort/illegal act lawsuit does not require any priorcontractualarrangementasitiscoveredbythelaw.Toqualifyasanillegalact,thefollowingfourcriteriamustbemet:1. Theremusthavebeenanillegalact(onrechmatig).2. The illegal actmust have caused the relevant third party to

sufferaloss.3. Theremusthavebeena“mistake”or“negligence”.4. Theremust be a direct relationship between the act and the

loss.


UnderArticle1343oftheICC,if thewordingofanagreementisopen to several interpretations/ambiguous, then the intent of thepartiesinvolvedmustbeascertainedratherthantheliteralsenseofthewording.UndertheConstructionLaw,intheeventofadispute,theIndonesianlanguageversionoftheconstructioncontractmustapply.


Ingeneral,termsthatconflictwiththelawtermsareunenforceable.One example is the provision on the prevailing language of theconstructioncontract.UndertheConstructionLaw,theIndonesianversion of the construction contract must prevail. Therefore,a provision in a construction contract that states that theEnglishversionoftheagreementprevailsmaynotberecognised.



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has been registered in the Central Jakarta District Court, if therespondentdoesnotimplementtheawardvoluntarily,thestepstoenforcetheawardareasfollows:1. fileapetitionforawritofexecution(exequatur)–theCentral

Jakarta District Court will then issue an Exequatur Order(Penetapan Exequatur);

2. fileapetitiontosummontherespondenttoappearincourttobeofficiallywarned(aanmaning)toimplementtheawardandtheExequaturOrder;and

3. file a petition to seize the respondent’s assets and sell themthrough public auction if the respondent denies or refusesto comply with the court’s demand as explained above forwhateverreasons.

The above procedures are subject to Indonesian Civil ProcedureLaw.TheawardcanberecognisedandmayonlybeenforcedwithinanIndonesianjurisdictioniftheysatisfythefollowingrequirements:1. theawardmusthavebeenrenderedbyanarbitrator/tribunalina

countrywhich,togetherwithIndonesia,isapartytoabilateralormultilateral treaty on the recognition and enforcement ofinternationalarbitralawards;

2. international awards are limited to awards which, underthe provisions of Indonesian law, fall within the scope ofcommerciallaw;

3. theawardsdonotviolatepublicpolicy;and4. anExequaturOrderfromtheChairmanoftheCentralJakarta

DistrictCourthasbeenobtained.Enforcementofinternationalarbitralawardsmaybechallengedinthefollowingways:1. Appeal to theSupremeCourt. Theappealcanbefiledonly

against a decision of the Chairman of the Central JakartaDistrictCourtthatrefusestorecogniseandenforcetheaward.TheSupremeCourtwillrulewithin90daysofreceiptoftheappealcase.AdecisionoftheChairmanoftheCentralJakartaDistrictCourtconfirmingandenforcingtheawardcannotbeappealed.

2. Annulment. Under article V(1)(e) of the New YorkConvention,annulmentoftheawardmayonlyberequestedintheplacewherethearbitrationwasheld.


UnderArticle436of theRV(Reglement of de Rechtsvordering–anIndonesiancivilproceduralregulationfromthecolonialera),aforeigncourtjudgmentcannotbeenforcedinIndonesiadirectly.Toenforce one, a new lawsuitmust be filed in an Indonesian court.Theforeigncourtrulingmaybeintroducedasevidenceinthenewproceedings,althoughinprincipletheIndonesiancourtwillnotbeboundbythefindingsoftheforeigncourt.Thebasicprocedurewillfollowthecivilprocedurallawasexplainedinquestion4.6below.


Civildisputes in Indonesiaarefiled ingeneralcourts,comprisingdistrict courts serving as courts of first instance and high courts


Yes,ourconstructioncontractscommonlyhavearbitrationclauses.As explained above, under the contract, the partiesmay agree toarbitrationbeforeorduringadispute.Thepartiestothearbitrationaregivenwidediscretiontodeterminetheirownproceduralprovisionsandprocesses,providedtheydonotconflictwiththeArbitrationLaw.SomeoftheprinciplesprovidedintheLawareasfollows.■ Secrecy:thearbitrationisconductedbehindcloseddoors.■ Language: Indonesian, unless the parties and the arbitrator

agreeotherwise.■ Representation: proxies may represent the parties provided

theyareproperlyauthorised.Thirdpartiescanparticipateinthearbitration if theyhaveinterests in thecaseandwith theagreementofallpartiesandthearbitrator.

■ Provisional Decision: this is possible if a party applies forit;forexample,anordertosellperishablegoods.Theexactscopeandextentofsuchinterimjudgmentsareunclear.

■ Forum: arbitration can be ad hoc or institutional, eitherdomesticorinternational.

■ Venue: to be determined by the parties or the arbitrator;however, certain functions (for example, site inspection orwitnessexamination)canbeheldelsewhere.

■ Witnesses: witnesses, including expert witnesses, may besummonedeitherattherequestofthepartiesortheorderofthearbitrator.

■ Secretary: a secretary should prepare an account of thearbitrationanditsproceedings.

Sofarasthearbitralprocessitselfisconcerned,thebasicproceduresinclude the claimant’s petition, the respondent’s response/counterclaim,hearing,evidencereviewandaward.Thereviewofthedisputemustconcludewithin180daysofthearbitrator/tribunalbeing instituted. This periodmaybe extended; often, the partiesmaywishtowaivetheprovisionsofthisarticleintheirarbitrationclausesoragreement.


Yes,enforcementofaninternationalarbitralawardcanbeappliedafter theawardhasbeen registeredat theCentral JakartaDistrictCourt by the arbitrator(s) or their proxy. When registering theaward,thefollowingdocumentsmustbeprovided:1. the original award, or its authenticated copy according to

the provisions on the authentication of foreign documents,togetherwithanofficialIndonesiantranslation;

2. the original agreement which is the basis for the awardor its authenticated copy according to the provisions onthe authentication of foreign documents, together with anIndonesianofficialtranslation;and

3. acertificatefromthediplomaticrepresentativeoftheRepublicofIndonesiainthecountryinwhichtheawardwasrendered,statingthatcountryandIndonesiaareboundbyabilateralormultilateral treaty on the recognition and implementation ofinternationalarbitralawards.

Uponreceiptof theabovedocuments, theCentralJakartaDistrictCourtwillissueadeedofregistrationoftheaward.Oncetheaward



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casebysubmittinganapplicationwithin14daysofreceiving thedistrict court’s ruling. It is notmandatory, but the appellant cansubmitamemorandumofappeal,whichsetsoutthereasonsfortheappeal.Thecourtwilltakesixmonthstooneyeartohanddownaruling. Theenforcementof theoriginaldistrictcourt judgmentisgenerallystayeduntilafinalandbindingrulingishandeddown.(c) AppealtotheSupremeCourtTheunsuccessfulpartymayappealagainstthehighcourtjudgmenttotheSupremeCourt.Appealsoncertaincases(suchascommercialcourt rulings onbankruptcy and intellectual property) lie directlywith the SupremeCourt. In general, the appellantmust state itsintention to appeal within 14 days of receiving the high courtruling.Theappellantmustsubmitamemorandumofappealsettingout thegroundsfor theappealwithin14daysof theapplication’ssubmission.Therespondentcanfileacounterappealmemorandumwithin14daysofreceiptoftheappealmemorandum.TheSupremeCourtingeneraldecidesonmattersoflawonly.EnforcementofthehighcourtrulingisgenerallystayeduntilafinalandbindingrulinghasbeenhandeddownbytheSupremeCourt.Itcantakefromonetofiveyearstorenderafinaldecision.(d) JudicialreviewintheSupremeCourtUnderIndonesianlaw,ajudicialreviewofafinalandbindingcourtjudgment (including of the Supreme Court) is only available inlimitedcircumstances,includingifthejudgmentwasbasedonfalseinformationoradeceptionbytheopposingparty,whichwasonlydiscoveredafterthecasehadbeenruledonandafterthejudgmentwashandeddown,orifsubstantialwrittenevidencewasdiscoveredthatcouldnotbefoundduringtheproceedings.Thejudicialreviewdoes not cancel or prevent enforcement of a final and bindingjudgmentwhilethejudicialreviewisbeingconsidered.

as courts of appeal. The Supreme Court supervises the districtcourtsandhighcourts,andisthecourtoffinalappeal.Therefore,Indonesiagenerallyadoptsa three-stagecourt system(exceptionsincludeappealsagainstcommercialcourtjudgmentsonbankruptcyanintellectualproperty,andIndustrialRelationsCourts,whichliedirectlywiththeSupremeCourt).(a) ThecourtoffirstinstanceGenerally, the process is as follows: (i) the plaintiff registers alawsuit with the district court’s clerk’s office; (ii) the court thenservesthedefendantanordertoappearincourtonthefirsthearing;and (iii) on the first hearing, the judge refers the parties to themandatorymediation. Ifmediationfails, themediatorreturns themattertothejudge.Subsequently,thedefendantcansubmitaresponsetotheplaintiff’sclaim. Theplaintiff isgivenanopportunitytosubmitarejoinderrespondingtothedefendant’sresponse,andthedefendantisgivenan opportunity to respond to it in a counterplea. The judgewillthenallowthedisputingpartiestopresentevidence,including,ifsodesired,witnessesorexperts.Finally,eachpartycansubmittheirclosingarguments;thereafter,thecourtrendersitsfinalrulingandreadsitoutinthefinalhearing.A2014SupremeCourtCircularLetter requires trials incourtsoffirst instance toconcludewithinfivemonthsof the lawsuitbeingregistered. However, inpractice, a civil court proceeding (in thefirstinstance)oftentakeslongerthanfivemonths.(b) AppealtothehighcourtThe unsuccessful party has an absolute right to appeal against adistrictcourtjudgmenttothehighcourt.Theappellantmustsubmitanappealtotheclerkofthedistrictcourtwithjurisdictionoverthe



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Established in 1980 by two Harvard graduates, Nono Anwar Makarim and Frank Taira Supit, Makarim & Taira S. (M&T) is a leading business law firm in Indonesia offering a full range of corporate, banking, litigation and specialist legal services to national and international clients.

Over the years, the firm has formed strong and lasting relationships with a large number of clients and businesses. We pride ourselves on the loyalty of our clients and attempt to provide to each client the same unvarying standard of service. The firm also has unique and unsurpassed experience and insight into many aspects of Indonesia’s business and governmental spheres and has the necessary expertise to assist our clients in their Indonesian investments and transactions.

M&T is also favoured as Indonesian counsel by a growing number of leading international law firms and has significant expertise in acting as local counsel in international and multinational transactions. Our existing connections both in Indonesia and overseas allow us to ensure the firm maintains and develops its expertise and is able to assimilate the most up-to-date drafting and other legal techniques and knowledge.

Heru Mardijarto is a Partner in the firm’s Corporate and Commercial department. His expertise includes general corporate matters, energy and natural resources, construction, and IT and telecommunications. He has advised many major international clients as well as Indonesian state-owned companies in relation to power plants as well as construction projects. He also has extensive experience in handling the procurement/tender process in both government and private institutions. Specifically for construction projects, he has been involved in some big construction projects for electric power plants, a blast furnace, and the construction of the Grissik–Singapore borderline gas pipeline. Recently, he has been actively involved in handling data protection legal issues and provided advice on them to both local and overseas clients.

Heru MardijartoMakarim & Taira S.Summitmas I, 16th & 17th FloorsJl. Jend. Sudirman Kav. 61–62Jakarta 12190Indonesia

Tel: +62 21 252 1272 / +62 21 520 0001Fax: +62 21 252 2720 / +62 21 252 2751Email: [email protected]: www.makarim.com

Alexandra Gerungan is a Partner dealing with litigation/dispute resolution at Makarim & Taira S. She has successfully handled litigation and dispute resolution cases across highly diverse sectors.

Her experience ranges from civil lawsuits to: arbitration; alternative dispute resolution; anti-corruption investigation; employment issues; land/property cases; insurance, banking and future exchange claims/disputes; police investigations (for example, related to allegations of forestry and environmental crimes); and internal/independent investigations. She also advises on related matters such as due diligence and general investigations, liquidation, bankruptcy/suspension of payment, and land/property issues.

Drawing on her experience, she is moreover able to advise clients on transaction structures, agreements and general business practices with a view to preventing the emergence of future disputes or issues.

Alexandra is a frequent contributor to and a co-author of various reports, articles and publications on litigation, arbitration, alternate dispute resolution, environment matters, rule of law, compliance issues and labour law. Her articles have appeared internationally in publications by Law Business Research, Global Legal Group and World Justice Project. She has also been invited as a speaker for seminars and workshops on litigation, arbitration, dispute settlement alternatives and insolvency.

Alexandra GerunganMakarim & Taira S.Summitmas I, 16th & 17th FloorsJl. Jend. Sudirman Kav. 61–62Jakarta 12190Indonesia

Tel: +62 21 252 1272 / +62 21 520 0001Fax: +62 21 252 2720 / +62 21 252 2751Email: [email protected]: www.makarim.com



Chapter 14

Matheson Rhona Henry

Ireland

building works and civil engineering works), site investigationcontract,frameworkagreement,minorworkscontract,ashortformcontract plus a contract for early collaboration) for use in publicsectorconstructionprocurement.Themostcommonlyuseddesign-onlycontractsinthisjurisdictionare those contracts which are produced by the regulatory bodiesfor disciplines like mechanical and electrical consultancy, civilengineeringandarchitecture togetherwithbespoke forms. Whenused,certainlyinthecontextoflargerprojects,thesecontractsareoften heavily amended. In addition, the GCCC has produced adesign-onlycontractforuseinthecaseofpublicsectorprojects.


The legal essential requirements of a contract in this jurisdictionare: agreement; consideration; certainty; intention to create legalrelations; and capacity. Generally, there is no requirement for aconstruction contract to be inwriting. Recent legislation in thisjurisdiction,theConstructionContractsAct,2013(whichcameintoforce on 25 July 2016), includes a right on the part of parties toa construction contract to refer payment disputes to adjudication,providesforcertainnewpaymentprovisionsandincludesastatutoryright on the part of a contractor/sub-contractor to suspendworksunderaconstructioncontractfornon-payment.


Ingeneral,aletterofintent(“LOI”)maybeissuedtoindicateanemployer’sintentiontocreateacontractorsimilararrangementwithacontractorinduecourse.ThephraseLOIisnotalegaltermofartinIreland,however,andassuchtheeffectofeachLOIwilldependontheindividualLOI’stermsandonthecontextinwhichtheLOIisissued.Inthecontextofaconstructionproject,anLOImaybeissuedwhen theparties to a construction contract arenegotiatingcontractparticularssothat, forexample, theemployercaninduce



Thereareanumberofstandard-formconstructioncontractsusedinthisjurisdiction.Themostcommonlyusedformsareasfollows:1. ConditionsofBuildingContractissuedbytheRoyalInstitute

of theArchitectsof Ireland (“RIAI”) (togetherwitha sub-contractform);and

2. Engineers Ireland conditions of contract forworks of civilengineering construction (together with a form of sub-contract).

These conditions of contract are, particularly with respect tolarger projects, usually heavily amended through a schedule ofamendments to reflect risk profile currently acceptable in themarketandtoreflectivelegislativechanges.Inadesignandbuildscenario,afurthersetofamendmentscanbeincorporatedintotheseconditionstofacilitateadesignandbuildprocurementroute.In the case of more complicated projects, for example, in thepharmaceutical, information technology and energymarket, thereareanumberofothertypesofcontractswhicharecommonlyused.Forexample:(a) the Fédération Internationale des Ingénieurs-Conseils

(“FIDIC”) suite of contracts, which includes a build-onlyformofcontract,adesignandbuildmechanicalandelectricalcontract and a turnkey or engineering, procurement andconstruction(“EPC”)contract;

(b) management contracts (which, in this jurisdiction, aretypicallybasedontheRIAIform);

(c) InstitutionofEngineeringandTechnologyMF/1;(d) NewEngineeringContract(“NEC”)Forms;and(e) JointContractsTribunal(“JCT”)Forms.In the case of public sectorworks, theGovernmentConstructionContractsCommittee(“GCCC”)haveproducedasuiteofstandarddocuments (including a build only, design and build (for both


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2. Data Protection Acts 1988 to 2003: these acts outlineobligations regarding the type of data an employermayholdonemployees, thebackgroundchecks thatanemployercancarryoutonpotentialemployees,seekingGarda vetting of potential employees and how long anorganisationcanretainemployeedata.

3. The Minimum Wage Act 2000: provides for a nationalminimumwage per hour for an adult employeewhich is€9.55perhour.Intheconstructionsector,employersusuallypayatahigherrateasamatterofsector-levelpractice.

4. Sectoral Employment Order (Construction Sector) 2017 (SI 455) (“SEO CS”): thiscameintoforceon19October2017 pursuant to the IndustrialRelations (Amendment)Act2015.TheSEOprovidesforstatutoryminimumpay(varyingdependingonthetypeandskilloftheworker),unsocialhourspremiums,pension,deathinservicebenefitand sick pay entitlements for craftsmen, constructionoperatives and apprentices who are employed in theconstructionsector.

5. Sectoral Employment Order (Mechanical Engineering Building Services Contracting Sector) 2018 (SI 59) (“SEO ME”):thiscameintoforceon6March2018pursuanttothe2015Actandappliestocertainworkersinthemechanicalengineeringbuildingservicessector,whichwillinclude,but is not limited to, qualifiedplumbers andpipefitters,and registeredapprenticeplumbersandpipefitters. TheSEOMEissufficientlywideinscopesothatitwillalsocover those employed through an employment agency.LiketheSEOCS,theSEOMEalsoprovidesforstatutoryminimumpayandminimumpensionentitlements.

6. The Industrial Relations Acts 1942 to 2015:thislegislationprovides the overall industrial relations framework forresolving industrial disputes in Ireland. It is based on apredominantly voluntarist system, the central featureof which is that an employer cannot be required torecognise a trade union or to negotiate directly with it.The recommendations from the Workplace RelationsCommissionor theLabourCourtare inmostcasesnon-binding; however, in certain circumstances the LabourCourt can issue binding orders in relation to terms andconditions.

7. The Organisation of Working Time Act 1997: regulatesworking time, annual leave and public holiday leave.It provides for a maximumworking week of 48 hoursaveraged over a four-month period (or in certain caseslongeraveragingperiods),dailyandweeklyrestperiods,andminimumannualleaveentitlements.

8. The Protected Disclosures Act 2014: this is the Irishgeneralwhistleblowercodeandallowsemployeestoraiseconcerns regarding potential health and safety issues attheworkplaceandfailureoftheemployertocomplywithlegalobligations,amongstotherissues.

9. The Protection of Employees (Part-Time Work) Act 2001:inadditiontoprovidingprotectiontopart-timeemployeesagainst less favourable treatment, this legislationimplements the EU-posted workers directive, imposingcertainminimummandatorystandardsunder local lawtoanyemployeesworkinginthejurisdiction,irrespectiveofnationality,wheretheywereoriginallyhiredortheplaceofresidence.Inshort,thispreventsforeignserviceprovidersusing foreign labour on more cost-effective terms andconditionstoundercutlocalserviceproviders.

10.The Protection of Employees (Transfer of Undertakings) Regulations 2003:therules(“knownasTUPE”)providethatwhereabusinessorpartofabusinesstransfersfromoneemployertoanother,anyemployeesattachedtothatbusinesswill be entitled to transferwith it on the sametermsandconditions,andwiththeirservicerecognisedinfull.Changesordismissalsrelatedtothetransferarenotpermitted,thoughredundanciesare.

thecontractor tobeginpreliminarycontractwork(e.g.,beginsiteclearance and site preparation, and the ordering of equipment)beforethepartiesexecuteafinalcontract.


Irish statute law does not require specific insurances in relationto construction projects, save for motor vehicle insurance whereappropriate.However,constructionprojectswilltypicallyinvolvesome/allofthefollowinginsurances:(a) insuranceoftheprojectworks(typicallyreferredtoas“All

Risks” insurance), takenoutbyeither thecontractoror theemployertocoverlossordamagetotheworksand/orprojectmaterials;

(b) employer’sliabilityinsurance,takenoutbythecontractortocoverinjurytoorthedeathofitsemployeesduringthecourseofaconstructionproject;

(c) public liability insurance, taken out by the contractor tocoverthird-partyclaimsinrelationtopersonalinjury,deathor injury to third parties and property damage (other thandamagetotheworks);and

(d) professional indemnity (“PI”) insurance, taken out by anypartywithdesignresponsibilitytocoverdesignliability.


(a) General Requirements TheConstructionContractsAct2013(the“CCA”)appliesto

allconstructioncontracts(asdefinedundertheCCA)enteredintoafter25July2016.TheCCAappliestooralandwrittenagreements.TheCCA:1. introduces requirements in relation to payment under a

constructioncontract;2. renders “ineffective” “pay when paid” clauses in

constructioncontracts;and3. providesforanadjudicationregimeinrelationtopayment

disputesunderconstructioncontracts. The Building Control (Amendment) Regulations 2014

also introduced a new regime in this jurisdiction aimed atachievingminimumstandardsinbuildingpracticeinrelationtodesignandconstructionmethods.

(b) Labour The following principal legislation relating to labourmust

be taken into accountwhen drafting construction contractsin Ireland; however, there is a large body of broaderemploymentlawthatwillalsoapplydependingontheissueandcircumstances:1. The Employment Equality Acts 1998 to 2015: theseacts

deal with employment discrimination on the groundsof gender, civil status, family status, sexual orientation,religion, age, disability, race and membership of thetraveller community. They also regulate issues such asharassment,sexualharassment,discriminatorydismissal,victimisation, access to employment, equal pay andworkingconditions.

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The following are some examples of an employer’sobligations in relation to a constructionproject under Irishhealthandsafetylegislation:1. An employer must satisfy itself that the contractor to

be appointed to the project has demonstrated that it iscompetenttocompletetheprojectworks.

2. An employer must appoint, in writing, a competentProject Supervisor Design Process (“PSDP”) anda competent Project Supervisor Construction Stage(“PSCS”)todischargeanemployer’sobligationsrelatedtotherespectivedesignandconstructionoftheworks.

3. Anemployermustmaintainasafetyfileinrelationtoeachconstruction project it undertakes, containing relevanthealthandsafetyinformation.

4. If the duration of a construction project is expected toexceedspecified limits (e.g., last longer than thirty (30)workingdays),anemployermustgivewrittennotice totheHealth& SafetyAuthority of the particulars of therespectivePSDPandPSCSappointments.


Standard-form construction contracts in this jurisdiction providefor an agreed percentage of the contract sum to be retained bytheemployer for thepurposesof remedyingdefects. The typicalretentionamountsarebetween3%and10%.Usually,thecontractorwillinvoicetheemployerforhalfoftheamountofthecontractsumretaineduponissueofthecertificateofsubstantialcompletion.Thebalanceof the retentionmonies is invoicedupon the issueof thedefects certificate/final certificate. In standard-form constructioncontracts,suchastheRIAIandGCCC,theretentionmoneyisheldintrustbytheemployerforthecontractor.


Performancebondsandparentcompanyguaranteesarepermissibleand commonly seen in construction projects in this jurisdiction.Theyarenotmutuallyexclusiveandregularlybothkindsofcontractsecurity are sought by employers. Performance bonds usuallyinvolveanemployer,acontractorandanindependentthirdpartysuchasabankorafinancialinstitution,whichguaranteestocovercertainlossessustainedbytheemployerduetothenon-performancebythecontractor. The amount of the bond is usually between 10% and12.5%ofthecontractsum.Incontrast,aparentcompanyguaranteewillcomedirectlyfromtheparentcompany,wherethecontractorisasubsidiaryoftheparentcompany,andwillcovertheentiretyoftheworks.Companyguaranteesareoftencappedatthecontractsum.On-demandbondsareverydifficulttoobtaininIreland.


Retentionoftitle(“ROT”)clausesarepermissibleinconstruction-relatedcontractualagreementsinIreland.

11.Paternity Leave and Benefits Act 2016: this allows the“relevant parent” to take a two-weekperiodof leave atanytimebetweenthedateofbirthortheplacementofababy/child(ifadopted)andinanyeventadatenotlaterthan26weeksaftersuchdate.Thisisprotectedleave.Anemployerisnotobligatedtopayanemployeewhoisonpaternityleave,andinanyeventtheemployeecanclaimapaternitybenefitforthetwo-weekperiod,whichisonparwithsimilarbenefitssuchasmaternitybenefitamountingto€230perweek,subjecttotheemployeehavingmadeappropriatePRSIcontributions.

12.EUlegislationsuchastheEqualPayDirective,theEqualTreatmentDirectiveandtheGeneralFrameworkDirectivemust also be considered when drafting constructioncontracts.

(c) Tax Subjecttolimitedexceptions,workersonaconstructionproject

(likeallemployed/self-employedpersonsworkinginIreland),aregenerallysubjecttothepaymentofincometax,universalsocial charge (“USC”) and pay-related social insurance(“PRSI”) either through self-assessment as self-employedpersons or through the pay-as-you-earn or PAYE system.In the case of employees, the employer needs to correctlyoperate thePAYEsystemofwithholdingtaxandbemindfulofitsobligationsanditsfilingrequirementsinthisregard.Inthe case of individuals engaged as independent contractors,the contracting entity needs to be entirely satisfied that theyaregenuineindependentcontractorsfromanIrishtax,socialsecurityandemploymentlawperspective. TheclassificationofworkersasindependentcontractorsratherthanemployeesisariskareafrequentlyauditedbyIrishRevenue.

Furthermore, Relevant Contracts Tax (“RCT”) must beoperatedbyapartywhofallsunderthedefinitionofaprincipalcontractor.InordertooperateRCT,theprincipalcontractormust register for RCT purposes and through the RevenueOnlineSystem(“ROS”)registerallrelevantcontractsunderwhichithasengagedsub-contractorsinvolvedintheprojectandnotifyRevenueinadvanceofanypaymentstobemadeto the sub-contractors. This systemallows theRevenue torequiresumsofmoneytobewithheldfortaxpurposesfromthesub-contractoreachtimetheprincipalcontractormakesapaymentandthewithheldamountisrequiredtobepaidtotheRevenueby theprincipalcontractor. Revenue imposesheavy penalties for those who do not register and fail tooperateRCT. The purpose of the system is to ensure thatsub-contractors satisfy their tax obligations on time as thewithheldamountsmaybeoffsetbytheRevenueonbehalfofthesub-contractoragainstanytaxliabilitiestheymayhave.ItshouldalsobenotedthatwhereRCTapplies,itcanaltertheapplicationofVATtotherelevantcontractaswell.

(d) Health and Safety The following key pieces of health and safety legislation

affecttheconstructionindustryinthisjurisdiction:■ Safety,HealthandWelfareatWorkAct2005.■ Safety, Health and Welfare at Work (Construction)

Regulations2013.■ Safety,HealthandWelfareatWork(Asbestos)Regulations

2006to2010andtheSafety,HealthandWelfareatWork(Carcinogens)(Amendment)Regulations2015.

■ Safety,HealthandWelfareatWork(GeneralApplication)Regulations2007to2012.

Theaboveregulationssetoutobligationsanddutiestoensureaminimumstandardofhealthandsafety in theworkplace,and specify certain equipment and procedures tominimiserisk. Failure to discharge the statutory duties within thelegislation can have huge implications ranging from a €3millionfineand/oruptotwoyears’imprisonment.

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Liquidateddamagesarecommonlyseeninconstructioncontracts.Theemployerandthecontractorarepermittedtoagreeacontractualrateofdamageswhichwillcoverparticularbreaches,e.g.,damagesforlatecompletion.Liquidateddamagescanbeexpressedinasinglesumbutitismorecommontospecifyadailyorweeklyrate.Thecontractual rateof thosedamagesmustbeagenuinepre-estimateoftheemployer’slossatthetimeofenteringintothecontract.Itisinvalidandunenforceableifwhatitstipulatesisapenalty.Whetheraprovisionisapenaltywillbeamatterforthecourtstointerpretaccordingtothecircumstancesexistingatthetimethecontractwasmade.Ifacourtfindsthataclauseinacontractisapenaltyclause,itwillnotenforceit.InDurkan Homes v Minister for the Environment Heritage & Local Government[2012]IEHC265,itwasheldthataclauseprescribingweeklyratesofliquidateddamagesamountedtoapenaltyastheaccumulatedfiguresfarexceededthevalueofthepropertywhichwasaffectedbythefinancialcrash.



Unlessthereisanexpressprovisioninthecontract,variationsarenotallowedinconstructioncontractsundercommonlaw.Clause13intheRIAIcontractgivestheemployertherighttoordervariationsthroughthearchitect.Mostconstructioncontractsinthisjurisdictioncontaindetailedvariationprovisions. Thearchitect isresponsibleforvaluingthevariationsandrecordingthemwithoutunduedelay.The contractor is then entitled to prompt payment for variationsproperly authorised and carried out. If a proposed variation isoutsidethescopeofwhatwasanticipatedbythecontractorandtheemployer,itmayfalloutsidethescopeofthepoweroftheemployertoorderavariation.


Theemployer isnot entitled toomitworkandhave itperformedby another contractor, unless there is an express power in thecontract. If work is omitted, the contractor would usuallyhave to be compensatedon aquantum meruit or “asmuch as hedeserves” basis. The contractorwould have to provide evidenceof theexpensesincurredasaresultof theomissionandmayalsobeawardedcompensationforthelossofanticipatedprofitandforunder-productiveuseofoverheadsasaresultofreducedworkload.


Inadditiontotheexpresstermsofaconstructioncontract,theremaybeotherterms,knownas“impliedterms”,whichformpartofthe

Ingeneral,aROTclausewillbeeffectiveinreservingtitletogoodsalreadysupplied toanemployerso longas thegoodsexist in thesamestate inwhich theyweresuppliedandso longas thegoodshave not either beenmixedwith other similar goods, transmutedintoamanufacturedproductor affixed to realproperty (i.e., landorbuildings).TheRIAIformofcontractprovidesthattitletogoodswillpassonpayment.AseachROTclausewillbeconsideredandinterpretedonitsownterms,itisimportanttonotethespecificcircumstancesaroundeachcontractualarrangementareimportantineachindividualcase.



Construction contracts in Ireland are commonly supervised andadministered by either an architect/engineer, or another contractadministrator(appointedseparatelybyanemployer).Examplesofcircumstancesofwheresuchacontractadministratorhasadutytoactimpartiallyareasfollows:(a) In the event of dispute: if the contractor is disputing an

architect/engineer’sdecisionfor,e.g.,puttingextraexpensesonthecontractor,thenthearchitect/engineermustdecideonthemeritsofthecontractor’sclaim,andinsodoingmustactfairlyandimpartiallybetweentheparties.

(b) Paymentandissueofcertificates:thearchitect/engineermustact impartially when deciding howmuch the contractor isentitledtoreceivebywayofpayment.Theemployermustnot interfere with the architect/engineer’s role of issuingcertificates.

(c) Extensions of time for completion: the contractor willnormallylookforanextensionwhenheisdelayedduetoacausewhichhebelievesentitleshimtoanextensionoftimeunderthecontract.Indecidingwhetherthecauseofthedelaywassuchastoentitlethecontractortoanextensionoftime,thearchitect/engineermustactimpartially.


TheConstructionContractsAct2013(“CCA”),section3,renders“ineffective”so-called“paywhenpaid”clausesexceptinthelimitedcircumstances provided for under theCCA such as, for example,whereapartytoaconstructioncontractisineitherabankruptcyoraninsolvencyprocess(asappropriate).

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Inaconstructioncontext, the termfloat isgenerallyused to referto the unallocated time between the finish of the last plannedactivityunderaconstructioncontractandthedateforcompletion.At common law, neither the contractor nor the employer “own”thefloat in the absenceof express agreement to the contrary. Inpractice,thequestion“who‘owns’thefloat?”tendstobedecidedbyexaminingwhetherornotthecontractorhasallowedmoretimeinitsprogrammefortheseriesofcontractactivitiesthatislongerthantheseseriesofactivitieswill,infact,taketocomplete.Ifthecontractorhasdonesoandiftheemployerwishestotakeadvantageof this unallocated time (i.e., to propose a change/variation thatabsorbs the float), the question “who ‘owns’ the float?” becomesanexaminationofwhethertheemployerisentitledtomakeuseofthefloatatnocost.Conversely,thefloatcanalsobelookedatasaconsequence–i.e.,insofarasadelaytothecontractprogrammecauses disruption to the contractor, and consequential loss and/orexpenseresultinthe“float”beingabsorbed,canthecontractorclaimanentitlement toanextensionof timeand/orcompensationfortheconsequentialloss/expenseitactuallysuffersasaresultofthisdelay/disruption?The argument in favour of the employer “owning” the float is,at a high level, that the employer has paid for the contractor’sprogramme as the employer has agreed to pay the contractor’scostofprogramming theworksand thecontractor’scostsduringthe duration of the contract period and, therefore, the employerhas contracted to buy the float and so can use it as it wishes.Conversely,theargumentinfavourofthecontractor“owning”thefloatispremisedonthefactthatthecontractor’scostsandprofitforaprojectareinfluencedbytheefficiencywithwhichitsresourcesare applied and the duration over which they are planned to beexecuted.Irishlawonwho“owns”thefloatisnotclearwhereaconstructioncontract does not expressly provide for “ownership” of the float.Frequently, construction contracts in this jurisdiction do notspecificallydealwithownershipofthefloat.


Generally,thetimelimitsforbringingaclaimunderaconstructioncontract are governed by the Statute of LimitationsAct 1957 (the“Act”) (save to the extent that a construction contract specificallyprovidesotherwise).Ifthecontractissignedbyhand,thepartieshavesixyearstobringtheclaimfromthedateofaccrualoftheaction,andifthecontractisadeed,thepartieshave12years.Ifthepartiesarebringingaclaimintort,theyhavesixyearsfromthedateonwhichtheincidentoccurred.RecentcaselawinIrelandhasdiscussedtheissueofwhenthecauseofactionaccrues.InBrandley v Deane[2017](SC,Unreported),MrJusticeMcKechniesetoutthatthelimitationperiodrunsfromwhenthedamage(not thedefect)becomes“manifest”–i.e.,capableofbeingdiscoveredbyaplaintiff.Thisdecisionaffirmsthejudicialapproachwherebydefectiveworkandresultantdamagesaredistinguishedindetermininglimitationperiods.

contractalso.Impliedtermsmaycomefromoneormoresources,including: custom; Judges’ decisions; and statute law. There arenumerousstatuteswhichaffect terms inconstructioncontracts, inparticular, theSale ofGoods andSupply of ServicesActs 1893–1980, Construction Contracts Act 2013, consumer legislationand employment legislation. Some terms which can be impliedinto construction contracts include an impliedfitness for purposewarranty, duty to exercise reasonable skill and care, a warrantythatmaterialssuppliedwillbeofgoodandproperqualityandanobligationtocarryoutworkinagoodandworkmanlikemanner.


Concurrency describes an effect caused by at least two eventsoccurring at the same time, of which one is at the contractor’sriskandoneisattheemployer’srisk.Intheconstructioncontractcontext, concurrency is often used by the employer as a defencetoaclaimforcompensation. AclaimforcompensationbasedonconcurrentdelayinIrelandwillmostlikelybedetermined,atleastatfirst,byreferencetotheexpressextensionoftimeclauseintheconstructioncontract(ifany).ThedominantapproachtotheissueofconcurrentdelayinEnglandandWalesisthatthecontractorisentitledtoafullextensionoftimecausedbythetwoormoreevents,regardlessofthecontractor’sownfault.ThisapproachwassetoutinHenry Boot Construction (UK) Limited v Malmaison Hotel (Manchester) Limited [1999] 70ConLR32(“Malmaison”)whereitwascommongroundbetweenthepartiesthat: “...if there are two concurrent causes of delay, one of which

is a relevant event, and the other is not, then the contractor is entitled to an extension of time for the period of delay caused by the relevant event notwithstanding the concurrent effect of the other event.”

TheapproachinMalmaisonwasapprovedofmorerecentlyinthecase ofAdyard Abu Dhabi v SD Marine Services [2011] EWHC848(Comm)(“Adyard”).There,thealternativeapproachthat,insuchcircumstances,thecontractorisentitledonlytoareasonablyapportioned extension of time (as set out in the Scottish case ofCity Inn Limited v Shepherd Construction Limited [2010] BLR473(“City Inn”))wasdiscussed.InAdyard,however,Mr.JusticeAkenheadconfirmedthattheMalmaisonapproachwasthecorrectapproachtotakeinEnglishlawjurisdictions.TheIrishcourtsarecertainlylikelytohaveregardtothisdecision.Thegeneralruleinrelationtorecoveryofcosts,setoutin e Beers v MTDS Origin IT Services UK (2011)BCR274,isthatintheeventof concurrent delay the contractorwill normally be entitled to anextensionoftimebutnotentitledtorecovercosts.ThiswasaffirmedinWalter Lilly & Co Ltd v Mackay & Anor [2012] EWHC1772(TCC).ThepublicworkscontractspublishedbytheGovernmentContractsCommittee for Construction (“GCCC”) for use in all publicsectorconstructionprojectsexpresslyprovide that in theeventofconcurrentdelay,thecontractorwillnotbeentitledtoclaimforanycosts.

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There are a number of non-contractual rights to terminate aconstruction contract. The parties can terminate a contract ifthere are circumstances beyond the parties’ control making theperformance of the contract impossible (frustration). A contractcan also be terminated if a serious or repudiatory breach occurs.However, most of the standard-form construction contracts donotdependoncommon lawfor terminationpurposesandcontainterminationrightsforparties.Thepartiesusuallysetalistofevents,suchasbreach, force majeure, insolvencyornon-payment, underwhichthecontractmaybeterminated.Terminationforconveniencewordingcanbeinsertedintoacontractwhichallowsonepartytoend the contractwithout having to establish that some event hasoccurred,butsuchclausesaredifficulttonegotiate.


Force majeureclausesexisttoexcludeliabilitywhereexceptional,unforeseeneventsbeyondaparty’scontrolpreventtheperformanceof its contractual obligations. Force majeure events within aconstruction contract generally include acts of God, earthquake,fire,floodorothernaturalphysicaldisasters,actsofwarandriot.As there is no doctrine of force majeure in Irish law, it is at thecontractualparties’discretionwhethertheywishtorelyuponforce majeureandcandosobyincludingaprovisionintheircontract.Force majeure may result in an automatic termination of thecontractorbyapartygivingnoticeofthetermination.However,therelevanteventmusthaveanadverseimpactuponperformanceofthecontractingpartyandcannotbeusedasanexcusetoendthecontract.Frustrationtakesplaceonlyafteracontracthasbeenenteredinto,andmeansthatthecontractceasestohaveeffectfromaparticulardateonwards. Assuch, itdischargesanotherwisevalidcontract.InNeville and Sons v Guardian Builders[1995]theSupremeCourtsaid that frustration arises whereby a supervening event occurswithoutthedefaultofeitherparty,andforwhichthecontractmakesno provision. The eventmust so significantly change the natureoftheoutstandingcontractualrightsandobligationsfromwhatthepartiescouldreasonablyhavecontemplated,soastomakeholdingthemtoitsstipulationsunjust.Itisimportanttonotethatfrustrationisforward-facing.Itwillnotdischargeexistingrightsandobligations,butwilldischargefutureobligationsunderthecontractinquestion.


Partiesareunabletoavailofabenefitofanycontractualrightiftheyarenotpartytothecontract.Thisisduetothedoctrineofprivityinthisjurisdictionwhichpreventsacontractfrombeingenforceable


Normally, the unforeseen ground conditions risk lies with thecontractor;however,itisimportantwhennegotiatingaconstructioncontract toensure thatrisksareplacedwith thepartywhoisbestabletomanagethem.TheRIAIformofcontractdoesnotincludeaclauseonunforeseenground conditions. It is not unusual for the parties to provide aclauseinascheduleofamendmentstotheRIAI,whichwouldallowthecontractoranextensionoftimeifparticularunforeseeableeventsoccur,suchasthepresenceofarchaeologicalremainsordiscoveryof utilities. However, if the contract is silent, the risk will passentirelyontothecontractor.LiketheRIAI,theJCTdoesnotgenerallyprovideforunforeseengroundconditions.In theGCCCformofCivilEngineeringContractused forPublicWorks,thereisanoptionforanemployertotakesomeriskregardingtheunforeseengroundconditions.Under FIDIC’s red and yellow books, the employer bears theriskofphysicalconditionswhichcouldnothavebeenreasonablyforeseeable by an experienced contractor at the date of tender(clause4.12).


Thecontractorisresponsibleforcompletingtheworksinaccordancewiththelocallawandregulationsandcarriestheriskinthecontractarisingfromachange in law, including inrelation to thecontractprice. If the contractor does notwant to carry the risk, hemustensurethatprovisionsareexpresslyincorporatedintothecontracttodealwiththisevent.


Underaconstructioncontract,thepartieshavetwoalternatives.Thecopyrightandownershipof thedesigncaneitherremainwith thecontractor,whograntsalicencetotheemployertousethedesigndocumentsfortheworks,orthecopyrightmaterialcanbeassignedto the employer upon execution of the contract. The copyrightdesignshouldnotbetransferredlightlyandrarelyis.


Most standard forms of construction contracts in this jurisdictionallow the contractor to suspend works if payment is not made.In addition, the Construction Contracts Act 2013 (the “CCA”)introduced a statutory right on the part of a contractor/sub-contractortosuspendworksunderaconstructioncontractfornon-payment.Significantly,ifworksaresuspendedincompliancewiththeCCAandthissuspensionaffectsacontractor’s/sub-contractor’sability to comply with the works programme, the CCA providesthesuspension’sdurationistobedisregardedwhencalculatingthecontractualtimelimittotheworksprogramme.

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(4) “The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matterof dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.”

LordHoffmanconcludeswithhisfifthprincipleonhowambiguitywithinaconstructioncontractshouldbeinterpreted:(5) “The ‘rule’ that words should be given their ‘natural and

ordinary meaning’.”


Termsofaconstructioncontractwhichcanbedeemedunenforceableare:a) liquidateddamageprovisions(wherethedamagesspecified

arenotagenuinepre-estimateoflossbutinsteadviewedasapenalty);

b) aclausewhichcreatesanindemnityagainstcriminalliability;c) aConstructionContractsAct2013renders ineffective“pay

whenpaid”provisions;andd) a clause seeking to circumvent the application of the

Construction Contracts Act 2013 will render the clauseunenforceableaccordingtosection12(2)oftheAct.


Adesignerhasobligationswhichareimpliedintothecontract.TheSaleofGoodsandSupplyofServicesAct1980implyanumberoftermswhichhaveanimpactontheextentofadesigner’sliability.Theseincludethatthedesignerhasthenecessaryskilltorendertheserviceandthattheserviceswillbesuppliedwithdueskill,careanddiligence.Itmustbenotedthattheseimpliedtermscanbenegatedthroughtheuseofexpresstermswithinthecontract.Adesignerwillnotusuallyhavetogiveanabsoluteguaranteeoftheirwork.Indesignandbuildcontracts,acontractorcanassumeresponsibilitythatworksarefitforpurposeunlessotherwiseexplicitlystatedinthecontract.Yetaconsultantisheldtoalessonerousstandardof“reasonable skill and care”,meaning that the contractor assumesgreaterliabilitythanthosetowhomtheyhavesubcontracted.



Mediation, conciliation, arbitration and litigation are the mostcommon methods of construction dispute resolution in thisjurisdiction. Contractual adjudication and expert determinationare also used. The Construction Contracts Act 2013 providesfor statutory adjudication of payment disputes arising underconstructioncontractsenteredintoafter25July2016.

infavourofor indeedagainstsomeonewhoisnotaparty to thatcontract.Inorderforathirdpartytoreceiveabenefit,theclaimedbenefitmustbeindependentorcollateraltothemaincontract.Thisis typically done through collateral warranties with third parties(e.g.,tenants,purchasers,funders).


Set-offasaremedyhasalegislativebasiswithinsection6(12)oftheConstructionContractsAct2013stating thatadecisionbyanadjudicator regarding payment disputes shall be binding, unlessotherwiseagreedby thepartiesandcanbe reliedbyanyof thembywayofdefence, set-offorotherwise inany legalproceedings.Thegeneralpositionunderbuildingcontractsisthatset-offagainstcertified sums will be allowed provided there are no specialprovisionsinthecontractwhichpreventorrestrictthispractice.InthecaseofMoohan and Another v S & R Motors Limited [2007]IEHC435,ClarkeJ.concludedthatset-offwasavailable.


Thepartieswillnormallyoweadutyofcareinbothtortandcontract.So,forexample,buildersofahousewillhaveadutyintorttotake“reasonablecare”toavoidreasonablyforeseeablelatentdefects.Aconcurrentdutyincontractwillbeowedbythebuilderarisingoutoftheircontractualobligationtoactwithskillandcare.


TheleadinginterpretationcaseintheUnitedKingdomisInvestors Compensation Scheme v West Bromwich Building Society [1998]1WLR 896. The Irish Supreme Court reaffirmed the InvestorsCompensationprinciplesintherecentcaseofMcMullan Brothers Limited v Mc Donagh[2015]IESC19.Lord Hoffmann in the Investors Compensation lists his fiveprinciplesinhowtodealwithambiguitywithinthecontract:(1) “Interpretation is the ascertainment of 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 in which they were at the time of the contract.”

Withinhissecondprinciple,heexpandsonhispreviousprinciple:(2) “Subject to the requirement that it should have been

reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.”

Hestressesinhisthirdprinciplethatwhenattemptingtounderstandthe context to the agreement, this process should not evolve intoan impermissible investigation of the subjective intentions of thepartiesinenteringintotheagreement:(3) “The law excludes from the admissible background the

previous negotiations of the parties and their declarations of subjective intent.”

LordHoffmann in his next principle acknowledges thatwithin acomplicated background, understanding the intention can haveminimumvalueinunderstandingthemeaningofthedocument:

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soughthadnoassetsinIrelandandnoreallikelihoodofhavingassetsinIreland(Yukos Capital S.A.R.L. v Oao Tomskneft Vnk Otkytoye Aktsionernoye Obshchestvo “Tomskneft” Vostochnaya Neftyanaya Kompania[2014]IEHC115,inwhichoneoftheauthorsactedforthesuccessfulrespondent).


In relation to court judgments given in EU Member States,Regulation(EU)No1215/2012(the“RecastBrusselsRegulation”)applies.TheRecastBrusselsRegulationappliestoproceedingsandjudgments in proceedings commenced on/after 10 January 2015.The2001BrusselsRegulation(Regulation(EC)44/2001)continuestoapplytojudgmentsinproceedingscommencedbefore10January2015.The Recast Brussels Regulation provides that a judgment giveninaMemberStateshallberecognisedintheotherMemberStateswithout any special procedures being required and is enforceablein otherMember Stateswithout any declaration of enforceabilitybeingrequired.EnforcementofjudgmentsfromIceland,NorwayandSwitzerlandisgovernedbytheLuganoConvention.Regulation (EC) No 805/2004 of the European Parliament andof the Council of 21 April 2004, which provides for EuropeanEnforcementOrdersforuncontestedclaims,appliestouncontestedclaimsincivilandcommercialmatters.WhereforeignstatesarenotMemberStatesoftheEUorcontractingpartiestotheLuganoConvention,therecognitionandenforcementof judgments fromsuch jurisdictions isgovernedby thecommonlawrulesofprivateinternationallaw.Toenforceajudgmentfroma foreign court at common law in Ireland, proceedings must becommencedbeforetheIrishcourtsbyeithercommencinganactionontheforeignjudgmentorcommencingfreshproceedingsontheoriginalcauseofaction.


Acourt action is commenced by issuing proceedings (usually bywayofasummons)intheappropriatecourt.Theappropriatecourtjurisdiction for the proceedings will depend on the value of theclaim.Incivilactionsincontract,theDistrictCourthasjurisdictiontoawarddamagesnotexceeding€15,000. TheCircuitCourthasjurisdiction to awarddamagesnot exceeding€75,000. TheHighCourthasoriginaljurisdictiontohearvirtuallyallmattersandwillgenerallyhearmattersthatexceedthemonetaryjurisdictionoftheCircuitCourt.Decisionsofthelowercourtscangenerallybeappealedtohighercourts, or questions regarding a point of law can be referred tohighercourts.DecisionsoftheHighCourtmaygenerallybeappealedtotheCourtofAppeal.TheCourtofAppealwasestablishedin2014.AdecisionoftheCourtofAppealmayonlybeappealedtotheSupremeCourtif:■ thedecisioninvolvesamatterofgeneralpublicimportance;

or■ in the interests of justice, it is necessary that there be an

appealtotheSupremeCourt.


The Construction ContractsAct 2013 provides that a party to aconstructioncontracthastherighttoreferapaymentdisputearisingunderthecontractforadjudication.Toexercisethisright,thepartymust serve a notice of intention to refer the payment dispute foradjudication.Thepartiesmaythenagreetoappointanadjudicatorwithinfivedays.Ifthepartiesareunabletoreachagreementwithinthat time, an applicationmaybemade for the appointmentof anadjudicatorfromthepanelestablishedbytheMinisterforBusiness,EnterpriseandInnovation.Once the adjudicator is appointed, the party who initiated theadjudication must refer the payment dispute to the adjudicatorwithinsevendaysbeginningwiththedayonwhichtheappointmentismade.Theadjudicatormustreachadecisionwithin28daysfromthedateofthereferral(orsuchlongerperiodasmaybeagreedbytheparties).Withtheconsentofthereferringparty,theadjudicatormayextendthis28-dayperiodbyamaximumof14days.Thedecisionof theadjudicatorbinds thepartiesuntil thedisputeisfinallysettledbythepartiesoradifferentdecisionisreachedonthereferenceofthepaymentdisputetoarbitrationorinproceedingsinitiatedinacourtinrelationtotheadjudicator’sdecision.


Arbitrationclausesareoftenincludedinconstructioncontracts.TheArbitrationAct2010appliestoallarbitrationscommencedafter9June2010andtheUNCITRALModelLawhastheforceoflawinIreland(subject to theArbitrationAct). TheIrishcourtsareverysupportiveofarbitration.While court challenges to an award are possible, the grounds forchallengesareverylimited.Thepartiescanagreeontheidentityofthearbitratororonanumberofarbitratorstoformatribunal. Constructioncontractsgenerallyprovide for a default appointing mechanism, which typicallyinvolvesanapplicationbyeitherpartytothepresidentofanamedprofessionalbody(forexample,EngineersIreland)requestingthatheorsheappointanarbitrator.Article19oftheModelLawconfirmsthatthepartiesareentitledtosettheirownprocedures.Ifnorulesarechosen,andthepartiescannot subsequently agree upon how the procedure is to beconducted,thenthetribunalcansettheprocedures.


IrelandisasignatorytotheNewYorkConventionontheRecognitionandEnforcementofForeignArbitralAwards,whichhastheforceoflawinIreland(subjecttotheArbitrationAct2010).TheIrishcourtshaveshownasupportiveapproachtotheenforcementofarbitralawards.Enforcementisnotgenerallyproblematic,unlessthereisreasontodenyenforcement(thegroundsforwhicharesetoutatArticle36oftheModelLaw).Ina leadingcase, theHighCourtheldthat theIrishcourtswouldnotexercisejurisdictionoveranapplicationfortheenforcementofanarbitralawardwhere thepartyagainstwhomenforcementwas

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However, if the case is suitable for admission to the commercialdivisionoftheHighCourt(the“CommercialCourt”),thistimelinemay be reduced. The Commercial Court has extensive casemanagement powers and can deal with significant commercialdisputes more quickly than the ordinary courts. To be admittedto the Commercial Court, the proceedings must be “commercialproceedings”(forexample,adisputerelatingtoabusinessdocument,businesscontractorbusinessdispute)and,ingeneral,musthaveavalueofover€1million. Whetheracasewillbeadmitted to theCommercialCourtisamatterforthediscretionoftheCommercialCourtjudge.The length of time it may take to obtain a decision of the finalcourt of appealwill depend on the complexity of thematter, thejurisdictionoftheappealcourt,aswellasotherfactors.Currently,theCourtofAppealhasabacklogofappeals,withappealsinthatcourttakingoverayeartobeheard.

A“leapfrog”appealmaybemadedirectlyfromtheHighCourttotheSupremeCourt if thecaseinvolvesamatterofgeneralpublicimportanceor:■ there is some other reason requiring that the interests of

justiceismetbyanappealtotheSupremeCourt;and■ theremustbeexceptionalcircumstanceswarrantingadirect

appealtotheSupremeCourt.Onceproceedingsareissued,thepartieswillexchangedocumentssettingouttheirrespectiveclaimsand/ordefences.Thepartiesmayalsoberequiredtodiscloserelevantdocumentstoeachother.Thisprocess is known as discovery. The parties may also exchangewitness statements and expert reports in advance of the hearing.Oral evidencewillusuallybegivenby relevant factualwitnessesandexpertwitnessesatthehearingofthecase.Thelengthoftimeitmaytaketoobtainadecisionofthecourtoffirstjurisdictionwilldependontheappropriatecourtjurisdiction,aswellasanumberofotherfactors.Itmaytakemanymonthsorevenyearstoobtainadecisionofthecourtoffirstjurisdiction.

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Matheson’s primary focus is on serving the Irish legal needs of internationally focused companies and financial institutions doing business in and from Ireland. Our clients include the majority of the Fortune 100 companies. We also advise seven of the top 10 global technology brands and over half of the world’s 50 largest banks. We are headquartered in Dublin and also have offices in London, New York and Palo Alto. More than 600 people work across our four offices, including 80 partners and tax principals and over 350 legal and tax professionals.

Our strength in depth is spread across more than 20 distinct practice areas, including asset management and investment funds, aviation and asset finance, banking and financial services, commercial litigation and dispute resolution, corporate, healthcare, insolvency and corporate restructuring, insurance, intellectual property, international business, structured finance and tax. This broad spread of expertise and legal know-how allows us to provide best-in-class advice to clients on all facets of the law.

Rhona Henry is a partner and head of Matheson’s Construction and Engineering Group.

Rhona Henry is distinguished by her industry knowledge and extensive market experience which includes advising on the build-out of capital projects; construction/project finance; public-private partnership construction and construction regulation.

Her experience in the area of construction/project contracts encompasses the entire life cycle of strategic commercial arrangements including:

■ Major international construction projects including pharmaceutical plants, infrastructure projects, utilities, data centres, power and process plants, corporate headquarters and commercial offices.

■ Bespoke project agreements/construction contracts (including the RIAI, FIDIC, MF /1 (Revision 4 and 5), NEC and JCT contracts).

■ EPC contracts.

■ Professional/design team terms of engagement.

■ Project/construction contract security including bonds, warranties and guarantees.

■ Procurement strategy route (design and build, management contracting, construction management, EPC).

■ Project/construction health and safety issues/project supervisor appointments.

■ Collateral warranties/direct agreements.

■ Facilities management/services agreements.

■ Interface agreements.

Rhona HenryMatheson70 Sir John Rogerson’s QuayDublin 2Ireland

Tel: +353 1 232 2000Fax: +353 1 232 3333Email: [email protected]: www.matheson.com

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Chapter 15

Kanagawa International Law Office

Hiroyuki Sakazaki

Hajime Kanagawa

Japan

to the contract lack legal capacity (kenri nouryoku) to enter intosuchcontractor individualpartiesof thecontracthavenomentalcapacity(ishi nouryoku)orcapacitytoact(koui nouryoku);(iii)ifeitherorbothpartiesthatsignthecontracthavenoactualintentiontovalidatethecontract;or(iv)ifeitherpartyismisrepresentedoraffectedbyduress(kyohaku)andtheirmanifestationsofintentionsareconsideredtohavedefects.


Asamatterofpractice,LOIsarerarelyusedinJapaninconnectionwith the executionof construction contracts. However,LOIs arecommonly used in other contexts such asM&A, so it is not anunfamiliar concept. Whether or not the LOI is binding or non-bindingmaybespecifiedintheagreement.


Bylaw,duringtheconstructionperiod,thepartiestoconstructioncontracts are only required to purchase (i) insurance that coversemployees of contractors, and (ii) insurance for defects in newlyconstructedbuildings if the contractor hasnot deposited funds tocoversuchdefects.Additionally,underthePAMF,contractorsmusthavefireinsurance,constructioninsuranceandanyotherinsurancestipulatedunderthedesigndocuments.Thisinsurancemustcoverthecompletedportionofconstructionworks,buildingmaterialsandbuildingfacilityequipmentbroughtontotheconstructionsite.


Under the Construction Business Act, construction contractsmust include the (i) scope of work, (ii) price for the work, (iii)



Japanhasseveraltypesoftemplatecontractsthathavebeencreatedbyindustryassociationsandarewidelyusedastemplates.Themostwidelyusedtemplatesare(i)theCentralCouncilforConstructionBusiness (chuuou kensetsu gyou shingi kai)model contracts (the“CCMC”),usedforprivatesmall-scaleandlarge-scaleconstructioncontracts and sub-contracting contracts, and (ii) a model formdrafted by thePrivateAssociations ofArchitects andContractors(the“PAMF”).ThePAMFisbasedontheCCMCandisthemostfrequentlyusedmodel form forprivate constructionprojects as amatterofpractice.For design and supervision services, there is amodel design andsupervision agreement drafted by the Private Associations ofArchitects and Contractors (the “PAMDSA”). Further, there aredesignandconstructionagreementsdraftedbytheJapanFederationofConstructionContractorsandmodeldomesticplantconstructioncontractspublishedbytheEngineeringAdvancementAssociation.


Under the Civil Code, in principle, contracts become valid andbinding after offer and acceptance, and no other actions arerequired, except for certain types of agreements that are requiredto be in writing (i.e. guarantee agreements/arbitration clauses).However,contractscanbenullandvoidorsubject toexerciseofthe rights to revoke the contract if: (i) the terms of the contractviolatespublicpolicy(koujyo ryouzoku); (ii) thecorporateparties


Japa

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dependsonwhohassuppliedtheconstructionmaterials.Generally,worksthathavebeenbuiltwithmaterialssuppliedbythecontractorbelongtothecontractoruntilithandsoversuchconstructionworkto the employer, unless otherwise agreed under the constructionagreements.Similarly,worksbuiltusingmaterialssuppliedbytheemployergenerallybelongtotheemployerfromthebeginningofconstruction.Ifanemployersuppliesthematerials,acontactormayuseastatutorylientoretainthecompletedconstructionworkuntiltheconstructionfeehasbeenfullypaid.If a construction project expires before the works have beencompleted, the contractor generally may not request payment oftheconstructionfeeunlessotherwiseagreedundertheconstructioncontracts. However, if such completed portion is profitable tothe employer, the contractor may attempt to claim a part of theconstructionfeeinproportiontothecompletedportion.



Insomeconstructioncontracts, theemployerhiresanarchitect tosuperviseconstructionworkasasupervisor,butthisisnottypicalinJapan.Asupervisorhiredbyanemployerisconsideredtohaveadutyofcaretotheemployeranditisnotgenerallyexpectedfortheemployertoactimpartiallybetweentheemployerandthecontractor.


Theoretically, such a provision could be included if both partiesagree,providedthat,undertheConstructionBusinessAct,themaincontractorinasub-contractorcontractpaystheconstructionfeetothesub-contractorasearlyaspossible,butwithinonemonthfromthemaincontractor’sreceiptofitsconstructionfee.Furthermore,amaincontractorengaginginsub-contractorcontractsofacertainsizegenerallyhas theobligationtopaytheconstructionfee to itssub-contractor within 50 days of such sub-contractor’s offer todelivertheconstructionwork.


Thepartiesmayagreetoliquidateddamages,whichneednotreflectthe actualor reasonably estimated amountofdamage. However,althoughthebasicruleisthatthecourtmaynotreducetheamount

commencement and completion date, (iv) advance payment, (v)variation,(vi)force majeure,(vii)priceadjustment,(viii)damagestothirdparties,(ix)useofmaterialsandequipment,(x)inspectionanddelivery,(xi)termsofpayment,(xii)defectliability,(xiii)delayanddamages,and(xiv)disputeresolution.Therearenostatutoryrequirements for construction contracts in terms of (a) labourcontracts that contractors enter into with employees who engagein constructionworks at the construction site, and (b) safety andhygiene.However,underthePAMF,thecontractormustdetailtheamountofexpensesforsocialwelfare includinghealth insurance,employee pension insurance and employment insurance as abreakdownoftheconstructionfee.


Under the Civil Code, in principle, an employer must pay theconstruction fee to the contractor in exchange for delivery orcompletionoftheworks,unlessotherwiseagreed.Therefore,ifthecontractor fails to complete or deliver the constructionworks, theemployerhastherighttoretainallorpartofthepayment.Inaddition,theemployeralsohastherighttorefuseallorpartofpaymentoftheconstructionfeeuntilcompletionoftherepairorthecompensationifthereareanydefectsinthecompletedworks,dependingonthescaleofthedefectsandsubjecttoafairandequitablenegotiationprocess.However, the main contractor in a sub-contractor contract mustgenerallyconfirmcompletionofconstructionby thesub-contractorwithin20daysfromthenoticeofcompletionandimmediatelyacceptdelivery of the constructionwork if the sub-contractor requests it.Additionally,amaincontractorengaginginsub-contractorcontractsofacertainsizegenerallyhastheobligationtopaytheconstructionfee to its sub-contractorwithin50days fromsuchsub-contractor’soffer to deliver the construction work. Under the PAMF, theemployermustmakeadvancepaymentofthefeebeforecompletionofconstructionworksifthepartiestotheconstructioncontractshaveagreedtopaytheconstructionfeeinproportiontothepercentageoftheconstructionworksthathavebeencompleted.


Performancebonds are often used in public constructionprojectsthat requiredepositsorothercollateral toensure theperformanceof the contractor under theAccountingAct (kaikei hou) orLocalGovernment Act (chihou jichi hou), but such arrangements areuncommon for private construction projects, other than overseasprojects. Performance bonds can take various forms, such asdeposits, guarantees, or insurance, depending on the contractualarrangement,and thereareno lawsor regulations thatprohibitorrestricttheconditionsofsuchperformancebonds.


Under the Civil Code, ownership of construction works largely

Kanagawa International Law Office Japan


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by the employer due to any delay attributable to the contractor.However,foranydelayattributabletotheemployer,thecontractoris not liable for any delay in construction and, depending on thesituation,mayhaveaclaimagainsttheemployerforreimbursementofcostorexpensesthathaveincreasedduetothedelay.UnderArticle20ofthePAMF,itisclearlyprovidedthecontractormay claim (i) an extension of the construction period, and (ii)reimbursementforcostsandexpensesthathaveincreasedduetothedelayattributabletotheemployer.If a delay is caused by events that are attributable to both thecontactorandtheemployer,itislikelythateither(i)thedelaywillbesolelyattributabletothepartythatcontributedmuchmoretothedelaythantheotherparty,or(ii) theamountofcompensationforthedamagethateachpartycanclaimfromtheotherwillbeadjustedbasedontherelativefaultoftheparties.


Theconceptof“float”isnotcommonincurrentJapanesepractice.However, in theory, if a “float”means a reservedperiod that cancover possible delay of the contractor, and then if the employercausesadelaysolelyattributabletoitthatusesupthe“float”,andthe contractor has a delay that should have been covered by the“float”period,thentherewouldhavebeennodelayintheoverallconstructionperiodbut for thedelayattributable to theemployer.As a result, the contractor would not be liable to the employerandunderArticle20underthePAMF,thecontractormaydemandextension of the construction period and compensation for thedamagethathasincurredduetothedelaytotheemployer.


UndertheCivilCode,claimsinconnectionwithdesign,constructionandsupervisingconstructionmustbemadewithinthreeyearsfromthetimeofcompletionofthedesignorconstructionwork(ortheduedateoftheconstructionchargeifagreedbytheparties).Inaddition,undertheCivilCodeandtheCommercialCode,otherthantheitemssubjecttoaspecificstatuteoflimitationperiod(jyoseki kikan)(i.e.claimsfordefectliabilityasdiscussedbelow),thegeneralstatuteoflimitation period (shoumetsu jikou) for claims under constructioncontractsis(i)fiveyears,ifeitherpartyisacorporationoranyotherlegal entity, or (ii) 10years, if bothparties are individuals. Thisperiodgenerallystartsfromthetimewhentheclaimholderbecomesfreefromlegalobstaclestoexercisesuchclaim.Thespecificstatuteof limitation period (jyoseki kikan) for claims against contractorsfor defect liability that the employer acquires in connectionwithconstructionworkis(i)10yearsincaseofbuildingsoranyotherconstructionsthataremadeofstone,soil,bricks,concretes,metalsoranyothermaterialssimilartothem,and(ii)fiveyearsincaseofbuildingsoranyotherconstructionsthataremadeofmaterialsotherthanthosementionedin(i)above,andstartsfromthedeliveryorcompletionoftheconstructionwork.


Exceptintheexceptionalcasewherethefairandequitableprinciple

ofcompensationforanydamageincurredduetobreachofcontractonce such amount has been agreed under the contract (underArticle424oftheCivilCode),thereisanexceptioniftheamountisunusuallyexcessiveorotherwiseviolatespublicpolicy(koujyo ryouzoku),sothereissomelimittotheamountsthatwillactuallyberecognisedbythecourts.



UndertheCivilCode,whenthescopeofconstructionworkthathasbeenagreedundertheconstructioncontractsneedstobechanged,bothpartiestheretomustagreewithsuchchange,unlessotherwiseagreedintheconstructioncontracts.UnderParagraph1ofArticle28of thePAMF, theemployerhas the right toaddorchange thescopeofconstructionworkwithout theconsentof thecontractor,but the employermust accept the change in the construction feeandcompensate for thedamage incurredby thecontractordue tosuchadditionorchangeinscope.However,underArticle28ofthePAMF,thecontractormustobtaintheemployer’sconsenttochangethescopeofconstructionworkandanychangeintheconstructionfeeinevitablyresultingfromsuchchangeofscope.


Ifomissionofworkfromthecontractcanberegardedasachangeinthescopeofwork,itmaybesubjecttotheprocessasdiscussedinthepreviousquestion.Also,anyprocessthathasbeenexcludedfromthescopeofworkmaybecompletedbytheemployeroranythirdpartiesotherthanthecontractor,becausethelawandthemodelconstructioncontractsarebasicallysilentonthisissue.However,underArticle 3 of the PAMF, if any processwithin the scope ofwork relates to an excluded process, the employer is required tocoordinate the entire process and the contractor is required tocooperatewithothercontractorsthatcarryouttheexcludedprocessinaccordancewithsuchcoordination.


The provisions in the contracts should be reasonably interpretedbasedonthepurposesoftheparties,thecircumstancestoenterintothe contracts, customs, and transaction conventions. Therefore,implied terms may be considered when interpreting contractualprovisions depending on the situation. However, if the contractcontainsanentireagreementclause,thecourtmightnotallowtheparties to change or supplement the contractual provisions usingoutsideevidenceandforcethepartiestoonlyrelyonthelanguageofthecontract.


Under theCivilCode, in general, the contractor is liable for anydelayinconstructionandrequiredtocompensatedamagesincurred



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UndertheCivilCode,ingeneral,apartymayterminateaconstructioncontractiftheotherpartyfailstoperformitsmaterialobligations.After the work is completed, the employer may terminate thecontractifthereisadefectintheobjectoftheconstructioncontractandthepurposeofthecontractcannotbeaccomplishedduetosuchdefect,butiftheobjectoftheconstructioncontractisabuilding,thecontractcannotbeterminatedandsuchdefectcanonlyberesolvedbyrepairorcompensationfordamages.Theseconditionsmaybechanged by contractual agreement. Furthermore, under theCivilCode,anemployercanterminateaconstructioncontractbeforetheworkhasbeencompletedbythecontractor,buttheemployerwillneedtocompensatethecontractorforanydamagesthatariseduetothe termination. Under theCivilCode, thepartiesmayterminatethecontractontheabovegroundsevenifthisisnotexpresslysetoutintheconstructioncontract,unlessthepartieshavespecificallyrelinquishedsuchrightsinthecontract.AccordingtoParagraph2ofArticle31ofthePAMF,theemployermayterminateaconstructioncontractbysendingawrittennoticetothecontractorforanyofthefollowingreasons:(1) the contractor does not start construction work after the

startingdate,withoutanyjustifiablereason;(2) the construction work is significantly behind schedule

without any justifiable reason, and it is unlikely that thecontractorwouldcompletetheconstructionworkwithintheconstruction period orwithin a reasonable period after theconstructionperiod;

(3) the contractor breaches Article 5 (prohibition of blanketsubcontracting and blanket delegation) or Paragraph 1 ofArticle17(repairduetoconstructionworknotfollowingthedesigndocument)ofthePAMF;

(4) thecontractorbreachesthecontract(inawayotherthanin(1) to(3)above)andthepurposeof thecontractcannotbeaccomplishedduetosuchbreach;

(5) theconstructionlicenceofthecontractoriscancelledorloseseffect;

(6) itisrecognisedthatthecontractorisindangerofbecomingunabletocontinuetheconstructionworkduetoreasonssuchassuspendingitspayments(e.g.anynoteorchequeissuedbythecontractorisdishonoured);

(7) thecontractorproposesterminationofthisagreementwithoutanyreasonthatfallsunderParagraph4ofArticle32((1)to(3)ofthelistbelow)ofthePAMF;or

(8) the contractor or its members have relation to organisedcrimegroups,etc.

Furthermore,accordingtoParagraph1ofArticle31ofthePAMF,theemployermayterminatetheconstructioncontractasnecessarybysendingawrittennoticetothecontractor(theemployerwillneedto compensate the contractor for any damages arising due to thetermination).According toParagraphs4 and5ofArticle 32of thePAMF, thecontractor may terminate the construction contract by sending awrittennoticetotheemployerincaseanyofthefollowingoccur:(1) theperiodofdelayorsuspension(pursuanttoParagraph1of

Article31orParagraph1ofArticle32ofthePAMF)lastsforaquarterormoreoftheconstructionperiodortwomonthsormore;

(2) the construction cost is decreased by two thirds or morebecausetheemployersignificantlydecreasedtheconstructionwork;

is applied and unless otherwise agreed under the constructioncontract,incaseofafixedamountcontract,thecontractorbasicallybearstheriskofunforeseengroundconditions.Ontheotherhand,underArticle16ofthePAMF,thepartiestoconstructioncontractsmaynegotiateanddiscusschangesinconstructionfeesbaseduponunpredictableeventsdetrimentaltotheconstructionworkcausedbyunforeseengroundconditions.


Exceptintheexceptionalcasewherethefairandequitableprincipleis applied and unless otherwise agreed under the constructioncontract,incaseoffixedamountcontracts,thecontractorbasicallybearstheriskofchangesinlaws.Inpractice,underArticle29ofthePAMF,thecontractorisallowedtochangetheconstructionfeeiftheamountbecomesclearlyinappropriateasaresultofchangesinapplicablelaws,whichmayenablethecontractortotransfertheriskofachangeinlawtotheemployertosomeextent.


Theintellectualpropertyinrelationtothedesignandoperationofthe property is usually owned by the creator of such intellectualproperty, unless otherwise contractually agreed. The intellectualproperty rights of design documents and buildings (insofar astheyhaveacreativedesign)arecopyrightandmoral rights. Theintellectualpropertyrightsthatmayoccurinrelationtoconstructionmaterials, building equipment and methods of construction arepatent rights, utility model rights, design rights and trademarkrights,whichareusuallyownedbytheinventor.


UndertheCivilCode,acontractorisnotentitledtosuspendworkunlessagreedunderthecontract.UnderArticle32ofthePAMF,acontractormaysuspendworkinthefollowingsituations:(1) advance payment or partial payment by the employer is

overdue;(2) the employer, unreasonably, does not cooperate with the

contractor to resolve doubts about conditions related todesignandconstruction;

(3) the employer cannot prepare the construction site for thecontractor to use, or the contractor cannot perform due toforce majeure,etc.;or

(4) theconstructionwasextraordinarilydelayedduetoreasonsattributabletotheemployerotherthantheabove.

Upontheoccurrenceofanyoftheseconditions,thecontractormustsend a written notice demanding cure of such situation within areasonableperiodandcanonlysuspendworkifsuchsituationisnotcuredbytheemployerwithinsuchreasonableperiod.Also,underArticle32ofthePAMF,acontractormaysuspendworkbysendingwrittennoticetotheemployerifitisrecognisedthattheemployermaylackcredibilitytopaytheconstructionpriceduetoreasonssuchastheemployersuspendingitspayments.Similarly,incaselaw,alowercourthasapprovedsuspensionofworkonthegroundthatthecontractorfearednon-paymentoftheconstructioncostbytheemployer(TokyoDistCt.Judgmentof29August1997,1634HanreiJiho99).



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P1 owes to P2 due to a construction contract or any other cause(exceptforobligationsarisingfromtortiousacts)againstobligationsofthesamesumwhichP2owestoP1duetoaconstructioncontractoranyothercause,aslongastherequirementsforset-off(e.g.theobligationwhichP2owestoP1isdue,etc.)aresatisfied.ThereisnoprovisioninthePAMFlimitingtherightsofset-off.


There is no express provision in relation to a duty of care in the“contractsforwork”(ukeoi)sectionundertheCivilCode.UndertheCivilCode,acontractorowesadutytotheemployertocompleteitsworkandtheemployerowesadutytothecontractortopaytheconstruction costs for the completed work. However, there is aprecedentwherethecourtapprovedthatthecontractor,asanexpert,owes a duty to research the ordered content and owes a duty toprovideinformation(includinggivingadviceandexplanation)totheemployerasasupplementarydutybasedonthe“principleofgoodfaith” (shingi-soku) (NagoyaDist Ct, Judgment of 15 September2006,1243HanreiTimes145)andtheremaybepossibilitieswherethecontractorowesacertaindutyofcarebeforethecompletionofthework.


Thereisnoparticularrulethatwillbeapplicablewhenthetermsofaconstructioncontractareambiguous(e.g.contra proferentem).Asmentionedinquestion3.3,thetermsofacontractareinterpretedbyconsidering(a)thepurposeoftheparties,(b)thecircumstancestoenterintosuchcontract,(c)customs,and(d)transactionconventions,andinsomecircumstancesmaybeinterpretedbysituationsoutsideofthecontractandnotlimitedtothetermsofthecontract.


In general, construction contracts are executed to bind the otherparty tobeardutieswhichareenforceable. Therefore,except forcaseswheresuchdutiesarevoidduetoviolationof“publicorder”(koujo ryouzoku),orthereisacauseforcancellation,suchcontractsareenforceable.


Accordingtocaselaw,inrelationtodesignandsupervisionduties,designersare said tobearanadvancedandbroaddutyofcareasfor safety of buildings (Sup.Ct., Judgment of 6 July 2007, 1984HanreiJiho34).However,suchdutyofcaredoesnotnecessarilymeanabsoluteorunlimitedobligation.AccordingtothePAMDSA,therearenoclauseswhichindemnifyormitigatetheobligationofthedesignerinrelationtothedeliverables,andontheotherhand,therearenoclauseswhich increase theobligationof thedesignercomparedwiththegeneralobligationfornon-performance.

(3) the employer breached the contract and the purpose of thecontractcannotbeaccomplishedduetosuchbreach;

(4) theemployeroritsmembershaverelationtoorganisedcrimegroups,etc.;or

(5) it is recognised that the employer lacks credibility to paytheconstructionpriceduetoreasonssuchassuspendingitspayments(e.g.anynoteorchequeissuedbytheemployerisdishonoured).


Under the Civil Code, the concept of force majeure is accepted,and if a party defaults due to force majeure or any other reasonnotattributabletotheparties,suchpartywillbereleasedfromtheperformanceofsuchobligation indefault (except foradefaultofmonetaryobligations). UndertheCivilCode,thereisnoconceptthatcompletelymatchesfrustration,but(i)acontractwillterminateif aperformanceofanobligationbecomes impossible toperformdue to reasons that are not attributable to the parties, and (ii)partiesmayreviseorterminateacontractif(a)amajorchangeofcircumstances(objectivecircumstances)thatwasunforeseeableatthetimeofthesigningdateoccurs,(b)suchmajorchangecannotbeattributabletotheparties,and(c)forcingapartytoperformitsobligations under the original contract is remarkably unfair andagainst the “principle of good faith” (shingi-soku) (“the principleof circumstantial change” (jijou henkou no gensoku)). However,it is very unlikely that “the principle of circumstantial change”would be applicable to a casewhere a contract has only becomeuneconomicduetoachangeofeconomicsituations,unlessthereisaspecialprovisionunderthecontracttoreleasethepartiesfromtheirobligationsinsuchacase. AccordingtoArticle29ofthePAMF,thecontractormaymakeaclaimtochangetheconstructionpriceintheconstructioncontracttothefairvalueatthetimeoftheclaimiftheconstructionpricebecomesclearlyunsuitableduetoasuddenchangeofeconomicsituations.


Ingeneral, under theCivilCode, only the contractingparties areentitledtoclaimcontractrights,butiftheydesignateathirdpartyasabeneficiaryandsuchbeneficiaryhasexpresseditsintentiontoenjoy the benefit to the obligor, such beneficiarywill be entitledto claim the benefit made under the contract (such contract iscategorisedasa“contractforathird-partybeneficiary”(daisansha no tame ni suru keiyaku) under the Civil Code). In practice, a“contractforathird-partybeneficiary”(daisansha no tame ni suru keiyaku)isnotusedinconstructioncontractstobenefitthesecondorsubsequentownersofabuilding.


Under the Civil Code, unless otherwise provided by a specialagreementunderacontract,P1mayfreelyset-offobligationswhich



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Japanesecourtandthecourtmustissuesuchorder,unlessanyofthefollowingsituationsareapplicable:(1) thearbitrationagreement isnotvaliddue toa limitationof

capacitytoact(koui nouryoku)ofeitherparty;(2) the arbitration agreement is not valid due to reasons other

thanalimitationofcapacitytoact(koui nouryoku)underthelawsandordinancesdesignatedbythepartiesasapplicabletothearbitrationagreement(incasetherearenodesignatedlawsandordinances,thelawsandordinancesofthecountrywheretheplaceofarbitrationbelongstowillbeapplicable);

(3) eitherpartydidnotreceivetherequirednoticepursuanttothelawsandordinancesofthecountryoftheplaceofarbitration(ifthepartiesenteredintoanagreementwhichagreesonmattersconcerningprovisionsunrelated topublicorder in such lawsandordinances,saidagreementapplies)duringtheappointmentprocedureofthearbitratororthearbitrationprocedure;

(4) either party was unable to participate in the arbitrationprocedure;

(5) thearbitralawardcontainsadecisiononmattersbeyondthescopeofthearbitrationagreementorofthepetitionpresentedinthearbitrationprocedure;

(6) the composition of the arbitral tribunal or the arbitrationprocedure is in violation of the laws and ordinances of thecountryoftheplaceofarbitration(ifthepartieshavereachedanagreementonthemattersconcerningprovisionsunrelatedtopublicorderinsuchlawsandordinances,saidagreementapplies);

(7) according to the lawsandordinancesof thecountryof theplaceofarbitration(ifthelawsandordinancesapplicabletothe arbitration procedure are those of a country other thanthatoftheplaceofarbitration,saidothercountry’slawsandordinancesapply)thearbitralawardisnotfinalandbinding,orthearbitralawardhasbeensetasideoritseffecthasbeensuspendedbyajudicialbodyofthatcountry;

(8) the petition filed in the arbitration procedure is concernedwith a dispute whichmay not be subject to an arbitrationagreementpursuant to theprovisionsof Japanese lawsandordinances;or

(9) thecontentofthearbitralawardiscontrarytopublicpolicyinJapan.


Under the JapaneseCivilProcedureAct, a judgmentof a foreigncourt (“ForeignJudgment”)willbeupheld (i.e.becomevalid)bythecompetentJapanesecourtwithoutrequiringanyspecialactionwithinJapan,unlesssuchForeignJudgmentdoesnotsatisfyanyofthefollowingconditions.Also,undertheJapaneseCivilProcedureAct,apartywhowishestoenforceaForeignJudgmentcanapplyto the competent Japanese court for an execution judgment and,insuchcase, thecourtmust issueanexecution judgmentwithoutexamining the details of such Foreign Judgment, unless suchForeignJudgmentisnotfinalandbindingordoesnotsatisfyanyofthefollowingconditions:(1) the jurisdiction of the foreign court must be recognised

pursuanttoitslawsandordinances,orapplicabletreaties;(2) the losing partymust have been served (excluding service

by publication or any other service similar thereto) withthe requisite summons or order for the commencement oflitigation,orhasappearedwithoutbeingsoserved;

(3) the content of the judgment and the litigation proceedingsmustnotbecontrarytopublicpolicyinJapan;and

(4) amutualguaranteemustbeinplacebetweenJapanandthecountrywheretheForeignJudgmentisrendered.



In general, parties who cannot resolve a dispute by consultationwillusecourtproceduresoralternativedisputeresolution(“ADR”).According toArticle 34 of the PAMF, if a dispute related to aconstructioncontractarises,thepartieswillfirstrequestathirdpartyappointedbybothpartiestoresolvethedisputeorresolvethedisputeby mediation or conciliation through the “Construction DisputeCommission”(kensetsu koji funsou shinsakai)(the“CDC”),whichis anADR body established based on the Construction BusinessActthatresolvesdisputesrelatedtoconstructioncontracts.Ifsuchdispute cannotbe resolvedby the aboveproceedings, thedisputewillberesolvedbyeitheranarbitrationproceedingheldbytheCDCactingasthearbitraltribunal,orbycourtprocedures.


UnderJapaneselaw,thereisaproceduresimilartotheadjudicationprocess called “civil mediation”, which is a method of ADRdifferent fromcourt proceedings and arbitration. However, sincecivilmediationcanonlybereachedbyanagreementbetweenbothparties,itisnotthesameastheadjudicationprocessusedin,e.g.,theUnitedKingdom. Though a court canmake an order in lieuofmediationifthereisnochancethatthepartieswouldenterintoan agreement, this orderwill cease to be effective if either partydisagreeswiththeorder.


In practice, it is not common for construction contracts tohave arbitration clauses. Under the PAMF, if theADR processsummarised in question 4.1 fails, the parties may either choosearbitrationorcourtproceedings.Ifarbitrationischosenandpartiesenterintoanarbitrationagreement,underJapaneseArbitrationLaw,thearbitrationproceedingswillstartwithoneof thepartiesfilingapetitiontothearbitralbodypursuanttotheagreement.Evenifapartyfilesalawsuitwiththecourt,thecourtmustdismissthecasewithoutprejudiceifeitherpartyclaimsthat thereisanarbitrationagreement between the parties. When the arbitration proceedingstarts, arbitrators will be appointed pursuant to the arbitrationagreementandanarbitraltribunalconsistingofsucharbitratorswillhearthecaseandmakeanarbitralaward.Thearbitralawardbindsthepartiesunderdisputeandtheymaynotfileanyobjectionstothearbitralbodyortothecourt.ApartywishingtoexecuteanarbitralawardmustacquireanexecutionorderfromthecourtandcarryouttheexecutionpursuanttotheCivilExecutionAct.


Under the Japanese Arbitration Act, regardless of the place ofarbitration (i) an arbitral award shall be recognised (i.e. becomevalid) by the competent Japanese court without requiring anyspecialactionwithinJapan,and(ii)apartywhowishestoexecuteanarbitralawardcanapplyforanexecutionordertothecompetent



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issues,appealtotheSupremeCourt.AccordingtoresearchmadebytheSupremeCourtofJapan,althoughtheactualperioddependsonindividualmattersofeachcase,theaverageperiodof(a)adecisionbythecourtoffirst jurisdictiontakesapproximatelyninemonths,and(b)adecisionbythefinalcourtofappealtakesapproximatelythreeyears(however,lawsuitsrelatedtoconstructionarelikelytotakemoretimethantheaveragecivillawsuit).

AcknowledgmentTheauthorswouldliketothankYujiShimadaandBrianBakerfortheirinvaluableassistanceinthepreparationofthischapter.YujiShimada is anAssociate in theKanagawa InternationalLawOffice.Tel:+81362066659/Email:[email protected] is aForeignAttorney in theKanagawa InternationalLawOffice.Tel:+81362066816/Email:[email protected].


UndertheJapaneseCivilProcedureAct,acivillawsuitwillstartwiththeplaintifffilingacomplainttothecompetentcourt(usuallytothedistrictcourt)andthecourtservingthecomplainttothedefendant.After proceedings such as preparatory proceedings to arrangeissues,pleadings,andtakingofevidence,thecourtproceedingsofthefirstjurisdictionwillendwithajudgmentbythecourt.Partieswhodisagreewith the judgmentmayappeal to thesuperiorcourt(e.g.thehighcourt),and,furthermore,partieswhodisagreewiththejudgmentofthesuperiorcourtmay,onlyforreasonsrelatedtolegal



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Kanagawa International Law Office is a globally-minded law firm, offering specialised knowledge and experience in international legal matters including mergers and acquisitions, project finance transactions, acquisition finance transactions and corporate finance transactions, headed by Mr. Hajime Kanagawa.

Kanagawa International Law Office

Hiroyuki Sakazaki is counsel at Kanagawa International Law Office. He represents Japanese and multinational clients in a broad range of corporate and financial matters, including real estate finance transactions, corporate finance transactions and mergers and acquisitions. He also has an expertise in cross-border transactions in emerging markets, especially in southeast Asia. Education: University of Tokyo (LL.B., 2000); and University of Southern California (LL.M., 2013). Bar Admissions: Japan.

Hiroyuki SakazakiKanagawa International Law Office7th Floor, Urban Toranomon Bldg1-16-4 ToranomonMinato-ku, Tokyo, 105-0001Japan

Tel: +81 3 6206 6859Fax: +81 3 6206 6653Email: [email protected]: www.k-ilo.com

Hajime Kanagawa is the founding partner of Kanagawa International Law Office. He represents Japanese and multinational clients in a broad range of corporate and financial matters, including mergers and acquisitions, project finance transactions, acquisition finance transactions and corporate finance transactions. He also has extensive experience in acquisition and financing of multiple renewable power projects under the feed-in-tariff regime in Japan. Education: University of Tokyo (LL.B., 1995); and University of Southern California (LL.M., 2004). Bar Admissions: Japan and New York.

Hajime KanagawaKanagawa International Law Office7th Floor, Urban Toranomon Bldg1-16-4 ToranomonMinato-ku, Tokyo, 105-0001Japan

Tel: +81 3 6206 6651Fax: +81 3 6206 6653Email: [email protected]: www.k-ilo.com



Chapter 16

Oseko & Ouma Advocates, LLP

Christine A. O. Oseko

Anaciata Mbula

Kenya

professionalintheteam,themanagementcontractorworkswiththeclientanddesignersfromtheoutset(briefstage)throughtheprojectcycletocompletion.Whereanintegratedapproachisfollowed,themanagerwillalsoprovidedesigns.Themanagement contractor ideally employs andmanagesworksofcontractorswhocarryouttheconstructionoftheprojectandheis reimbursed for his management services, with payment beingbased on the actual time of construction. The person thereforerepresents the client’s management functions as the client’sauthorised representative. As the facilitator and coordinator, therole isperformedbyqualifiedexperts suchasarchitects,quantitysurveyorsorengineers.


Kenya is a common law jurisdictionwhere contracts are used todefine the rightsandobligationsof theparties toacontract. Thecontract ensures that the employer’s project is completed asrequired; similarly the contractor receives commercial returns forworksatisfactorilydone.Theintentiontocreatealegalrelationisderivedfromtheinterpretationandapplicationoftheconditionsofcontract. TheLawofContractAct,Cap23LawsofKenya(“theAct”)providesunderitsSection2thatthecommonlawofEnglandrelatingtocontract,asmodifiedbythedoctrinesofequitybyActsofParliamentoftheUnitedKingdom,totheextentofandsubjecttocertainmodificationsintheAct,shallextendandapplytoKenya.Contractsaredefinedasagreementsenforceablebylaw. Inorderforacontracttobeenforceable,theremustbepresentinthecontractcertainessentialelements. Theremustbea ‘lawfuloffer’byonepartyanda‘lawfulacceptance’bytheother.Whenapersonsignifiesto another thewillingness to do somethingor not to do anythingwithaview toobtain theassentof thatotherpersonwith respecttodoingornotdoingthething,thepersonissaidtohavemadeanoffer. Consequently,when theperson towhomtheoffer ismadesignifieshisassentthereto,theofferissaidtohavebeenacceptedinthatcase.However,ifthereisnosuchintentiononthepartofthe parties, then in that case, there is no contract. For example,mere agreements of domestic or social nature do not necessarilycontemplatecreationofacontract.A contract is founded on an exchange of promises. Each partyto a contractmust therefore be both a promisee and a promisor.



In Kenya, there are two common contracting methods in theconstruction industry: traditional construction contracts, wheredesign works and construction are separated; and integratedcontracts,alsoknownassinglesourcecontracts,wheredesignandconstructionworksarecombined.Thelatterplacesbothdesignandconstructionobligationsuponthecontractor.Traditional construction contracts separate the responsibility fordesignoftheprojectfromtheaspectofconstruction.Theseparationofthetwoentitiesiseminentevenincircumstanceswherevariantsof thebasicsystemallowforco-operationbetweenthecontractorand client or his consultants. Other characteristics are that thedesignworkoftheprojectisusuallycompletedwithinadesign-onlycontractbeforetheprojectcommencesonsite,commonlyattenderstage.Thismakestheconstructionworkoftheprojectasequentialprocess.Ontheotherhand,integratedcontractsplaceonthecontractortheresponsibilityfordesign,constructionandthecommissioningoftheproject.Byintegratingbothdesignandconstructiontooneentity,potential conflicts between the designer and the contractors areavoided.Inanintegratedconstructioncontract,planningforbothdesignworkandconstructioncanproceedsimultaneously,hencethelikelihoodoftheprojecttakingashortertime.Thesecontractsmaybe considered under different variants such as: design and build;build-own-operate-and-transfer; plant and design-build packagedeal; and turnkey. Normally in an integrated contract, the clientprovidestopotentialconsortiadetaileddesignandconstructionplanaswellasperformanceandoperationalrequirements.Management ContractingManagementcontractinghaslongbeenembracedinKenya.Itisaformofcontractingwhereby themanagementcontractorprovidesaprofessionalmanagementserviceinaproject.Asaconstruction


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Constructioncontracts inKenyaareguidedbyvarious regulatoryforms; namely statutory regulation, government policies, contractlaw,tortlawandprinciplesofequity.Theseregulatoryformsimposespecificrequirementsthatregulatelabour,taxpayment,health,andsafety.Statutoryregulationsetsstandardsrequiredtobeachievedinaconstructionandengineeringcontractandprescribepenaltiesfor thosewho do not comply. Health, safety, environmental andlandplanningregulationsensurethesafetyoftheconstruction,landuse planning and preservation of the environment. Contractorsmust complywith this authorisation above before being awardedclearance for theworks. Other statutory requirements such as inthe EmploymentAct, 2007 set minimum wages, working hours,and termination procedures of employeeswhile theOccupationalSafety and HealthAct 2007 sets the health and safety standardsfor employers. Procurement laws inKenya guide the process ofselecting a service provider for construction services in Kenya,especially in the public sector, and if the construction is offeredthroughaPrivatePublicPartnership(“PPP”),thenthePPPunithasasayincontractnegotiationstoensurestabilityofthecontractualobligations.Statutoryrequirementsareeffectedthroughapprovals,settingstandardsandaccreditationmechanismstowhichcontractorsarestrictlyrequiredtoadhere.


Thereisnolegalrequirementoftheemployertoretainpartofthepurchasepriceforworksasretentiontobereleasedeitherinwholeorpartuponcompletionofwork.This,however,isprovidedunderthecontractbetweentheemployerandthecontractorandisenforceableundercontractlaw.Inthecircumstances,thecontractorisrequiredto tender and construct as per clients’ designs and specifications.Similarly, the contractor is required to carryout, superintend andcomplete the works according to the specifications and rectifyany defects in accordance with the contract. In some contracts,the contractor ispaida lumpsum,while inothersmilestones forpaymentareset.Somespecifyforthelastpaymenttobemadeuponexpiryofthedefectsliabilityperiod.


Theuseofperformancebondstoguaranteeperformanceiscommonpractice in Kenya. In construction and engineering projects,performancebond,alsoknownascontractbond,isasuretyissuedbyaninsurancecompanyorabanktoguaranteesatisfactorycompletionofaprojectbythecontractor.Intenderdocuments,forexample,itiscommonpracticethatbidderssupplybidbonds,whichareapplicableduringthetenderingprocess,andperformancebondsissuedinfavouroftheclientonceatenderhasbeenawarded.Intheeventthecontractor

Consideration is an English common law concept which isconcernedwith thebargainof the contract. It is the recompensegivenbythepartycontractingtoanother.InKenya,foracontracttobevalid,theremustbeaconsiderationwhichmaybeincash,in-kind,orthroughanactorabstinence,andthesecouldbeinthepast,presentorfuture.In constructionandengineering, a contract shouldbeeffective inthatitshouldgivearesultthatmeetstheobjectivesoftheprojectandfurtherreliablyprovidestheintendedlong-termbenefitssought.Thepartiestothecontractneedalsotohavethenecessaryauthoritytocontractandmustalsohavesuitablydefinedresponsibilities.Thestrategy in construction contracts is to develop a framework thatbringstogetherandestablishesboundariesofroles,responsibilitiesand relationships between the parties to the construction project.Theseincludeconditionsunderwhichthecontractistooperate.


InKenya, theconceptof“letterof intent”, thoughinuse,hasnotbeenembraced inconstructionandengineeringprojects. Instead,HeadsofTerms (“HOTs”) aremoreprevalent andusually signedsubjecttocontract.Thereareothervariedapproachesadoptedbyclients/developers under public or private procurement throughadvertisingrequestsforproposals(“RFPs”)andreceptionoftenders.Governmentconstructionandengineeringprojectsareinitiatedbywayoftendering.Thetenderingprocessmayentailpreparationoftenderdocumentsandselectionofthecontractorstobeinvolvedinthetenderincaseofselectivetendering.Insuchselection,thepre-negotiationstagemayinvolvethesigningofHOTsbeforethemainagreementisnegotiated.


TherearespecificstandardorstatutoryinsurancerequirementsforconstructionandengineeringprojectsinKenyaincommonpractice.However,undertheWorkInjuryBenefitsAct,2007(“WIBA”)theemployer isexpected tohaveaWIBApolicy tocoveremployeesengagedintheexecutionoftheinsured’sprojectagainstaccidentalbodily injury,disablementordeath. Moreover, thepolicy for theJointBuildingCouncil’sStandardFormofContractprovidesinitsclause12(3)thatthecontractorshallmaintaininsurancesforsuchamountsof indemnity asmaybe specifiedbywayofprovisionalsuminrespectofanyexpenses,liability,loss,claimorproceedingswhichtheemployermayincurbyreasonofdamagetoanypropertyotherthanthatcausedbycollapse,subsidence,vibration,weakeningorremovalofsupportsorloweringofgroundwater.Thepolicyistakeninthejointnamesofthecontractorandtheemployer,thoughitonlyprotectstheemployer.Ideally,everyinsurancepolicywillhaveanumberofconditionswhichregulatethecoveroftheinsurance.Most employerswill requirecontractors tokeepconstructionandrenovation works adequately insured with an insurance coveracceptabletotheemployerandtomaintainthecoverforthedefectsliabilityperiod.

Oseko & Ouma Advocates, LLP Kenya


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contains descriptions of items of work, their quantities, and theprinciples formeasurement. Payments to the contractor are thenbasedonsuchmeasurementsofworkactuallydone,andsuchpriceperunitofthework,whichisbasedonvaluationsandcertificatesascertifiedbythedeveloper’sconsultant.Othervariantsinpaymentsunder traditional contracts in Kenya are: the payment of a lumpsumwhere a specified sumofmoney is indicated in the contractaspaymenttothecontractorfortheconstructionworks;theprimecostmethod,wherethecontractorisreimbursedwiththetotalcostsincurredplusafeeforhisservicestocoveroverheadsandprofit;andfinally,theuseofascheduleofrates,wherethereisnoprescribedsumbutascheduleofunitrateswithinthecontractdocuments tobeusedwhencalculatingpaymentsmadetothecontractorbytheemployer.Nothingentitlestheemployertoprovideinthecontractthat theywillpaythecontractorwhentheyhavethemselvesbeenpaid;however,thepartiesenjoythefreedomtoinsertsuchaclauselike “pay when paid” within the contract under the freedom ofcontractingprinciple. Whereworkhasbeensub-contracted,mostsub-contractsmake reference to themain agreement and, in thiscase,“paywhenpaid”maybemorerealistic tonegotiate, thoughwhen itcomes toenforcement in law, thesamestands the riskofbeingviewedasanunfaircontractualterm.Incertain standard formconstructioncontracts inKenya, suchastheAgreements and Conditions of Contract for BuildingWorks(1999)paymentisscheduledatintervalsstatedintheappendixtotheconditionsofcontract.SuchconditionsincludeissuanceofaninterimpaymentcertificatebythearchitectwithinsevendaysfromthedateofreceiptoftheQuantitySurveyor’sValuation.


Typically,partiesarepermittedtohaveprovisionsinthecontractthatassigninadvanceresponsibilityforcoveringthecostsofpossibleoccurrenceswhichmaybeunforeseen.Anexampleispaymentofliquidateddamagesfordelaysandextensionoftimeandpaymentsforanydefects.Suchpaymentamountsmustbeagreedinadvance,asagenuinepre-estimateoftheloss.Otherwise,mostdisputesendupincourtwheresuchfixedsumsareviewedaspunitiveasopposedto a genuine estimate, notwithstanding that the partiesmay havesignedthecontract.



In construction contracts, the employer and contractor mayincorporatewithin thecontractaprovision forvariationofworksto be done. Where such provision is accepted, the employer isentitledtomakereasonablevariations.However,inpractice,suchvariationsareonlydoneagainstthepotentialcostofsuchchangesand provides for a renegotiation of the cost between the parties.Variations are often a source of conflict and have the effect ofincreasing theoverallcostand timerequiredforprojects,andarethereforetreatedwithcaution.

isunabletocompletetheprojectsatisfactorilyaccordingtothetermsofthecontract,thentheclientisabletoinvoketheperformancebondbyuptothevalueoftheincompletework.Performancebondsareusuallysetat10%ofthecontractprice.Forconstructioncontracts,50%maybereleasedimmediatelyoncompletionofthework,withthebalancebeingreleasedaftersixmonths.


ItisnotcommonpracticeinKenyatohaveretentionoftitleclausesincorporatedinconstructioncontractualdocumentation,particularlybecausesuppliesformingfixturesunderlawbecomepartoftherealpropertywhichbelongstothelandowner.Thesupplier’scontractcan,however, incorporate termsandconditions thatcanbe reliedupon to claim payment for such goods and services delivered totheemployerbywayofdamages.Inconstructionandengineeringprojects,thecontractorcanstillhavearemedyundercontractandmakeclaimofanynon-paymentforgoodsandsuppliesusedintheworksifproperlyincorporatedinthecontract.



SupervisionofconstructioncontractsbythirdpartiesonbehalfoftheemployersiscommoninKenya.Thethirdpartyinthiscaseactsastheclient’srepresentativeandisresponsibleformanagingtheprojectonbehalfandintheinterestoftheclient. Therepresentativemaybeanemployeeoftheclient,anarchitect,acharteredsurveyor,oranengineer.AccordingtoPublicProcurementOversightAuthorityofKenya (PPOAK, 2006), the client’s representative is named inthe conditions of contract and is responsible for supervising theexecutionoftheworksandadministeringthecontractandmustbeanarchitect,oraquantitysurveyorregisteredundertheArchitectsandQuantitySurveyorsAct,Cap522,oranengineerregisteredundertheEngineersRegistrationAct,Cap530.Thedutiesofsuchthirdpartydependontheconditionsofcontractandthenegotiatingpowersoftheparties.However,thesupervisorisrequiredunderthecontracttoexercisehisdiscretionbygivinghisdecision,opinion,approvalorintakinganyotheractionwhichmaypossiblyaffecttherightsandobligationsoftheemployerorcontractor.Heisexpectedtoexercisesuchdiscretion impartiallywithin the termsof thecontract. Mostcontractsprovidefordisputeresolutionmechanismsifeitherpartyisaggrievedwiththedeterminationoftheindependentthirdparty.


It is common with traditional contracts in Kenya that a Bill ofQuantities isestablishedby theemployerbefore tendering,which



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theLimitationsofActionsAct,Cap22LawsofKenya. Actionsmaynotbebroughtaftertheendofsix(6)yearsfromthedateonwhich the causeof actionaroseonclaims related to constructionandengineeringcontracts.Inmostcontracts,thisdatestartsrunningfromtheexpiryofthedefectsliabilityperiodorthedatewhenthecertificateofoccupationisissued,whicheverislater.


Theacceptanceofanobligationordutyinaconstructioncontractbringswith itareciprocalacceptanceofrisk. Whoeverbears theriskofunforeseengroundconditionsdependson theconstructionof the contract and whether such risk is incorporated within thecontractualclauses.Inadesignandbuildcontract,alsoknownasan integratedcontract, inmostcircumstances thecontractorbearstheriskinrelationtounforeseengroundconditions.


Theriskofchange in lawcomesaboutasa resultofachange inlegislation or introduction of new laws after the contractual basedate. Under theInternationalFederationofConsultingEngineers(“FIDIC”) formof contracts, such risks aregenerally retainedbytheemployer.Inusualnon-FIDICcontractinginKenya,achangeinlawisincorporatedasaforce majeureconditionforwhichneitherpartyisliable.However,inPPPprojects,politicalandlegislativerisksarebornebytheContractingAuthority.


Ownership of intellectual property in construction depends onwhetherthedesignerisanemployeeoftheproperty/projectowneror acts as an independent contractor. When the designer is abona fideemployeeof theprojectowner, theworkcreatedbythedesignerinurestothebenefitoftheprojectowner.Whereas,whenthe designer is an independent contractor and has discretionaryauthority concerning the design, then the intellectual propertyownership inures to the benefit of the designer, unless otherwisecontractuallyagreed.Inthiscase,theprojectownerwillrequirealicencetousetheintellectualproperty,and,inmostcases,theuseisonlylimitedtothatparticularproject.


Incertaincircumstances,thecontractorisentitledtosuspendworks;for example, as a result of the employer’s default, frustration ofcontractandineventsofforce majeure.


Mostconstructioncontractsrecognisetheowner’srighttoterminateacontractbeforeaproject’scompletionforcauseorwithoutcause.Whereterminationforcauseisapplicable,groundsneedtobesetoutexpressly,whileothergrounds,evenifnotsetout,arecommonpracticeandlaw,suchasbankruptcyandillegality.Thecontractor’sright of termination on the other hand is usually limited only tobreachandforce majeurecircumstances.


Employersinconstructionandengineeringprojectswouldcertainlydemand that theworkbe handled to completion. Omittingworkfromthecontractmayresultinasuitfornon-completionforwhichthecontractorwouldrefundthecostanddamageswithrespect totheir particular portion of the project. If the relevant works areorganisedwith a variation or differentiation between the contractforworkandthecontractfordesign,thenthecontractormayomitworkifitdoesnotagreetothevariation.


It has been general practice that, in construction contracts, termsrequiring work to be done diligently and progressed regularlyare expressly provided. However, courts can imply terms in aconstructioncontract togivebusinessefficacy to theconstructionagreement.Lawofsaleofgoodshasalsoimpliedtermsastoqualityandmerchantabilitythatmaybeapplicableinconstructioncontractswhereprocurementisafunctionofthecontractor.


The Conditions of Contract for Procurement ofWorks or Plant,2000 and the Public Procurement Oversight Authority providethe following conditionswhichmay affect cost and extension oftime: variations caused by the employer; a cause of delay givingentitlement toanextensionasmaybeagreed in thecontract;anydelayorimpedimentorpreventionbytheemployer;andsuspensionby theemployernot foracauseattributable to thecontractorandnot necessitated by the contractor’s risk. For these, extension isgrantedwithoutacostindication.Whereadelayisthefaultofthecontractor,on theotherhand, thecontractmayprovidefornoticetobegiventotheemployerandnegotiationofanextension,failingwhichcostsforthedelaymaybecomepayabletotheemployer.


Interpretation of the contract should determine the ownership ofthe float in order to arrive at a conclusion ofwhether or not thecontractor should receive extra time to finish the work. If theemployer owns the float, then the contractormay be required toputinextraworktocompleteconstructionwithoutanextensionofthesetprojectdeadline.Ifthecontractorownsthefloat,thenanychangesbytheownermayresultinanextensionofthecompletionperiodbytheemployertotheadvantageofthecontractor.


InKenya,thelimitationperiodforclaimsisgenerallygovernedby



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the objective test approach in interpretation of such ambiguities.Thecourtslookattheintentionofthecontractingpartiesbymakingreference to ‘what a reasonable person having all backgroundknowledgeaswouldhavebeenavailabletothepartieswouldhaveunderstoodthetermsofthecontracttomean’.Thecourtsinmostcircumstances will take into account commercial common sensewhileinterpretingambiguoustermsinconstructionandengineeringcontracts.Insomecases,ambiguitywillbeinterpretedagainstthedrawerofthecontract.


Yes,courtsarereluctanttoenforcealiquidateddamageclausewheretheagreedamountisnotproportionatetoactualdamagesresultingfromadelay inaconstructionproject. Inothercases, courts areneverwillingtoenforceunfairtermsofacontractsuchasexclusionclauseswhichexcludeonepartyfromliabilitythatnaturallyshouldbepart of the contract. Exclusionof liability for personal injuryanddeathisalsonotenforceable,norisanyobligationtoperformanillegalaction.


In traditional construction contracts, where the design work isseparatefromtheconstructionwork,thereisanassumptionthatthedesigners,intheprocessofcompletingtheplanandspecifications,havedesignedtheworkwithallfactorsinmindthroughtheprojectslife cycle. The design responsibility lies with the employer;however,thedesignerisresponsiblefordesigndefectswherethereisarequirementthatheowesa‘fitforpurpose’obligation.Giventhatthecontractorisonlyprovidedwiththedesignofworkandmustbuildtheworksinaccordancewithit,thedesigner’sobligationsareto ensure that the design fulfils the ‘fit for purpose’ requirement.Intheabsenceofexpresswordsinthecontracttothecontrary,thedesignergenerallyhasanabsoluteobligationtoprovideworkthatis‘fitforpurpose’.



The dispute resolutionmethodswhich are commonly available inthe construction and engineering contracts include adjudication,mediation,arbitration,courtproceedingsandexpertdetermination.Itisimportantthatpartiestoaconstructioncontractunderstandthesedispute resolution methods and ensure that the contract containsappropriate dispute resolution clauses. In the event of a dispute,partiesmakeaninferencetothecontractualdisputeresolutionclause.


Dispute resolution throughan adjudicationprocess is common inKenya.AccordingtotheCharteredInstituteofArbitrators-Kenya,adjudication processes are adversarial and involve parties to acontractsubjectingthemselvesbeforeanadjudicatorwhousestheir


Force majeure is a common and important contractual clause inconstruction and engineering projects in Kenya. It absolves theinnocentparty(eithertheownerorcontractor)fromclaimswhosecausesareduetotheforcesofnatureandwhichcouldnotreasonablyhave been expected. A contract becoming uneconomic is not areadilyacceptableforce majeureconditionunlessspecificallystatedinthecontract,andinmostcases,certainqualificationstotheclausehavetobenegotiatedandputinwriting.


Mostcontractsrestrictthird-partyclaimsand,assuch,onlypartiestoacontractcanclaimagainstit.Therecourseofsubsequentownerswillbetothevendor(owner)andnotthecontractor.WhethertheownerinthiscasecanrecoverfromthecontractorwilldependonthedefectsliabilityclauseandifacertainamountoftimehaslapsedinrelationtotheLimitationofActionsAct.


Therighttoset-offisacontractualoneanddependsonagreementoftheparties.Set-offcanbeeffectedwhereapartyowestheothersumsorwherethereisabreachofobligationofonepartyforwhichthepartyisliableforcertaincosts.Mostcontractswillprovideforautomaticset-off,butifaclaimarises,thenanapplicationtocourtforadeterminationofliabilitywillbemade.


Dutyofcareundercommonlawisalegalobligationthatisimposedbylawtotheextentthatreasonableskillandcareshouldbeappliedwhen carrying out any task that could foreseeably cause harm toothers by professionals. For example, the Public ProcurementOversight Authority Standard Bid Documents for Design-Build& Turnkey Contracts (2007) provides that if the design-builderdesignates other employees, its foreman is responsible for thepreventionof accidents. Limitationof liability for aparty’sownnegligence is therefore not acceptable in most well-negotiatedcontracts.


In the construction and engineering industry, most contractualdisputesariseasaresultofdifferencesinopinionofthepartiesoverwhattheambiguoustermsofacontractmean.Kenyancourtstake



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JudgmentsarisingoutofforeigncourtproceedingscanbeupheldandenforcedinKenyagiventhatKenyaratifiedtheConventionontheRecognitionandEnforcementofForeignJudgmentsinCivilandCommercialMatters. The Convention, however, only applies todecisionsrenderedincivilorcommercialcourtsoftheContractingStates.Thereareotherrestrictionstoitsapplication;forexample,theConventiondoesnotapplytodecisionsthemainobjectofwhichistodeterminequestionsofsocialsecurity,succession,questionsofbankruptcyandquestionsoffamilylaw,amongothers.


Incircumstanceswherethecontractprovidesforcourtproceedingsin Kenya for determination of construction disputes, the legalproceedings are commenced when the plaintiff makes a formalcomplaint or demand before a competent court. In makingthe complaint, every pleading in the proceedings must containinformationastothecircumstancesinwhichit isallegedthat theliabilityhasarisen.Everydecreebyacourtmaybeappealedfromunlessbarredbysomelawand,insuchcircumstances,leaveofthecourtmustbesought. Anapplicationforleavetoappealismadewithin 14 days from the date the order to be appealed against ismade.Generally,courtproceedingscantakealongtimedependingon compliance by the parties with the Civil Procedure Rulesto ensure just and expeditious disposal ofmatters. There are nostandard timelines before the courts. Matters can take anythingfromtwoyearstoover10years,dependingonthecomplexityandco-operationofthepartiesinvolved.ThecourtsysteminKenyaisalsoback-loggedtosomeextent.

own knowledge and investigations, while weighing the evidencepresentedbythepartiesinordertoarriveatadecision.Thesuccessfulparty toanadjudicationcanapply tocourt forenforcementofanadjudicator’s decision. Thedecisionof an adjudicator is bindingunlessrevisedinarbitrationorlitigationincourt.


Arbitration in the construction industry inKenya is governed byvariouslaws,whichinclude:theConstitution;theArbitrationAct,1995;theArbitrationRules;theCivilProcedureActCap21LawsofKenya;andtheCivilProcedureRules,2010.Theprocessinvolvespartiesagreeingtoresolvethedisputetoathirdparty,thearbitrator.Thewillofthepartiesprevail,however,wherethereisnoconsensus.Arbitrationstartson thedate that the respondent is servedwitharequesttoreferthemattertoarbitration.Thepartiesandthearbitratorcanagreeonwhichrulestoapply,andthearbitrationclauseinthecontractcanimposeasetofproceduralrules.However,wheretheparties cannot agree on the rules, then the arbitrator has certainprocedural powers under Section 20, Arbitration Act. Arbitralproceedings are confidential and confidentiality is maintained tothe highest possible standards. Some international contracts alsostipulateforinternationalarbitrationforums/rulesandsuchclausesareenforceableinlaw.


Kenya ratified the New York Convention on the Recognitionand Enforcement of Foreign Arbitral Awards 1958 (New YorkConvention)on10February1989,witha reciprocity reservation.Moreover, Kenya is a signatory to the EastAfrican CommunityTreatywhichrecognisesarbitrationastheavailablemeansofdisputesettlementwithintheCommunity.IftheinternationalarbitralawardiscoveredbytheNewYorkConvention,itwillthenberecognisedandenforcedbyKenyancourts. AchallengetoenforcementmayonlycomeaboutinsituationswheretheawardisnotcoveredbytheNewYorkConvention.



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Oseko & Ouma Advocates, LLP (O&O) is a leading business law firm in Kenya. Our expertise spans over Corporate & Commercial Law, Oil & Gas, Energy, Mining & Natural Resources, Project Finance, Construction & Engineering Projects, Real Estate & Banking, Intellectual Property Law, and Commercial Dispute Resolution. O&O has a strong history of providing effective legal services to both local and multinational businesses, including the government. We bring together knowledge across the firm’s specialisations, such as commercial, supply and distribution chains, M&A, technology, financial services sectors, tax, energy, employment, manufacturing, real estate and banking.

We enable clients to actualise their commercial transactions and projects by supporting them throughout the process. The department is supported by able internationally trained Advocates with vast local experience. Our legal networks have enabled us to successfully carry out both local and transboundary transactions.

Christine is the Managing Partner at O&O Advocates and prides herself on her international experience which cross-cuts various jurisdictions. She is currently pursuing an M.B.A. at Warwick University (UK) and holds an LL.M. in International Business Law from Boston University (US). She obtained her LL.B. at Leicester University (UK) after which she started her practice at O&O Advocates as an Associate while lecturing in various universities in Kenya, following which she took up a role as the Managing Partner. Under her leadership, the firm has grown in leaps and bounds, serving both domestic and international corporate clients. Christine’s areas of specialisation include construction and project finance, real estate and banking, energy and natural resources, intellectual property and labour law.

Christine A. O. OsekoOseko & Ouma Advocates, LLPThe Mirage Tower 1, 5th FloorChriromo Road, WestlandsP.O. Box 47291-00100NairobiKenya

Tel: +254 701 359 088Email: [email protected]: www.osekoouma.com

Anaciata heads the Commercial Law Department at O&O Advocates. She holds an LL.B. from Moi University and an LL.M. in Oil and Gas Law from the University of Aberdeen (UK), joining the list of very few experts in Oil & Gas, Mining and Energy in Kenya. Before joining O&O Advocates, Anaciata began her training in an international law firm in Nairobi, where she got exposure to commercial/corporate transactions of an international nature, mergers and acquisitions, corporate restructuring, energy, construction and infrastructure, banking and real estate, among others. Her current areas of specialisation include energy, mining and general infrastructure project financing and public-private partnerships.

Anaciata MbulaOseko & Ouma Advocates, LLPThe Mirage Tower 1, 5th FloorChriromo Road, WestlandsP.O. Box 47291-00100NairobiKenya

Tel: +254 703 144 060Email: [email protected]: www.osekoouma.com



Chapter 17

Wong & Partners

Janice Tay

Siaw Wan Lim

Malaysia

disputeresolutionandliabilityclauses.Provisionsforadjudicationare not mandatory but we now see a trend to include statutoryadjudicationcompliantprovisions instandardformcontracts(e.g.AIACstandardforms).


Lettersofintentarecommonlyissuedbyemployerstoacontractorasanexpressionof intent toaward thecontract to thecontractor.Generallyitisnotlegallybindingasitisa“letterofcomfort”andisnotintendedtocreateacontractualrelationshipuntilacontractisformallysigned.Notwithstandingthis,thequestionofwhetheraletterofintentislegallybindingornotdependsonthenatureofthedocumentitself.Forexample,ifitisclearfromtheletterthatthetermswillbindthepartiesintheinterimuntilacontracthasbeensigned,thencourtsareinclinedtoenforcethetermsoftheletter.


Thestatutoryinsurancerequiredtobetakenoutintheconstructionindustry is workmen compensation insurance, as provided bySection26oftheWorkmen’s Compensation Act 1952,toinsureallworkmenemployedtocarryoutconstructionwork.OtherstandardtypesofinsurancewouldbeContractor’sAllRisk,ErectionAllRisk, PublicLiability Insurance and (in high designliabilitycontracts)ProfessionalIndemnityInsurance.


(i) General Requirements ContractorsundertakingconstructionworksinMalaysiaare

requiredtoberegisteredwithCIDBpursuanttoSection25



The standard types of construction contracts used are build-onlyand design and build contracts. The following institutions havepublishedstandardformofconstructioncontracts:(i) MinistryofWorks(Jabatan Kerja Raya(“JKR”));(ii) MalaysianInstituteofArchitects(PersatuanArkitekMalaysia

(“PAM”));(iii) InstitutionofEngineersMalaysia(“IEM”);(iv) Construction Industry Development Board of Malaysia

(“CIDB”);and(v) AsianInternationalArbitrationCentre(“AIAC”).Thestandardformsfordesignandbuildcontractsplaceobligationsforbothdesignandconstructiononcontractors.Thereisnoissuedformofdesign-onlycontractinMalaysia.Malaysiadoesnothaveafixedorcommonformformanagementcontracting,butisafamiliararrangementforsizeableprojects.


ContractsinMalaysiaaregovernedbytheContracts Act1950andcommonlaw.Thegeneralprinciplesofcommonlawspecifiedabovewouldapplytoformalegallybindingcontract,whetherornotitisaconstructioncontract.Further,thepartiestothecontractshouldhavethecapacitytoenterintothecontractandpartiesshouldensurethat all essential terms are included in the contract; for example,


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to secure and/or guarantee the performance of the contractor’sobligationsunderthecontract.Forexample,seeClause37oftheAIACBuildingContract2018.Performance BondsTherearetwotypesofperformancebondsinthemarket:■ conditional performance bond,where the condition for the

demandonthebondmustbefulfilled;and■ unconditional or on-demand performance bond (and this

is themost commonly used),where the employermust bepaidupondemand regardlessofwhether there is a disputebetweenpartiesastotheentitlementoftheemployerinsuchinstanceorwhetherthesuminquestionisdue.

The courts in Malaysia are generally hesitant to intervene indisputes relating to bonds. Where a party seeks an injunction torestrainthedemandmadeonthebond,thepositionisclearthatthecourtswillonlyrestrain(i)abankfrommakingapaymentifthereisclearevidenceoffraud,and(ii)abeneficiaryfromreceivingsuchif there is fraudandunconscionability,pursuant to theunderlyingconstructioncontract.Company GuaranteesAcompanyguaranteeisaguaranteeusuallygivenintheformofaletterbyaparentorholdingcompanyofthecontractortoguaranteetheperformanceofthecontractorunderaconstructioncontractandtomakegoodanybreachbythecontractorundertheconstructioncontract.Accordingly,theguarantorisonlyliabletopayorstepintoremedyiftherehasbeenabreachoftheunderlyingconstructioncontract.


Itiscommonforcontractorstohaveretentionoftitlerightsinrelationtothematerialsandgoodstobeusedintheworks. ThestandardformsofconstructioncontractsinMalaysiagenerallyprovidethatthetitletosuchmaterialsandgoodstopasstotheemployeruponthe employer’s payment for such goods and supplies. Examplesinclude:■ Clause20ofJKRForm203A.■ Clause14.2ofPAMContract2006.■ Clause33.2ofCIDBStandardFormofContractforBuilding

Works2000.■ Clause14.2oftheAIACBuildingContract2018.



Itiscommonforconstructioncontractstobesupervisedonbehalfof the employer by a third party. This is usually the engineer,architect, project manager or superintending officer (the contractadministrator).

oftheLembaga Pembangunan Industri Pembinaan Malaysia Act 1994.

(ii) Labour Local workmen are required to be registered under the

Employee’s Social Security Scheme pursuant to theEmployees’ Social Security Act 1969. All workmenshould also be insured under Section 26 of theWorkmen’s Compensation Act 1952.

(iii) Tax Acontractorwho isa“registeredperson”under theGoods

and Services Tax (“GST”) Act 2014 is required to chargeGST for his services (Guide to the Construction Industry(Goods andServicesTax),RoyalMalaysianCustoms). Inaddition,forpaymenttoanon-residentindividual/company,theIncome Tax Act 1967requiresthepayertowithholdtaxfromanysuchpaymenttopaysuchtaxtotheInlandRevenueBoardofMalaysia.

(iv) Health and safety Anemployerhastoensurethesafety,healthandwelfareat

work of his employees which includes providing trainingandsupervisionpursuanttoSection15ofthe Occupational Safety and Health Act 1994. A safety and health officeris required to be employed pursuant to section 29 of theOccupational Safety Health Act 1994forbuildingoperationsandengineeringconstructionworks,wherethecontractpriceexceedsRM20million.


Retention sums are common inMalaysian construction contractsto securedueperformanceof the contractby the contractor. Forexample,thefollowingstandardformsprovideforaretentionsumof5%–10%:■ Clause30.5ofthePAMContract2006.■ Clause58.6IEM.CE2011Form.■ Clause42.3oftheCIDBForm.■ Clause30.5oftheAIACBuildingContract2018.It is commonly seen inpractice that a certainpercentageof suchretentionsumisreleasedwhentheworksaresubstantiallycompleteand the balance upon completion of any agreed defects liability.ThisisalsoreflectedinClauses30.6(c)and(d)ofthePAMContract2006 and Clauses 30.6(c) and 30.6(d) of the AIAC BuildingContract2018.TheMalaysianCourtofAppealinQimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd & Anor [2011] 2AMCR 784;[2012]3MLJ422(upheldbytheFederalCourt)heldthatretentionmoniesareby theirverynatureandpurpose trustmoniesheldbythe employer for a specific purpose as trustee for the contractor.However,thereisnorequirementfortheretentionmoniestobekeptinaseparatebankaccountevenwheretheemployerhasgoneintoliquidation.


It is common practice in Malaysia that performance bonds and/or company guarantees are provided in a construction contract

Wong & Partners Malaysia


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theevidenceshowsreallossinherentlywhichisnottooremote,thenSection75Phrasewillapplyandpermithimtorecover“reasonable compensation”(i.e.substantialdamageswhichare“reasonable and fair according to the court’s good sense and fair play”),cappedatthevalueofthesumexpressedasliquidateddamages.



An employer is entitled to vary the works to be done under thecontractundertheexpresstermsofthecontractorundercommonlaw, whereby the contractor will be entitled to payment on aquantum meruitbasis.Suchworksmustbeachangetotheworksspecifiedintheoriginalcontract and complywith the express procedural requirements aswellasthelegalities.


Generally,work canonly be omitted from the contract under theexpresstermsofthecontract.


Yes.Someexamplesofimpliedtermsareasfollows:(i) Implied by statute:

■ Acontractor/sub-contractormayreferapaymentdisputefor adjudication (Construction Industry Payment and Adjudication Act 2012).

(ii) Implied under common law:■ Theemployershallfullycooperatewiththecontractor.■ Thecontractorshallensuretheworksarefitforpurpose,

where the employer relies on the contractor’s skill andjudgment.


ThepositioninMalaysiaonthismatterisnotsettled.Authoritiesfrom Commonwealth courts are instructive and have persuasivevalue.


ThepositioninMalaysiaonthismatterisnotsettled.Authoritiesfrom Commonwealth courts are instructive and have persuasivevalue.

Thedutyof thecontract administratorwoulddependon the termsof the construction contract underwhichhe is required to act. Inundertakinghiscertificationrole(forexample,ofthecertificateforanextensionoftime,certificateofnon-completion,certificateofmakinggooddefects,certificateofcompletion,etc.),itisusuallyexpressedorimpliedthathemustactindependentlyimpartially,reasonablyandexpeditiously.


PursuanttotheConstruction Industry Payment and Adjudication Act 2012(“CIPAA”),anActwhichappliestoeverywrittenconstructioncontractsaveforcertainlimitedexceptions,aconditionalpaymentclauseisrenderedvoidpursuanttoSection35.Section35providesasfollows:“35. Prohibition of Conditional Payment

■ Any conditional payment provision in a construction contract in relation to payment under the construction contract is void.

■ For the purposes of this section, it is a conditional payment provision when:■ The obligation of one party to make payment is

conditional upon that party having received payment from a third party; or

■ The obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party.”

TheMalaysianCourtshaveconstruedSection35widelyandtakentheviewSection35providesmereexamplesandisnotexhaustive.There is uncertainty as to whether Section 35 is limited toadjudicationsonlyandwhetherSection35(andCIPAAasawhole)isprospectiveonlyor retrospectivedue to recentcourtdecisions,such as the Court ofAppeal’s decision inBauer (Malaysia) Sdn Bhd v Jack-In-Pile (M) Sdn Bhd (CA)CivilAppealNo.B-02(C)(A)-1187-06/2017.


Yes,suchclausesarecommon.Ingeneral,thelawinMalaysiagoverningclaimsforLADfordelaypresentlyplacestheburdenontheemployertoproveitslossesonabalanceofprobabilitiesinordertosucceedinitsclaimforliquidatedandascertaineddamages.TheFederalCourtcaseofSelva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy[1995]1MLJ817heldthatapartyseekingtoclaimliquidateddamagesmustproveitsactuallosses,butremainsboundbythecaponliabilityinthesensethatitisunabletorecovermorethatthestipulatedsum,evenifitcanproveslossinexcessofthatstipulatedsum.However,forcaseswherethecourtfindsitdifficultto assess damages for the actual damage as there is “no known measure of damages employable”forthebreachinquestion,andyet



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ExamplesofthesecanbeseeninClause1.3ofPAMContract2006andClause1.3(c)oftheAIACBuildingContract2018.


Generally,thereisnorightofsuspensionundercommonlawand,intheabsenceofacontractualentitlement, thecontractor’sactofsuspensionmayamounttoabreachofcontract.However,inthecontextofstatutoryadjudication,CIPAAprovidesforarighttosuspendperformanceorreducetherateofprogressofperformanceofanyconstructionworkorconstructionconsultancyservices under a construction contract if the adjudicated amountpursuant to a successful adjudication decision has not been paidwhollyorpartly.ThepartywhoexerciseshisrightunderCIPAA:■ isnotinbreachofcontract;■ is entitled to a fair and reasonable extension of time to

completehisobligationsunderthecontract;■ is entitled to recover any loss and expenses incurred as a

resultofthesuspensionorreductionintherateofprogressofperformancefromtheotherparty;and

■ shall resume performance or the rate of progress ofperformance of the construction work or constructionconsultancy services under a construction contract inaccordancewith the contractwithin 10working days afterhaving been paid the adjudicated amount or an amount asmaybedeterminedbyarbitrationoracourt.


Thecommongroundsofterminationareasfollows:(a) Defaultofobligations.(b) Insolvencyevents.(c) Prolongedsuspension.(d) Force majeure.Partiesmay also terminate a contract under common law on thegroundsofarepudiatorybreachorthebreachofacondition.The JKR standard forms,which aremost commonly used in thepublicsector,alsoprovide for terminationongroundsofnationalinterest,convenience,andcorruptionorunlawfulactivities.Therearenoavenuestoremedyinsolvencyeventsandcorruptionorunlawfulactivities.Assuch,theinnocentpartywouldbeentitledtoimmediatelyterminatethecontract.There is no requirement to expressly set out termination rights,althoughinpractice,suchterminationrightswouldusuallybestated.


Construction contracts inMalaysia usually have a force majeureclause.Adelayorbreachbyapartyduetoaforce majeureeventwouldentitlethesaidpartytoanextensionoftimeortheexcusalofthebreach.However,force majeureisnotapplicablewherethedelaywaswithintheclaimant’scontemplationandcontrol(Golden Bay Realty Pte Ltd v Orchard Twelve Investments Pte Ltd [1989]MLJ70).


LimitationperiodsaretypicallyimposedbytheLimitation Act 1953 which is applicable inWest Malaysia, the Limitation Ordinance1952 (Sabah), the LimitationOrdinance 1959 (Sarawak) and thePublic Authorities Protection Act 1948.Thelimitationperiodforacontractualoratortiousclaimissixyearsfromtheaccrualofthecauseofaction.TheLimitation Act 1953doesnotapplytoanyactionorarbitrationtowhichtheGovernmentofMalaysiaisaparty(s3,Limitation Act 1953).Instead,s32ofthePublic Authorities Protection Act 1948 providesthatthelimitationperiodforsuchactionorarbitrationis36monthsfromtheaccrualofthecauseofaction.


The contractor normally bears the risk of unforeseen groundconditions.However,thisisalsosubjecttothenegotiationsoftheparties as there have been circumstances in which the employerboresuchrisk.ThecontractorbearstheriskintheJKRandIEMstandardforms.


Theemployernormallybearstheriskofachangeinlawaffectingthecompletionoftheworksinthattheconstructioncontractwouldentitle the contractor to claim for an extension of time in such asituation. For example, see Clause 23.8(b)(vii) of the AIACBuildingContract2018.However,whetherornotthecontractorisentitledtoanincreaseinthe contract price depends on the commercial negotiations of theparties.


Copyrightfirstvests in thecreatorofapieceofwork. However,pursuant to Section 26 of the Copyright Act 1987, copyright isdeemedtobetransferredtothepersonwhocommissionedtheworkor the author’s employer where work is commissioned under acontractofserviceormadeinthecourseofemployment.Assuch,copyrightwouldvestintheemployer.An example of ownership vesting in the employer as works ormaterials are being developed can be seen inClause 63.1 of theJKRForm203.Note,however,Subrule29(20)oftheArchitectsRules1996,wherethat architects own the copyright in all documents, drawings andworksexecutedfromsuchdocumentsanddrawingsunlessagreedotherwise.Inpractice, it isnotuncommonfor theparties toagreeotherwisein construction contractswhere intellectual property rightswouldvestintheemployerastheemployertypicallyrequirefullrightstousesuchpropertywithoutfurtherliability. Inthestandardforms,however,thedefaultpositionisthatthecontractorretainsownershipofsuchintellectualpropertyrights,andtheemployerisgivenanon-exclusiveroyaltyfreelicencefortheuseofthedesignsorworks.



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Wherethetermsofaconstructioncontractareambiguous,thecourtsmayadoptcertainrulesastohowsuchambiguityisinterpreted.Forexample:(i) General Guidelines First,acourtinterpretingaprivatecontractisnotconfinedto

thefourcornersofthedocument.Itisentitledtolookatthefactualmatrixformingthebackgroundtothetransaction.

Second, the factualmatrixwhich forms the background tothe transaction includes all material that was reasonablyavailabletotheparties.

Third, the interpretingcourtmustdisregardanypartof thebackgroundthatisdeclaratoryofsubjectiveintentonly.

Lastly, the court should adopt an objective approachwheninterpretingaprivatecontract.

(ii) Parol Evidence Extrinsic evidence will only be admitted and considered

if it falls under the exceptionspermittedunder s 92of theEvidenceAct1950.

(iii) Contra Proferentum Anyambiguityisresolvedagainstthepartywhoseekstorely

ontheparticularterminissue.(iv) Ejusdem Generis Wherewords of a particular class are followed by general

words, the general words only cover matters of the sameclass.

(v) Noscitur a sociis Themeaningofawordmaybeascertainedaccordingtoits

context.


A conditional payment provision in a construction contract isvoidbyvirtueof s35of theConstruction Industry Payment and Adjudication Act 2012(seeabove).Anytermswhichrestraintheexerciseof lawful tradewillbevoid(s28,Contracts Act 1950). Further,provisions restrictingapartyfromenforcinghisrightsunderthecontract,orlimitingthetimefortheenforcementofhisrights,willbevoid(s29,Contracts Act 1950).


Adesignerisrequiredtocarryouthisobligationswithreasonableskillandcareaccording to thestandardsof reasonablycompetentdesignerandtoensurethattheworks,whencompleted,arefitfortheirpurpose. It iscommoninconstructioncontracts to limit theliabilityofthedesignertothecontractpriceorfeepayabletothem.Thedesignerisnotrequiredtogiveanabsoluteguaranteeinrespectofhiswork.

In general, force majeure provisions in contracts expresslyexclude economic downturn, insufficient funding or commercialimpossibility.


In general, a contract cannot be enforced by or against a personwho is a stranger to it; however, parties may be able to pursueother remediesavailable to themin tort. Collateralcontractsandwarrantiesarealsousedasanexceptiontothedoctrineofprivityofcontract.


Aparty is entitled to set offwhere expressly provided for in thecontract.Theseitemstypicallyincludedeductionsofretentionsum,liquidated and ascertained damages over payments and paymentsmadetothirdparties.Suchdeductionsareusuallymadesimplyoruponcertificationbythecontractadministratorunlessthecontractrequires the contractor’s prior agreement or the decision of anindependentthirdparty.However,thereisacommonrestrictiontotherightsofset-offwhichistolimitthesettingoffformoniesowedonlyinrelationtothesameconstructioncontract,i.e.P1cannotsetoffamountstobepaidtoP2underconstructioncontractno.1,forthesumsthatP2owesP1underconstructioncontractno.2.However,inthecontextofstatutoryadjudication,thereisauthoritythat set-offs arising from different contract(s) between the samepartiesmaynotberaised.


Parties toaconstructioncontractmayoweadutyofcare toeachotherincontractandtort.Unlessexpresslyprovidedforinthecontract,thepartiesareunderthefollowingimpliedduties:The Employer(i) Theemployermustcooperatewiththecontractor;(ii) theemployermustnotpreventthecontractorfromcarrying

outhisworks;(iii) theworkswillbesupervisedbyaqualifiedperson;(iv) the employer will give the contractor possession and site

access;and(v) the employer must prepare and hand over the necessary

documentstoenablethecontractortocarryouttheworks.The Contractor(i) Thecontractoristoundertakeallworkwhichisindispensably

necessaryforthecompletionofthework;(ii) workistobeexecutedinaproperandworkmanlikemanner

usingreasonableskillandcare;and(iii) materialsorgoodssuppliedmustbefitforpurpose.



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(f) reinstatement of parties’ right to choose any law or rulesof lawapplicable to thesubstanceofadisputeandarbitraltribunal’srighttodecideaccordingtoequityandconscience,ifsoauthorisedbytheparties(Section30);

(g) expressprovisionsempoweringthearbitraltribunaltograntpre-andpost-awardinterestonanysumsthatareindispute(Section33);

(h) expressprovisionsensuringconfidentialityofarbitrationandarbitration-relatedcourtproceedings(newSections41Aand41B);and

(i) reinforcement of principles ofminimum court interventionand finality of arbitral awards for domestic arbitrations(repealofSections42and43).


Malaysia isasignatory to the1958NewYorkConventionon theRecognitionandEnforcementofForeignArbitralAwards(“theNewYorkConvention”). An arbitration award obtained in a “foreignstate”(i.e.aStatewhichisapartytotheNewYorkConvention)isenforceableinMalaysia.EnforcementofinternationalarbitrationawardsmayberefusedforfailingtomeettheconditionssetoutinSection38orbasedonthegroundsassetoutinSection39.Section38oftheMalaysian Arbitration Act 2005providesthatonapplicationinwritingtotheHighCourtwiththeawardandwrittenarbitrationagreement,anarbitrationawardfromaforeignstateshallberecognisedandbeenforcedbyentryasajudgmentintermsoftheawardorbyaction.Section39oftheArbitration Act 2005providesthatrecognitionorenforcementofanarbitrationawardmayberefusedwhere:(i) apartytothearbitrationagreementwasunderanyincapacity;(ii) thearbitrationagreementisnotvalidunderthelawtowhich

thepartieshavesubjectedit,or,failinganyindicationthereon,underthelawsoftheStatewheretheawardwasmade;

(iii) theapplicantwasnotgivenpropernoticeoftheappointmentof the arbitrator or of the arbitral proceedings or wasotherwiseunabletopresentthatparty’scase;

(iv) the awarddealswith a disputenot contemplatedbyor notfallingwithinthetermsofthesubmissiontoarbitration;

(v) the award contains decisions onmatters beyond the scopeofthesubmissiontoarbitration.Thatbeingsaid,wherethedecisiononmatterssubmittedtoarbitrationcanbeseparatefrom those not so submitted, only that part of the awardwhichcontainsdecisionsonmatterssubmittedtoarbitrationmayberecognisedandenforced;

(vi) the composition of the arbitral tribunal or the arbitralprocedure was not in accordance with the agreement ofthe parties, unless such agreement was in conflict with aprovisionofthisActfromwhichthepartycannotderogate,or, absent such agreement,was not in accordancewith theArbitration Act 2005;

(vii) theawardhasnotyetbecomebindingonthepartiesorhasbeen set aside or suspended by a court of the country inwhich,orunderthelawofwhich,thatawardwasmade;

(viii) thesubjectmatterofthedisputeisnotcapableofsettlementbyarbitrationunderthelawsofMalaysia;or

(ix) theawardisinconflictwiththepublicpolicyofMalaysia.



Disputes are generally resolved by way of court litigation,arbitration,adjudicationandmediation.


Malaysia enacted statutory adjudication with the Construction Industry Payment and Adjudication Act 2012(CIPAA).CIPAA applies to every construction contract made in writingrelatingtoconstructionworkcarriedoutwhollyorpartlywithintheterritoryofMalaysia,includingaconstructioncontractenteredintobytheGovernment.DisputeswhichmaybereferredtoadjudicationunderCIPAArelatetopaymentforworkdoneandservicesrenderedundertheexpresstermsofaconstructioncontract.Theprocessisusuallyadocuments-onlyprocedureandlastsaround100 days. The decision is temporarily but immediately bindingpending thefinal resolutionof thesubjectdisputesbyarbitration,litigation or agreement between the parties. In the interim, thelosingparty is required tocomplywith theadjudicator’sdecisionandpaytheadjudicatedamountunlessthedecisionhasbeenstayedorsetasidebytheHighCourt.


ArbitrationsaregovernedbytheArbitration Act 2005(“AA2005”)which is based on theUNCITRALModel Law and amended bythe Arbitration (Amendment) Act 2011 (“Amendment Act”) andArbitration (Amendment) (No. 2) Act 2018whichcameintoforceon8.5.2018.Section 8 of theAA 2005 expressly states that “No court shall intervene in matters governed by this Act, except where so provided in this Act”.Pursuanttosection10oftheAA2005,itismandatoryfortheMalaysiancourtstostayanycourtproceedingswhicharethesubjectofanarbitrationagreementinfavourofarbitration.Astaywillberefusedwhereapartyhastakenastepintheproceedingsorthearbitrationagreementisnullandvoid,inoperativeorincapableofbeingperformed.The2018AmendmentsfollowthelatestrevisionoftheUNCITRALModelLawandarbitral lawsof leading jurisdiction in the regionandworldwide,andintroduceschangessuchasthefollowing:(a) clarification of the status of an emergency arbitrator and

orders/awardsgrantedbytheemergencyarbitration(Section2andnewSection19H);

(b) reinstatementofparties’righttochooserepresentationbyanyrepresentative,notjustalawyer(newSection3A);

(c) acourt’spowertolookatthesubjectmatterofthedispute,indecidingonarbitrability(Section4);

(d) clarificationoftherequirementthatanarbitrationshouldbein writing–recognitionofelectronicmeansofcommunication(Section9);

(e) comprehensive, yet balanced provisions dealing with theHighCourt’sandarbitraltribunal’spowerstograntinterimmeasures(Section11,Section19andnewSections19A–19J);



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AnactionusuallycommencesbywayofaWrit (wheregenerallytherearecontestedfactsandwhichproceedstotrial)orOriginatingSummons(wherematterscanbesummarilydisposedof).TheMalaysian courts are comprised of a hierarchical system ofcourts with the Superior Courts and Subordinate Courts and thedoctrineofstare decisisapplies. TheSuperiorCourtscontaintheFederalCourt, theCourtofAppeal, theHighCourtofSabahandSarawakwhereas the SubordinateCourts contain of the SessionsCourt, the Magistrates Court, Penghulu’s Courts, Native Courtsandothermiscellaneouscourtsandtribunals.TherearespecialisedconstructioncourtsinMalaysia.Thetimetoresolvedisputesmaygenerally takeone to twoyearsfromadecisionbythecourtoffirstinstanceuntiladecisionbythefinalcourtofappeal.


Foreign judgments may be enforced by registration under theReciprocal Enforcement of Judgments Act 1958 (“REJA”) or bywayofacommonlawaction.Pursuant to REJA, a foreign judgment must meet the followingrequirementsbeforeitcanbeupheldandenforced:(i) the foreign judgment must be delivered by a court listed

undertheFirstScheduleofREJA1958;(ii) itmustbeafinalandconclusivedecisionbetweenparties;(iii) itmustbeajudgmentforasumofmoneypayable(doesnot

includesumssuchastaxes,finesorotherpenalties);and(iv) the applicable registration must be made within six years

afterthedateofjudgment,oriftherewasanappeal,afterthedateofthelastjudgmentintheappeal.



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Wong & Partners is a Malaysian law firm dedicated to providing solution-oriented legal services to its clients. As a member firm of Baker McKenzie International, we bring a unique combination of local knowledge and global experience to every matter. Since its establishment in 1998, Wong & Partners has grown steadily and now consists of 18 partners and more than 50 associates. The Firm’s lawyers are able to deliver comprehensive and integrated advice to clients, and are trusted by respected domestic and multinational corporations for their needs in Malaysia and throughout Asia. The Firm’s lawyers are committed to helping clients apply industry-specific, innovative and practical solutions.

The Firm has been named Malaysian Law Firm of the Year by ChambersAsiaPacific2018and Asian Legal Business Malaysia Law Awards 2018 respectively; Malaysia Law Firm of the Year by Euromoney Asia Women in Business Law Awards 2017; Intellectual Property Law Firm of the Year by Asian Legal Business 2018; Malaysia Deal Firm of the Year by Asian Legal Business 2017; and ranked Tier 1 in various legal directories in various practices.

Janice Tay is a partner in the Dispute Resolution Practice Group at Wong & Partners. Her expertise lies in construction and engineering. She regularly advises and assists international and local clients on construction law in Malaysia. She is involved in international and domestic arbitrations and her portfolio includes litigation and appearances at all levels of the courts.

Janice is a Fellow of the Chartered Institute of Arbitrators and a Mediator, a qualified Adjudicator to adjudication disputes under the Construction Industry Payment and Adjudication Act 2012; and on the Kuala Lumpur Regional Centre for Arbitration’s (KLRCA) panel of arbitrators, adjudicators and mediators.

Janice is the current Deputy President of the Society of Construction Law (Malaysia), Secretary of the Chartered Institute of Arbitrators (Malaysia) and Committee Member of the Chartered Institute of Arbitrators (Malaysia) Young Practice Group.

Janice TayWong & Partners (member firm of Baker & McKenzie International)Level 21, The Gardens South TowerMid Valley City, Lingkaran Syed Putra59200 Kuala LumpurMalaysia

Tel: +603 2298 7838Fax: +603 2282 2669Email: [email protected]: www.wongpartners.com

Siaw Wan Lim is a partner in the Finance & Projects Practice Group at Wong & Partners and specialises in major projects, infrastructure and construction matters.

She focuses on negotiating, drafting and advising on project documentation including concession agreements, power purchase agreements, fuel supply agreements, engineering procurement and construction contracts, sub-contracts, consultancy agreements, project development partner agreements, handover, operation, maintenance agreements, port operating agreements, service agreements and tender documentation. Her clients include sponsors, employers and contractors from various sectors including general engineering and construction, conventional power, renewable energy, oil and gas, shipping, rail, health and education industries.

Siaw Wan LimWong & Partners (member firm of Baker & McKenzie International)Level 21, The Gardens South TowerMid Valley City, Lingkaran Syed Putra59200 Kuala LumpurMalaysia

Tel: +603 2299 6405Fax: +603 2282 2669Email: [email protected]: www.wongpartners.com



Chapter 18

COMAD, S.C. Roberto Hernández García

Mexico

■ For lump-sum contracts in the private sector, the contractmustbeinwrittenform,withadescriptionoftheworkandthe amount or design of the work when applicable. Thecontractcanincludeclausesthatpartiesconsiderappropriatefor the characteristics of the work, without affecting theessenceofthecontract.

■ For contracts in the public sector, a public procurementprocess must be followed in order to formalise a publicworks contract. This type of contractmust include all therequirementsestablished inarticle46of theLawofPublicWorksandRelatedservices(LPWRS),suchasthenameofthe government authority, the applied public procurementprocedure, the informationof thebidder, thecharacteristicsoftheworktobedone,andtheamountandformsofpayment(which are also established in the law). The bidder mustknowthemodelcontractatthetimeofthebid.


The equivalent to a letter of intent in Mexico is the so-called“Preliminary/Promise Contract”, provided for in the Civil Code,whichcontemplatesthatthepartiesareobligedtoenterintoafuturecontract.Inadditiontotheessentialqualitiesofanycontract,forthiscontracttobelegallybindingitmustbeinwrittenform,andestablishatimelimitforthepartiestoenterintothefuturecontract.This preliminary contract can only have as its object the futureintention to enter into a contract under the terms and conditionsagreedbytheparties.


Yes, there isstatutory insurancefor thecontractorwithrespect toitsemployeesundertheLawofSocialSecurity(fordeath,personalinjury or sickness of employees). In addition, depending on theobject of the contract, the parties can establish, in clauses in thecontract, the insurances that theydeemnecessary in termsof the



Mexico has not developed its own general standard types ofconstruction contracts (model contracts), although some specificprojectshaveusedinternationalformssuchasFIDIC(Fédération Internationale des Ingénieurs-Conseils),AIA(AmericanInstituteofArchitects–USA)andConsensusDocs(USA).On the contrary, in Mexico companies develop their ownconstructionandengineeringcontracts,accordingtotheapplicablelawoftheplacewheretheworksaretobeperformedandaccordingtothenatureofthecontract(publicorprivate).Regular types of construction contracts include Lump-Sum,UnitPrices,Mixed (Lump-Sum andUnit Prices), and in recent times,due to theparticipationofforeigncompanies in themarket,moreConstructionManagementcontracts(at-riskorpure)haveseenthelightofday. According toMexican legislation,parties canagreeonanymatterthattheydecideaslongastheydonotviolatepublicorder/publicinterestrules.


To create a legally binding contract inMexico, it is important tocomply with all the requirements established in the general lawapplicabletocontracts,suchas:consentorwillingness;licitobject;capacity to contract; and the form that each contract requiresaccording to the law. Nevertheless, there could be specific rulessuchasthefollowing:


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Asforprivatecontracts,thepartiesareentitledtofreelyagreetheterms of retentions and translate such agreement into a contractclause.


InMexico,performancebondsare themostcommonmechanismforguaranteeingcontractualobligations.Regarding public works contracts, the LPWRS establishes inits article 48 the requirement for performance bonds, whichmust be provided in order to sign the contract. The amount andspecificconditionsareestablishedbytheauthority,butusuallythepercentageisnothigherthan10percentofthetotalcontractvalue.With respect to private contracts, the existence of performancebondsissubjecttotheconditionsagreedbytheparties.


Itisnotcommonpracticetoincludetheseprovisionsinconstructioncontracts. Nevertheless, article 2644of theCivilCodementionsthatwhen the contractorshavenotbeenpaid, theycan retain thework thathasbeenconstructed,but it doesnotmention the righttoretainthetitleortoremovegoods.Theonlycaseinwhichthiswouldbepossibleisifthepartiesexpresslyagreeandestablishitasacontractclause.



Itiscommonforconstructioncontractstobesupervisedbyathirdparty on behalf of the owner. Third parties are supposed to actimpartially,butinpracticeitiscommonforthemtoactonbehalfoftheowner.Usuallytheengineerorarchitectmayprovideelementsfortheemployertodecideonthesuspensionoftheworks,butunlessthereisexpressauthorityofthethirdparty(whichisunusual),thesuspensionwillcomedirectlyfromtheemployer.


“Pay when paid” clauses are possible in private contracts. Inaccordancewith article 1839 of the Civil Code, the parties havecontractualfreedom,whichallowsthemtoincludewhateverclauses

objectofthecontract.Themostcommoninsurancesusedinpracticeare: professional liability (design); civil liability; general liability(all-risk); automobile; equipment or machinery; environmental;construction;orworkinsurance.Asforpublicworkcontracts,theyusuallyobligethecontractortoprovideinsuranceoncertainmatters,inordertocovercontingenciesduringtheexecutionofthecontract.Dependingontheprocuremententity, therewill be additional requirements according to internallaws and regulations (Comisión Federal de Electricidad (CFE),Petróleos Mexicanos(Pemex),etc.).


Regardingpubliccontracts:(a) Generalrequirements:forthistypeofcontract,theLPWRS

establishes a list of requirements that the contract mustincludeandcomplywithinordertobeenforceable.

(b) Labour: labour law establishes that all companies mustcomplywithitsterms,includingsub-contractors,outsourcingcompanies,etc.

(c) Tax:accordingtothetaxlaws,bothpartiesshallcomplywiththeirownobligations.

(d) Healthandsafety:thisrequirementisonlyforthecontractorintermsofarticle67LPWRS.

Regarding private contracts: the parties can agree on the generaltermsandconditionsforthecontract,aslongassuchagreementsdonotviolatethepublicinterestrulesandstatutoryrequirements,suchasthefollowing:(a) Generalrequirements:forexample,thelump-sumcontractis

requiredtobeinwrittenform,withadescriptionoftheworkandtheamountordesignoftheworkwhereapplicable.

(b) Labour: it is important todistinguishwhether the statusofthoseworking on site is as employees of the employer oremployees of the self-employed contractor. For the firstassumption,theemployermustcomplywiththeobligationsprovided for in the Federal Labour Law. In the case ofself-employed contractors, the labour relationship will bebetweenthecontractorandtheemployees,sothecontractoris thepartywhichmustcomplywith theobligationsof theFederalLabourLaw(articles10,13,15FLL).

(c) Tax:taxesmustbepaidaccordingtotheTaxCode.Eachofthepartiesshallcomplywithitsownobligations.

(d) Health and safety: in terms of article 15-C of the FederalLabour Law, the employer is obliged to review thecontractor’s compliance with the applicable measures forsafety,healthandenvironmentalprotection.


For public contracts, the LPWRS establishes in article 46bis thepossibilityfortheemployertomakearetentionintwophases:(a)duringtheperformanceoftheworks(asaperformanceguarantee);and/or (b) after completion of theworks (defects liability). Theconditionsoftheseretentionsareoneoftheessentialrequirementsof public contracts, as provided in sectionX of article 46 of thesamelaw.

COMAD, S.C. Mexico


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In thecaseofpublicworkscontracts, theLPWRSprovisionsareautomatically applicable and even if the contractual clauses aresilent or ambiguous with respect to a matter established in theLPWRS,thelatterwillapply.Concerningprivatecontracts,partiesmaychooseaspecificpieceoflegislationtoapplytothecontract.Therefore,theCivilCodeoftherespectivestate,and/ortheCommercialCode,shallapply.


Regardingpubliccontracts,article46bisof theLPWRSmentionsthatifthedelayiscausedbythecontractor,thecontractualpenaltieswill apply, as long as they do not exceed the total price of thecontract.Inthatcase,therewillnotbeanextensionoftimeunlessthepartiesagreetoone.Ifthedelayiscausedbytheemployer,thecontractorisentitledtoreceive:(i)thecostsoccasionedbythatconcurrentdelay;and(ii)anextensionofthefinaldeadlineinthesameproportionofthedelay,inaccordancewitharticle52oftheLPWRS.Incasetherearetwoeventsthatcausethedelay,theaffectedpartycanallegeconcurrentdelay. Nevertheless, thishas tobeproved,notwithstandingthatthelawissilentonthis.Forprivatecontracts,theCivilCodedoesnotestablishahypothesisregardingtheextensionof timecausedeitherbythecontractorortheemployer;however,inthecaseofthecostsoccasioned,article1840 states that the parties can agree on a clause for liquidateddamagesincaseoneofthemdoesnotcomplywithitsobligations,whichmayresultinadelay.


Thereisnospecificprovisionorcaselawregardingthismatter,butinprinciplethecontractorwouldnotbeentitledtoanextensionoftime,sincethatfloatisawayto“cover”therisks,andprovidinganextensionwouldmeanadoublebenefitforthecontractor.Itisimportanttorememberthatthepartiescanagreesuchprovisionsinthecontract.


ThegenericperiodofthestatuteoflimitationsunderMexicanlawis10years.Nevertheless,thisperiodcanbemodifiedorchangedinanagreementbytheparties.Additionally,article66oftheLPWRSestablishesthattheemployercan only make a claim within 12 months following the day ofcompletionandacceptanceoftheworks;theclaimsmaybemadeforlatentdefectsandforanyotherresponsibilitythatthecontractormayhaveincurredintermsofthecontract.

theydeemconvenient,andconsidering“paywhenpaid”isnotanessential requirementfor thevalidityof thecontract, it isentirelyvalid.


Liquidated damages are the most commonly used sanction forbreachesofcontractunderMexicanlaw.Thepartiescanagreeinadvanceacertainsumtobepaidintheeventofparticularbreaches,or in the cases agreedby them. However, thiskindofprovisionhassomerestrictions.Inprivatecontracts,theamountofliquidateddamagescannotexceedthevalueofthebreachedobligation,andinpubliccontracts,liquidateddamagescannotexceedtheamountoftheperformancebond.



Forpubliccontracts,article59oftheLPWRSallowstheauthoritytomodifythescopeofthework,yettherearesomelimitsonthisright: variation in the scope is the responsibility of the authority,andthedeterminationmustbesupportedandestablishtheimpactonthepriceandpaymentterms;suchmodificationcannotvarythecontract term or price bymore than 25 per cent, normodify theoriginalprojectsubstantially.Ifthechangesexceedthementionedpercentagebutdonotvarytheobjectofthecontract,thepartiescanexecuteaChangeOrder,whichwillbeconsideredpartofthecontract.Publiclump-sumcontractscannotbemodifiedwhenthetotalpriceortermareaffected.Regarding private contracts, articles 2623 and 2627 of the CivilCodeprovidethatinalump-sumcontract,theemployerisentitledtovarythescopeofthework.Inthistypeofcontract,itisessentialthat the parties agree on the terms and conditions of theChangeOrder, due to all the changes that may be involved (in terms ofpaymentandtime).WhenexecutingaChangeOrder, it is importanttoverifythatthenew terms do not conflict with contractual provisions, but alsocomply with applicable laws and regulations (i.e. ConstructionRegulations).


In termsofarticle2027of theCivilCode, if thecontractoromitstheperformanceofcertainwork,theemployercandoithimselforhireathirdpartytodoitatthecontractor’sexpense.Thisprovisionappliestobothprivateandpubliccontracts,sincearticle13oftheLPWRSestablishesthattheCivilCodeissupplementary.

COMAD, S.C. Mexico


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However,itisimportantthatthecausesforterminationareexpresslysetoutinthecontractsothatthepartiesareclearastounderwhichcircumstancesthecontractcanbeterminated.


Force majeureisrecognisedinourjurisdictionasaneventthatisnotforeseeablewherethepartyisunabletopreventitfromhappening.Given the nature of such events, it is not possible to ask forliquidated damages (article 1847 Civil Code), unless one of thepartieshadtheopportunitytopreventtheforce majeureanddidnotactcorrespondingly.Underthetermsofarticle62LPWRS,itispossibleinpubliccontractsto argue that the force majeure event caused the impossibility tocontinuewiththeworks,bringingabouttheearlyterminationofthecontract.Caselawstatesthatforaneventtobeconsideredforce majeure,itisnotenoughreasonthatthecompliancewithcontracttermsturnsmore complicated or burdensome, but that it is impossible to beaccomplished.


According to article 1869 of the Civil Code, the third party isentitledtoclaimthebenefitonlyincaseswherethepartiestothecontractagreetoestablishthatthebenefitwillbeforthisthirdparty.Inpubliccontracts,thelawdoesnotcontemplatethisscenarioandtherefore,itisnotpossible.


IntermsoftheCivilCode,inthesecasesitispossibleforthepartiestosetoffthedebtsuptotheamountofthelowestone(articles2185and2186CivilCode). The limitations to this rightareexpresslymentionedinarticle2192oftheCivilCode,someofwhichmaybeapplicableifonepartywaivesthisright,and/orifthedebtstosetoffarefiscaldebts.


Partiesoweadutyofcare toeachotherconsideringthat theyareprofessionals,performingvalidworkunderthelaw.Lackofdutyofcarewillimpactontheperformanceofthecontractandcouldcauseapossiblebreachbythepersonthatdoesnotcomplycorrectly.


Yes, the Federal Civil Code and the Codes of the 32 federativeentities, as well as the Commercial Code, provide rules for the


Forprivatecontracts,article2618oftheCivilCodeestablishesthateveryriskthatmayoccurbeforethecompletionoftheworkwillbeatthecontractor’sexpense,unlessotherwiseagreedbytheparties.Inthecasethatthecontractisambiguous,theCivilCodemaybeapplied, since it is supplementary to theLPWRSand the latter issilent(article13LPWRS).Notwithstandingtheaforementioned,unlessotherwisestatedintheconstructioncontract, theowner shall bear the riskofunforeseengroundconditions,andnotthecontractor.


Inpubliccontracts,thepartywhobearstheriskofachangeinlawisthecontractor,duetohisobligationtocomplywiththeapplicablelaw,inaccordancewitharticle67LPWRS.Regardingprivatecontracts, in thecaseof lump-sumagreements,alltherisksthatmayariseduringconstructionwillbebornebythecontractor(article2617CivilCode);byinterpretationofthisarticle,itmaybeunderstoodthattheriskofachangeinlawisalsoincluded.However,itisimportanttonegotiateriskallocationwhendraftingacontract.


The employer owns the intellectual property in public contractsin accordance with section XIII of article 46 LPWRS; all theintellectualpropertyrightsderivedfromthecontractedserviceswillbethepropertyoftheemployerexceptwhenthereisanimpediment.In thecaseofprivatecontracts, theCivilCodedoesnotestablishanythingaboutthis;itmustbeagreedbytheparties,buttheownerusuallykeepstheserights.


Thisisrarelyseen,butthecontractormaysuspendtheworksincaseswheretheemployerdoesnotpaythecontractororthereisextendedforce majeure.Also,theCivilCoderecognisestheconceptofforce majeure,whichiscommonlyprovidedforincontracts.


Under the terms of article 60 LPWRS, a public contract can beterminated on the grounds of general interest, and when it isdemonstrated that continuing with the work would not benefitthe State. The only scenario that the LPWRS contemplates forthecontractor to terminate thecontract iswhen force majeurehasoccurred,making it impossible tocontinuewith theworks (article62).IntermsoftheCivilCode,whichappliestoprivatecontractsandtopubliccontracts inasupplementarymanner, the innocentpartyhastherighttochoosebetweenrequiringthecompliancewiththeobligations of the contract, and terminating the contract (article1949CivilCode).

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There isno“adjudication”asunderstood in theUnitedKingdom,AustraliaorMalaysia.However,partiesmayagreetosubmittheirdisputes to aDisputeAdjudication Board (DAB) as adjudicationprocesseshaveabindingeffect.ThisisratheruncommoninMexicoduetothelackofregulation.


Manyconstructioncontractshavearbitrationclauses–mainlythoseof CFE and Pemex. Arbitration inMexico abides by the rules ofICC,LCIAandtheCommercialCodewhichfollowstheUNCITRAL(UnitedNationsCommissiononInternationalTradeLaw)ModelLaw.


Yes, the courts recognise and enforce international arbitration.MexicoisasignatoryoftheNewYorkandPanamaConventions.


There are provisions in the procedure laws for enforcement of ajudgmentinaforeigncourt.Theprocedureandrequirementshavetobemetinordertoenforceaforeignjudgment.


Incasesrelatedtoconstruction,thisisacommercialmatter.Usuallysuchmattersaresolvedbycivilorcommercialcourts. Thereisamainprocedure,anappealandtwofederalinstances.Theentiretyoftheinstancesmaytakebetweentwotofouryears.

interpretation of a contract as follows: (i) the ambiguous termmustbeinterpretedinaccordancewiththeotherconditionsofthecontract, but also applying the sense that is consistent with theobjectandpurposeofthecontract;(ii)thecustomarypracticeofthecountryofthepartymustbetakenintoconsideration;and(iii)ifitisimpossibletoresolvethedoubtthroughtheserules,thenitwillberesolvedinfavourofthegreaterreciprocityofinterests(articles1851–1857CivilCode).


Ingeneral,termsandconditionsthatareillegaland/oragainstthepublicorderorpublicinterestprovisionsarenotenforceable.“Illegalacts”areunderstoodasallacts thatgoagainst the laworcustomarypractice(articles1830and1795CivilCode).


Thedesigner’sobligationsarenotabsolutewithregardtosituationsinwhich a construction contractor incurs a fault for constructionreasonsandnotduetodesignfactors.



According to the public contracts law, disputes are generallyresolvedthroughclaims,conciliation,arbitrationandtrial(articles83–104 LPWRS); nevertheless, the most used means to solve adisputeinMexicoregardingpubliccontractsisstillgoingtocourt.Disputesinprivatecontractsmaybesolvedthroughthemechanismsagreedbythepartiesandestablishedinthecontract.Inthiscase,thelawestablishesnolimitation.Inordertochooseaparticularmethodofdisputeresolution,itisimportanttoknowthetypeofprojectandthemostconvenientresolutionmethod.

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COMAD, S.C. is a prestigious boutique law firm, founded 51 years ago (1965), which specialises in: construction and infrastructure law (transactional and disputes); public procurement (transactional and disputes); and corporate integrity in construction (training and advice). It has participated in some of the most relevant infrastructure projects in Mexico and Central America. The firm and its members are recognised in international independent publications such as Chambers and Partners, Who’s Who Legal and Euromoney. It is the only law firm certified in these areas of law by the National Chamber of Consulting Enterprises (CNEC).

Roberto is an international attorney specialised in construction law, public procurement law and compliance. He has a Master’s degree in Mexican Administrative Law from the Universidad Panamericana, Mexico City. He has also attended courses at prestigious universities such as the University of California (Davis and Berkeley), the University of Florida, Harvard University and Cambridge University, UK. He has served as a leader in international construction groups; for example, as Co-Chair of the International Construction projects Committee of the International Bar Association (IBA), and Chair of the Infrastructure Disputes Committee of the International Chamber of Commerce (ICC) in Mexico. He is the Consulting Editor and Co-Author of: “Construction and Infrastructure Disputes: A global handbook”; and “International Public Procurement: A guide to best practice”, both published in the UK.

Roberto Hernández GarcíaCOMAD, S.C.FEBO 29Credito ConstructorMexico City 03940Mexico

Tel: +52 55 5661 3733 Fax: +52 55 5663 0814Email: [email protected]: www.comad.com.mx

COMAD, S.C. Mexico


Chapter 19

Abuka & Partners, Legal Practitioners Patrick Abuka

Nigeria


Tocreatea legallybindingcontract, theessentialelementsare, towit, offer, acceptance, capacity, intention to create legal relationsandconsiderationmustbepresent. Theparties involvedmustbead idem(consensual),withrespecttotheobligationstheyintendtocreatethroughtheofferandacceptanceprocess.There is no legislation stipulating any mandatory rule thatconstruction contracts in Nigeria must be in writing. Except,of course, in cases where the contract touches upon rights overland, for which some statutes provide that it must be written.Constructioncontractsmay, therefore, ingeneral,beoral,writtenorpartlywritten.Atypicalconstructioncontractshouldbewrittenwith its termsexpressly spelt out. Arbitrationclauses,whichareusuallyincorporatedintoconstructioncontractagreements,makeitmandatorythatsuchconstructioncontractsmustbeinwriting(seetheArbitrationandConciliationACT,Cap.A18LFN2004).


Theconcept“LetterofIntent”iswellrecognisedintheconstructionindustryinNigeria,andwhetherornotaletterofintentcancreateabindingcontractisdependentonthefactsandcircumstancesofaparticularcase.Aletterofintentwhichcontainsthefineelementsofavalidcontract(i.e.offer,acceptance,intentiontoenterlegalrelations,etc.)coupledwithperformancefromthepartyactinguponthesame,maycreatelegallybindingobligations.But,wherethetermsarestillbeingnegotiatedpriortoanagreement,thepartywhoactedthereonwouldbecompensatedonlyonaquantum meruitbasis.



The most common standard forms of construction contract inNigeriaare:theJCTstandardformofcontract(withoutquantities),2005Edition;thestandardformofbuildingcontractinNigeria,1990(SFBCN); the International Federation of Consulting EngineersContract (FIDIC), otherwise known as “The FIDIC conditionsof contract for construction for building and engineering worksdesigned by the employer, 1999 Edition”; the general conditionsof contract for the procurement of works, 2011 (the GCC); andthe Federal Ministry of Works standard conditions of contract(Roadworks),1999Edition(FMOWC).TheuseofstandardformcontractsinNigeriahasbeenfoundtobeconvenient,time-savingandcost-effectiveintheconstructionindustry.However, the forms may be amended to suit the requirementsof some types of projects, if so required. In fact, the standardform contracts aremostly used by public sector entities, but notnecessarilysobyprivatesectorconstructioncontracts.In Nigeria, the JCT Design & Build Contract 2005 places theobligationsfordesignandconstructiononcontractors,especiallyinengineeringandconstructioncontracts.Anyofthestandardformconstructioncontractscanbeadoptedtoconcludeadesign-onlycontractwhichmayoperateundertheSpecialConditionsofContract(SCC),dependingontherequirementsoftheparticularconstructionprojectinNigeria.Yes, management contracting is a well-accepted arrangement inNigeria’sconstructionindustry.


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(d) There is no construction industry-specific legislation onhealth and safety requirements in Nigeria. However, theEmployees Compensation Act 2010 makes provision forcompensationoftheemployeeincaseofdeath,injury,diseaseordisabilitywhichmayariseinthecourseofemployment.TheFactoriesAct (FA), 2004, does not cover constructionsites in its definition of “Factory”. Thismeans, therefore,that theprovisionsforbothsafetyandhealthofworkers inthesaidActexcludeemployeesunderconstructioncontracts.However, S57 of the FA empowers theMinister of Laborand Productivity to make a regulation which will extendtheprovisionsof theFAonsafetyandhealth toworksandengineering construction sites. It is expected that, whentheLabor Safety,Health andWelfareBill 2012 (LSHWB)is signed into law by the President, safety and healthconsiderationsastheyrelatetoconstructionactivitieswillbecoveredadequately.


ItiscommonforconstructioncontractstocontainaRetentionBond(orGuarantee) for the contractor, in theplaceof cash,which theemployer ought to have retained, prior to full completion of thecontract.


It iscommonpractice in theconstruction industry forcontractorsto take out performance Bonds/Guarantees, Advance PaymentBonds and Retention Bonds for the benefit of the employer assecurityfortheperformanceoftheirobligationsunderthecontract.Undersomestandardformsofconstructioncontract,liketheGCCandtheFIDICcontracts,theemployermayterminatethecontractongroundsof failureby thecontractor to takeout suchbonds inapplicablecircumstances. Thereareno restrictionson thenatureofsuchbonds,butthenatureofsuchisusuallydeterminedbytheobligationstheycreate.


InNigeria,constructioncontractsarestructuredinaccordancewithstandard forms of construction contract and, even in negotiatedbespokecontractforms,therearenoexpressorimpliedtermswhichveststitlerightstogoodsandsuppliesusedintheworks.Assecurityforpromptpaymentinconstructioncontracts,usuallythecontractwillhaveaprovisionwhichensures thearrangementforpaymentto thecontractor, and suchobligation topay for theworks formspart of the terms of the construction contract. Failure to pay asandwhenthepaymentfallsdueconstitutesanactionablebreachofcontract.Thecontractor’soptionstoremedyaredamages,interestor additionalpayment,where there isnopriornotice towithholdpayment issuedby theemployer, inaccordancewith thecontract.


There is no statutorily required type of insurance specific to theconstruction industry. However,most standard formconstructioncontracts prescribe insurance cover in the names of both theemployerandthecontractor.Thefollowingaretypesofinsurancecommonlyrequiredinconstructioncontracts:■ Allrisksinsurance/lossinsurance.■ Publicliabilityinsurance.■ Professional indemnity insurance (on a “claimsmade”basis

forprofessionalnegligence).■ Latentdefectinsurance.


(a) There are none. However, construction workmay not beundertaken without satisfying the statutory provisions ofthe Land Use Act 1978 (LUA), which regulates the use,ownershipandadministrationof landinNigeria. Also, theNigerianUrbanandRegionalPlanningLaw(NURPA1992)mustbeconsideredbeforeanydevelopmentuponany landsituateinanystateintheFederationmaytakeeffect.Thereisarequirementthatthebuildersinthecountrymustpossessthe requisite licencesandskills,obtainedby registration inthe council of Registered Builders of Nigeria (CORBON)establishedbytheBuilders(Registrationetc.)Act,1989.Intermsof the technical or professional expertise required toact as an engineer in the construction of public buildings,such professional must be registered with the Council ofRegisteredEngineersofNigeria(COREN)establishedundertheEngineers(Registration,etc.)Act,1970(ERA).Infact,therearesundryissuesintheconstructionindustryinNigeriathatmayrequireacontractortoseekspecialistguidance.

(b) There are quite a number of pieces of labour legislationthat employers and contractors must comply with. Theseinclude the Labour Act 2004 which regulates all aspectsof employment in Nigeria, such as terms of employment,wages,classesofworkers,probationaryperiods,redundancy,etc. The Employees CompensationAct 2010 (ECA) andtheLabourSafety,Health,andWelfareBill2012(LSHWB)awaitthePresident’sassent.Whensignedintolaw,theyshallrepealtheextantFactoryAct,2009,andonlythenshallsafetyandhealthissues,withrespecttoconstructionactivities,beadequatelycovered.

(c) Employers and employees are required to register for amonthlyco-contributorypensionsschemewiththeNigerianSocial InsuranceTrustFundScheme(NSITF). Suchfundsare further remitted to the Pensions Fund Administrator(PFA)ofchoiceforthebenefitoftheemployeeatitsmaturity.Income received as wages are tax-deductible from sourceby employers under the pay-as-you-earn (PAYE) schemeandareremittedtotheStateInlandRevenueService(IRS).Employers and/or contractors, as incorporated companies,payCompanyTaxestotheFederalInlandRevenueService(FIRS).Thereareothertaxes,whichincludeeducationtax,etc.,whichmaybepayableunderconstructioncontracts inNigeria.

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Therightsandentitlementsoftheemployerareprovidedunderthecontract and there is no limitation by any statute or otherwise tofetter such right to vary theworks, save the contract itself. Anyvariation which would fundamentally change the works wouldautomatically constitute a new contract. Itwill be a question offacttoprovetheexistence,ifany,ofavariationinthenatureoftheworks.Wheretheemployeracceptsaproposalforaccelerationtoadjustthecompletiondate,thesaidactwillbeincorporatedintothecontractpriceanddeemedavariation.


Anyitemofworkwhichtheemployerchosetoomitwhilstdrawingthecontractnecessarilycannotbepartofthecontract,andtherighttodotheworkhimselforawardittoathirdpartyisalsonotfetteredbyanyexternalinstrumentorstatute.Itisuncommonforcontractsto stipulate that the employermay omitwork for the purpose ofawardingittoanotherparty.


Thevariousrightsandobligationsofpartiestoacontractareoftenprovidedinthespecificcontract.InNigeria,impliedtermsarereadintothecontractbyeithertheconductoftheparties,oroperationsoflaworbythecustomorusageofthetradetowhichthetransactionrelates.Impliedtermsoftenfloworreadintotheexpresstermsofthecontract.However,anytermwhichwouldcontradicttheexpresstermsandcharacterof thecontractwouldnotbe implied into thecontract.


Wherethecauseofadelayisconcurrent,inthatboththeemployer’sdelaying event and the contractor’s delaying event occurredsimultaneously,therewouldbeaneedtoanalyseproperlythevariousfactors at play, with regards to time of occurrence of the delay,durationof thedelayandcausation. InNigeria, severalmethodsadoptedfromthoseusedbytheEnglishandAmericancourts,e.g.in theHenry Boot Construction (UK) Ltd. vs. Malmaison Hotel (Manchester) Ltd.andSmith vs. The United States of America,aregainingcurrency.Thesehavetheeffectthat,wherethecontractorisdelayedbytwoconcurrenteventscausedbythefaultsofboththeemployerand thecontractor, the saidcontractor shall inall casesbeentitledtoanextensionoftime. Butwhetherthecontractorisentitled tomonetarycompensationwilldependonwhose faultorriskwasthedominantcauseforthedelay.Itwill,therefore,dependonthefacts,evidenceandtermsofthecontractoftherelevantcase.

ThecommonlawremedyoflienhasbeenovertakenbyGuarantees/Bonds,whichmaybeprovidedinthecontract.



Construction contracts usually contain provisions for theemployment of a thirdparty as the constructionmanager,who isanagentoftheemployer.Healsoperformsquasi-judicialdecision-making functions and supervises the works. Such constructionmanagerisboundtoactimpartially.Indirectingrelationsbetweentheemployerandthecontractor,theconstructionmanager’sdutyasanagentoftheemployerislimitedbythetermsofthecontractandhemust act independently and impartially, when communicatingwithbothof them. However, exceptwhere theprovisionsof thecontract places limitations on the powers of the constructionmanager,astheemployer’sagent,hisdutybecomesabsoluteunderthecommonlawruleof“Qui facit per alium, facit per se”(hewhoactsthroughanotherisdeemedtoactbyhimself).


No.Such“paywhenpaid”conceptisunknownandinapplicableintheconstructionindustryinNigeria.


Under common law, the employer is entitled to claim generaldamages upon proof of actual loss which it suffered due to thecontractor’s failure to complete the works on the date stipulatedin the contract. Under some operative construction contracts,a pre-estimate of loss by the employer may be included in theevent that the said contractor fails to complete theworks on thestipulatedcompletiondate,provided in thecontractasLiquidatedandAscertainedDamages(LAD). Theemployerisrelievedfromtheburdenofproving theactual lossorgeneraldamages for latecompletionbythecontractorwhereLADisprovidedinthecontract.LAD provisions state the rate of damages that the contractor isliabletopayperday,weekandmonth,ofdelayoftheworkbeyondtheagreeddateforcompletion.IfanLADclauseinacontractissuccessfullyproventobeapenaltyclause,itwillbeunenforceableand invalid and the LAD clause will be rendered inoperative asagainstthecontractor.Theemployermustthensubmitaclaimforgeneraldamages.



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A contractor cannot, without appropriate notice to the architect/engineer,suspendwork,evenwheretheemployerhasfailedtopayinaccordancewiththecontract’sterms.Thesuspensionofworkbythecontractorwithoutdueregardtothecontractualprovisionsmaymakeitliableforbreachofcontractordelay. The time andmanner inwhich a contractormay suspendwork isusuallygovernedby the relevantprovisionsand termsofthecontract.


Where the contract is breached, the innocent party is entitled toterminate the same. The contract may, however, stipulate thegroundsuponwhichtheinnocentpartymayterminatethecontract,especiallyafteranopportunityhasbeengiventothepartyinbreachtoremedythesame.


Theconceptof“force majeure”iswellrecognisedunderNigerianlawandsuchforce majeureeventsincludewar,flood,civilunrest,inclementweather,etc.Aforce majeureeventisaneventwhichmayhappeninthecourseofthecontractthatgeneratecircumstancesthatmayhampertheperformanceofthecontract.Force majeureentitlesthepartyrelyingonittoextendedperformanceofthecontract.Acontractwhichhasbecomeuneconomiccannotsufficientlygroundaclaimofforce majeureinordertobeexcusedfromtheobligationsinthecontract.


Under the common law privity of contract doctrine, a contractdoesnotconferanybenefitorimposeobligationsonnon-partiestothecontract. However,thereareexceptionstothegeneralruleofprivityofcontractdoctrine,whereby,underaconstructioncontract,athirdpartycouldbenefitunderthecontract.Acollateralwarrantyprovides for an extra-contractual facility, which gives rights to athirdpartyunderthecontract.


Set-offisatermwellrecognisedunderNigerianlaw. Wheretwopartiesarebothindebtedtoeachother,onedebtcansetofftheother.However,bothdebtsclaimedbythetwopartiesmustbeintheformof a liquidatedmoney demand. There is no set-off right againstfuturedebtordebtwhichisstillcontested.


Generally,itwilldependontheformofconstructioncontractinusebytheparties.Floatbelongstotheprojectandtowhoeverusesitfirst.Butthecontractorwould,incircumstanceswhereanextensionoftimecannotbegrantedandfortheavoidanceofliabilityforLAD,request an appropriate extension of time, and compensation notexceedingthefloatbegiventoitasarefund.Itissuggestedthatthecontractorshouldinsertthefloatasaseparatenamedactivityorallotmoretimethanrequiredforeachactivity.


InNigeria,claimsthatarisefromcontractaresubjecttoatimebar(seeS.7(1)(a)and(b)of theLimitationAct,Cap.522LFNVol.3). Actionsthatarefoundedfromthecontractarenotactionable,unlessbroughtwithinsixyearsof thedateonwhichthecauseofactionoccurred. Actionforbreachofcontractshouldbeinitiatedtimeously,withinsixyearsoftheoccurrenceofthesaidbreach,ortheclaimantwouldloseitsrightofactionagainstthepartyinbreachduetothetimebar.


Thiscanbedeterminedinthecontract.Butgenerallyinlaw,saveforanytermtothecontrary,thecontractorbearstheriskofunforeseengroundconditions. Itiscommonlyexpectedthattheconstructioncontractstateswhobearswhatrisk.Quiteoften,theprocurementmethods adopted help in apportioning risks appropriately, whilebeingmindfulof theprinciple that riskshouldbeallocatedto thepartymostabletobearit.


Thecontract,ofcourse,willspecificallyindicatewhichpartybearstheriskofachangeinlawaffectingcompletion.However,itisanimplied term in theconstructioncontract that thecontractormustadhereandcomplywithextant lawsandregulationsapplicable toitsoperation.Intheabsenceofanexpressprovisioninthecontractspecifyingwhobearswhatrisk,eachpartyinthecontractwillberesponsibleforcomplyingwiththeobligationsofthelawpertainingtoit.


The employer pays for and obtains ownership of all intellectualpropertyseverallydevelopedbythearchitect/designerorcontractorfortheexecutionoftheproject,providedthatthecontractdidnotspecifyotherwise.



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However, the mutual demand for speed, cost-effectiveness,preservation of relationships and maintenance of privacy neededin the resolution of construction contract disputes often informswhether, mediation, amicable settlement or arbitration would bechosen.Partiesareboundbytheirpreferredorchosenmethodsfortheresolutionofdisputesarisingfromconstructioncontracts.


Yes. Adjudicatory processes are available for resolutions ofconstruction contract disputes in Nigeria, but are sparinglydeployed. The adjudication method of choice is contractuallyincludedinthestandardformofconstructioncontractasthereisnostatutegoverningadjudicationinNigeria.TheappointmentoftheadjudicatorsismadejointlybytheemployerandthecontractorandnamedintheSpecialConditionsofContract(SCC).Sincethereisno legislationgoverningadjudication inNigeria,all incidencesofadjudicationoperatecontractually inaccordancewith therelevantformsofconstructioncontract,e.g.theGCCForm.Theproceduresarethereforeasprovidedinthesaidagreements.


Arbitrationasamethodofdisputeresolutionisthemostpreferredmechanismfortheresolutionofdisputesintheconstructionindustryin Nigeria. Arbitral services and proceedings are constituted inaccordance with theArbitration and ConciliationAct, 1988 withrulesmadepursuantthereto,theseveralmulti-doorcourthouses,theInternationalCentreforArbitrationandMediationinAbuja,andtheLagos Regional Centre for International CommercialArbitration,etc. The particular standard form of construction contract usedprovides: the processes for referrals to arbitration; the numberof arbitrators; the qualification that the proposed arbitrator mustpossess; the appointing authority, if the parties did not agree onanarbitrator;andtheapplicablelawthatwouldgovernthearbitralproceedings.


Nigeriahasdomesticated theConventionon theRecognition andEnforcement of ForeignAwards (theNewYorkConvention) andhasratifiedthesame.Thus,foreignarbitralawardsininternationalcommercialdisputesareenforceableand regardedasres judicata bythecourts,exceptwhereitsenforceabilityishamperedbypublicpolicyconsiderations.


ByvirtueofthecombinedinterpretationoftheForeignJudgement(Reciprocal Enforcement) Act, Cap. F35 LFN 2004 and theReciprocalEnforcementofJudgementsOrdinance,Cap.175LFN1958,foreignjudgmentsmaybeupheldandenforceableinNigeriaifthejudgmentisfirstregisteredinacourtinNigeria.Judgmentsare enforceable provided that the said judgment sought to beenforcedinNigeriais:


In the Nigerian courts, the test of foreseeability is applied todeterminewhetheradutyofcareexistsinordertoholdthenegligentpartyliable.Thetermsofthecontractwouldspecifywhetherthereisacontractualdutyofcareontheparties.


Yes.TheNigerianCourtswouldperforceapplythe“literalrule”ofinterpretation inconstructioncontracts, togiveeveryword in thedocumentitsordinarygrammaticalmeaning,withoutanyaddition,subtraction or extension of themeanings, unless doing sowouldlead to absurdity, and negate from the intention of the parties orrenderthedocumentmanifestlyambiguous. Insuchinstance,the“golden rule” of interpretation would be applied to provide thecontextualmeaningandpurposeforeveryprovisioninthecontractandthebackgroundfactssurroundingtheagreement.Inaddition,the contra proferentem rule can also be applied to interpret anincurablyambiguousprovisioninthecontractagainsttheauthorofthecontract.


TheNigerianCourtswillnotenforcecontractswhosetermswouldproduceanyunlawfulpurposeoronewhich is contrary topublicpolicy.


Toproperlysituatetheobligationsorliabilitiesofthedesignerinaconstructioncontract,thetermsofthecontractmustbeconsidered.Inatypicalbuildcontract,thedesignisundertakenbyaprofessional(an architect/engineer) and it is implied in a contract that such aprofessional will deploy the utmost care, skill and expertise incarryingouthisobligationsunderthecontract.Inrelationtothis,a designer may be found to owe a “fit for purpose” obligation.However, onerous responsibilities in respect of the constructionisplacedon thecontractor,whoimpliedlymustbefoundtohaveundertaken to provideworks that are fit for purpose, and in thatregardthecontractor’sobligationsarequiteabsolute.Thisisoftennotthecaseforthedesigner.Thedesignermayonlybeliablefornegligence,wherethedesignisfoundtobedefective.



In general, disputes between parties are mostly resolved, unlessconsensually settled, by adjudication. The major adjudicatorymethods include litigation, arbitration, etc.,whilst the consensualmethods are mainly negotiation, mediation, conciliation, etc.



Nig

eria

Abuka & Partners, Legal Practitioners, was under the name and style Abuka Ajegbo Ilogu & Nwaogu. It was founded on 28th March, 1979 by the four named partners, who had worked individually and separately until that date. The partners had been in the legal profession since 1970. Following a restructuring of the law firm, we adopted the shorter and simpler name Abuka & Partners, Legal Practitioners.

Major Areas of Practice

■ Trademarks.

■ Oil & Gas.

■ Corporate & Commercial.

■ Maritime and Shipping.

■ Financial Institutions.

■ Litigation and Alternative Dispute Resolution.

■ Real Estate.

Founding and Managing Partner, Abuka & Partners, Legal Practitioners. Admitted in 1974 as a Solicitor and Advocate of the Supreme Court of Nigeria. Education: the University of Ife; the University of Lagos, and the Nigerian Law School (LL.B. Hons., 1973; B.L., 1974; M.B.A., 1975; LL.M., 2000). Lecturer, M.B.A. Class, University of Lagos, 1976–1978. Member: Nigerian Bar Association; International Bar Association; American Bar Association (International Associate Member); the Lagos Chamber of Commerce; Nigerian-American Chamber of Commerce, Hon Life Vice President, Nigerian-British Chamber of Commerce; Nigerian-German Business Association. Languages: English.

Patrick AbukaAbuka & Partners, Legal PractitionersWestern House 10th Floor8–10, Broad Street, P.O. Box 7022LagosNigeria

Tel: +234 803 305 4371 / 805 236 3930Email: [email protected] [email protected]: www.abukapartners.com.ng

for specific performance are, by the rules of the relevant StateHighCourt,institutedintheHighCourtwherethecontractoughttohavebeenperformedorwhere thedefendant residesorcarriesonbusiness.Finaldecisionsfromcourtsoffirstinstanceuptotheappealcourtcanlastforaspanof10yearsinNigeria.Thatiswhyalternative dispute resolution is strongly advised in constructiondisputes. However, proceedings which are commenced by anuncontestedsummarysummons/undefendedwritproceduremaybedeterminedwithinaperiodof12months.

(a) thejudgmentofasuperiorcourtintheforeigncountry,whichhasreciprocaltreatmentofjudgmentswithNigeria;and

(b) amonetaryjudgmentwhichisfinalandconclusivebetweentheparties.

Under theordinance, theapplication for leave to register thesaidforeignjudgmentinNigeriamustbebroughtwithin12monthsofthe date the judgment was delivered in the foreign court. Onceregistered,it thenbecomesajudgmentoftheHighCourtandcanbecomeenforceableviaacertificateissuedinaccordancewiththeSheriffsandCivilProcessAct,C6,LFN2004.


Court proceedings in Nigeria are, according to the rules of therelevant court, initiated by way of writ of summons and/ororiginating summons. Cases on liquidated money demands canbebroughtundersummarysummons(undefendedlistprocedure),accompaniedbyanapplicationforsummaryjudgment.ThereisnospecialisedcourtforconstructionmattersinNigeria,butactionsforinterpretationofacontractor toconstruct the termsofacontractdocumentmaybeinstitutedbyoriginatingsummons(Order2,Rule2,FCTHighCourtRules,2004).AppealsofdecisionsoftheHighCourtgouptotheCourtofAppealandmayfinallygoontofurtherappealintheSupremeCourt.Disputesemanatingfromconstructioncontractswithregardtobreachesofcontractordeclaratoryorders



Chapter 20

Advokatfirmaet Thommessen AS

Jacob F. Bull

Henrik Møinichen

Norway

including the follow-up of design work during the constructionperiodandwarrantyperiod.Further,werefertothestandardNS8402:2010Generalconditionsofcontractforconsultancycommissionswithremunerationbasedonactualhoursspent.Thisstandardisintendedtoregulatecontractualrelationsbetweencommissioningpartiesandarchitects,consultantengineers and other professionals in the context of commissionsconnected to theconstructionandcivilengineeringsector,and is,e.g.,usedforfollow-upworkduringtheconstructionperiod.In addition, we refer to the standard NS 8403:2005 Generalconditions of contract for construction supervision commissions.Thisstandardisintendedtoregulatecontractualrelationsbetweencommissioning parties and construction supervisors relating toconstruction supervision in the context of construction and civilengineeringworks.Lastly,werefertothestandardNS8404:2013Generalconditionsforindependentcontrolcommissions.A standard contract for EPCM (engineering, procurement,and construction management services) contracts has not beendeveloped in Norway and EPCM contracts are not widely usedwithintheconstructionsector.Within the offshore sector, Norwegian Fabrication Contract(fabrication/construction obligations upon the contractor) andNorwegianTotalContract(designandconstructionobligationsuponthe contractor), both revised andupdated in2015, are commonlyused. Some employers also use these standards as the basis forconstruction, and design and construction, contracts for onshoreconstructionprojects.


AsastartingpointandinaccordancewiththeNorwegianContractAct, a legally binding contract is generally entered into once anofferhasbeengivenandsuchofferisacceptedwithinthetimelimitforacceptance.IncontrasttoEnglishcontractlaw,twopartiescanenter into a binding agreement regardless of whether or not theconsiderationisagreedupon.Pursuant to Norwegian case law, an agreement may be legallybindingevenifthepartieshavenotenteredintoawrittencontract.For instance, an agreement can be legally binding based on one



TherearetwomaintypesofconstructioncontractinNorway:(i) NS 8405:2008 Norwegian building and civil engineering

contracts;and(ii) NS8407:2011Generalconditionsofcontractfordesignand

buildcontracts.Theabovestandardcontractshavebeenpreparedandunanimouslyrecommended by a committee appointed by Standards Norway,basedonaproposalputforwardbyrepresentativesbothfromtheemployersideandthecontractorside,andmaythusberegardedas“agreeddocuments”.NS8405hasbeenpreparedforuseinacontractualrelationshipinwhichoneparty (the contractor) undertakes to carryout buildingor civil engineeringwork (including installations, new buildings,maintenance, repairs and alternations) for another party (theemployer), and in which most of the drawings, descriptions andcalculationsaretobeprovidedbytheemployer.Thus,thisstandardcontract places thedesignobligationsupon the employer and theconstructionobligationsuponthecontractor.NS 8407 has been prepared for use in a contractwhere one part(the design and build contractor) takes on all or a substantialproportion of the design work in addition to the execution ofbuilding or civil engineering work (including installations, newbuildings,maintenance, repairs and alterations) for another party(theemployer).Thus,thisstandardcontractplacesboththedesignandconstructionobligationsuponthecontractor.As to the forms of design-only contracts, the following standardis commonlyused:NS8401:2010General conditions of contractfor design commissions. This standard is intended to regulatecontractualrelationsbetweencommissioningpartiesandarchitects,consultant engineers and other professionals in the context ofdesigncommissionsintheconstructionandcivilengineeringsector,


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Norwegian authorities have a constant (and increasing) focus onsecuringequalworkingconditionsandgoodhealthsafety,andtheenvironment (“HSE”) routines on construction sites in Norway.Many of the big scale buyers in Norway are public procurers,which have a particular focus on compliance. Both HSE andCSR issues are often to a certain extent regulated in constructioncontracts.ContractorswhoareinterestedinNorwegianconstructionprojectsmustbeprepared toprovidedocumentationforboth theirproper knowledge about the relevant legislation, and their ability/willingnesstoimplementsystemsthatwillensurethatprojectsareperformedincompliancewithsuchlegislation.Therearestatutoryrequirements(andcollectivewageagreements)withrespectto,inter alia,thefollowing:(i) Workingconditions:includesrequirementsrelatedtosalary,

holidays and holiday pay, working hours, insurance andpension,accommodationandotherworkingconditions.

(ii) Health, safety and environmentmatters: mainly consistingofrequirementsrelatingtosafetyonconstructionsites,andtheobligationtoensureasafephysicalandmentalworkingenvironment.

(iii) Administrative requirements: requirements related tocontrol routines, transparency, systems for provision ofID-cards and lists of persons working on the constructionsite, documentation on salary payments, work schedules,contracts,etc.

Thecontractormustensurethatthesalaryandworkingconditionsapplicableforthecontractororanysubcontractorpersonnelareinaccordancewith theActof4June1993no58relating togeneralapplicationofwageagreements,etc.andregulationsappurtenanttotheAct.Asaminimum,theconditionsshallcorrespondtothewageagreementsapplicabletothework.AstoHSE,theemployermainlyhasacontrollingfunction,whereasthecontractorisresponsibleforensuringthatcompliancewithHSErequirements isan integralpartof theworkplan. Thecontractormust present a plan for itsHSEwork, regular safety inspectionsmustbecarriedout,androutinesandsystemsforhandlinglapsesandincidentsmustbeestablished.With respect to tax, the contractormust submit anRF-1199 formto the Central Office ForeignTaxAffairs (“COFTA”) concerninginformation about the contract, contractor and his personnel.Whetheranemployeemustpay taxonearningsfromworkwhichhasbeenperformedinNorwaydependsonseveralconditions,e.g.theperiodoftimespentinNorwayandwhetherthebusinessmaybedeemedas conductedor carriedout inNorway. In any event,tax agreements between Norway and another state may limit therighttodemandpaymentofincometaxrelatedtoworkperformedinNorway.


AccordingtoNS8407,adeductionof7.5%oftheprogresspaymentshallbemadebywayofretention.Theretentionshallbeinvoicedandpayableinconnectionwiththefinalaccount.Inaddition,the

party’sactofquasi ex contractu(acertaintypeofbehaviour),orifitcanbedeterminedthatthepartieshaveagreedonthemaintermsof the agreement. Furthermore, the contracting parties’ justifiedexpectations may imply that a legally binding contract has beenenteredinto.Consequently, therearenoformalrequirementswithrespect tothevalidityandenforceabilityofacontract,i.e.thatwrittencontracts,oralcontractsandelectroniccontracts(scans)arebindinguponthepartiesandwillbeenforceable.Inordertoenforceanagreement,itwouldonlybenecessarytodemonstrateonthebalanceofprobabilitiesthatthepartieshaveenteredintotheagreementinquestion.


PursuanttoNorwegiancaselaw,thereisapresumptionthataLetterof Intent does not commit the parties to enter into the intendedagreement. By entering into a Letter of Intent, the parties arecommittedtotheprocessofenteringintoalegallybindingcontract,nottothecontractper se.BysigningaLetterofIntent,thepartiesdemonstrate that theyare seriousandcommitted toact loyally innegotiations towards a final agreement, but it does not involve alegaldutytoenterintoabindingcontract.However, there is a “point of no return”, and the circumstancesmay imply that the parties cannot back out of the agreement. Itis important to keep inmind that it is the contents of the LetterofIntentthatserveasaguidelinefortheinterpretation.Ithasnoconsequencethatthepartieshavecalledtheagreementa“LetterofIntent”,aslongasthenatureofitfulfilsthegeneralconditionsforalegallybindingcontract.


AccordingtoNS8407,thecontractorshallkeepinsuredmaterials,designdocumentsandthatpartoftheworkwhichhasbeenperformedat any time until delivery/take-over of the contract object. Theemployermustbeco-insured.Further,thecontractorshallprocureandmaintainliabilityinsurance,whichshallcoverliabilityforanydamageandeconomiclossthecontractormaycausetothepersonorpossessionsoftheemployeroranythirdpartyinconnectionwiththeperformanceofitsobligationsunderthecontract.The parties are, however, free to agree on a different insuranceregime.Withregardtolargebuildingorcivilengineeringworkcontracts,weoftenseethattheemployerprovidesandmaintainsa“ConstructionAllRisk”(“CAR”)or“Builder’sAllRisk”(“BAR”)insurance.Onsuchoccasions,thecontractorwillusuallybeco-insured.For the sake of completeness, it should be mentioned that anemployermust,accordingtomandatorylabourlegislation,provideandmaintainworkmen’sinjuryinsurance.Inaddition,employerswill always require that the contractor provides and maintainsliability insuranceand, incaseofdesignwork,oftenprofessionalliabilityinsurancehastobeprovidedandmaintainedbytheengineer.

Advokatfirmaet Thommessen AS Norway


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theemployer.However,thethirdpartywouldpossiblyhavesomefiduciarydutiestowardsthecontractorandmaynotactin“badfaith”orina“blameworthy”mannertowardsthecontractor.ThestandardNS 8403:2005 General conditions of contract for constructionsupervisioncommissionsisoftenusedforsupervisioncontracts.


Yes,thepartiesmayagreetoincludea“paywhenpaid”clauseinthecontract.However,itcannotbeexcludedthata“paywhenpaid”clausemayon someoccasions be deemed “highly unreasonable”andconsequentlysetasideormodifiedbyaNorwegiancourt.


The parties are free to agree on liquidated damages in the eventof particular breaches, including in case of delay, and there arenomandatory requirementsorgeneral restrictionswith respect toliquidateddamagesbetweenprofessionalparties.Consequently,thecontractorcanbeboundtopayasumwhichiswhollyunrelatedtotheamountoffinanciallosssuffered.However,a“highlyunreasonable”liquidateddamagesclausemaybesetasideormodifiedbyaNorwegiancourt.



InaccordancewithNS8407(andNS8405),theemployerisentitledtovarytheworkstobedoneunderthecontract.Avariationtotheworkmustbesufficientlyconnectedtothecontractinquestionandmustnotbeofamateriallydifferentnaturetotheoriginallyagreedwork. Unless otherwise agreed, the employer is not entitled toorderthecontractortomakechangesrepresentinganadditiontothecontractpriceofmorethan15%.


AccordingtoNS8407,partsoftheworkcanalsobeomittedfromthe contract. If it is omitted, it is somewhat uncertain whetherthe employermay get a third party to perform thework. In ouropinion, the employerwould inmost instances not be entitled toissueanegativevariationorder(omitworkfromthecontract)iftheintentionisthattheemployerwishestotransferpartsofthescopeofworktoanothercontractor.

employer may withhold payment if the employer has legitimateclaimsagainstthecontractor.


It is common for the contractor to be required to provide theemployer with a performance bond to guarantee the correctperformance of contractors’ obligations under the contract, andalsoaparentcompanyguaranteeintheeventthecontractoristhesubsidiaryofanothercompany.Therearenogeneralrestrictionsonthenatureofsuchbondsandguarantees,providedthatthecontractisenteredintobetweenprofessionalparties.In accordance with NS 8407, the contractor shall provide theemployer with security for the performance of his contractualobligationsduring theexecutionperiodand theguaranteeperiod.The security during the execution period, including liability fordelayed completion, shall amount to 10% of the contract price.Upontake-over/deliveryofthework,thesecurityshallbereducedto3%ofthecontractpriceinrespectofanyguaranteeclaimsforaperiodofthreeyears.Thesecurityshallbeprovidedintheformofanordinarybankguarantee (notanon-demandguarantee) fromabank,insurancecompanyorotherfinancialinstitution.However,inconstructionandsupplycontractsweoftenseethatanon-demandguaranteeisstillrequired.


InaccordancewithNS8407, thecontractwork shallbecome thepropertyof theemployerprogressivelyas thework isperformed.Materials delivered to the project site and which are to beincorporated into the contract object become the property of theemployeruponpayment.Materialsdeliveredbytheemployershallremainthepropertyoftheemployer.Thepartiesmayagreethatthecontractorretaintitleandtherighttoremovegoodsandmaterialsfromthesite.However,thecontractoris in principle not entitled to invoke retention rights towards theemployer’screditorswithrespecttomaterials,etc.,whichhavebeenincorporatedintothemainobject.



Some construction contracts are supervised on behalf of theemployerbyathirdparty.Suchanengineerorarchitectwouldnothaveaparticulardutytoactimpartiallybetweenthecontractorand



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tohavebecomeaware,ofthecircumstanceswhichformthebasisforthevariationorderrequest.Further,ifthecontractorreceivesarejectioninresponsetoavariationorderrequest,includingademandforanextensionoftimeand/oradjustmentofthecontractprice,thenthecontractormusttakethenecessarystepstoinitiateordinarycourtorarbitrationproceedingsnolaterthaneightmonthsaftertake-overofthecontractwork.The contractor shall issue a final account proposal and the finalinvoicewithin twomonthsafter take-over. If thecontractor failstodoso,theemployerisentitledtosetafinaldeadline,whichshallnotbeshorterthan14days.Ifthecontractorfailstosubmitthefinalaccount, thenhe loses(withcertainexceptions) theright tomakeanyclaimsinconnectionwiththecontractagainsttheemployer.Itshouldalsobenotedthatanyclaimsmaybecometime-barredinaccordancewith theNorwegianLimitationAct, regardless of theagreedmechanismsinthecontract.Claimswillingeneralbetime-barredthreeyearsafterthedateonwhichthecreditorfirsthadtherighttodemandperformance.Further,accordingtoNS8407,theemployermustpresentguaranteeclaimswithoutunduedelayandwithinfiveyearsaftertake-overatthelatest(guaranteeperiod).


AccordingtoNS8407,theemployerbearstheriskforunforeseenground conditions if they deviate from what the contractor hadreasontoexpectwhenpreparingitstender.However,thecontractorisobligedtotakeintoaccountallavailableinformationinconnectionwiththepreparationofitstenderasfurtherdetailedinthestandardcontract.


AccordingtoNS8407,theemployerbearstheriskofachangeinlawaffecting theperformanceof theworks. Thecontractormustnotify the employer thereofwithout undue delay. However, thisonlyappliesifthecontractorcouldnothavebeenexpectedtotakeintoaccountsuchchanges to lawsandregulationsat the time thetenderwassubmittedandcouldnothavebeenexpectedtoavoidtheconsequences.


Unless otherwise agreed, the employer shall only be entitled tousethedesignworkforthecompletionoftheproject,subsequentoperation,maintenance,alterationsorextensions. Allotherrightsto thedesignworkshallcontinuetobeheldbytheparty thathaspreparedthedesignwork.


According to NS 8407, the contractor is entitled to suspendperformance of thework if the employer is in substantial breachof its payment obligation or if it is evident that such breachwilloccur.Thecontractormustnotifytheemployerofsuchsuspensioninwriting24hoursinadvance.


Subjecttocertainexceptions,theNorwegianbackgroundlaw(bothgeneralcontract lawandconstruction law)wouldonlyapplyasa“gap-filler”totheextentlegalquestionshavenotbeenregulatedinthecontract.Further,incontrastto,forexample,Englishcontractlaw, the judge or arbitrator would not necessarily be bound “bythefourcorners”ofthecontract,butusethebackgroundlawinitsinterpretationofthecontract.


Inthecaseofconcurrentdelay,thecontractorwouldbeentitledtoan extension of time equal to the parts of the delay thatmay beattributed to fault of the employer, provided that the fault of theemployerimpactsthe“criticalpath”.Ifthecontractorisdelayedasaresultoftwoevents/faultsoccurringinparallel,andoneisthefaultorriskofthecontractorandoneisthefaultorriskoftheemployer,thecontractorwouldasamainrulenotbeentitledtoanextensionoftime.Astothecostsincurredbythecontractor,theemployerwouldonlybeliablefor increasedcostswhichmaybeattributedtoafaultorriskoftheemployer. If therearetwofaultsoccurringinparallel,and the costs would have occurred regardless of the employer’sfault,thecontractorwouldasamainrulenotbeentitledtothecostsoccasionedbythatconcurrentdelay.


Whether the employer or the contractor “owns the float” is anongoing discussion in Norwegian legal theory, and there is nodecisiveorclearcourtpracticewithananswertothislegalproblem.Themainviewinlegaltheoryrelatedtoonshorecontractsisthatthecontractorownsthefloat,i.e.thecontractorisentitledtoanextensionof time if he is subsequentlydelayedafter the employerhasusedupthefloat.However,itisdifficulttoestablishgeneralprinciplesregardingthislegalproblemandthecourtstendtosolveitonacase-by-casebasiswithoutaddressingthe“ownership”ofthefloat.


NS8407includescertaintimelimitsthatthepartiesmustrespect.Ifapartyfailstosubmitaclaimwithinsuchtimelimits,thenthepartylosesitsclaimagainsttheotherparty.With regard to variation orders and variation order requests, thestandard setsout several strict time limits. Themain rule is thatthecontractorisobligedtosubmitavariationorderrequesttotheemployer“withoutunduedelay”afterhebecomesaware,orought



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InaccordancewithgeneralprinciplesofNorwegiancontract law,a thirdpartymaybeentitled toclaim thebenefitofacontractualrightwhichismadeforitsbenefit,i.e.thatacontractmaygrantathirdpartyrights,butingeneralnotimposeanyobligationsonanythirdparty.Thismustbeassessedbasedonaninterpretationoftherelevantcontract.Further,acontractingpartymay,unlessagreedotherwise,assignitscontractualrights(butnotobligations)toathirdpartywithouttheotherparty’sconsent.A second or subsequent owner of a building is, in most cases,regardlessofwhetheraclaimorrighthasbeentransferredtosuchsubsequentowner, entitled tomakeclaims fordefectsagainst thecontractorinaccordancewiththeoriginalcontract. However,thecontractormaywith, except formandatory consumer legislation,invokeany limitationsof liability,etc.under itscontractwith theemployeragainstthesecondorsubsequentownerofthebuilding.


The right of set-off of a counterclaim against a primary claim isrecognised under Norwegian law when the following generalconditionsarefulfilled:(i) theprimaryclaimandthecounterclaimmustexistbetween

thesameparties(exceptincasesof“connexity”,i.e.claimsarisingoutofthesamecontractualrelationship);

(ii) theprimaryclaimandthecounterclaimmustbeofthesamenature;

(iii) the time of discharge of the primary claim must haveoccurred;and

(iv) thecounterclaimmustbedueandpayable.Aset-offmustbedeclared.Awrittennoticewouldbepreferable,buttherearenostrictformrequirementsunderNorwegianlaw.


According toNS8407,bothpartieshaveaduty tocooperateandshow loyalty during the performance of the contract,which is inlinewiththegeneralprinciplesofNorwegiancontractlaw.Abreachof a party’s fiduciary dutiesmay, inter alia, result in liability fordamagesandlossofrightsunderthecontract.


When interpreting a construction contract, the judge’s aim is todeterminethemeaningintendedbytheparties.Abasicprincipleofinterpretationofcontractsisthatanagreementmust,regardlessofthewording,beinterpretedinaccordancewiththejointintentionofthepartiesatthetimetheagreementwasenteredinto.


AccordingtoNS8407,apartyisentitledtoterminatethecontractiftheotherpartyhassubstantiallybreacheditscontractualobligations,whichcorrespondswithgeneralprinciplesofNorwegiancontractlaw. Inaddition,aparty isentitled to terminate thecontract if itisevidentthatasubstantialbreachwilloccur.However,thepartyin breach shall begiven a reasonabledeadline for remedying thematterbeforeterminationcanbeimplemented.Further, a party is entitled to terminate the contract if the otherpartygoesbankruptorbecomesinsolvent.However,theemployershallnotbeentitledtoterminatethecontractifitisproventhattheworkwillbecompletedinaccordancewiththecontract.Norshallthe contractor be entitled to terminate the contract if satisfactorysecurity is provided for the timely performance of the remainingpartoftheemployer’sobligationsunderthecontract.Exceptasstatedabove,NS8407doesnotincludeanygroundswhichautomaticallyentitletheinnocentpartytoterminatethecontract.A party must terminate the contract by submitting a writtendeclarationtotheotherparty.


The concepts of both force majeure and “frustration” (known as“failed contractual assumption” or “breach of expectations”) are,subjecttocertainconditions,recognisedinaccordancewithgeneralprinciplesofNorwegiancontractlaw.InaccordancewithNS8407,thepartiesareentitledtoanextensionoftimeiftheprogressoftheirobligationsishinderedbycircumstancesoutside their control, such as extraordinary weather conditions,ordersorprohibitionsbypublicauthorities,etc.However,apartyshallnotbeentitledtoanextensionoftimeinrespectofhindranceswhichthepartyshouldhavetakenintoaccountwhenthecontractwas entered into or the party could reasonably have avoided orovercome theconsequencesof suchoccurrences. Thepartiesarenotentitledtoanycompensationasaresultofforce majeure.InaccordancewithNorwegiancaselaw,thecontractor’srisks(andinprinciple theemployer’srisksaswell)are limitedaccordingtothe doctrine of “failed contractual assumptions”. In order for apartytosucceedwithaclaimbasedonthisdoctrine,theassumptionmusthavebeenadeterminingelementinthecontract(fundamentalassumption), and the other party must have been aware of theassumption.Inaddition,theassumptionmustbedeemed“relevant”,which depends on an overall assessment as towhat party shouldcarrytheriskfortheunexpecteddevelopment.Based on the above rules, it is not usual and itmust be deemedextremelydifficult,toarguesuccessfullythatacontractwhichhasbecome uneconomic is a ground for claiming force majeure or agroundforclaimingcompensationforincreasedcosts,etc.



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AccordingtoNS8407,disputesshallbesettledbyordinarycourtproceedingsunlessithasbeenagreedtoreferdisputestoarbitration.However,arbitrationisoftenusedasadisputeresolutionmechanisminconstructioncontractsinNorway.TheNorwegianArbitrationActisbasedontheUNCITRALModelLawon InternationalCommercialArbitration, follows theModelLawclosely in structure and content, and canbe considered as anationalimplementationoftheModelLaw,withcertainvariations.Generally,andasthemainrule,partiesarefreetoagreeonthetermsgoverning the arbitration proceedings. TheArbitrationAct onlycontainssomefewmandatoryprovisions.

Section20oftheArbitrationAct,correspondingtoArticle18oftheModelLaw,confirmsthatthepartiesmustreceiveequaltreatmentateverystageofthearbitralproceedings.

Section 20 also adopts the principle that both parties are fullyentitledtopresenttheircases.Itisemphasisedinsection28thatthepartiesareresponsibleforclarifyingthefactsofthecaseandthattheyareentitledtopresentsuchevidenceastheywish.Underthissection,thearbitraltribunalmay,however,refusetoacceptevidencewhich is clearly not relevant and also, to some extent, based onproportionality.

TheArbitrationAct only specifies a fewprocedural rules. To theextent that neither of the parties have agreed onwhat shall applyin other respects, the tribunal may apply the rules it considersappropriate.

The principle of orality (i.e. that the parties, their counsel andwitnessesmustexpressthemselvesorallybeforethecourt)andtheprinciple of immediacy (i.e. that all evidence must be presentedbefore the court that is to render the judgment) are fundamentalprinciplesinlegalproceedingsintheordinarycourtsofNorway.Inarbitration,theseprinciplesarenotgiventhesameprominence,butaretoaconsiderableextentadoptedinmostarbitralproceedings.

The provisions of sections 12 and 13 of the Arbitration Actconcerning the appointment of arbitrators correspond to a greatextent,intermsoftheircontent,toArticles10and11oftheModelLaw. Thus, the parties are free to determine the appointmentprocedure.Thespeedatwhichthetribunalcanbesetupdependsontheparties,aslongastheyagree.TheArbitrationActprovidesthatthepartiesmust,tothegreatestextentpossible,jointlyappointthearbitraltribunal.Thiswill,attheoutset,placeanobligationonthepartiestospendsometimeascertainingwhethertheycanreachanagreementonajointappointment.

Ifthepartiesareunabletoagreeonwhoshouldbeappointed,theappointment procedure is in essence similar to that provided inArticles10and11oftheModelLaw:unlessotherwiseagreed,thetribunalshallconsistofthreearbitrators.Eachpartymustappointanarbitratorwithinonemonthofbeingrequestedtodosobytheotherparty.Thesetwoarbitratorsshallthereaftertogetherappointthepresidingarbitratorwithinonemonth.

Ifapartyfailstoactasrequiredundertheapplicableappointmentprocedure,ifthetwoparty-appointedarbitratorsareunabletoreachagreementonthethirdarbitrator,orifanappointingbodyfailstoactasprovided,eachofthepartiesmayundersection13(4)oftheArbitrationAct request the relevant district court to appoint theremainingarbitrator(s).

In respect of commercial contracts, the wording is of particularimportance and often given decisive weight. If, however, thewording is unclear and other relevant circumstances (previousnegotiations,subsequentconduct,thepurpose,etc.)areinsufficienttoconcludeontheinterpretationissue,thenthecontractwilloftenbe interpreted against the interests of thepartywhoprovided thewording(contra proferentemdoctrine).


TheNorwegianstandardconstructioncontractsdonotincludetermswhichareunenforceable.


In construction contracts which involve an element of designand/or thecontract is fordesignonly, thedesignerhas ingeneralundertakenanobligationastotheresult,whichmaybecharacterisedas“absolute”,i.e.thecontractorisresponsibleforthedeliveryofacontractobjectinlinewiththetermsandconditionsofthecontract.Thedesigner isnotobligedtogiveabsoluteguaranteesinrespectof his work. In accordance with the principle of contractualfreedom,thepartiesmayagreeonwhateverterms,includinglimitedguarantees/warranties.AccordingtoNS8407,theguaranteeperiodissettofiveyearsfromtake-overofthecontractobjectandthecontractorisinprinciplenotliablefortheemployer’sconsequentiallosses.InNS8401(standardcontractfordesignonly),thecontractor’sliabilityfor damages is, unless otherwise agreed, limited to approximatelyMNOK 5.5 for liability which is not covered by insurance, andapproximatelyMNOK14forliabilitycoveredbyinsurance.



Disputes arising in connection with a construction contract, andwhicharenotresolvedbymutualagreement,arenormallysettledbyordinarycourtproceedingsattheagreedlegalvenue(ortherightlegalvenueinaccordancewithNorwegianprocedural legislation)unlessthepartiesagreeotherwise,e.g.arbitration.According toNS 8407, the partiesmay, unless agreed otherwiseanduntil take-over, alsodemand that adisputebedeterminedbyanumpire (temporarydispute resolution). Suchdecisionshallbebindingonthepartiesifthepartiesfailtobringanumpiredecisionbeforeacourtorarbitrationtribunalwithinsixmonthsofthedateofthedecision.


In Norway, we do not have an adjudication process. However,there is voluntary court-administeredmediation. The purpose ofsuchmediationisthattheparties,withthecollaborationofajudge(mediator),trytosolvethedisputeamicably.



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contract shall be solved by court proceedings abroad, then thejudgmentwillinprinciplebeenforceableinNorway.


ThemainelementsofordinarycourtproceedingsinNorwaymaybesummarisedasfollows:■ Beforetheplaintifffilesthewritofsummonstothecourt,the

plaintiffmustnotifythedefendantinwritingthattheplaintiffisconsideringinitiatingcourtproceedings.

■ The case commences when the plaintiff files a writ ofsummonstothecourtoffirstinstance(citycourt).Thewritshallstatetheclaimsinvokedbytheplaintiffandsetoutthefactual and legal assertionsonwhich theclaimsarebased.In addition, the evidence on which the plaintiff wishes torelymustbesubmitted,butadditionalevidencemayalsobepresentedatalaterstage.

■ Thereafter the defendantwill be given a deadline (usuallythreeweeks)forsubmittingareply.

■ Thereafter, further communication with the court and theotherside,includingthesubmissionofadditionalargumentsandevidence,iscarriedoutbysubmittingwrittenpleadings.

■ Anoralhearingshallinprinciplebeheldwithinsixmonthsfromthedateonwhich thewritofsummonswasfiled. Inpractice, the scheduling of the hearing depends on theworkloadofthecourtaswellasthecomplexityofthecase.

■ Thehearingisdividedintothreeparts:theopeningarguments(wherewrittenevidenceisnormallypresented);theevidence(partyandwitnesstestimonies);andtheclosingarguments.

■ Thecourtshallrenderthejudgmentwithintwoweeksfromthe date on which the hearing was adjourned (four weeksif there ismore than one judge), but the deadline is oftenpostponed. The judge will normally indicate when thejudgmentcanbeexpectedattheendofthehearing.

■ Thepartieshavetherighttoappeal.Thedeadlineforappealisonemonthfromthedaythatthejudgmentisserved.Thecourtofappealmayrefuseleavetoappealagainstajudgmentifitfindsitclearthattheappealwillnotsucceed.However,onlyonrareoccasionsdoesthecourtofappealrefusetohearanappeal.

■ Thehearingof the appealwill likelybeheld6–12monthsafter the appeal is submitted. The court of appeal shall inprinciple render the judgment within four weeks from thedateonwhichthehearingwasadjourned.

■ A judgment rendered by the court of appeal may also beappealed to the Norwegian Supreme Court. However,judgmentscannotbeappealedwithoutleave.Leavecanonlybegrantedif theappealconcernsissueswhosesignificanceextends beyond the scope of the current case, or if it isimportantforotherreasonsthatthecaseisdeterminedbytheSupremeCourt. In construction cases, it is extremely rarethattheSupremeCourtacceptstoheartheappeal.

Basedontheabove,weestimatethatajudgmentbythecourtin the first instancemay be deliveredwithin 6–10monthsaftersubmissionofthewritofsummons.Ajudgmentfromthecourtofappeal–whichinmostcaseswillbethe“finalcourtofappeal”–may thereafterbedeliveredwithin7–12monthsofthesubmissionofthenoticeofappeal.

Arbitrationawardsarenotsubjecttoanyappeal.Theonlyrecourseagainst an arbitral award is to bring an action before the courtsclaimingthesettingasideoftheaward.


Pursuanttosection45(1)oftheArbitrationAct,anarbitrationawardshallberecognisedandenforceable,irrespectiveofthecountryinwhich itwasmade. Thismeans that arbitration awardsmade incountriesnotpartytotheNewYorkConventionarealsorecognisedandenforceableinNorway.

However, for an arbitral award to be recognised and enforced,certainconditionshavetobemet,cf.section45(2)oftheArbitrationAct.Apartyhastomakeavailabletheoriginalarbitrationawardora certified copyof the award. If the arbitral awardhas not beenmadeinoneoftheScandinavianlanguages(Norwegian,SwedishorDanish)orinEnglish,thepartymustalsomakeavailableacertifiedtranslationofthearbitrationaward.Thecourt(oradministrativeagency)mayalsorequesttheexistenceofanarbitrationagreementtobeproved.Regardless of whether an arbitral award is recognised andenforceable,recognitionandenforcementmay,however,berefusedpursuant to section 46 of the Arbitration Act. This provisioncorrespondstoalargeextenttoArticle36(1)oftheModelLawandArticleVoftheNewYorkConvention.Pursuant to section 46 (1) of theArbitrationAct, recognition orenforcementmayberefusedattherequestofthepartyagainstwhomitisinvoked,ifthatpartyfurnishesevidencethatoneofthepartiestothearbitrationagreementlackedlegalcapacityorthearbitrationagreementisnotvalid.Suchrefusalmayalsoresultwherecertainproceduralerrors–concerningnoticetotheparties,jurisdictionofthetribunal,etc.–havebeenmade.Thecourt(ortheadministrativeagency)shall,pursuanttosection46(2)oftheArbitrationAct,oftheirownaccordrefusetorecogniseandenforceanawardifthedisputecouldnotbesettledbyarbitrationunderNorwegianLaworifrecognitionandenforcementwouldbecontraryto“ordre public”.


Ajudgmentrenderedbyaforeigncourtwillonlyberecognisedasafinalandenforceablejudgmenttotheextentprescribedbylaw.InaccordancewiththeNorwegianDisputeAct,theLuganoConventionof 2007 between the EU and the EFTA-countries (includingNorway) shall be deemed implemented into Norwegian law byway of incorporation, andChapter III of theLuganoConventionconcernsrecognitionandenforcementofjudgments.Consequently,judgmentsfromcountriespartytotheLuganoConventionof2007maybeenforcedinNorway.AsforjudgmentsfromoutsidetheEU,suchjudgmentsmaybeenforceableinNorwayinaccordancewithtreatiesbetweenthestates.In addition, a foreign judgment is enforceable in Norway if thepartieshaveagreedtoreferdisputesunderacontract toaforeigncourt. Thus, if the parties agree that disputes arising out of the



Nor

way

Thommessen is one of Norway’s leading commercial law firms with offices in Oslo, Bergen and London. The firm has 225 highly qualified employees, including 170 lawyers covering the entire area of business law. With more than 150 years in business, Thommessen has consistently acted in the largest and most complex matters seen in Norway and contributed to shaping the legal landscape. Bringing experience and innovation together, the firm is well-placed to meet clients’ need for timely and bold advice. Thommessen is an independent law firm and has established relations with highly regarded law firms all over the world. Thommessen places great emphasis on being a professional partner for its clients and on providing independent advice of the highest professional and ethical standard.

Jacob F. Bull (Partner) heads the firm’s practice group for onshore and offshore construction. He has extensive experience with construction projects both in Norway and abroad. Jacob provides advice in all phases of a project, including preparation of the tendering and negotiation strategy, participation in negotiations, follow-up and handling of matters and claims during project execution and the warranty period. His name is often highlighted by international rating agencies.

Jacob F. BullAdvokatfirmaet Thommessen ASHaakon VIIs gate 10Postboks 1484, VikaNO-0116 OsloNorway

Tel: +47 23 11 11 56Email: [email protected]: www.thommessen.no

Henrik Møinichen (Senior Associate) works within the firm’s practice areas of construction, oil and gas, oil service and shipping. Henrik has been actively involved in several onshore and offshore construction projects, including assistance in preparing tender documents, participation in negotiations and dispute resolution during project execution and the warranty period. Henrik has recently assisted Norwegian and international clients in major litigations before ordinary courts and arbitration proceedings and is currently involved in various shipping disputes.

Henrik MøinichenAdvokatfirmaet Thommessen ASHaakon VIIs gate 10Postboks 1484, VikaNO-0116 OsloNorway

Tel: +47 23 11 11 22Email: [email protected]: www.thommessen.no



Chapter 21

Greenberg Traurig Grzesiak sp.k.

Agnieszka Stankiewicz

Barbara Pancer

Poland

onboththeformandthecontentoftheconstructioncontract,subjecttothegeneralrulesofthePolishCivilCode.Nospecificformisrequiredforaconstructioncontracttobeenforceableandbinding.Onlycertain specificclausesneed tobemade inwriting, e.g. thearbitrationclause.Itiscommonpracticetoincludethecontractor’sofferintheschedulestotheconstructioncontract;however,thisisnotmandatory.


The Polish Civil Code provides only for the binding form ofan indicationofwillingness to enter into a contract, i.e. an offer.An offer constitutes a statement provided to the other party ofwillingness to enter into a contract. The concept of a “letter ofintent” as a non-binding indication ofwillingness to enter into acontractisknownandusedinPoland;howeveritisnotacommonpracticeintheconstructionmarket.


Themarket standard is that the contractor has the two followingtypes of insurance in place: a construction all-risk insurance(CAR); and third-party liability insurance. The above types ofinsurance,however,arenotastatutoryobligationofthecontractor.Nevertheless,naturalpersons(constructionmanagers)arerequiredbythebindinglawtoobtainthird-partyliabilityinsurance.


Aconstructioncontractshouldcomplywiththegeneralrulesofcivillawandmustcontain,inter alia,provisionsonthescopeofworkand



Thereisnomarket“standard”typeofconstructioncontract;howeverthemajority of construction projects are performed under one ofthetwofollowingformsofcooperationbetweentheemployerandthecontractor:(i)ageneralcontractorcontract;or(ii)managementcontracting.Underthefirstform,theemployercommissionsalltheconstructionworktoonecontractor– thegeneralcontractor,whousually appoints subcontractors for specific parts of the scope ofwork.Underthelatter,theemployer(usuallyincooperationwithacontractmanager)commissionsspecificpartsofthescopeofworktoseveralcontractors.A construction contract may cover both construction and designworks;however,usuallythedesignworksarecommissionedtoanarchitect under a separate agreement. There is no standard formof design agreement; however, a typical design agreement willincludeprovisionsregarding:thescopeofthedesign;thedesigner’sremuneration;thedesigner’sliability;andthetransferofcopyrights.Theprovisionsrelatingtothetransferofcopyrightsshouldincludethe transfer of economic, derivative andmoral rights and list thefieldsofexploitationofthedesign.


UnderPolish law, there areno specific rules for the executionofconstruction contracts and the general rules on the execution ofcontracts(agreements)applyaccordingly.Thepartiesmaydecide


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permit an obligation on the employer to appoint a supervisioninspector (Polish: inspektor nadzoru budowlanego). In theabovecircumstances, a project management agreement is concluded.In the above situation, a constructionmanager and a supervisioninspector (project manager) are representatives of the employerandtheydonotactimpartially;usuallytherearenootherimpartialentitiesinvolvedinperformingtheconstructioncontract.


Inaccordancewiththeruleof“freedomofcontracts”,suchclausesarenotforbidden;however,inpractice,theydonotexistinPoland.


The parties are permitted to agree in advance on a fixed sum ofliquidated damages for particular breaches. Usually the partiesagreeonliquidateddamagesforadelayinthecontractmilestonesandthehandover,whicharecalculatedasfollows:numberofdaysofdelaymultipliedbyX%ofthecontractprice.Itiscommonthatthepartiesagreeacapon theaggregateamountof the liquidateddamages in the formof a relevant part of the contract price (e.g.10%,20%).Theliquidateddamagesarenotrelatedtotheamountofthelosssufferedbytheemployer.Ifthelosscausedbyafaultofthecontractorexceedsthecaponliquidateddamages,theemployermayalternativelyclaimfor remedyof the loss suffered in its fullamount.However,theemployermayclaimforremedyonlyiftheparties included a relevant provision in the construction contract.Claiming for remedy ismore complicated for the employer as itneedstoproveandjustifytheamountofitsloss.



Yes,theemployerisentitledtovarytheworkstobedoneunderthecontract.Suchavariationisusuallyagreedunderachangeorderoranannextothecontract.Insuchcases,however,thepartiesshouldagree on an extension of the time for completion and additionalremunerationforthecontractor.Thereisnolimitonthisright.


Ifthecontractorfailstoperformpartoftheconstructionworksanddoesnot remedy thisbreach following theemployer’snotice, theemployerisentitledtoperformtherelevantpartoftheconstructionworksitselforcommissionperformanceoftheconstructionworks

remunerationandindicatetherightsandobligationsoftheemployerandthecontractor.Itisnotnecessarytoincludeprovisionsoneitherlabourortaxintheconstructioncontract.Asarule,thecontractorshouldcomplywithhealthandsafetyregulationsintheconstructionprocess;howeverthereisnoobligationtolistsuchobligationsintheconstructioncontract.


Yes, theemployer ispermitted to retainpartof thecontractpriceif the construction contract includes suchaprovision. As a rule,thepartiesagreeonapercentageofthecontractpriceasaretainer.This can be released either inwhole or in part (usually after thefinalhandover).Thepartiesmayalsoincludeaprovisionallowingthe employer to retain amounts equal to the payments due tosubcontractorsfromthecontractor.


Usuallyunderaconstructioncontract, thecontractorisobligedtoprovidetheemployerwithbankguaranteesservingasperformancebonds, i.e. a performance bank guarantee for the period of theconstruction works and a bank guarantee for the period of thestatutorywarrantyand/orqualityguarantee.Suchguaranteesmustbeissuedinlinewiththebankinglaw.Thepartiesmaydecideonspecific provisions, the term and the issuer of the guarantees attheirdiscretion. Provisionofaparentcompanyguarantee isalsopermissibleifthepartiessoagree.


Suchsolutionsarepossible,i.e.thepartiesmayincludeapplicableprovisionsintheconstructioncontract;however,thisisnotpractisedintheconstructionsector.



As a rule, construction works are managed by a constructionmanager (Polish: kierownik budowy) appointed by the employer.In specific cases (i.e. justified by highly complex structuresor construction works or the anticipated impact on the naturalenvironment),theconstructionauthoritymayincludeinthebuilding

Greenberg Traurig Grzesiak sp.k. Poland


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There is no rule regarding such situations andusually thepartiesdo not include relevant provisions in the construction contract.PursuanttothePolishCivilCode,iftheperformanceofacontractwouldentail excessivedifficultiesorexposeoneof theparties toa serious loss (due to an extraordinary change in circumstances,i.e. achange in the law), the relevantcourtmay (i)designate themannerofperformingtheobligation,(ii)establishthevalueoftheperformance, or even (iii) decide that the contract be dissolved.Whendissolvingthecontract,thecourtmaydecideonthesettlementbetweentheparties.


It is usually the employer who owns the intellectual property inrelationtothedesignandoperationofthepropertyafterthecontractiscompleted.Theconstructioncontractshouldcontaintherelevantclauses allowing for the transfer of full economic copyrights infavouroftheemployer.


Thecontractorisentitledtosuspendworksincaseoftheemergenceof a force majeure eventor if this is included in theconstructioncontract. Usuallythepartiesdefinetheterm force majeureor listthetypicalforce majeureeventsinthecontract.Thecontractmayalso provide for additional cases when the contractor is entitledto suspend works, e.g., delays in payments of the contractor’sremunerationbytheemployer.


UndertheprovisionsoftheCivilCode,theemployerisentitledtorescind the construction contract without notice if the contractoris late commencing or finishing theworks to the extent that it isunlikely that the works will be completed at the agreed time.Furthermore,untiltheconstructionworksarefinished,theemployermay rescind the construction contract at any time by paying theagreed remuneration. Thepartiesmay also include a contractualright of rescission in the contract; however, setting the final datewhen rescission is possible is essential for the validity of such aclause.


Theconceptofforce majeureisknowninourjurisdiction.Thetermforce majeureisnotdefinedbyanystatutoryprovisions;thereforeitisusuallydefinedordescribedinthecontract.Aforce majeureclaimmaybepursuedonlyifaforce majeureeventtookplaceandaffectedtheclaimingparty.Constructioncontractsusuallyprovideforaruleunderwhichthecontractor(i) isentitledtosuspendtheperformanceofconstructionworksfortheperiodoftheemergence

toathirdparty(substituteperformance).Thepartiesmayagree,inanannextothecontract,tointentionallyomitacertainpartofthescopeofwork.


Pursuant to the “freedom of contract” rule, parties executing acontractmayarrange their legal relationshipat theirdiscretionaslongasthecontentorpurposeofthecontractisnotcontrarytothenatureof therelationship, the lawor theprinciplesofcommunitylife; therefore a construction contract may include any and allprovisions, as long as they are not contrary to the nature of theconstructioncontract,thelawortheprinciplesofcommunitylife.


Insuchasituation, thecontractorwillonlybeobliged topay theemployer liquidateddamages for thedaysof thedelaycausedbythe fault of the contractor. A time extension (and/or additionalremuneration) is possible only if the delay is caused by reasonsattributabletotheemployer.


Eachvariationorderedbytheemployerhastobeagreedunderanannexorachangeorder.Undertheannex/changeorder,thepartiesamend the contractualmilestones so the variation cannot use thefloatandcausethecontractor’sdelay.


Polish law provides for statutory prescription periods. Withrespect toacontractor’sclaimsfor its remuneration, thestatutoryprescriptionperiod is threeyears. With respect to anemployer’sclaims,whentheconstructionworksarecompletedtheemployer(asarule)isentitledtoexerciseitsrightsarisingfromthe(i)statutorywarranty,or(ii)qualityguarantee.Theperiodofstatutorywarrantyforconstructionworksisfiveyearscommencingfromthedateofthefinalhandoveroftheworks.Theperiodofthequalityguaranteeforconstructionworksisagreedbythepartiestothecontract.Usuallythepartiesagreeonafive-yearperiodcommencingfromthedateofthefinalhandoveroftheworks.Thepartiestotheconstructioncontractmayagreeinthecontracttobroaden,limitorexcludethecontractor’s liability towards the employer stemming from thestatutorywarrantyor/andthequalityguarantee.


Usuallyitistheemployerwhobearstheriskofunforeseengroundconditions;however,thepartiesmayagreeotherwiseinthecontract.



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It should be noted that, within the meaning of the Polish CivilCode, a contract for designworks is a different type of contractthan a construction contract, so the rules described herein withrespect to construction contracts do not apply to contracts onlyfordesignworks. Therulesdescribedhereinrefer,however, toa“designandbuild”contract.Asarule,afterthecompletionoftheconstruction contract, the contractor is liable under the five-yearstatutory warranty for defects (or under the quality guarantee, ifprovided by the contractor), including defects resulting from thecontractor’sdesignworks.Thepartiestotheconstructioncontractmay,however,broaden,limitorexcludeliabilityunderthestatutorywarrantyfordefects.



Disputesareresolvedbeforecompetentcommoncourtsunlesstheparties to the construction contract include an arbitration clausein the contract (or conclude a separate agreement on arbitration).ProceedingsbeforePolishcourtstakeplaceintwoinstances.Ifapartyisdissatisfiedwiththeverdictofthecourtoffirstinstance,itmayappealtothecourtofsecondinstance.


No,thereisnosuchprocedureinourjurisdiction.


Arbitration clauses are sometimes included in constructioncontracts;however,themajorityofcontractsremainsubjecttothejurisdictionof commoncourts. For a construction contract tobesubjecttoarbitration,itmustincludeaclearandwrittenarbitrationclause.ArbitrationproceedingsareregulatedbytheCivilProcedureCode;however,thepartiesareentitledtomodifycertainstatutoryprovisions in the arbitration clause (or in a separate arbitrationagreement).Usuallyinthearbitrationclausethepartiesindicatetherelevantarbitrationcourtandthearbitrationisconductedundertherulesadoptedbythegivencourt.Anawardmadebyanarbitrationcourt is valid and enforceable like a verdict of a common court;however, it may be set aside by a common court in a separateproceedinginstitutedbyoneofthepartiestothedispute.TheCivilProcedureCodeprovides for an exhaustive list of caseswhen anactiontosetasideanawardofarbitrationcourtmaybefiled.


Yes,thecommoncourtsrecogniseinternationalarbitrationawards

of the force majeure event, and (ii) is not liable for the delay inthe construction works caused by the force majeure event. Thepartiestotheconstructioncontractmayalsodecideuponadditionalentitlementsrelatedtotheemergenceofforce majeureevents.The Polish Civil Code does not provide for the institution offrustration;itdoes,however,provideforasimilarinstitution,i.e.iftheperformanceofacontractwouldentailexcessivedifficultiesorexposeoneofthepartiestoaseriousloss(duetoanextraordinarychange in circumstances, e.g., a change in the law), the relevantcourtmay(i)designatethemannerofperformingtheobligation,(ii)establishthevalueoftheperformance,oreven(iii)decidethatthecontractbedissolved.Economicinefficiencymaynotbeagroundforaforce majeureclaim.


A third partymay claim the benefit from a construction contractonlyiftherightsandobligationsfromthecontractortheemployer’srights arising under statutory warranty and/or guarantee weretransferredtothatthirdparty.


Yes, a party to a construction contract is entitled to set off itspayment against payments due from the other party. The CivilCodeprovidesforexceptionstotherighttoset-off;however,theseexceptionsdonotingeneralapplytopaymentsbetweenthepartiestoaconstructioncontract.


Parties to construction contracts owe a duty of care (Polish: należyta staranność) on the basis of the provisions of the CivilCode.However,thepartiesmaydecideonthedefinitionandpreciseunderstanding of the term “duty of care” under the constructioncontract.


Under the Polish Civil Code, it is the common intention of thepartiesandtheaimofthecontractthatshouldbeexaminedratherthanitsliteralmeaning.


Asthecasemaybe,sometermsinaconstructioncontractmaybefoundunenforceablebytherelevantcourt;however,whenexecutingacontract,itisassumedbythepartiesthatalltheprovisionsofthecontractarefullyenforceable.



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wasissuedinacasewhichfallsundertheexclusivejurisdictionofPolishcourts;(iii)adefendantwhodidnotdefendonthemeritsofthecasewasnotdulyservedwithastatementofclaiminsufficienttimetoenablethedefendanttoarrangeforadefence;(iv)apartywasdeprivedofthepossibilitytodefenditselfintheproceedings;(v) an action involving the same claimbetween the same partieswasbroughtbeforeacourtintheRepublicofPolandbeforeitwasbroughtbeforeacourtofaforeignstate;(vi)itisirreconcilablewithanearlierfinalandnon-appealablejudgmentofaPolishcourtoranearlierfinalnon-appealable judgmentofacourtofa foreignstaterecognised in the Republic of Poland, given in a case involvingthesameclaimbetweenthesameparties;or(vii)suchrecognitionwouldbecontrarytothefundamentalprinciplesofthelegalorderoftheRepublicofPoland(publicpolicyclause).


Processes before common courts are instituted by a statement ofclaimfiledwiththerelevantcourtbytheclaimant.Itistheclaimantwhohastoprovideevidencefortheclaim.Acourtproceedingendswithaverdict.Ifapartyisdissatisfiedwithaverdict,itmayappealtothehigherinstancecourt.Accordingtotheinformationpublishedby theMinistry of Justice, in 2017 court proceedings lasted, onaverage,fivetosixmonthsinthefirstinstance.Thereisnosimilardata for appeal proceedings, but usually appeal proceedings lastlongerthanproceedingsbeforecourtsoffirstinstance.

and issuedeclarationsofenforcementofsuchawards. Commoncourtswill refuse to recogniseorenforceanawardorsettlementagreement made before an arbitral tribunal if: (i) the disputecannot be resolvedby arbitration in accordancewith the law; or(ii)recognitionorenforcementofanarbitralawardorasettlementagreement made before an arbitral tribunal would be contraryto the fundamental principles of the legal order of the Republicof Poland (public policy clause). The court will also refuse torecognise or enforce an award issued abroad or a settlementagreement made before an arbitral tribunal abroad if the partyrequestingtherefusaldemonstratesthat:(i)therewasnoarbitrationagreement or the arbitration agreement is invalid, unenforceableorno longereffective inaccordancewith theapplicable law; (ii)the applicantwas not given proper notice of the appointment ofanarbitratororofthearbitrationorwasotherwisedeprivedoftherighttopresentitscaseorrespondtotheotherparty’scasebeforethe arbitral tribunal; (iii) the award dealswith a dispute that thearbitrationagreementdoesnot coveror contains adecisiononamatterthatgoesbeyondthescopeofsuchagreement,providedthatifitispossibletoseparatethedecisionsonmatterscoveredbythearbitrationagreementfromtheimpugnedones,thecourtshallonlysetasidetheimpugneddecisionsandallowtheotherstostand;thecourtshallnotsetasideanawardonthegroundsthatitdecidedonamatternotcoveredbythearbitrationagreementifthepartytothearbitrationfailedtoobjecttoitsinclusion;(iv)thecompositionofthearbitraltribunalorthearbitralprocedurewasnotinaccordancewiththearbitrationagreementor,failingsuchagreement,withthelawofthestatewherethearbitrationtookplace;or(v)theawardhas not yet become binding on the parties or has been set asideorsuspendedbyacourtofthestateinwhich,orunderthelawofwhich,thatawardwasmade.


A judgment of a foreign state court issued in a civil matter isrecognised ex lege unless the following obstacles exist: (i) it isnotfinalandnon-appealableinthestatewhereitwasissued;(ii)it



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Greenberg Traurig is a law firm with over 2,000 attorneys, serving clients from 38 offices around the world. The Warsaw office has a professional team of more than 100 lawyers and is highly ranked in all major practice areas.

Our real estate team consists of more than 40 top-rated specialists who cover a broad spectrum of core real estate and related practices, including finance, corporate, M&A, tax and capital markets. This team is one of the largest real estate teams in Poland.

We provide a full-service real estate practice, from acquisition, tenant and landlord representation to assisting developers and lenders in seeking to create new real estate development and finance concepts. We also handle dispute resolution arising out of real estate transactions. The team benefits from the support of our market-leading real estate practice in the United States.

Agnieszka Stankiewicz is a partner in the real estate department of the Warsaw office of Greenberg Traurig.

She has over 20 years of professional experience in corporate finance and real estate transactions. Her practice focuses on assisting a variety of foreign and domestic investors in M&A, takeovers, joint ventures, corporate and organisational restructuring, acquisitions and divestments of real estate or real estate holding companies, the financing and refinancing of real estate acquisitions, forward purchase and leaseback transactions, all aspects of real estate development projects as well as the due diligence of companies and assets and the restructuring of their financial indebtedness.

Agnieszka has been recognised as one of the leading lawyers in Poland in various legal directories including Chambers Europe and EMEA Legal 500. She is also listed as a Who’s Who Legal expert in real estate.

She graduated from the Faculty of Law at Warsaw University. She qualified as an advocate in 2001.

Agnieszka StankiewiczGreenberg Traurig Grzesiak sp.k.ul. Książęca 400-498 WarsawPoland

Tel: +48 22 690 6142Fax: +48 22 690 6222Email: [email protected]: www.gtlaw.com

Barbara Pancer is a senior associate in the real estate department of the Warsaw office of Greenberg Traurig.

Barbara has 15 years of professional experience. She focuses her practice on the investment process, including sale agreements, EPC and other construction contracts (also based on FIDIC templates), development and property management agreements and commercial leases. She also advises on matters connected with the development process, including planning, permit and construction issues. She has broad experience in performing due diligence audits related to the legal aspects of real estate in connection with the sale and purchase of real estate, as well as for banks financing acquisitions or development of real estate.

Barbara has been involved in major real estate and infrastructure projects on the Polish market.

She graduated from the Faculty of Law at Warsaw University. She qualified as a legal advisor in 2012.

Barbara PancerGreenberg Traurig Grzesiak sp.k.ul. Książęca 400-498 WarsawPoland

Tel: +48 22 690 6132Fax: +48 22 690 6222Email: [email protected]: www.gtlaw.com



Chapter 22

FALM – Sociedade de Advogados, RL

António André Martins

Joana Maltez

Portugal


Forprivateconstructioncontracts,therearenoessentialqualitiesorformalitiesrequiredforthecontracttobelegallybinding.However,incaseofadispute,thepartyrelyingonthecontractmustrequirelegal proof of the existence of the said contract. Therefore, it isprudenttohavesomesortofacknowledgmentfrombothpartiesthatthecontractexists.Forpublicconstructioncontracts,thepublicprocurementproceduresare legally binding and are derived from European law. Theproceduresinvolvealargenumberofformalitiesandrequirementscomprisingbothpre-adjudicationandpost-adjudicationprocedures.


InPortugal,civillawestablishestheprincipleoffreedomofcontract,bymeansofwhichtheparties,withrespecttotheimperativerulesforeseen in the law, are free to agree amongst themselves thecontractualdisciplinebywhichtheywishtoabide. Nevertheless,articles224and230ofthePortugueseCivilCodeexpresslyprovidethepossibility for anyentity togive theotherparty indicationofitswill to enter into a contract. The law establishes that, unlessotherwisespecified,suchofferisofanirrevocablenature.


With respect to construction activity, the only insurance thatis mandatory is accident at work insurance. Such insurance isnecessary inaccordancewithLawno.41/2015of3 June foranycontractortobeallowedtopursueitsactivityinPortugal.



OnecannotspeakaboutstandardtypesofconstructioncontractinPortugal,butratheraboutcommontypesofconstructioncontract.In fact, there are no standard drafts adopted by the constructionsector. However, there are two main types of contract that areusually adopted in construction projects both in the private andpublic sector: Contrato de Empreitada por Preço Global; andContrato de Empreitada por Série de Preços. Thefirst isa lumpsumcontractwherethepriceisfixedbeforehand,andthelatterisaso-called“priceseriescontract”,establishingapriceforeachtypeofworks,wherethecontractorispaidinaccordancewiththeresultoftheworkseffectivelycarriedout.These two main types of contract were, until 2008, expresslyprovidedinthenationallaw.However,thePublicContractsCode,approvedbymeansofDecree-Lawno.18/2008of29January,nolongerestablishesadistinctionbetweenthesetwotypesofcontract.Thismatterisnowsubjecttothelibertyofthecontractingparties.DesignandconstructioncontractsarecommoninPortugal.Thesecontracts are in fact standard in certain areas, such as in PPPAgreements.With regard to management contracting, this has become quitecommoninrecentyearsduetotheincreaseinoutsourcing.Untilafewyearsago,Portugueselawexpresslyprovidedfortheexistenceof theEmpreitada por Percentagem (percentage contracting), bymeans ofwhich the contractor is paid a given agreed percentageoverthecostsincurred.Thepositionofthemanagingcontractorisrecognisedbynationallaw.Inpubliccontracts,thepercentageofsubcontractingmaynotbeabove75%.


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tojudiciallyexecutesuchpropertywithpreferenceoveranyothercommon creditors, including mortgage creditors. However, thecontractormaynotremovegoodsormaterialssuppliedfromthesite,assuchgoodsormaterialsareconsideredtohavebeenincorporatedintotheworksandthereforetransferredtotheemployee.



Yes,itiscommonforconstructioncontractstobesupervisedbyathirdparty,actingonbehalfoftheemployer.Suchthirdpartydoesnothaveadutytoactimpartially,astheyrepresenttheemployer.


Yes,“paywhenpaid”clausesarefrequentinourjurisdiction,andareoftencombinedwith“back-to-back”and“ifandwhen”clauses.


Thepartiesareallowedtoagreeafixedsuminadvance.However,a court may reduce, in accordance with the stipulations of theapplicable law,suchamount if it isdeemedmanifestlyexcessive.Portuguesecourtshavecometolimitsuchamountsonafrequentbasiswhenevertheyclearlyexceedtheeffectivedamagesincurred.



Inaprivateconstructioncontract,unlessotherwiseagreedby theparties, the employer may not vary the nature of the works, butonlytheirvalue,andonlyuptoafifthoftheagreedprice.Withinpublicconstructioncontracts,theemployermayrequest,ifcertainconditionsaremet,variationstobeperformedunder thecontract.Suchvariations shouldnot, however, exceed10%of thepriceofthecontract.

However,therearealsosomesituationswherethecontractormayreplacetheneedtoproveitseconomiccapacitytoexecutesomekindofworkswithcivilliabilityinsuranceofanamountequaltothecostoftheworkstobeexecuted.Inthesesituations,thecontractormusthavebothaccidentsatworkinsuranceandcivilliabilityinsurance.It is, however, usual for public and private employers dealingwith construction contracts to demand the existence of a morecomprehensive insurancepolicy covering all of the relevant risks(this is thecase insituationswhere there isnolegalobligationtohavecivilliabilityinsurance).


There are no general requirements that apply exclusively toconstructioncontracts.However,thecontractormustbepreviouslyauthorisedbytheauthoritiestoactasaconstructor,pursuanttoLawno. 41/2015 of 3 June, andmay not carry out works beyond thelimitsofsuchauthorisation.Employeesmustholdavalidworkvisa.Decree-Law273/2003of29Octoberalsodemandsthatasafetyandhealthplanbeincludedinanypublicorprivateoffer,andsuchplanmustbeincludedasanannexinpublicconstructioncontracts.


Yes,theemployerisallowedtoretainpartofthepurchaseprice.In public contracts, there is usually a guarantee of 5% which iscomplementedby a retentionof an additional 5%of the contractprice. This retentionmay be replaced by an alternative form ofguarantee.


In private contracts, all forms of guarantee are admissible. Themostcommonformofguaranteeisafirst-demandbankguarantee.Companyguaranteesarelesscommonbutarenotforbidden.Inpubliccontracts, the formsofguaranteeare legallyestablishedandare,inaccordancewitharticle90ofthePublicContractsCode,eithermadebymeansofacashdepositortitlesissued,orguaranteedbythePortugueseState,bankguarantees,oraninsuranceguarantee.


The contractor has the legal right to retain theworks as long asthere are any amounts due, and the contractor also has the right

FALM – Sociedade de Advogados, RL Portugal


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Usuallysuchriskisbornebytheemployer,althoughitiscommonto make exceptions for tax and environmental law in publicconstructioncontracts.


Usually intellectual property is transferred to the employer at theendoftheworks.


The parties may agree freely on suspension causes. Delayedpayments or force majeure are common causes of suspension.Civillawestablishesthatthecontractormaysuspendtheworksifpaymentsaredelayed(“exceptio non adimpleti contractus”).


Groundstoterminateacontractcanbefreelyagreedbytheparties.Under objective circumstances, the innocent partymay terminatethecontractbydeclaringtotheguiltypartythattheyhavelosttheirinterest in the contract. If the execution of the works becomesimpossible,anyofthepartiesisentitledtoterminatethecontract.


Yes,Portugueselawacceptstheconceptofforce majeure, limitedtoextraordinaryeventsmostlybeyondhumandetermination.Force majeuresituations,whichingoodfaithcausetheexecutionofthecontracttobeunbearableorimpossible,allowtheinjuredpartytoclaimachange,reductionorreliefofobligationsortheterminationofthecontract.Withregardtothesecondquestion,itisnotlikelythatsuchaclaimwouldbesuccessfullyargued,unlessthecontracthadbecomeuneconomicduetoforce majeure.


Theanswertobothquestionsisaffirmativeassuchrightsarerelatedtothebuildingitselfandthuswillbetransferredwiththepropertyrights,withintheguaranteeperiod.


The right of set-off in pecuniary undertakings is provided in the


Inprivateandpublicconstructioncontracts,workscanbeomittedfrom the contract. Works omitted from the contract can then beexecutedbytheemployerorathirdpartyonitsbehalf.


Yes, there are terms that may be implied into a constructioncontract regardlessof itspublicorprivatenature. Bothcivilandadministrative laws provide an important set of ruleswhichmaysupplementacontractualagreement.


Concurrent delays would probably only entitle the contractor toanextensionoftime.Thecostsoccasionedbyaconcurrentdelaywouldnotusuallybeconsideredtheresponsibilityoftheemployer.


Yes,aslongasthefloatwasidentifiedassuchintheworksschedule.


In Portugal, all claims are subject to a limitation period. In thecase of defects in construction works, such limitation period isfiveyears,exceptforclaimsreferringtostructuralelementswhichhavea limitationperiodof10years,beginning from thedate thefinishedworkswereaccepted.However,defectsmustbenotifiedtothecontractorwithinoneyearfromthemomentthattheemployerbecomesawareofsuchdefects,andtheclaimmustbefiledwithinthefollowingyear.Ifthesedeadlinesarenotmet,theemployermaynolongerbringclaimsagainstthecontractor.


Thisriskisnormallybornebytheemployer.However,itmaybeconsidered as a change of circumstances underwhich the partiesagreed to contract, as long as such eventwas abnormal andwasunpredictable and, in good faith, caused the execution of thecontracttobeimpossible.Insuchcase,theriskwillbesharedeitherbychangingorreducingthetermsofthecontractor,ifthecontractisimpossibletoexecute,byresolvingit.



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Construction contracts of higher value commonly have arbitrationclauses.ArbitrationiswellconsolidatedinthePortuguesejurisdictionandisruledbyLawno.63/2011,of14December.Arbitrationusuallystarts with a notice to all interested parties defining the object ofthedispute,presentingevidenceandarguments,andnominatinganarbiter.Thecounterpartiesaregiventheopportunitytopresenttheirevidenceandarguments and (dis)agreewith thenominatedarbiter,ornominatetheirownarbiter,whenthearbitrationistobeheldbyagroupofthreearbiters.Inthelattercase,thetwonominatedarbitersshallnominatethethird,whowillpreside.Awardsaretakenaccordingto the Portuguese statutory rules, unless the parties should choosethatthearbitersshalldecideaccordingtoequity. Thearbitersmayalsodetermine injunctions. Decisionsarebindingbetweenparties,althoughthosetakenaccordingtostatutoryrulesmaybeappealedtotheStatecourtsifthepartiespreviouslyagreedso.DecisionsmayberevokedbytheStatecourtsifvoid.


ThePortuguesecourtsrecogniseandenforceinternationalarbitrationawards. Enforcement may only be denied within the limitationsprovidedinLawno.63/2011,of14December,relatedgenerallytoirregularitiesofthearbitrationprocedure,violationofthePortuguesestatutoryrules,ortheprinciplesofinternationalorder.


Foreigncourts’judgmentsonconstructioncontractscanbeenforcedinPortugalafterbeingrevisedbyahigherPortuguesecourt. Forsomecountries,specificinternationalconventionsmaybeapplicabletoeasesuchprocedure.


Court proceedings related to construction contracts, both of civiland administrative law, will follow a common procedure whichbeginswitharequirementtodefinetheobjectofthedispute,thentopresentevidencesandarguments,andtoconcludewiththedemand.The counterparty is given the opportunity to present its evidenceand arguments. If further evidence is necessary, an audience isadjournedand thefinaldecisionwill follow. Generally, the rightofappealisallowedonlyifthepleahasavaluesuperiortothe“a quo”court’slimit,andtheparty’slossamountstomorethanhalfasmuchassuchlimit.Itisnotpossibletodeterminehowlongeachproceedingislikelytotake.

CivilCodeandoperatesbymeansofasimplestatementtotheotherparty.Suchrightofpaymentmustbejudiciallydemandable.ThisrightdoesnotexistinpubliccontractsifthepubliccontractoristhePortugueseState.


PartiestoanycontractsubjecttoPortugueselawareobligedtoactingoodfaithtowardsoneanother.


Yes, the Portuguese Civil Code establishes such rules. In fact,unless otherwise agreed by the parties, the interpretation of thecontractual terms shall bemade by taking into consideration thehypotheticalwillofthepartiesiftheyhadpreviouslyforeseensuchambiguity. Nevertheless, if the rules of good faith determine adifferentsolution,suchsolutionshallprevail.


No,aslongassuchtermscomplywiththelawandtheobligationsarefeasible.


Theliabilityofthedesignermaybecontractuallylimited.



Disputesaregenerallyresolvedbyjudicialcourts.Incontractswithhighervalues,however,thepartiesfrequentlychoosearbitrationasafastermeanofresolvingtheirdisputes.


Adjudication processes similar to those provided in the UK’sConstructionandRegenerationActhaveceased toexist inpublicconstructioncontracts,andhaveneverexistedinprivateconstructioncontracts.



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FALM – Ferreira de Almeida, Luciano Marcos e Associados, Sociedade de Advogados, SP, RL is a law firm with four Partners. Incorporated in 2006 and therefore celebrating its 12th anniversary this year, the firm thrives on its Partners’ and Associates’ experience of over 30 years within the different areas of public and private law, mostly focused on planning and real estate law, construction, public procurement and project finance.

The firm has advised a large number of national and foreign construction and infrastructure companies in some of the major construction and engineering projects in Portugal in recent years. The teams are very much used to working with clients from the very inception of a project – usually the acquisition of the site – to the licensing and zoning procedures, construction and sale, through to the operation and maintenance of the finished asset.

António is the Partner in charge of the law practice groups for Construction, Public Procurement, and Project Finance. Within these practice areas, he has successfully advised some of Portugal’s largest construction and engineering contracts. António has also been actively participating in the negotiation of numerous project finance deals throughout the last 15 years, advising some of the largest European construction companies.

António André MartinsFALM – Sociedade de Advogados, RLRua Abranches Ferrão, n.º 10, 5.º B1600-001 LisbonPortugal

Tel: +351 21 722 4200Fax: +351 21 722 4201Email: [email protected]: www.falm.pt

Joana is a Senior Associate in the law practice groups for the Construction, Public Procurement, Project Finance and Expropriation sectors. She has been involved in several public procurement bids with construction and engineering contracts as a consultant for the bidders, and is on the teams that continuously advise the private contractors in managing such public contracts. Joana has advised on infrastructure projects, railways, highways, hospitals, prisons and other major buildings.

Joana MaltezFALM – Sociedade de Advogados, RLRua Abranches Ferrão, n.º 10, 5.º B1600-001 LisbonPortugal

Tel: +351 21 722 4200Fax: +351 21 722 4201Email: [email protected]: www.falm.pt



Chapter 23

Trofin & Asociaţii SCA Oana Cuciureanu

Romania

such as technical and economic documentation developmentservicesduringcertainphasesoftheproject.Also, inconstructionpractice,generalcontractingagreementsarefrequentlyencountered(contract de antrepriza generala)betweenemployers and general contractors, where the general contractorsubcontracts part of the works for which he does not have thenecessary experience or resources. Through this contract, thecontractor usually assumes responsibility for the supply of allthe materials, labour, equipment and services necessary for theconstruction of the project, obtaining the construction permits, ifneeded,andcoordinatingthesubcontractorsandtheirworkonthesitesothat theproject isdeliveredwithintheplannedcompletiontimeandbudget.Thecontractor concludescontractswith its subcontractors,but inmostcasestheemployer’spriorapprovalisrequiredortheemployerrequiresnotificationinadvanceofanysubcontractorappointment.


A construction contract is legally concluded if it respects thegeneralconditionsforconcludingavalidcontract,thesebeing:(a)thepartieshavetheability toenter intoacontract; (b) thepartiesconsenttothecontract;(c)thecontracthasadeterminedandlawfulobject;and(d)thecontracthasalawfulandmoralcause.Nowrittenformisrequiredaslongastheconsentofthepartiestoenterintotheconstructioncontractisfoundandheld.Also, a contractmaybe concludedwhen a party acceptswithoutanyamendmentanoffertoenterintoacontractbytheotherparty.Even if it is theoretically possible to conclude a contract “in asimplifiedform”(offer/acceptance),generalpracticeistoconcludethecontractinwritinginordertobeabletopreciselydeterminetheextentoftheparties’obligations.Thepricemustbedeterminedoratleastbedeterminableand,ifnotsetoutinthecontract,isconsideredtobethepriceprovidedbythelaworcalculatedaccordingly,orestablishedinrelationtotheworksexecutedandthecostsincurred.Moreover,thecontractisconsideredtobeasalecontractandnotaconstructioncontractwhen,accordingtotheparties’intention,theexecutionoftheworksisnotthemainpurposeofthecontract,alsotakingintoconsiderationthevalueoftheassetssupplied.



NostandardformsofconstructionanddesigncontractexistintheRomanian legal system, except for large infrastructure projects,whereitismandatorytousestandardformsofcontract,accordingtothelatestlegislativechanges.The Ministry of Regional Development, Public AdministrationandEuropeanFundshasdraftedtwostandardisedcontractmodelsfor works contracts (for, respectively, design and build) relatedto publicly funded investment objectives, in accordancewith theNationalStrategyforPublicProcurementdevelopedbythenationalconstruction institutions togetherwith theEuropeanCommission.ThecontractswereapprovedbyGovernmentDecisionno.1of10January2018.Except for these instances, the parties may choose to use theirown standard contracts, but the standard formsmostwidelyusedinRomaniafornationalandinternationalprojectsarepublishedbythe International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils)(FIDIC).Still, it is customary for standard contracts to incorporate andcomplywithRomanianlawmandatoryrequirementsandpracticeson engineering, design and build. Usually, the contracts forengineeringprojectsdifferfromdesignandconstructioncontracts.Thefollowingcontractsmaybeused:■ The “Red FIDIC” – the “Conditions of Contracts for

Construction”.Theseareusedforbuildingandengineeringworksdesignedbytheemployer.

■ The“YellowFIDIC”–“ConditionsofContractforPlantandDesign-Build”.Theseareusedforelectricalandmechanicalplant,andforbuildingandengineeringworks,designedbythecontractor.

Acommondesign-onlycontractinRomaniaistheservicecontract,throughwhich theproviderundertakes toprovidedesignservices

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The contractor is responsible for the construction works untilthe hand-over; therefore he usually undertakes by contract theobligationtoconcludeanall-riskinsurancepolicycoveringpersonaland property damage. The risks insured include: flood, fire, andearthquake; property damage to the works or to the equipment;damagecausedtothirdparties;andemployeeinjurycausedon-sitebytheworkorequipment.It should be noted that, according to theRomanian EmploymentCode,theemployerhastheobligationtoinsureallemployeesfortheriskofaccidentsatworkandoccupationaldiseases(theemployerisdifferentfromthatinconstructioncontracts;inthiscaseitreferstothepersonthatemploystheworkers,usuallythecontractor).


In principle, there are no statutory requirements in relation toconstructioncontracts.AccordingtotheCivilCode,theemployerisobligedtoobtainallauthorisationsrequiredbylawinordertoexecutetheworksandtheconstructormustcooperatebydeliveringtohimalltheinformationnecessaryinrespectofitsspecialisation.Law 50/1991 (“ConstructionAct”) regarding the authorisation ofconstructionworksrequirestheconstructionworktobeapprovedbythecompetentauthoritiesandabuildingpermit.Theconstructionworkscannotbeinitiatedintheabsenceofthese.Currently,abillisopenforpublicdebateamendingtheexistingConstructionAct.Thisdraftlaw(ontheauthorisationoftheexecutionofconstructionworks and the demolition of constructions) was brought to theattentionof thepublicby theMinistryofRegionalDevelopment,PublicAdministrationandEuropeanFunds.Thisprojectwasputupforpublicdebateon15January2018andisduetobeapprovedbytheGovernment,debatedinParliamentand,subsequently,approvedbytheheadofstate.ThemainamendmenttotheConstructionActproposed by this project consists in the possibility of executingcertainconstructionworkswithoutaconstructionpermitorwithapermitobtainedusingsimplifieddocumentation.Moreover,anurbanisticcertificate,alsoknownasaTownPlanningCertificate, is required in order to acknowledge and respect thelegal,economicandtechnicalrequirementsofthelandandexistingbuildingsanddeterminethenecessaryapprovalsforauthorisation.Also,theConstructionActprovidesthatallconstructionsmustfulfilcertain requirements, such as resistance and stability, fire safety,hygiene,publichealthandenvironmentalprotection.Inregardtoemploymentrelationships,theRomanianEmploymentCode provides that individual employment contracts must beconcluded with all employees. The contracts must contain thejob description and working conditions and must be registeredto the local labour authorities. Also, the employees must havethe educational background or professional experience set by theinternalregulationsinordertooccupycertainpositions.The subcontractor’s legal status relationships are set by thesubcontracting agreement. The main contractor is liable for thesubcontractor’sactsaswellashisown.Itisimportanttonotethat,iftheywerenotpaidbythecontractor,thepersonswhocarriedoutactivityfortheperformanceoftheservicesortheexecutionofthecontract on the basis of a contract concludedwith the contractorhavetheabilitytomakeadirectclaimagainsttheemployeruptotheamountowedbytheemployertothecontractoratthetimeofsubmittingtheclaim.

Adjudication is not formally recognised by Romanian legalprovisions and, consequently, is not enforceable. Duringperformanceofworkswherea standard formofFIDICcontractis concluded,manydisputes are referred to adjudicationpanels.Theadjudicator’sdecisionwillnotbeenforcedbytheRomaniancourts if the losing party is non-compliant. Recently, theRomanianHighCourt decided thatDisputeAdjudicationBoard(DAB)decisionscannotbeenforced,eveniftheyareorderedbywayofaprovisionalorpartialarbitrationaward.The effects and limitations ofRomanian law onFIDIC contractshavebeenconfirmedas,duringaprocedureofenforcementofsuchan arbitral award, the Romanian courts rejected the claim of thecontractoron thegroundthatpartialarbitralawardshavenofinaleffectandthereforedonothavethenatureofanarbitraljudgment,asthisisprovisoryandproduceseffectsonlyuntilthesettlementofthependingarbitration.


TheRomanianlegislationdoesnotincludetheconceptsofletter of intentor letter of acceptance inconstructioncontracts. However,according to theprincipleof freedomofcontractprovidedby theCivil Code, the parties are free to conclude any contracts and todetermine their content in the limits foreseen in the law, andaccordingtopublicorderandtheprinciplesofmorality.On this topic, theCivilCodeprovides for theunilateral promise,which is legallybindingonly for itsauthor,whose intention is toundertakeobligationsregardlessofitsacceptance.Iftheauthordidnotstipulateaperiodoftimeforcompletionofitsobligations,thepromiseisconsideredtobemadefortheperiodappropriateforthenatureoftheobligationsandforthecircumstances.Also,Romaniancivillawprovidesforthepossibilityofthepartiestoconcludeapromise to contract,whichshallcontainalltheclausesoftheenvisagedcontract,intheabsenceofwhichthepartiescouldnotexecutethepromise.Ifnotexecuted,theemployerisentitledtodamagesorhemayaddressthecourtinordertoobtainadecisionthat substitutes the contract. This can be interpreted as a legallybindingindicationofwillingness.Ifthepartiesonlyundertaketonegotiateinordertoconcludeoramendanagreement,itisnotbeconsideredapromisetocontractandisthereforenotlegallybinding.The party initiating, continuing or breaking negotiations contrarytogood faith shall be liable for theprejudice caused to theotherparty. In determining suchdamage, the expenses incurred in thenegotiation, the refusalofotheroffersby theotherpartyandanysimilarcircumstanceswillbetakenintoaccount.


There is no compulsory construction-related insurance underRomanianlaw,butinpracticethepartiesusuallyagreecertainnon-compulsoryinsurances.

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date in a private contract. However, in public contracts, the lawprovidesthattheguaranteeshallbeconstitutedbybanktransferorby a guarantee instrument issued under the law by a bank or aninsurancecompany.Regardingvalue,usuallytheperformancebondissetatanamountofupto10%ofthecontractvalue(inpubliccontracts,thispercentageismandatory).


TheCivilCodestatesthat,incontractingcontracts,thecontractorexecutestheworksatitsownrisk.Italsostatesthat,inconstructioncontracts,therisksofthecontractpasstotheemployerfromthedateofthehand-overoftheconstruction,uponcompletionofthework.This means that, until a Taking Over Certificate is obtained, theownership of the works belongs to the contractor, but in mostcontractsthecontractorwaivesthisrightinfavouroftheemployer.The Romanian Civil Code also institutes a legal mortgage onthe construction for the contractor in order to guarantee thatthe employer pays the price due for the works; the mortgage isconstituted andpreservedunder the law. Therefore, the amountsowedtothearchitectandthecontractor’semployeesforperformingtheconstructionworksarealsoguaranteedbyalegalmortgageovertheconstructioniftheyhaveadirectcontractwiththebeneficiaryandonlytotheextentoftheaddedvalueoftheworks.



Yes,itisacommonpracticeinRomaniathatconsultantengineersorarchitectsareemployedbytheemployerinordertosuperviseandmanageallcontractualissuesbetweentheemployerandcontractor.Unfortunately, industry practice drastically changed the scope ofengineersasitisknownintheFIDICSuiteofContracts.Tellingly,theengineer’sscopeislimitedtothatofacourier,anexpensiveone,whosemaindutyisonlytodispatchthecorrespondencebetweentheemployerandcontractor,havingnopowertodetermineanyissueswithoutthepriorapprovaloftheemployer.The employer’s desire for absolute control over the engineer’sactionsanddeterminationscanresultinendlessdisputesanddelayswhichareeventuallyreferredtothecourtsforafinaldecision.


The inclusionofaprovision inaconstructioncontract,accordingtowhich payment of the contractor takes place uponpayment of

AccordingtothelatestchangesinRomanianfiscalregulations,inforcefrom1January2018,someofthesocialcontributionsarenowbornebytheemployee(suchaspensionandhealthcontributions).Still, thework insurance contribution of 2.25% of thewage andpartofthepensioncontribution(4%ofthewageincaseofunusualconditionsofwork,or8%ofthewageincaseofspecialconditionsofwork)arebornebythecontractor.Inanycase,wherealabouragreement ismandatory, the employee’sorganisation (usually thecontractor) has a duty to calculate andwithhold all the taxes forwhichhisemployeesareaccountableandthenpaythetaxtothetaxauthoritiesontheemployees’behalf.Asforhealthandsafety,accordingtoLaw319/2006regardinghealthandsafetyatwork,theemployer(asdescribedinquestion1.4)hastheobligationtotakethenecessarymeasuresinordertoensure:thesafetyandhealthofworkers; thepreventionofprofessionalrisks;theprovisionof information to, and trainingof,workers; and themaintenanceof theorganisational framework. Also,according toGovernment Decision no. 300/2006 regarding minimum healthand safety standards for temporary ormobile sites, the employerortheprojectmanagermustensurethatasafetyandhealthplanisestablishedpriortotheopeningofthesite.


Thereisnoexpressprovisiononthisissueindomesticlegislation;therefore the employer is legally permitted to retain part of thepurchasepriceifprovidedbythecontract.Usually, construction contracts provide for a monthly progresspayment depending on the amount of work the contractor hascompletedand it isnotnecessary for theemployer togivea“payless”noticetothecontractor,incasetheemployerisnotgoingtopaycertainamountsstatedinthecontractor’sprogresspaymentreport.Based on the general freedom of contract, it is common for theparties to agree that the employerwithholds part of the purchaseprice as retention for performance or defects liability. Usually,thisretentionisreplacedbybankguaranteeletters(asdescribedinquestion1.7).


Construction contracts commonly require that the contractorsprovide performance bonds in order to guarantee performanceof the works. The contractor uses a guarantee letter which ismost commonly issued by a bank, but can also be issued by acompany. However, a guarantee letter issued by a subsidiary oraholdingcompanyof thecontractororbyan insurancecompanyisusuallymoredifficulttoenforceanditmayinvolvecontentiousproceedings. According to the Romanian Civil Code, guaranteeletters are irrevocableandunconditional, andmustbepaidat thefirstandsimpledemandoftheemployer,unlessotherwiseprovidedinthetextoftheletterofguarantee.Therefore,thebankthatissuedthe guarantee cannot invoke exceptions based on a pre-existingconstructioncontract.Thereareno limitationson thenatureof thebondsorguaranteesusedinordertoguaranteetheriskofnotrespectingthecompletion



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TheCivilCodehasnoprovisionsforvariationofworks.Thus,thepartiesarefreetoagreeontheprocedureforvariations.Wherethecontractingagreementhasnoprovisionsforvariations,therulesonconcludingcontractswillapply.Inthiscase,theemployerwillsendfulldetailsofthevariation,followedbyanofferfromthecontractorintermsoftheextendedtimeneededforcompletionandtheprice.Where the employer accepts the contractor’s offer, an addendumtothemainconstructioncontractwillbesigned,orthepartiesmaychoosetoexecuteatotallynewcontract.


Where the contractor fails to carry out any obligation under thecontract,theemployer:(a)mayrequirethecontractortomakegoodthefailureandtoperformitwithinaspecifiedreasonabletime;(b)mayemployathirdpartytoperformit,deductingthecorrespondingamountsfromthecontractamount;or(c)maychoosetoterminatetheconstructionagreementshouldtheomittedworksbesubstantialenough.Duetothefactthattherearenostatutoryprovisionsinthisrespect,it is advisable for the parties to agree on all thesematters in theconstructioncontract.


Yes,thereareseveralconstructionprovisionswhichareconsideredas implied terms, especially those referring to the formalcommissioningof theworks, constructionquality regulationsandotherregulationsrelatedtofiresafety,generalhealthandsafetyorenvironmentalprotection.


TheRomanianCivil Code entitles the employer to terminate theconstructioncontractifthecontractorfailstoperformitsworksinaccordancewiththeinitialtimescheduleorifhedoesnotperformthenecessaryremedies(Article1872).Also,thecontractorisentitledto terminate the contract if the employer does not accomplish itsowncontractualobligationsandtheperformanceoftheagreementbecomes impossible due to the employer’s fault. The contractormayalsoclaimpenalties(Article1873).The contractor has the possibility to suspend the works in casesomedesignerrorsareascertainedandtheemployerisaccordinglynotified.Thenon-fulfilmentofcontractualobligationsisprovidedforby theRomanianCivilCode andgivesoneparty the right tosuspenditsownobligationstowardstheotherpartyifthelatterfailstofulfilitsobligations.

the employer, is not prohibited by Romanian law. The generalprovisions in thismatter state that the employer is bound to paythecontractorthepriceatthetimeandplaceofthereceptionoftheentireconstruction,unlessotherwisestatedbylaworbycontract.In practice, the parties provide such clause especially whensubcontractingtheworks. However, thelawallowspersonswho,on the basis of a contract concludedwith them, have carried outanactivityfortheprovisionofservicesortheperformanceofthecontractedwork,toclaimdirectlyagainsttheemployerforuptotheamountwhichthelatterowestothecontractorwhensubmittingtheclaim.Moreover,inordertoguaranteethepaymentofthepricedueforthework,thecontractorhasalegalmortgageontheconstruction,whichisestablishedandpreservedunderthelaw.Also, if thecontractordoesnot receivepaymentaccording to theclauses in thecontract,he is entitled to receivefinancingchargescompoundedmonthly,calculatedontheamountunpaidduringtheperiodofdelay.


Yes, liquidated damages are enforceable under Romanian lawsubjecttothescrutinyofthecourtifadisputeisreferredtoitfordetermination.Inpractice,whenthepartiesstipulateinthecontractapre-estimatedloss, the employer’s damage must be proved in order to collectthe compensation and, according to the Civil Code, the courtscandecrease theamount incase theyconsider it tobeexcessive,respectively: i) when the main obligation was partially executedand such execution benefitted the employer; and ii) the penalty(appliedtothecontractor)ismanifestlyexcessiveinrelationtothedamagethatcouldhavebeenforeseenbythepartieswhensigningthecontract.Inthelattercase,suchdecreasedcompensationmustremainhigherthanthemainobligation.Anystipulationcontrarytotheaboveshallbedeemednottobewritten.Also, a further two situations can determine a decrease in thecompensation: when the contractor has a guilt in causing thedamage;orthedamagewascausedinpartbyaneventwhoseriskwasassumedbythecontractor.Inbothcases,thecompensationwillbeproperlydecreased.The employer can either demand the execution of the mainobligation, or the payment of the compensation, except when apenaltywasstipulatedforlatecompliancewiththemainobligation(in this case, the employer can request both the execution of themainobligationandthepaymentofcompensation–ifhedoesnotwaivethisrightorifhedoesnotaccept,unconditionally,themainobligation).Ifthepartiesdonotstipulateapre-estimatedlossandtheyprovideonlyliquidateddamagesforlatecompletion,thentheemployerwillhavetherighttocollectcompensation,withouttheneedtoprovethedamagehesuffered. ThevalueoftheliquidateddamageswillbecalculatedatthelegalinterestprovidedbyOrder13/2011regardingthelegalinterestandtheregulationoffinancial-fiscalmeasuresinthebankingfield.



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■ The first scenario is in case the design is performed bythe employer, where it is mandatory for him to order andcompleteageologicalsurveyofthelandbeforestartinganydesignworks.Therefore,itistheemployer’sriskwhenissuesrelated tounforeseengroundconditions are raised. In thiscase,thecontractorisentitledtoacostsandtimeextension.

■ The second scenario is where a design-build contract isexecutedbetweentheparties.Inthiscase,ifthecontractorundertakesanygeologicalsurveyoftheland,itmaybeartheriskofunforeseengroundconditions.


Asageneralrule,thecontractorbearstheriskofnon-performanceofthecontract,andisthereforeresponsibleforperformingtheworksinaccordancewithanylegislativechanges.Forexample,inthecaseofaspecificdesign-buildcontract,achangeinlegislationaffectedtheconditionsforissuingconstructionpermitsforthesecondbuildinglistedinthecontract,forwhichitwasestimatedbythecontractorthatitneededanextensionoftimeofninemonths.Theemployerrejectedthecontractor’sapplicationforanextensionoftime.Thedispute was referred to the state courts for determination, whichfound and held that the contractor was experienced, and, at thetimeitenteredintotheconstructioncontract,itshouldreasonablyhaveforeseensuchachangeinthelaw.Duetothis,hisclaimwasdismissedandtheemployer’scounterclaimforliquidateddamagesforlatecompletionwasgranted.However,eachpartybearstheriskofachangeinlawifthechangeregards one of their respective obligations. For example, theemployer bears the risk of amendments to the law on obtainingbuildingpermitsifitishisdutytodesignandobtainthesame.Hardship might be used as successful defence when changes inlegislation occur, provided that some conditions provided by lawarefulfilled.


Usually, theemployerowns the intellectualproperty rights to thetechnical design, drawings, specifications and other documentspreparedbyhimoronhisbehalf.Thecontractorownsintellectualpropertyrightsandauthorrightsforthedesignandspecialtechnicalsolutionsdevelopedbyhim.However,itiscommonlyagreedthatthepartiesuseeachother’sdocumentsforthepurposeoffulfillingtheircontractualobligations.


TheRomanianCivilCodeprovidesthatthecontractormaysuspendworks if the employer does not immediately communicate anymeasures taken inorder toremovetheerrorsor theshortcomingsof thedesignworksor if themeasures takenarenot appropriate,provided that the contractor has previously notified the employerandthedesigneroftheseissues.As mentioned below in question 3.16, if a contract remainsunclearafterapplyingthegeneralrulesofinterpretation,itshallbeinterpretedinfavourofthepartythatundertakestheobligation.Moreover,accordingtoanotherinterpretationruleregardingunusualclauses andhaving inmind that the contractor’s right to suspendworks is provided by law, any contractual clause providing thatthecontractorwaivesitsrighttosuspendtheworksisnoteffectiveunlessexpresslyacceptedbythecontractor.

Incasetwohindrancesoccur,onebeingthecontractor’sfaultandtheothertheemployer’s,andthecontractorclaimsatimeextension,the claimmust be analysed separately from the event caused bythe employer and its potential claims. Both partiesmay requestcostsoccasionedby theirdelays. Thecompetent stateor arbitralcourtsshalldecideonsuchclaimsandshallcompensateoutstandingreceivables. However, both hindrances should be very welldeterminedinordertoproceedwithcompensation,butinpracticesuchstrictdeterminationmaynotbepossible.It is worthmentioning that, in the Romanian state court system,expertwitnessesarelicensedbytheRomanianMinistryofJusticeand, regretfully, there are no experts qualified to perform criticalpathanalyseswhereconcurrentdelaysarise.


Romanianlawdoesnotprovideacleardefinitionforfloats;thereforethegeneralrulesforcontractsshallbeapplied.Theworkscheduleisdraftedbythecontractor;thereforeanyadditionalperiodoftimestipulatedthereinshallbeinterpretedinfavourofthecontractor.Moreover,thecivillawprovidesthatifacontractremainsunclearafter applying the general rules of interpretation, it shall beinterpretedinthefavourofthepartythatundertakestheobligation.Hence, the contractor is entitled to an extension of time if theemployerusesbyavariationanyadditionalperiodoftimeallocatedbythecontractorfortheperformanceoftheworks.


According to the Civil Code, the period for guarantee againstconstruction defects are provided by a special law, which statesthatthecontractorshallbeliable,accordingtohisobligations,forhiddenconstructiondefectsarisinginaperiodof10yearsfromthereceptionof thework. Thecontractor isalso liablefor theentireduration of the construction’s existence for defects in structuralworksresultingfromnon-observanceof thedesignandexecutionregulationsinforceatthedateoftheconstruction.Thus,thecontractorisliableforthehiddendefectsthatmanifestinthis10-yearperiod(exceptfordefectsinstructuralworksthatcanmanifestfortheentiredurationoftheconstruction’sexistence).Theemployerisentitledtosubmittheclaimincourtonthisaspectinthegeneraltermofthreeyearsfromthediscoveryofthedefect.Forthecostofworksnotpaidbytheemployer,thecontractorwillalsohavetosubmititsclaimwithinthreeyearsfromtheduedate;otherwisehisclaimwillbedismissedasbeingtime-barred.


Romanianlawdoesnothaveanyspecificprovisionsforsuchcases.Therefore,itisadvisableforriskallocationbetweenthepartiestobeasclearlystatedaspossibleinthecontract.Incaseswherenosuchprovisionsareaddressedinthecontract,theissuemightbedeterminedbytestingwhohasabettercontroloftherisk,theparties’experienceorbyapplyingthegeneralprinciplesoflaw.Nevertheless,wedistinguishtwomainscenarios:



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Iftheimpossibilityofexecutionistemporary,theexecutionoftheworkissuspendedforareasonableperiod,takingintoaccountthedurationandconsequencesoftheeventthatcausedtheimpossibility.Inthissituation,thecontractormaysuspendtheperformanceofhisobligationsorterminatethecontract.Inthelastcase,thecontractorcanclaimforthereimbursementofthebenefitsalreadyperformedinrelationtotheobligationsthatcannolongerbeexecutedduetotheevent.Iftheimpossibilityofexecutionistotalandfinal,thecontractceasesautomaticallyandwithoutnoticefromthemomenttheeventoccurs.Inthiscase,iftheeventofforce majeureorfrustrationisproven,theemployerisnotliablefordamages.Also,thecontractorcouldclaimforreimbursementofthebenefitsalreadyperformed.Withregardtothepossibilityofsuccessfullyarguingthatacontractwhich has become uneconomic is grounds for a claim for force majeure, the Romanian Civil Code regulates the legal principleof hardship,which is an exception to the principle ofpacta sunt servanda (contractsmustbefulfilled).Accordingtothehardshipprinciple,iftheexecutionofthecontractbecomesexcessivelyonerousdue toanexceptionalchange in thecircumstances,whichwouldmake itmanifestlyunfair toperformtheobligations,bothpartiesmayrequest:(a) adaptationofthecontract,inordertodistributefairlybetween

thepartiesthelossesandbenefitsresultingfromthechangeincircumstances;or

(b) theterminationofthecontract.Itisimportanttonotethatachangeofcircumstancesaswellastheextentofthecircumstancesmustnotandcouldnotreasonablyhavebeentakenintoaccountbytheentitledpartywhenthecontractwasconcluded.


Romanian law contains provisions underwhich a third party canclaim thebenefitsof contract rights as longas theyaremade fortheirbenefit.These rights can be agreed in the initial construction contract(being in favourofa thirdpersonorcontainingstipulations forathirdparty) inwhichaparty,called thepromissor,undertakes theother party, called the stipulant, to execute a benefit in favour ofanotherperson,calledthethird-partybeneficiary.Bytheeffectofthestipulation,thethird-partybeneficiaryacquirestherighttoaskthepromissordirectlyfortheperformanceofthecontract.These rights can also be included in a side contract between acontractingpartyandthethird-partybeneficiary(theassignmentofaclaim).Especiallywith regard to the construction contract, the employermayentrusttooneormoresubcontractorstheexecutionofpartsofthework.Inrelationtothecontractor,theemployerisresponsiblefortheworkofthesubcontractorasforhisownwork.Regardingliabilityforbuildingdefects,thirdparties(whichacquirethebuilding),arenotentitledtoclaimanydefectstothecontractor,aftertheissuanceofthetakingoverminute,unlessitisproventhatthecontractoractedinbadfaithandhidtheflawsorthethird-partybuyercouldnotidentifyanydefectsonaregularinspectionofthesite.

Also, inpre-formulatedstandardcontracts (inwhich theessentialclausesareimposedbyonepartyandtheotherpartyonlyhasthepossibilityofaccepting themas such), theclausesare interpretedagainstthepartythatproposedit.Also,accordingtoaprincipleoftheRomanianlaw,onepartyhastherighttorefusetoexecuteitsobligation,totheextentappropriate,whentheotherpartydoesnotperformitsobligationsarisingoutofareciprocalcontract. Inlightofthis, thecontractormaysuspendworkswhentheemployerisindefault.


Acontractmaybeterminatedbyaresolutionorderedbythecourtattherequestofacontractingpartyormaybeunilaterallydeclaredbytheentitledparty.Atthesametime,inspecificcaseswherethepartieshaveagreedinthecontract,theresolutioncanoperateautomatically.Inthiscase,thepartiesexpresslystatethegroundsforautomaticterminationofthecontract.Romanian law contains specific provisions regarding terminationofconstructioncontracts.TheRomanianCivilCodedistinguishesbetweenthecasesofresolutionfromtheemployer’sfaultandfromthecontractor’sfault.Theemployerhastherighttoterminatethecontractincaseswhere,withoutjustification:(a) compliancewiththeagreeddeadlineforthereceptionofthe

workhasbecomemanifestlyimpossible;(b) thework is not executed in the agreedmanner andwithin

the term determined by the employer according to thecircumstances, and the contractor does not remedy theestablisheddeficienciesanddoesnotchangethemethodofexecutionoftheworkforthefuture;and

(c) nootherobligationsarefulfilledbythecontractoraccordingtothelaworunderthecontract.

Thecontractorhastherighttoterminatethecontractandtoclaimfordamagesifthecontractorcannotstartorcontinuetoexecutethecontractdue to theemployer’sownunjustified failure to fulfil itsobligations.


The concept of force majeure and frustration are known underRomanianlawandconstitutegroundsforterminationofacontract.AccordingtotheRomanianCivilCode,force majeureisanexternal,unpredictable, absolutely unavoidable and inevitable event. Also,frustration is an event that cannot be predicted or prevented bythepersonwhowouldhavebeen responsible if the event hadnotoccurred. According to jurisprudence, force majeure events are,in most cases, natural phenomena such as earthquakes, floods,landslides,etc.Warsandrevolutionsmayalsobeconsideredasforce majeure.With regard to contracts concerning construction work, if theemployerishinderedinitsexecutionoftheconstructionduetoforce majeure orfrustration,thecontractorwillbenotifiedregardingtheexistenceoftheeventcausingtheimpossibilityofexecution.



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Usually,iftheprovisionsofaconstructioncontractareambiguous,general rules of legal interpretation shall be applied. Thus, inaccordance withArticle 1268 of the Romanian Civil Code, if aprovisioninacontractmayhaveseveralmeanings,theprovisionsshallbeinterpretedaccordingtothescopeandobjectoftheparties’consent. This type of clausewill also be interpreted taking intoaccountthenatureofthecontract,thecircumstancesinwhichitwasconcluded,thepriormeaninggivenbytheparties,andthegeneralmeaning of such provisions, particular terms and customs. Theprovisionsofacontractwillonlybeinterpretedinordertoproducelegal effects. Asmentioned above in question 3.5, if a contractremainsunclear after applying thegeneral rules of interpretation,it will be interpreted in favour of the party that undertakes theobligation.InRomanianlaw,thecontra proferentem interpretationofcontractsisapplicableonlyforthepre-formulatedstandardcontract,meaningcontracts inwhich theessentialclausesare imposedbyonepartyand the other party only has the possibility of accepting them assuch.Hence,inthiscase,clausesareinterpretedagainstthepartythatproposedthem.Forexample,ifintheconstructioncontractthepartiesprovidedalump sum price and also an estimated quantity price, this clause(which may benefit one party and prejudice the other) will beinterpreted in accordance with the parties’ will, such as priornegotiations, aprioroffer communicatedby the contractorwhichwasacceptedbytheemployer,oreventhevalueofthecontract.In case the parties use a FIDIC contract, the general conditionsprovided therefor provide certain means of interpretation of thecontractualprovisionsorterms.Fromtheseprovisions,thepartiesmay derogate particular conditions by introducing or eliminatingcertainwaysofinterpretation.


Inaconstructioncontract,clauseswhichareabusiveorvoidorinbreachofmandatorydomesticlegislationmaynotbeenforced.Forexample, Law no. 72/2013 – related to themeasures for a delayin payment obligations resulting from agreements concludedbetweenprofessionalsand/orbetweenprofessionalsandauthorities–providesthat,betweenprofessionals,thepaymentdatemustnotexceed60daysaftercompletionofworks.Byexception,thepartiesmayagreeon the timingof themainpayment,but thisprovisionmustnotbeabusive.Aprovisionwillbeconsideredabusiveifthecontractual provisions set delay penalties or a very high level ofinterestforadelay.However, the effectivenessof theprovisionsmaybe analysedbycompetent courts, whichwill rule on each party’s assertions andevidence.Standard clauses providing for the benefit of the person whoproposes: limitationof liability; the right tounilaterally terminatethecontract;suspensionoftheperformanceoftheobligationsortoprejudicetheotherpartyinthedisqualificationortheextensionoftheterm;limitationoftherighttoopposeexceptions;restrictionofthe freedomtocontractwithothers; tacit renewalof thecontract;applicablelaw;arbitrationclauses;orderogationfromtherulesonjurisdictionofthecourtswillonlyhaveeffectifexpresslyagreedtoinwritingbytheotherparty.

Subsequentownersareunabletoassertanydefectwarrantyclaimsagainst the employer, taking into consideration that there is nocontractual relationship. However, thebuyer retainshis rights toassertwarranty claims due to defects against the seller,who caninturndirectactiontotheemployerduetodefectiveperformance.


IfP1owestoP2acertain,liquidatedanddueamounttoP2andvice versa, theRomanian legislationrecognisesandallows themutualset-offoftheseamounts. ThislegalinstitutionisprovidedbytheRomanianCivilCode. However, this typeof compensationonlyoperateswheneverthepartiesagreeuponthemutualdebts.Also,thepartiesmayinsertintheconstructioncontracttheset-offofmutualclaims.Thisoperatesbasedontheparties’mutualagreement.Thiskindofset-offwillbeappliedincasethelegalset-off isnotapplicable, but the parties hold an interest to extinguish mutualundertakings. Forexample, inaconstructioncontract, thepartiesmayagreeonset-off if thecontractordoesnotperformtherepairworksinthedefectliabilityperiod,inwhichcasetheemployerwilldeductalltheirperformancefromtheperformancebondconstitutedby thecontractor (as the employer itselforusinga thirdparty toconducttheremedies).Inthiscase,acertainnotificationprocedurewillbeusedinordertoconsolidatetheset-off.Another type of set-off is recognised by Romanian law: judicialset-offofclaims. In this regard, theHighCourtof Justice, in itsJudgment 2752 dated 26 September 2014, held that, in a civilclaimwhichhasalreadybeen initiated, theprocedural instrumentthe defendant has in order to fulfil its right is the counterclaim.Accordingly,thedefendantcan,againsttheclaimant,set-offitsowndebtifthisdebtisdisputableandtheotherpartydoesnotrecogniseit. The courts will rule on this matter and will set the mutualreceivablesfortheparties.


InaccordancewithArticle1858of theRomanianCivilCode, theemployermust be immediately informed by the contractor if theusual performance of works, the construction’s durability anditsusageaccording to thedesignplanmaybeendangeredby thefollowing:■ theobtainedmaterialsandothermeansforconstructionthat

theemployerhasprovidedaccordingtothecontract;■ inadequateinstructionsgivenbytheemployer;and■ theexistenceofunforeseeneventsthatthecontractorisnot

liablefor.Also, Article 1875 provides that the employer has to allow thecontractor, ifnecessary, touseaccessroads, itsownwatersupplyequipment and other utilities which serve the site. Also, theemployerhasthedutytoobtainalltherequiredlegalpermitsfortheworks’performance.Inordertofulfilthisobligation,thecontractorhas the duty to cooperate with the employer, providing all thenecessaryinformationthathehasorheshouldhave.Thus,inaRomanianconstructioncontract,thepartieshavemutualdutiestoprotectrightsandgoods,andpreservetherightsoftheotherparty.Theaforementionedlegalobligationsareapplicablewhetherornot these areprovided in the contract, as theseobligations areprovidedbygenerallaw.IfthepartieschoosetouseaFIDICagreement,thistypeofcontractusuallyprovidesmutualdutiesofcare.



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includinganagreedlistofpotentialmembersinthecontract.TheDABcannotactasanarbitratoranditsdecisionmaybeconsideredtechnicalevidence.After receiving all the documents related to the dispute from theparties,theDABwillgiveasolutionanditsreasonsforsuch.Suchdecision, inaccordancewithFIDICRules,willbebindingon theparties, provided of course that the decision is accepted. Thus,should a party be dissatisfiedwith theDAB’s decision, it shouldcommunicateapriornoticecommunicatedtotheotherpartywithin28daysofthetheDAB’sdecision.Unlesssettledamicably,anydisputeinrespectofwhichtheDAB’sdecisionhasnotbecomefinalandbindingmayfinallybesettledbyinternationalarbitration.ThepartiesmayderogatefromtheFIDICGeneralConditionsandmayinsert theirownparticularconditioninorder toorganiseandgivetheirowneffecttotheadjudicationprocess.Pleasealsoseequestion1.2above.


UnderRomanianlegislation, thepartiestoaconstructioncontractmaychooseanarbitrationclause. SomebasicrulesofarbitrationarealsoprovidedbytheRomanianProceduralCode.InaccordancewithArticle542paragraph(1),thepartiesmayagreetosolvetheirdisputes by arbitration. In the arbitration agreement, the disputemaybereferredtooneorseveralpersons,engagedbythepartiesorarbitrationagreementtoruleonthedisputeandrenderafinalandbindingjudgment.Thearbitrationmaybead hocorinstitutionalised.HavinginmindthecomplexityofconstructiondisputesinRomanianlegislation, the parties usually choose the arbitration to be putbeforeICCParisortheInternationalCommercialArbitrationCourtorganised by the Romanian Chamber of Commerce and Industry.However,ifaFIDICcontractisconcludedandthepartieschoosenottoamendthearbitrationprovisionprovidedbyitsGeneralConditions,inaccordancewithclause20.6,thedisputeshallbesettledundertheRulesofArbitrationoftheInternationalChamberofCommerce.RegardingtheInternationalCommercialArbitrationCourtorganisedbytheRomanianCommerceandIndustryChamber,on1January2018,newarbitrationrulesenteredintoforce.Theserulesintendtoimprovetheactivityofinternationalcommercialarbitration,takinginto consideration the latest European practices in commercialarbitration.Forexample,asimplifiedprocedurethatshouldlastatmostthreemonthsisprovidedforclaimsunderthevalueof50,000lei,orabifurcationprocedureispossible.The arbitral tribunalmust be constituted of a single arbitrator orseveralarbitratorsinanoddnumber.Ifthepartiesdidnotagreeonthenumberofarbitrators,theclaimwillberuledbythreearbitrators,onebeingappointedbyeachpartyandthethirdbeingappointedbythefirsttwo.Thearbitrationawardisfinal,bindingandenforceableandhasthelegaleffectsofacourtruling.However,thepartiesmayrequestthecompetentcourt(whichistheCourtofAppealfromthearbitrationplace)toannulthisrulingifcertainlegalmattersareattained(e.g.thetribunalhadnojurisdictiontorule,thearbitrationtribunalwasnotlegallyconstituted,onepartywasnotlegallysummoned,orthearbitrationwasnotthoroughlyconducted).Asafinalnote,constructionarbitrationisamoreefficientmannerof solving construction disputes regarding time and expertise.Romanian courts, which are highly loaded with all kind ofcommercialcases,havenospecialisedconstructiondivisions,andinmostcasessuchdisputesarenotruledinafairandefficientway.


The designerwill be held liable for theworks he has performedand has contractually agreed to. Regarding any hidden flaws intheconstruction,thedesignerandtheotherinvolvedparties(suchasthecontractor,materialsupplier,technicalexpert,engineer)areresponsible for a 10-year period beginning at the time of takingover theconstruction,or, inrelationtostructural integrity,for thedurationoftheconstruction’sexistence.Should thedesignerprove theflawsarenotaconsequenceof thedesignheprovidedandshouldhedemonstratethattheseflawsarea resultof lackofcoordinationorsupervisionof theconstructionworks,hisliabilitywillbeeliminated.Also,thearchitect’sliabilitywillbeeliminatedifheprovesthattheemployerwronglychosematerials, subcontractorsorconstructionmethods. The exemption of the architect’s liability shall not beappliedifthispartyacknowledgedthesoil,materialflaws,electionofthesubcontractors,expertsorerectionmethodsanddidnotnotifytheemployerimmediatelyduringtheperformanceoftheworks.According to the quality of the construction, the architect isresponsible and liable, based on the plans and work executiondetailsheprovided.



In case of a construction dispute, the parties or their legalrepresentatives(counsel)shouldtrytosolveitoutsidethenational/arbitrationcourt.Insuchcase,asettlementoraprotocolstressingamutualobligationtofulfilmaybeexecuted.Nevertheless,iftheamicablesettlementofsuchdisputesfails,thepartiesmaybringtheirclaimsbeforethenational/arbitrationcourts(usuallytheRomanianArbitrationCourtrelatedtotheChamberofCommerceorICCParis).


Adjudication procedures are used only if the parties concluded aFIDIC contract, in order to accelerate the solving of technicalissues arising from such contracts. The FIDIC clause related tothe appointment of the Dispute Adjudication Board intends toencouragethepartiestoreachanagreementandallowsthemtorefercontentious matters to an impartial DisputeAdjudication Board.Theadjudicationprocessisapriorandmandatoryproceedingand,unless the parties settle their claims, they will go to arbitrationproceedings.Sub-clause20.2of theFIDICRedBookprovides twoalternativearrangementsfortheDAB:thefirstiswithonesolememberoftheDAB,havingenteredintoatripartiteagreementwithbothparties;andthesecondiswithaDABofthreepersons,eachofwhomhasenteredintoatripartiteagreementwithbothparties.The appointment of a DABmay be facilitated, especially if themembersarenotappointedatthecommencementofthecontract,by



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jurisdictiontoholdtheproceedings,without,however,beingbasedexclusively on the defendant’s presence or property not directlyrelatedtothedisputeinthestateinwhichthatcourtissituated;and(c) there is reciprocity regarding the effectsof foreign judgmentsbetweenRomaniaandthestateofthecourtthatruledthejudgment.Also,ifthejudgmenthasbeengivenintheabsenceofthepartywholostthecase,itmustalsoprovethatthepartyconcernedhasbeenservedingoodtimebothwiththesummonsforthetrial/hearingandwiththereferralofthecourt,andthatitwasgiventheopportunitytoplead its caseand toappeal thedecision. Unlesscertainpriorconditions are met, the court will not rule on the merits of theforeignrulingandwillnotamendit.


Inordertoinitiateaclaimincourt,apartymustsubmitaninitialpetition,whichwillstressitsclaim,legalandfactualgrounds,andciteevidencethat it intendstosubmitorhasalreadyobtained. Ifthe claimhas a value under 200,000 lei, the submissionmust beaddressedtotheLowerCourt.Iftheclaimexceedsthisvalue,theclaimmustbesubmittedtoatribunal.Thedefendanthasthepossibilitytoanswertheclaimant’sstatementofclaimbysubmittingastatementofdefence,andprovidingallitslegaland factualgroundsandcounterevidence. If thedefendantalsohasclaimsagainsttheclaimant,acounterclaimsubmissionwillbedraftedandsubmittedtogetherwiththestatementofdefence.Since technical issues are frequently cited in such cases, inmostconstructioncasesatechnicalreportissubmittedasevidence.Thereportmayillustrateifthepartiesperformedtheconstructionworksin accordancewith their agreement, if therewereflaws, deficientworks, or the performedworks need remedies. This evidence isthe most important of all, as all courts need technical opinions,consideringthefactthatspecialisedconstructioncourtdivisionsarenotorganisedinRomania.The first court ruling may be appealed within 30 days from itscommunication. In the second procedural stage, the partiesmaydebateallthemattersofthecase,thusallkindsofevidencemustbesubmittedifrequested,eventhetechnicalreport).Theappealrulingisenforceable.The Civil Procedure Code and general legislation stresses thatall financial claims cases may be challenged in a second appeal(including construction cases) if their value exceeds 500,000 lei.Further, the Romanian Government, by Ordinance no. 95/2016,decidedtosetupanewvaluethresholdof1,000,000leiforcasesthatmaybechallengedinasecondappeal.However,thisthresholdapplied only to cases registered between 1 January 2017 and 1January2018.InaccordancewithConstitutionalCourtDecisionno.369,dated31July 2017, any threshold for second appealswas eliminated, andcurrentlyallappealrulingsmaybechallengedinasecondappeal.Usually,aconstructioncasemaytakebetweenone-and-a-halfandtwo-and-a-halfyearstobefinallysettled.Thepartiesmayenforcethejudgmentaftertheappealcourtsettlesthecase,butwhensucha case is initiated, the time and costmust be taken into account,asthepartiesrequirethenecessaryresourcestoproceedwithsuchdifficultcases.


AccordingtotheRomanianCivilProcedureCode,Article1125,aforeignarbitral awardwill be enforced inRomania if thedisputeis not contrary to the public policy and international law. Theprocedure is provided by Articles 1124–1134 of the RomanianProceduralCode.Additionally,Article1065of theRomanianCivilProcedureCodestipulatesthepossibilitytochoosethemostfavourablelaw(“mitior lex”):theNewYorkConvention;ortheRomanianCivilProceduralCode.The grounds for dismissing the recognition or enforcement ofawards are identical in both cases because the Romanian CivilProcedureCodetakesontheprovisionsofarticle5oftheNewYorkConvention.AccordingtotheCivilProcedureCode,inordertoenforceforeignarbitral awards, an application for approval of the enforcementshall be submitted to the tribunal, attaching the said award, andthe arbitral convention translated into Romanian (article 4.2 ofthe Convention on the Recognition and Enforcement of ForeignArbitralAwards, NewYork 1958). There is no requirement fora prior exequatur decision in order to address an application fordeclarationofenforceability.In general, the Romanian courts will only verify some priorproceduralissuesandwillnotdebatethemeritsofthearbitralaward.


Firstly,weshoulddistinguishwhethertherulingisrenderedbyanEUMemberStateorbyathirdstate.In the first case, as construction cases are commercial cases, thepartiesbeingcompanies (professionals),Regulation1215/2012oftheEUshallapply. Thus,a judgmentservedbyaMemberStateCourtwilleasilybeupheldandenforcedinRomaniaviaasimplifiedprocedurebasedonEuropeanlaw.Article36ofRegulation1215/2012providesthatallrulingsheldbycourtsinanEUMemberStateshallberecognisedbytheotherstateswithoutanyspecialprocedure. Article39of the same regulationprovidesthatajudgmentrenderedbyanEUMemberState,whichisenforceableintheState,thatservedit,isenforceableinanyotherMemberStatewithoutrequiringawritofcompulsoryexecution.Inthecaseofrulingsrenderedbythirdstates, inaccordancewiththeRomanianCivilProceduralCode, foreign judgmentsare fullyrecognisedinRomania(i)iftheyrefertothepersonalstatusofthecitizensofthestateinwhichtherulingwasmade,(ii)iftheywereruledinathirdstaterecognisedasbeingthesameasthecitizenshipofeachparty,or(iii)ifrecognitionhasbeenrenderedonthebasisofthelawdeterminedasapplicabletoRomanianlaw,anditisnotcontrarytothepublicorderofRomania,andtherighttoadefencehasbeenfulfilled.Rulings other than those mentioned above may be recognisedinRomania inorder tobenefit from res judicata if the followingconditionsaremetcumulatively:(a)thejudgmentisfinalaccordingto the lawof thestatewhere itwasrendered;(b) thecourtwhichruled on it had, under the law of the parties’ state of residence,



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In 2001, Valentin Trofin decided to start his own practice and founded his Law Office with another two exceptional lawyers, who handled the firm’s practice. In the following year, Iulia Trofin joined the practice as a full-time lawyer.

In 2003, Valentin Trofin and Iulia Trofin decided to set up a professional law firm having both of them as founders.

Trofin & Asociatii was founded in March 2003 as a boutique law firm specialised in the construction industry and corporate law. Immediately after that, in 2004, the firm become well known for its professionalism and leading voice in construction projects and real estate development. Since then, the firm’s practice has increased, now being experienced in mergers and acquisition, intellectual property, employment law, real estate development, insurance claims, banking & finance, public procurement, international commercial or investment arbitration and domestic litigation.

Since 2003, Trofin & Associates had been involved in more than 50 construction or real estate development projects with values ranging from EUR 10 million to EUR 70 million.

Since 2007, the firm was involved in many cross-border transactions, especially in Turkey, the Russian Federation, North Africa and the Republic of Moldova. The firm has great experience in dispute resolution including international commercial arbitration, having been involved in more than 30 cases of domestic or international arbitration.

Every year the firm’s dispute resolution practice represents, on average, clients in more than 70 litigation and arbitration cases, with a peak in 2009–2012 when they were involved in more than 200 litigation and arbitration cases each year.

In 2016, the Romanian Government appointed them, as co-counsel, to represent Romania in an investment arbitration in a dispute worth hundreds of millions of Euros under the rules of ICSID Washington D.C. (USA).

The lawyers in our firm have a strong academic background, and are frequent speakers at workshops and international conferences.

Managing Partner

Valentin Trofin holds a Bachelor of Law degree (1998) and a Master’s degree in International Commercial Arbitration (2014), both from the Law School of the University of Bucharest. He also holds a Diploma in International Commercial Arbitration from the Chartered Institute of Arbitrators (2014). Valentin Trofin is a Ph.D. candidate at the Doctoral Law School of Titu Maiorescu University.

Valentin Trofin is admitted to the Bucharest Bar Association (1999), the National Association of Authorized Romanian Valuers (2003) and to the Romanian National Union of Insolvency Practitioners (2010). He is also a member of the International Bar Association, Society of Construction Law (UK), Romanian Society of Construction Law and a founding member and Treasurer of the Bucharest Arbitration Network.

Valentin Trofin is experienced in corporate transactions and project financing with a focus on construction, real estate development and both commercial and investment arbitration. His continuing legal education includes participation in training courses, seminars and conferences related to both FIDIC contracts, including the YPMTP 2012, and international commercial arbitration.

Mr. Trofin regularly represents companies, both domestic and international, in cross-border transactions, especially in Turkey, the Russian Federation, North Africa and the Republic of Moldova.

Partner

Oana joined our team in 2013 as a senior associate. Currently, she coordinates the litigation department of our law firm.

Oana graduated Law School in Bucharest in 2006 and holds a Business Law LL.M. from Nicolae Titulescu University. She was admitted to the Bucharest Bar in 2008 and in the last five years has attended several events on construction law in order to extend and develop best practice solutions for our clients.

Oana advises important companies, both employers and contractors, in all stages of construction projects, regarding construction management, risk management, strategic project advice, material supply and other relevant issues. She has also been involved in important and complex construction cases, having as their subject important and foreign elements, in front of the highest Romanian courts.

Her experience relates to FIDIC agreements and other construction agreements, being specialised in negotiations and pre-court matters. She assists clients in preparation for imminent litigation or amicable settlement of court cases with an unfavourable prognosis.

Also, since 2016, Oana has been part of the Romanian arbitration team in an investment arbitration case handled by the International Centre for Settlement of Investment Disputes of Washington involving major privatisation, insurance/reinsurance and insolvency issues.

Valentin TrofinTrofin & Asociaţii SCA70 Blvd. Ferdinand I, 3rd Floor2nd District021393 BucharestRomania

Tel: +40 21 337 50 00Email: [email protected]: www.trofin.com

Oana CuciureanuTrofin & Asociaţii SCA70 Blvd. Ferdinand I, 3rd Floor2nd District021393 BucharestRomania

Tel: +40 21 337 50 00Email: [email protected]: www.trofin.com



Chapter 24

Moravčević Vojnović i Partneriin cooperation with Schoenherr

Slaven Moravčević

Ivana Panić

Serbia


Construction contracts are not subject to any specific execution/notarisationrequirements,exceptfor thefact that theymustbe inwrittenform.Aconstructioncontractisdeemedconcludedoncetheofferofoneparty(thecontractor)isacceptedbytheotherparty(theinvestor).Also, a construction contract must contain essential elementsenablingtheexecutionoftheworks(prices/terms).Besidetheabove,specificrequirementsfordesignandexecutionoftheworkssetforthunderSerbianlawmustbefollowed.


Serbianlawisnotfamiliarwiththeconceptofaletterofintent,ora letterofacceptance,as it isknownunder theFIDICConditionsofContract.However,inSerbianandregionalconstructionpractice,aletterofintent isusedasa(mostoften inappropriate) legalgroundfor theexecutionofworkswhile themainagreement isbeingnegotiatedandimplemented.Under applicableSerbian laws, issuing an application for a letterofintentmaybeinterpretedasanagreement(i.e.acceptanceoftheparty’sofferconstitutesanagreement).Oftenthemainambiguityarisingfromaletterofacceptanceisitslegalaim,i.e.whether:(a) theletterofacceptanceservesasaninvestor’sacceptanceof

theofferprovidedbythecontractor,wheretheemployerwillseparately, upon such letter of acceptance being executed,negotiateandenterintoanagreementontheexecutionoftheworks(inotherwords,theletterwouldallownegotiationsontheagreement,basedontheofferbythecontractor);or

(b) theagreementontheexecutionoftheworkswouldbeexecutedindependently from, but simultaneously with, the letter ofacceptance,sothatallsuchdocumentswillformanagreement.



Serbian law is not familiar with specific types of constructioncontracts(modelconstructioncontracts)thatmaybefoundinsomeGerman-speaking countries; however, high-level constructionlawsarebeingdeveloped inSerbia,aswellas in thesurroundingregion. General contractual terms and conditionsof constructionareregulatedundertheSerbianContractsandTortsAct;however,mostofthesetermsareofadispositiveandnotanimperativenature.Key mandatory rights and obligations pertaining to the generalcontractor and the employer are set forthunder thePlanning andConstructionAct(“PCA”).Additionally, these relationships are regulated by the SpecificCustoms on Construction (Posebne uznase o gradjenju); theapplication of the Specific Customs on Construction is notmandatory,butcanbeagreedbetweentheparties.Giventheextensiveforeigninvestmentsandfinancingfrombanks/financial institutions for many of the projects, one of the modelagreements most commonly used is the FIDIC (InternationalFederationofConsultingEngineers)ConditionsofContract.FIDIChybridcontractsarealsowidelyapplied,especiallyinengineering,procurementandconstruction(“EPC”)contracts.Design-onlycontractsareusuallybasedontheFIDICWhiteBookor other tailor-made design contracts for the development of thedesignforissuanceoftheconstructionpermit(previouslyknownasconceptdesign)and/ordesignforconstruction(previouslyknownasmaindesign).Management construction contracts are typically used under thename “general construction contracts”. However, such contractsdifferfromstandardmanagementcontractsduetothegreaterroleof the main/management contractor. The main issue with suchcontracts is a matter of licensing (licence for execution of theconstructionworks).


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specificmaterialorintellectualworksonly.Althoughthetermisthemainelementthatdifferentiatesdefiniteandindefiniteemploymentagreements,generallythesamerights,obligationsandliabilitiesareguaranteedunderboth typesof agreement. Even the terminationconditionsthatapplytobothtypesofagreementaregenerallythesame(theonlydifferencebeingthatdefinitetimeagreementsmaynotbeterminatedonthegroundsofredundancy).


Yes. Most commonly, retention is partially released onceconstructionworksaretakenoverbytheemployer(one-half)anduponexpirationofthedefectliabilityperiod.


Frequently, the performance ofworks, aswell as the liability forremovalofdefectsduringthedefectliabilityperiod,issecuredbyguarantees/bonds issuedby thebank as unconditional, payable atfirstdemandandirrevocable.Inpractice,Serbiancourtsissuedrawdownbankguaranteessolelyforthecollectionofdelaydamages.In certain cases, parties provide a corporate guarantee instead ofa performance bond; however, given that enforceability of suchsecuritieswhencomparedtobondsislessefficient,issuancethereofisnotcommon.Finally, the foreign exchange regulations should be followedcarefullywhenbondsareissuedbynon-residents.


RightofretentionisprescribedundertheSerbianContractsandTortsAct,whichallowsacreditortoestablishtherighttoretain(retencija)thegoodsofadebtoriftheyareinthepossessionofthedebtor.However,giventhenatureoftheworks,thisrightcannotbequalifiedasastatutorylienovertheworks.



Construction contracts aremost commonly supervised by a thirdparty, either through statutory supervision or by engaging anengineer(FIDICConditionsofContract).

In light of the above, it is advisable to prescribe themanner andtimelineinwhichtheletterof intent(agreement)willbereplacedwiththemainagreement.Also,themainagreementshouldcontaindetailsontheworksexecuteduptothatmoment(onthebasisoftheletterof acceptance (agreement))or the remaining scope, and thepricepaidforsuchworks.Onealternativeisapreliminaryagreementontheexecutionofthemainagreement(containing theobligationsof theparties toenterintothemainagreementwithinacertainperiodoftime).


Most commonly, works are insured under CAR (Contractors’All-Risk Insurance);design liability is insuredunderprofessionalliabilityinsurance.DeathandpersonalinjuryinsuranceisregulatedbytheSerbianLawonHealthandSafetyatWork. Thepartyemploying theworkersisliableforemployees’injuriesatwork,occupationaldiseasesandwork-relateddiseases, so it shouldhave insurance. Thefinancialmeansfor insuranceshallbeborneby theemployer,andshallbedeterminedsubject to the levelof risk frominjury,profession-orwork-related disease with regard to the workplace and workingenvironment.


Serbian laws, in principle, do not prescribe specific constraintsregardingtheconstructionofbuildings,besidesstatutoryrequirementsfor obtaining relevant permits and licences for the execution ofconstructionworks. However, besides general legal requirements,projectsofspecificstateinterestand/orimportance,suchasenergyprojects,maybesubjecttospecific(additional)legalrequirements.In lightof theabove, for thepurposesofexecutionof theworks,two types of permits/licences will be necessary: (i) permits thatrelatetotheworksdirectly,i.e.permitsrequiredfortheexecutionofconstructionworksunderapplicablelaws;and(ii)licencesthatrelate to the contractor itself, i.e. licences required for a foreignentityinthecapacityofcontractortoexecuteconstructionworks.Firstly,pursuanttothePCA,constructionworkscannotcommencebeforeapermitfortheconstructionoftheworkshasbeenobtained.Followingcompletionof theworks, theemployermustobtainanoccupancypermit,whichisissuedforafacilityorpartofafacilitywhoseconstructionphaseshavebeendeterminedintheconstructionpermit.Contractorsandemployersaresubjecttotaxpaymentrelatingtotheworks,aswellasincome.Besidesthosementionedabove,someadditionallegalrequirementsrelating to the works/labour force must also be met during theentire course of the project’s implementation (e.g. work permitsfor foreignworkers,occupationalhealthandsafetypermits,etc.).Namely, construction workers in Serbia are mainly engaged onthe basis of (i) definite or indefinite employment agreements, or(ii)serviceagreementsenteredintoforthepurposeofprovisionof

Moravčević Vojnović i Partneri Serbia


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Yes. Under Serbian law, “liquidated damages” are known ascontractual penalties for delay and may be agreed as a penaltyfor late completion for the total works and/or milestones in theexecution of theworks. Also, parties commonly stipulate a cap/maximumamountforcontractualpenaltiesfordelay,payablebythecontractortotheemployer.TheSerbianContracts andTortsAct, however, prescribes certainlimitations concerning caps/limitations on liability of contractualpenalties/damages.Initially, the agreement stipulating the maximum amount ofcompensation shall be valid, provided that the agreed amount isnot in blatant disproportion to the damage and unless otherwiseprovidedbylawforthecaseathand.Also,inthecasethatthedamagesufferedbythecreditorismoreextensive than the amount of agreed contractual penalty, thecreditorisentitledtorequestthedifferenceuptothetotalamountofdamages.ThisstandpointwasconfirmedbytheHighCommercialCourtoftheRepublicofSerbiainitsdecisionPž.3970/08,dated11November2008.However, the parties are not entitled to exclude or limit inadvanceliabilityinthecaseoffraud,deliberatedefaultorrecklessmisconduct by the defaulting party. Moreover, the competentcourt,attherequestofaninterestedparty,mayannulacontractualprovisionevenforsimplenegligenceifsuchlimitationofliabilityistheresultofadominantpositionofthedebtoror,otherwise,ofunequalpositionsofthecontractingparties.Acontractualcaponliabilityisalsovalidunlessthesetamountisinobviousdisproportiontothedamagessustained.Also,whereamaximumamountofdamageshasbeenagreed, thecreditor shallbeentitled to seek full compensation should the inability to fulfilanobligationbecausedbythedebtor’swilfulmisconductorgrossnegligence.In addition to the foregoing specific rules, limitation of liabilityclauses, as well as any other contractual provisions, could bechallenged based on certain general principles set forth in theSerbianContractandTortAct(e.g.theprincipleoffairness,equalconsideration,etc.).



The employer is entitled to vary the works to be done by thecontractor in quantity and/or quality and/or type. The applicablelaws do not prescribe a limit on variation procedures; however,in the case such a variation would have an impact on the timefor completion and/or price of theworks, such change should beapprovedbythecontractor.

In accordancewith the PCA, during the execution ofworks, theinvestormustensurestatutorysupervisionoftheworks.Statutorysupervisioncoverstheobligationtoreviewtechnicaldocumentation,tocontrolandassessthecomplianceoftheworkswiththetechnicaldocumentation, to review regulations, standards and quality,and to take appropriate measures with respect to the contractor.Accordingly, statutory supervision may also mean undertakingmeasuresofsuspension.However,mostcommonlytherightofsuspensionisretainedundertheauthorityoftheemployer.


Yes, these typesof back-to-back clauses, aswell asback-to-backagreements,areallowedandnotuncommoninpracticeinSerbia.UnderSerbianlaw,thereisnoconcrete/mandatoryruleorregulationunder which the court would request the employer to pay thecontractoramountsdueregardlessofan“ifandwhen”clause.The validity and enforceability of an “if andwhen” clause couldbe claimed under one of the main principles prescribed by theSerbianContractsandTortsAct;specificallythe“autonomyoftheparties’ will”, with respect to contractual relations. This wouldapplyespeciallyinthecasewherepartieswerefreetonegotiatethecontract.Conversely,non-negotiableagreements(called“ugovori po pristupu”) are interpreted in favour of the person adhering tosuch an agreement. It is predominately known in Serbia as “in dubio contra stipulatorem”.However, when a party to a bilateral agreement fails to fulfil itsobligations,theotherpartymay,unlessprovidedotherwise,requestfulfilmentof theseobligations,and isentitled tocompensationofdamagesinanyevent.InadditiontotheaboveandthegeneralprinciplesoftheObligationsAct(e.g.thegoodfaithargument),acontractorcouldclaimpaymentson account of works that were duly executed and taken over bythecontractoronthebasisoftheclaimforunjustifiedenrichment.PursuanttotheObligationsAct,afterapartofaperson’spropertyistransferredinanywaytoanother,andsuchtransferhasnolegalgrounds,thepersonacquiringthepropertyinsuchawayisboundtorestituteit,andwhereimpossible,tocompensatethevalueofthebenefitsgained.Legal doctrine has also confirmed that a contractor is entitled torecompense where work is carried out at the request (express orimplied) of the principal and, for any reason, there is no right topaymentunderthecontract.Thecontractorwouldreceivethebenefitofsuchwork,anditwouldbeunjustiftheemployerweretoretainthebenefitwithoutpaying thecontractor for thework. Thesameapproachhasbeenadmittedincertaincasesinwhichitwasheldbythecourt/tribunalthatunjustifiedenrichmentmaybeavailabletothecontractorinthecasethatnoremedyisavailableunderthecontract.

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limitation period) for mutual contractual claims in the sphere ofthe sale of goods and services, known as commercial contracts.Unenforceabilityduetothestatuteoflimitationsshallbegintorunonthefirstdayfollowingthedaythecreditorwasentitledtorequestfulfilmentoftheobligation.


The risk of unforeseen ground conditions is most commonlyregulatedcontractually.Inastandardconstructioncontractanddesignandbuildcontracts,theriskofunforeseengroundconditionsisbornebytheemployer.On theotherhand, in turnkeyprojects, such risk is shifted to thecontractor.However, based on applicable laws, the unforeseen groundconditionsmayalsoqualifyaschangedcircumstancesunderSerbianlaw,whichwouldallowterminationofthecontract.


Usually,eachpartybearstheriskofachangeinlawaffectingtheirscopeofobligationsunderthecontract.However, incaseachangeinthelawaffects thepermissibilityofexecution of theworks, such riskwouldmost likely liewith theemployer.It is alsoworthmentioning that changes in the lawmay also bequalified as legal grounds for termination of/addendum to thecontract.However,someconstructioncontracts(withthestateorgovernmentauthorities)alsohavestabilisationclausesinthisrespect.


Pursuant to theLawonIntellectualProperty, intellectualproperty(IP)rightsaredefinedasbothmaterialandmoralrights(personalrightsoftheauthor).The moral segment of IP rights is not transferable and thus isretainedbytheauthor.Therefore,itmaybedeemedthatIPrightsoverthedesignandtheworkspertaintothearchitect.Consequently,pursuanttothelaw,suchfacttriggerstheobligationoftheemployer,in the case it wishes to change the main design/construction, toaddressthesamearchitecttoundertakerespectivechanges.However, the material segment of IP rights is transferable, andconditionsofsuchatransfer/assignmentshouldbeaddressedinthecontractwiththeemployer.


ThegeneralrightofthecontractortosuspendworksisnotregulatedunderSerbianlaw;however,itmaybesubsumedunderoneofthebasicprinciplesoftheSerbianContractsandTortsAct.Namely,pursuanttosaidlaw,inbilateralagreementsneitherpartyisobligedtofulfilitsobligationiftheotherpartyfailstofulfilorisnot ready to simultaneously fulfil its obligation, unless otherwiseagreedorlegallydefined.Inlightoftheapplicablelaw,itmaybearguedthatthecontractorisentitledtosuspendworksduetonon-paymentbytheemployer.

In Serbia, in practice, variations are generally ordered by theemployerasinstructionswithoutaproperassessmentoftheimpactonpriceandtimerequiredfortheexecutionoftheworks.


Theworks can be omitted from the contract by the employer orthethirdpartyadministratingthecontract(e.g.theengineer).Themannerandconditionsforomissionaredeterminedonacontractualbasisandaremostoftendoneintheformofvariations.Inaddition,theomissioncanbeappliedintheformofanannextothecontract(requiringsignatureofbothparties)orpartialtermination.


Constructioncontractsmustcontainkey/essentialelements(amongother definitions of the works, prices and terms) to be deemedapplicable.Allothertermsmustbeagreedonacontractualbasisorprescribedundermandatory provisions of Serbian law, being the lawof thecountrywheretheworksareexecuted.


Serbian laws and regulations do not prescribe a mechanism forcalculatingpenaltiesincaseofconcurrentdelays.In practice, however, the contractor is commonly granted anextension of time and/or the costs occasioned by the concurrentdelay in case the delay of the employer was such to directlycause thedelayof thecontractor. Inotherwords, incaseswherethecontractor,due toactsand/oromissionsof theemployer,wasdirectlypreventedfromexecutingtheworksinatimelymanner.


The concept of variations during the float is not established inregionalconstructionpractice,andthusmustbeobservedonacase-by-casebasis,takingintoconsiderationspecificcircumstances.


SuchlimitsariseoutoftheSerbianContractsandTortsActandareappliedtoconstructioncontracts.Claims shall become unenforceable after a 10-year period (thegeneral limitationperiod isone inwhichall the rightsexpireandthat applies unless a right is not anticipated in another period oflimitation)andathree-yearperiod(speciallimitationperiodsaresetfor individualsubjectiverightswhichareshorter than thegeneral

SerbiaMoravčević Vojnović i Partneri


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absenceofcharacteristicsrequiredforitsnormaluse;(ii)absenceof characteristics required for its particular uses; (iii) absence ofcharacteristicsthatwereagreedupon;and(iv)non-conformitywiththemodel or sample. However, this liability can be excludedorlimitedinthecontract.


Set-offofclaimsisgenerallypermissibleunderSerbianlaw.AccordingtotheSerbianContractsandTortsAct,adebtormaysetoff theclaimbyacreditoragainsthimwithhisclaimagainst thecreditor.Inordertodoso,theObligationsActprovidesconditionsthatneedtobefulfilled:(i) both claims have to be of a monetary nature, or other

replaceablegoodsofthesamenatureandkind;(ii) bothclaimshavetobedue;and(iii) onepartymustdeclare to theother its intention for set-off

(i.e.tosendawrittennoticeonset-off).Upon the notice set-off being dispatched, the settlement will beconsidered effectuated upon fulfilment of the conditions set forthunderpoints(i)and(ii)above.Uponset-off,thecontractor/employermayinitiatetheproceedingsagainstthepartythatperformedset-off,claimingthattheclaimand/orvaluethereofwasunjustified.Inorder to support its claims, the claimant shall have theburdenof proving the facts relied on, i.e. the insubstantiality of the set-offofclaimswith regard to thecontract. On theotherhand, thecompensatoryobjectionstandsfortherespondentintheproceedings.


Duty of care may be subsumed under the basic principle of theSerbianContractsandTortsAct, and thusapplied. However, theextentofthisprinciplediffersfromitscommonlawconcept.


The basic principle of interpretation that shall be applied inaccordancewithSerbianlawistheoriginalintentofbothparties.However, in the region it ismainly recognised for types of non-negotiable agreements (called “ugovori po pristupu”), which areinterpretedinfavourofthepersonacceedingtosuchagreement;inprinciple,knownas“in dubio contra stipulatorem”.


The FIDIC Conditions of Contract contain certain provisionsthat may be challenged from the perspective of local law in theproceeding(e.g.limitationofliability);however,theriskofsuchachallengeislow.


The grounds and procedure for termination are most commonlyagreed between the respective parties and regulated under theconstructioncontract.BasedonSerbianlaw,acontract(includingaconstructioncontract)maybeterminatedduetonon-fulfilmentoftheparties’obligations.Depending on whether the term for fulfilment of the parties’obligationsisanessentialelementofthecontractornot,thepartyterminatingthecontractmayberequiredtoleaveanadditionaltermforfulfilmentofobligationofthebreachingparty.


Serbianlawdoesnotknowtheconceptofforce majeureassuch,butinsteadappliesitthroughspecificlegalconceptssuchas“inabilitytoperform”or“changeincircumstances”,whichareregulatedbytheSerbianContractsandTortsActandmainlyconstitutegroundsforterminationof,oramendmentsto,anagreement.Specifically,asageneralrule,wherethefulfilmentofobligationsbyoneofthepartiestoabilateralagreementhasbecomeimpossibleduetoeventsnotattributabletoeitheroftheparties,thecounterparty’sobligations are then also cancelled out; if such a counterpartyhas fulfilled apart of itsobligationsuntil that time, itmayclaimreimbursementaccordingtotherulesgoverningthereimbursementof benefits acquired groundlessly. Accordingly, in the case ofpartial inability toperformdue toeventsnotattributable toeitheroftheparties,thecounterpartymayterminatetheagreementifthepartialperformancedoesnotcorrespondtoitsneeds;otherwisetheagreementremainsinforceandthecounterpartymayrequestapro ratareductionofitsobligations.Asarule,inthecasereferredtoabove,theagreementisterminatedoutofcourt.Force majeure itself is in theory usually defined as an outsideinterferencewhoseeffectcouldnothavebeenforeseen,avoidedoreliminated.


Accordingtocaselaw,thecontractorandtheemployeraredeemedjointly and severally liable towards the buyer for damage causedin relation to the construction. In accordancewith the PCA, theemployer,thecontractorandthedesignerareallliabletowardsthebuyer.Furthermore, pursuant to the Serbian Contracts and Torts Act,the seller (the employer) is liable for the following materialdefects of a building at themoment risk passes to the buyer: (i)



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Disputes are resolved in Serbia by a sole arbitrator or by anarbitration tribunal. Thedecisions rendered in the arbitration arebinding.Arbitration can be conducted as ad hoc or institutional. TheForeignTradeCourtofArbitrationis locatedinBelgradeandhasadministratedthousandsofcasessofar.Besides those mentioned above, mediation is another alternativedisputemechanismwhich is available inSerbia. Amediator is aneutral personwho helps the parties to come to an agreement inrelationtothedisputeathand.Amediator’spositioncanbeformalor informalandhe/shedoesnotrenderadecision that isbinding;rather,he/shehelpsthepartiestofindthesolutionbythemselves.


Yes, given that court practice in the area of construction law isundeveloped in Serbia, most construction contracts contain anarbitrationclauseandthusdisputesarereferredtoarbitration.Asstatedabove,arbitrationisconductedasad hocorinstitutional,depending on the dispute’s value and parties’ agreement.CommercialentitiesinSerbiawilllikelyagreeonsomeoftheverycommonarbitrationrules,suchasthosesetbytheUnitedNationsCommission on International Trade Law (“UNCITRAL”), theInternationalChamberofCommerce(“ICC”)andtheLondonCourtofInternationalArbitration(“LCIA”).


Serbia signed the NewYork Convention on the recognition andenforcement of foreign arbitral awards and has accepted itsprinciplesandnorms.ThatmeansthatinSerbiaallforeignarbitralawardswillhavethesametreatment,regardlessofwhetherornottheycomefromastatethatisaNewYorkConventionsignatory.ThereasonsforrefusalofrecognitionandenforcementoftheforeignarbitralawardarelistedintheConventionandareasfollows:■ Consideredonlyattherequestofthepartyagainstwhomitis

invoked:1. thearbitrationtribunaldidnothavethejurisdiction;2. therightofdefencewasnotrespected;3. thearbitratorsdecidedbeyondtheirauthorisation;4. the arbitral procedure was not in accordance with the

parties’agreement;or5. thearbitrationawardwasnotfinal.

■ Consideredex officiobythecompetentcourt:1. thesubjectmatterwasnotcapableofbeingsettledbefore

thearbitration;or2. thedecisionwascontrarytopublicpolicy.


Serbian lawdealingwith the issue of the enforcement of foreigncourt awards prescribes several reasons for a refusal of theirenforcement;amongothers,thelackofreciprocity.


If not agreed otherwise, it is an employer’s obligation to provideconstruction plans/designs and a contractor’s obligation to carryout works according to the plans/designs. Therefore, an error inthe design is an employer’s liability. If the employer trusted thepreparationofdesigns toa thirdperson(adesigner/architect), thenthedesigner/architectshallbe individuallyandfully liable towardstheemployerfordamagethatoccurredduetoerrorsinthedesign(theerrorofthedesignhastobenotifiedtotheemployer).Iftheerrorindesignresults inadefect in thebuilding thataffects itssolidity,thedesignershallbeliableforanydefectthatshowswithinten(10)years.Incaseboththecontractorandthedesignerareliable,theirliabilitywillbemeasuredproportionallytotheirrespectivefaults.Thepartiestoacontractcannotexcludeorlimitdecennialliability.In light of the above, decennial liability shall be applied to thearchitect and/or engineering consultant in respect of its design(design error), notwithstanding that the works are executed by adifferentperson,andnotonadesignandbuildbasis.Also,andonthe sameprinciples, the contractor is held liable for the structuraldefectsofconstructionworks,evenifsuchdefectswerearesultofadesignerror.However,contractually,onacase-by-casebasis,mutual liabilitiesand indemnifications in relations between contractors/employers/designers may be tailor-made and adjusted to the specificcircumstancesof thecase, especially inviewof theperson liabletocover thecorrectionofdesignerrorsand/or the rectificationofdefectsinworksthatresultedduetosucherrors.Thecontractorcan,however,beliablefordesignerrorsifhenoticedan error indesign and failed tonotify the employer (omissionofnotificationduty).Acontractorisobligedtoreviewthedesignwithduediligence.



InSerbia,disputesaregenerallyresolvedbythecourts.Inrecentyears,however,otherdisputeresolutionmechanismshavebecomeincreasinglypopular. Onesuchmethod,arbitration,findsgeneralapplicability incommercialdisputes. On theotherhand, there isalsoanintentiontoresolvedisputesthroughtheinvolvementofaneutralthirdpersonactingasamediator.


Litigation still has primacy when considering all the types ofdisputes.LitigationisgovernedbytheSerbianLitigationActandcanbeledbyasinglejudgeorachamber(dependingonthetypeofdisputeanditsvalue).Asoneof themostcommonadjudicationprocesses,arbitrationisthemostimportantalternativetolitigationasastateadjudication.



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In Serbia, the judge would normally schedule the preliminaryhearing,inwhichalloftheevidencethatwillbepresentedduringthe proceeding should be proposed. After all of the evidenceis presented in the proceeding, the judgewill conclude themainhearingandrenderadecisiononthematter.Thelosingpartyhastherighttoappealadecisionwithin15daysasofthereceiptofthedecision(i.e.eightdaysinthecaseofadisputewithaminorvalue).Inparticularcasesexplicitlystipulatedbythelaw,apartyisentitledtosubmitanextraordinarylegalremedytothesecondinstance.


There is no common practice with respect to the duration of ajudicialprocedure.Thisdependsonthecomplexityofthedisputeat hand and other circumstances that can affect the dynamics oftheprocedure.However,itisourexperiencethatlesscomplicateddisputesarelikelytoberesolvedwithinoneyearbythefirstinstancecourt.Asregardstheappealprocedure,itisnormalforthecourttorenderadecisionwithinsixmonthstooneyear.



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Moravčević Vojnović i Partneri in cooperation with Schoenherr has been active in the Serbian market since 2002. The firm’s practice is client-orientated, with specialised practice groups that provide industry-focused services to meet the demands of a competitive, developing and rapidly changing marketplace. The firm’s client list includes leading companies, financial institutions, organisations and governments. The Belgrade office, via its specialised country desks, acts as a hub for Bosnia-Herzegovina, Macedonia and Montenegro.

Schoenherr is a leading full-service law firm in Central and Eastern Europe. About 300 professionals service national and international clients from our offices in Austria, Belgium/EU, and throughout the entire CEE region. As one of the first international law firms to move into CEE, we have grown to be one of the largest firms in the region.

Slaven Moravčević is a partner with Moravčević Vojnović i Partneri in cooperation with Schoenherr specialising in M&A, real estate, telecommunications and energy, and heads the firm’s operations in Montenegro. In addition, Slaven is head of Schoenherr’s Real Estate practice group. He has 15 years’ experience in real estate development projects. He is active across different sectors and regulated industries, including the energy, financial services, infrastructure, insurance, telecommunications, media and pharmaceutical industries. Slaven also acts as general counsel to the Government of Montenegro on all large-scale property investment projects.

Slaven MoravčevićMoravčević Vojnović i Partneriin cooperation with Schoenherr Dobračina 15 SRB-11000 BelgradeSerbia

Tel: +381 11 3202 600Fax: +381 11 3202 610Email: [email protected]: www.schoenherr.rs

Ivana Panić specialises in construction law with emphasis on FIDIC Conditions of Contract, along with real estate and construction arbitration. Given that construction law/FIDIC is her main area of expertise, Ivana has been engaged in all the firm’s FIDIC-related projects on various project sides (investors, contractors and subcontractors) in different industries, such as power plant construction and hotel/resort development. Ivana acts as the local FIDIC trainer with the Serbian Association of Consulting Engineers (FIDIC). Ivana has been with the firm since 2009.

Ivana PanićMoravčević Vojnović i Partneriin cooperation with Schoenherr Dobračina 15SRB-11000 BelgradeSerbia

Tel: +381 11 3202 600Fax: +381 11 3202 610Email: [email protected]: www.schoenherr.rs



Chapter 25

Allen & Gledhill Ho Chien Mien

Singapore

the construction industry, offers are commonly provided by wayoftenderorbid.Untilsuchanofferisdulyaccepted,thegeneralpositionisthatnocontractualobligationarises.A construction contract in Singapore does not need to expresslyprovideforadjudication.TheBuilding and Construction Industry Security of Payment Act (Cap. 30B) (“SOPA”), which providesthe statutory adjudication scheme in Singapore, applies to anyconstructionorconstruction-relatedcontractsmadeinwritingonorafter1April2005.


In Singapore, it is common for employers to instruct theirrepresentativeorthearchitecttoissuealetterofintenttoindicatetheirselectionofacontractor.Whilealetterofintentisnormallystipulated to be non-binding, it gives the contractor a basis uponwhichtocommencethemobilisationofresourcesandnegotiationswithsubcontractorsandsuppliersfortheproject.Italsoprovidescontractorswithadegreeofcertainty,particularlywherecontractorshave to place orders for items that require long lead times, suchas items to be pre-fabricated in factories before being deliveredforassemblyonsite. Whethera letterof intent isbindingwouldtypicallydependonitssubstance,ratherthanform.


In Singapore, parties typically include in construction contractspublic liabilitypolicies,professional indemnity insuranceclauses,or Contractors All Risks Insurance (“CAR”) clauses (whichencompass all risks associated with material physical loss ordamageinaconstructionproject).Contractorsandsubcontractorsare also required,under theWork Injury Compensation Act (Cap.354)(“WICA”), tomaintainwork injurycompensation insuranceforallemployeesdoingmanualworkandallnon-manualemployeesearningS$1,600amonthorless.



CommonlyusedstandardformconstructioncontractsinSingaporeincludetheSingaporeInstituteofArchitectsArticlesandConditionsof Building Contract (the “SIA Conditions”), the Public SectorStandardConditionsofContractforDesignandBuildConditionsof Contract (“PSSCOC”), and the Real Estate Developers’AssociationofSingaporeDesignandBuildConditionsofContract(the“REDAS Conditions”).The SIAConditions are themost widely used standard form for“construct only” contracts. Under the REDAS Conditions, thecontractorbearsboth thedesignandconstruction responsibilities.On theotherhand, thePSSCOCisused forallpublicprojects inSingapore,withdifferentversionscateringtoboth“construct only”and“design and build”contracts.FIDICformsarewidelyusedforengineeringprojects.Management contracting is less common in the Singaporeconstruction industry, although this method of procurement isusuallyusedbymoresophisticatedemployers.TherearenewSIAConditionswhichhavejustbeenreleased,whichintroducedesignandbuildelements.Theseformshaveyettogainwideacceptance.


ConstructioncontractsinSingaporeareformedwhenthereisavalidofferandacceptanceandvaluableconsiderationisprovided.Within


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The party that procured the bond may attempt to stop thebeneficiary’s call on an on-demand bond by applying for aninjunction. To succeed, the applicantmustproveeither fraudorunconscionability.“Unconscionability” is an equitable conceptunique toSingapore.Itinvolvesanactofunjustifiableunfairnessbythepartycallingontheondemandbond.However, parties are free to contractually agree to excludeunconscionabilityasabasisforstoppingacallonthebond,solongasclearlanguageisusedtothateffect(CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd & Anor [2015]3SLR1041).


The standard form contracts typically vest ownership of goodsand supplies used in the works in the employer, whether or nottheemployerhasmadepaymentfor thoseplantsormaterials. Insuchcases,ascontractorsdonothaveownershipofsuchgoodsandsupplies, they cannot claim title over suchmaterials in the eventofnon-payment. However, it shouldbenoted thatSection25oftheSOPAallowscontractorstoplaceliensoverunfixedandunpaidgoodssuppliedbythecontractoriftherespondentfailstopaytheadjudicatedamountinfull.



Thestandardformcontractslistedinquestion1.1abovecontemplatethesupervisionofworksonbehalfoftheemployersbythirdparties.TheREDASform refers to such thirdparties as the“Employer’sRepresentative”,whereasthePSSCOCrefers tosuchthirdpartiesas the “SuperintendingOfficer”. Note that it is also not unusualfor employers using REDAS and PSSCOC forms to use theirownemployeesasthecontractsupervisor/administrator. TheSIAConditionsstipulatethatsuchthirdpartieshavetobeanarchitect.These third parties (whether independent parties or employees oftheemployers)areobligedtoprovidetheirservicesinanimpartialmanner when the contract provides for them to undertake acertifier’soradjudicator’srole.Inallotherrespects,theyactastheemployer’sagents,suchaswhenissuinginstructionsordirectionsonbehalfoftheemployer,inthebestinterestsoftheemployer.


No.“Paywhenpaid”provisionsareprohibitedbySection9(1)oftheSOPA.


Someexamplesofsuchstatutoryrequirementsareasfollows:1. Generally,undertheBuilding Control Act (Cap.29)andthe

Building Control (Licensing of Builders) Regulations 2008,buildersmustobtainabuilder’slicenceiftheworks,broadlyspeaking,involvethestructuralintegrityofabuilding.Suchworks,and/orworkslocatedinareasthatmayhaveasignificantimpactonpublicsafety,wouldtypicallyrequiretheapprovaloftheCommissionerofBuildingControl.

2. Labour: The Singapore Ministry of Manpower requiresforeignunskilledandsemi-skilledworkersintheconstructionindustry to hold a Work Permit. To qualify for a WorkPermit, all foreign workers must obtain a Skill EvaluationCertificate, so as to ensure that they are adequately skilledforvariousconstructiontrades. Duetoquotarestrictionsonthe employment of foreign employees, the ratio of foreignemployeestolocalfull-timeemployeesintheemployer’stotalworkforcemustbelimitedto7:1.Employersmustalsopayaforeignworkerlevy.

3. Tax:Whenpaymentsaremadetoanon-residentcompanyorindividual,he/sheisrequiredtowithholdapercentageofthatpaymentandpaytheamountwithheld(withholdingtax)totheInlandRevenueAuthorityofSingaporeundertheIncome Tax Act (Cap.134).

4. Health and Safety:ContractorsarerequiredundertheWICAto maintain work injury compensation insurance for (i) allemployeesdoingmanualwork,and (ii) all employeesdoingnon-manualworkandearninglessthanS$1,600monthly.


Yes.Generally,thestandardconditionsofcontractpermitemployersto withhold retention monies (typically 5–10% of the contractprice),halfofwhichisreleaseduponsubstantialcompletionoftheworks,andtheotherhalfisreleaseduponthecompletionofdefectsrectificationworks.


Contractors are commonly obliged to provide employers withperformancebond(s).In Singapore, there are generally two types – “on-demand” and“conditional”bonds.Theemployercanonlycallonaconditionalbonduponproofofdefault,asprescribedinthecontractorbond.However,foranon-demandbond,theinstitutionprovidingthebondhastopaythesumassuredondemandbytheemployer,withoutanyneedforproofofdefault.

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2. an employer will not prevent a contractor from performinghis obligations under the construction contract (Evergreat Construction Co Pte Ltd v Presscrete Engineering Pte Ltd [2006] 1 SLR(R) 634; TT International Ltdv Ho Lee Construction Pte Ltd [2017]SGHC62).


The position in Singapore with regard to extensions of time forconcurrentdelaysremainsunsettled.Onthisissue,Commonwealthcases are instructive and have persuasive value. InHenry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999)ConLR32(“Malmaison”), iftherearetwoconcurrentcausesofdelay,oneofwhichisarelevanteventallowingfortimeextensionandtheotherisnot,thecontractorisentitledtoanextensionoftimefortheperiodofdelaycausedbytherelevantevent,notwithstandingtheconcurrenteffectof theother. Incontrast, theposition in theScottishcaseofCity Inn Ltd v Shepherd Construction Ltd [2007]CSOH190 (“City Inn”) is that, if thereareconcurrentcausesofdelay, the delay should be apportioned as between the relevanteventandthecontractor’sriskevents.However,City Inn hasbeenrejectedinthecontextofaJCTStandardFormofBuildingContract,intherecentcaseofWalter Lilly & Co Ltd v Mackay and Another [2012]EWHC1773 (TCC),which insteadupheld theapplicationofMalmaison inEngland.Assuch,itislikelythattheMalmaison approachwillbehighlypersuasiveintheSingaporecourts.OfnoteisthelocalcaseofPPG Industries (Singapore) Pte Ltd v Compact Metal Industries Ltd [2013]SGCA23,wheretheCourtofAppealfound concurrent delay and granted an extension of time to thecontractor,butwithoutanydiscussionofanyoftheabovecases.There is no Singapore authority on the contractor’s entitlementto recover prolongation costs occasioned by concurrent delay. AleadingauthoronconstructionlawinSingapore,ChowKokFongstatesthat“[i]t is arguable that given that the contractor would have been in some default, it seems inequitable that he should be entitled to recover for these damages or expenses”,but“if the contractor is unable to establish that the employer events are the dominant cause of the loss, it may be possible to apportion loss between the causes…” (Chow Kok Fong, Law and Practice of ConstructionContracts(Sweet&MaxwellAsia,4

thEd,2012)p.608).However,

inpracticeandbycontractualprovision,contractorsareusuallynotallowedtoclaimforcostsarisingoutofanyextensionoftimeasaresultofconcurrentdelay.


WhiletheSingaporeCourtofAppealhasgenerallydefined“float”time as “time [that] caters for contingencies occasioning delay and is also for purpose of coordination and interfacing of different trades” (Jurong Engineering Ltd v Paccan Building Technology Pte Ltd [1999] 2 SLR(R) 849, [41]), there is no clear Singaporeauthorityonthepointofwhetheracontractorwhosefloathasbeenusedupbytheemployerissubsequentlyentitledtoanextensionoftimeifheisthendelayed.However, local case law suggests that “float” time should not beused up by acts of delay by the employer. For example, it was


Yes. A liquidated damages clause will only be enforced if theliquidated damages provided for are genuine pre-estimates ofthe losses likely to flow from the breach. Note that reasonableliquidateddamagesarelikelytoberecoverableinscenarioswhereitisnotpossibletoestimatethelossesthatmaybesuffered,e.g.publicinfrastructureprojects.



Generally,theemployerisentitledtoordervariationsifthereisavariationclauseintheconstructioncontract.However,theemployerusuallywillnotbeable toordervariationsonce thecertificateofcompletion has been issued. The contractor is also not requiredtoundertakeworksbeyondthescopeofthevariationclauseitself,which typically defines a variation as any addition, reduction orsubstitution to the works. Such variations cannot substantiallychangethenatureofthecontract.


Yes. Standard form contracts such as the SIA Conditions andPSSCOC contain clauses that allow an employer to omit worksfrom the contract. However, an employer generally cannot omitworkssuchthatthecontractorisdeprivedofthesubstantialbenefitof suchworks. If the omission has changed the character of thecontract substantially, the contractor may allege that the omittedworkamountstoachangeinthescopeandnatureofthecontract.Inpractice,however,theemployerandcontractormayreachamutualagreementastotheomissionoftheworks.Subject to the above and any prohibition in the contract, theemployermaythencarryouttheomittedworkshimselforengageathirdpartytocompletethesaidworks.


Examplesoftermsthataretypicallyimpliedunderstatuteinclude:1. a contractor’s right to refer payment-related disputes to

adjudication(Section12ofSOPA);or2. acontractor’srighttosuspendperformancefornon-payment

(Section26ofSOPA).Termsmayalsobeimpliedundercommonlaw,suchas:1. anemployer’sobligationtodoallthatisnecessaryonhispart

tobringaboutcompletion(Evergreat Construction Co Pte Ltd v Presscrete Engineering Pte Ltd [2006]1SLR(R)634);or



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Generally, the creator of a piece of work owns the copyright ofthatwork. However,where theworkwas created by the personinthecourseofhisemployment,theemployerwouldgenerallybethe owner of the copyright in thatwork. Therefore, technical orcommercial information created by the architects or engineers oftheemployerwouldusuallybelongtotheemployer.Usually,thisisdealtwithinthecontractprovisions.


Yes. A contractor may suspend work if the contract confers onthe contractor a right to do so. Typically, contracts may permitsuspensiononaccountof:1. a serious breach (typically in relation to certification and

paymenttermsofthecontract)bytheemployer;and2. the architect’s failure to issue a certificate, save for an

interim certificate (e.g. clause 33(4) of theSIAConditions).Separately,sections23and26oftheSOPAentitleacontractortostopworkintheeventoftheemployer’sfailuretopayanadjudicatedamountfollowingtherenderingofanadjudicationdeterminationinthecontractor’sfavour.

Otherwise,thereisnocommonlawrighttosuspendwork(Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004]3SLR(R)288).


Inadditiontoanyexpress groundsforterminationinacontract,theusualgroundsonwhichan innocentparty isentitled to terminateacontractinclude(i)suchparty’scommonlawrightstoterminatefortheotherparty’srepudiationofperformance(orabandonment),(ii)wherethereisabreachofacondition,or(iii)wherethebreachinquestiondeprives the innocentpartyofsubstantially thewholebenefit of the contract, save where the term expressly, clearlyand unambiguously states that any breach of it, regardless of theseriousnessoftheconsequencestofollow,wouldneverentitletheinnocent part to terminate the contract (RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007]4SLR(R)413;Sports Connection Pte Ltd v Deuter Sports GmbH [2009]3SLR(R)883).


The concepts of force majeure and frustration are known inSingapore.Parties may contractually provide for non-performance upon theoccurrence of specified force majeure events so that such non-performancedoesnotamounttoabreach.Whetherforce majeure arisesandwhatrightsandobligationsfollowsuchaneventissubjecttoapreciseconstructionofthecontractualclauseitself.Intheabsenceofaforce majeure clause,thecommonlawdoctrineof frustrationmayexcuse thenon-performanceofacontractorby

suggestedasobiterinLian Soon Construction Pte Ltd v Guan Qian Realty Pte Ltd [1999]3SLR(R)518at[31]that:“[i]t is arguable that the float time is in principle not available for accommodating variations and delays emanating from the employer or other delay events in respect of which the contractor is entitled to extension under the contract.”


UndertheLimitation Act (Cap.163),theusuallimitationperiodforan action in tort or contractwouldbe sixyears from thedateonwhichthecauseofactionaccrued.Inrespectoflatentdamage,thelimitationperiodiseithersixyearsfromthedateonwhichthecauseof action accrued, or three years from the earliest date onwhichtheclaimantfirsthadboth(i)theknowledgerequiredforbringinganactionfordamagesinrespectoftherelevantdamage,and(ii)arighttobringsuchanaction.Notethatthelawonwhenaparticularcauseofactionarisesisquitecomplicated–andisdependentalsoonwhichcauseofactionisreliedupon–e.g.negligence,breachofcontract,breachofstatutoryduty,etc.Thisis,however,subjecttoa15-yearlong-stoplimitation.


InResource Piling Pte Ltd v Geospecs Pte Ltd [2014]1SLR485,QuentinLohJstatedat[66]that: “[I]n the context of the Singapore building and construction

industry, the risk of adverse subsoil conditions is variably borne by the contractor. None of the standard building contract forms commonly in use in Singapore provide otherwise. This is the well-known and accepted commercial environment of long standing…”

For instance, Clause 5.1 of the PSSCOC states that the risk ofunforeseen ground conditions lieswith the contractor. However,Clause 5.2 of the PSSCOC allows the contractor to recoveradditionalcostsincurredasaresultofadversephysicalconditionswhichcouldnothavebeenreasonablyforeseenbyanexperiencedcontractor.


A change in law is a risk that is typically allocated between thepartiesusingforce majeure clauses.ThereisnoclearSingaporeauthorityaddressingtheissueofwhichpartyshouldbeartherisksarisingoutofachangeinlawifthisisnotexpresslycontemplatedbythecontract.Ononehand,thereissuggestion that if there isnoexpressprovisionproviding that thehappeningofsuchaneutraleventwouldallowthecontractoratimeextension or a claim in damages, the contractor is taken to haveacceptedthelegalriskoftheoccurrenceofsuchanevent.Ontheotherhand,theSingaporecourtsmayadoptthepositionexpoundedbytheSupremeCourtofChristchurchinNew Zealand Structures & Investments Ltd v McKenzie [1979]1NZLR515,whichheldthat,intheabsenceofanexpressclauseastowhoshouldbearresponsibilityforadditionalcostsoccasionedbychangesinstatutoryregulation,it is the responsibility of the employer to vary thework and thecontractorisentitledtoadditionalpaymentforthevariedwork.



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ThecurrentapproachtakenbySingaporeCourtsfortheconstructionof contract terms is a “contextual” one (Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008]3SLR(R)1029(“Zurich”)).Underthisapproach,thecourttakesintoaccountthe“essence and attributes of the document being examined”(Zurich at[132(a)]).Extrinsicevidencemaybeadmittedtoaidintheinterpretationofthewrittenwordsofacontract,providedthattheextrinsicevidenceinquestionis“relevant, reasonably available to all the contract parties and relates to a clear or obvious context”(Zurich at[132(d)]).If there is still any ambiguity in the interpretation of a clause,the contra proferentem rule would apply and the clause is to beconstruedagainstthepartyseekingtorelyonit.


The following are examples of unenforceable terms/clauses in acontract:1. clauses which exclude liability for personal injury or death

(section2oftheUnfair Contract Terms Act (Cap.396));2. “paywhenpaid”provisions(section9oftheSOPA);3. liquidateddamagesclausesthatamounttoapenalty;and4. provisionswhichmightpreventtheoperationofthetermsof

theSOPA(section36(2)oftheSOPA).


Usually, an architect’s liability is not absolute in the sense thatthearchitectisliablewhollyforalllossesthatresultfromtheactsof that architect. It must be shown that the architect has fallenshortofthestandardoftheordinaryskilledpersonexercisingandprofessing tohavea special skillor competence (Bolam v Friern Hospital Management Committee [1957]1W.L.R.582at586).Incertaincircumstances,anarchitectmayalsorelyontheindependentcontractordefence(MCST 3322 v Mer Vue Developments Pte Ltd [2016]2SLR793).Inspecialcircumstances,anarchitectcanenterintoadutybeyondthatofusingskillandcareincarryingoutdesign.Thismayoccurexpressly(for instance,bycontract)or itmaybe implied that thedesignerhaswarranted theachievementof a certain result, e.g. afitnessforpurposeclause.Employers may, in practice, try to extract an absolute guaranteefromdesignersinrespectoftheirwork.However,designersseldomagreetothisduetodifficultiesinobtainingprofessionalindemnityinsurancesinthisregard.



Apart from litigation, the SOPA provides for an adjudicationprocess to achieve a fast and low-cost settlement of payment

treating the contract as having existed until the point when thefrustratingeventoccurred,whileanyaccruedrightsandobligationsremain enforceable after the frustrating event. However, thedoctrineoffrustrationoperatesonlyinexceptionalcircumstances,wherethesuperveningeventisonethatradicallyorfundamentallyalters thecontract such that it isno longer the sameaswhatwasoriginallyenteredinto.


Section2oftheContracts (Rights of Third Parties) Act (Cap.53B)allowsathirdpartytobenefitunderthecontractif(i)thecontractexpressly states the same, or (ii) the contract purports to confera benefit onhimand the parties intended that the termwouldbeenforceablebythethirdparty.


Under Singapore law, in addition to any rights conferred by thecontract, P1 may rely on legal and equitable set-off to set offagainstthesumsduetoP2thesumsP2owestoP1.However,bothlegalandequitable rightsof set-offcanbeexcludedbyclearandunequivocalwordsinacontract(Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004]3SLR(R)288).Contractsprovidingfortemporaryfinalityonthearchitect’scertificatesmayalsoexcludeset-offswhichhavenotbeencertifiedbythearchitect(Chin Ivan v H P Construction & Engineering Pte Ltd [2015]3SLR124).At common law, the amount should be ascertainable and due,whileinequity,therightofset-offincludesunliquidateddamages.However, unlike legal set-off, equitable set-off needs to beinseparablyconnectedtotheclaimagainstwhichitisraised.


Partiestoconstructioncontractscanoweadutyofcaretoeachotherincontract,withsuchscopeandcontentascontractuallyprescribed.Atthesametime,aconcurrentdutyofcareintortmayalsoariseifthetestlaiddowninSpandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007]4SLR(R)100issatisfied:1. itmustbefactuallyforeseeablethatafailurebyonepartyto

takereasonablecarecouldresult in theotherpartysufferingdamages;

2. theremustbe sufficient legalproximitybetween theparties,taking into account the physical, circumstantial, and causalproximityofthepartiesandtheiracts;and

3. theremustbenopolicyconsiderationswhichwouldmilitateagainsttheestablishmentofatortiousdutyofcare.

Thistortiousdutyofcarecannotbeinconsistentwiththetermsofthecontract.



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ofcourt,inthesamemannerasajudgmentoranorderofthecourt(i)byanactionundercommonlaw,(ii)undersection29oftheIAA,or(iii)undersection46(3)oftheAA.TheRulesofCourt setout theprocedures for enforcinga foreignarbitralaward.Generally,anapplicationcanbemadebyfilinganoriginatingsummons,whichissupportedbyanaffidavit.Onceleaveisgivenbythecourttoenterjudgmentonanapplicationtoenforcetheaward,theotherpartyhas14daystochallengetheleavegranted.Enforcement of international arbitration awards from arbitrationsseated inSingaporemaybe refusedoneither thegrounds setoutin Article 34 of the UNCITRAL Model Law on InternationalCommercialArbitration,orsection24oftheIAA(PT First Media TBK v Astro Nusantara International BV [2014] 1 SLR 372).Enforcementofallotherforeignawardsmayonlyberefusedonthegroundssetoutundersection31oftheIAA.


Generally,yes. ForeignjudgmentsmaybeenforcedinSingaporeunderthe:1. Reciprocal Enforcement of Commonwealth Judgments

Act (Cap. 264) (“RECJA”): Facilitates the enforcement ofjudgmentsorordersofsuperiorcourtsoftheCommonwealthcountries.

2. Reciprocal Enforcement of Foreign Judgments Act (Cap. 265) (“REFJA”):Facilitatestheenforcementofjudgmentsbysuperiorcourtsofnon-CommonwealthcountrieswhichhavebeengazettedundertheREFJA.

3. Common law: Facilitates the enforcement of foreignjudgmentswhichfalloutsidetheambitofRECJAandREFJA.

Under theRECJA andREFJA, only foreign judgments or ordersmadebyaforeigncourtincivilproceedingswherebyanysumofmoneyismadepayableareenforceable.Underthecommonlaw,anin personam finalandconclusiveforeignjudgment renderedbya courtof competent jurisdiction,which isalso a judgment for a definite sum of money, is enforceable inSingaporeprovided,inter alia:1. itwasnotprocuredbyfraud;2. itsenforcementwouldnotbecontrarytopublicpolicy;3. itsenforcementwouldnotbeanenforcementofforeignpenal,

revenueorotherpubliclaws;or4. theproceedingsinwhichitwasobtainedwerenotcontraryto

naturaljustice.


An action is commencedwith the claimant’s personal service ofacopyofawritoranyotheroriginatingprocess (supportedbyastatementofclaimoraffidavit,respectively)onthedefendantwithinsixmonthsofitsissuebythecourt,orwithin12monthsiftheclaimistobeservedoutofjurisdiction.Oncepleadingsareexchanged,discovery,theexchangeofaffidavitsofevidence-in-chiefandexpertreports(ifnecessary),andsettingdownfortrialoccur.Apartymayfileanappealwithinonemonthoftherenderingofthejudgment.Typically,asconstructiondisputesinvolvelargevolumesofevidenceandrequire theprovisionofexpertevidence, the timerequired toresolvesuchdisputesmayvarybetween12and24months.

disputes.Disputesarealsocommonlyresolvedthrougharbitration.The SIA Conditions and PSSCOC both provide for this avenueof dispute resolution. Parties may also proceed to mediationbeforethecommencementofarbitrationor litigationproceedings.Alternatively,arbitrationorlitigationproceedingsmaybestayedinorderforpartiestopursuemediation.


Yes, there is amandatory statutory adjudication procedure underthe SOPA applicable to most types of construction works. Anadjudicationtypicallyoccursinthefollowingmanner:1. The contractor may activate the adjudication process by

servingapaymentclaimontheemployer.2. The employer is required to provide a payment response

stating,amongstotherthings,theresponseamountand,iftheresponseamountis lessthantheclaimedamount, thereasonforthedifferenceandthereasonforanyamountwithheld.

3. Ifthecontractortoaconstructioncontractdisputesthepaymentresponseissuedbytheemployer,oriftheemployerfailedtoprovide a payment responsewithin the period stipulated bytheSOPA, thecontractor isentitled tomakeanadjudicationapplicationafterastipulatedperiod.

The adjudication process is designed to determine the quantumof payment quickly and economically without the full length ofarbitrationorlitigation.Typically,theadjudicationprocesscanbecompletedwithinafewweeks.


Yes.TheSIAConditions,PSSCOCandREDASConditionscontainarbitrationclauses.A dual arbitration regime exists in Singapore. DomesticarbitrationsaregovernedbytheArbitration Act (Cap.10)(“AA”)and international arbitrations are governed by the International Arbitration Act (Cap. 143A) (“IAA”). Many provisions in thetwostatutesaresimilar. Nonetheless,themaindistinctionsareasfollows:1. Stay of court proceeding in favour of arbitration. Under

the domestic arbitration regime, the court has discretionarypowerastowhethertograntastaywhereoneof thepartiescommenced court proceedings in contravention of anarbitration agreement. However, under the internationalarbitrationregime,it ismandatoryforacourttograntastayif thecourt issatisfiedthat thereisanarbitrationagreement,unless such an agreement is null and void, inoperative orincapableofbeingperformed.

2. Appeal against an award. Under the domestic arbitrationregime,apartywhoisdissatisfiedwithanarbitralawardmayappealtothecourt.Thisrighttoappealislimitedtoquestionsoflawarisingoutofanawardmadeintheproceeding.Undertheinternationalarbitrationregime,thereisnorightofappealatall.


Yes. Singapore isa signatory to the1958NewYorkConventionon theRecognition andEnforcement ofForeignArbitralAwards.Thus,aninternationalarbitrationawardmaybeenforced,withleave



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Allen & Gledhill is an award-winning full-service South-east Asian commercial law firm which provides legal services to a wide range of premier clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which are the first of their kind. The Firm’s reputation for high-quality advice is regularly affirmed by its strong rankings in leading publications, and by the various awards and accolades it has received from independent commentators and clients. Together with its associate firm, Rahmat Lim & Partners in Malaysia and office in Myanmar, Allen & Gledhill has over 450 lawyers in the region, making it one of the largest law firms in South-east Asia. With this growing network, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond; in particular, on matters involving South-east Asia and the Asia region.

Chien Mien undertakes a wide range of contentious and non-contentious construction and engineering-related work. On the contentious side, he has extensive litigation, arbitration, adjudication and mediation experience – both domestic and international. On the non-contentious side, he has been involved in some of the largest building and infrastructure projects in Singapore and Asia Pacific, including greenfield developments of power and utilities plants, oil storage terminals, LNG terminals and regasification plants, petrochemical and pharmaceutical plants, manufacturing facilities, mega-malls and transportation hubs, prime office towers and luxury hotels and condominium developments.

Chien Mien 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. He also sits as a senior adjudicator under the SOP Act and has been appointed arbitrator for arbitrations administered by SIAC, ICC and the AIAC (Asian International Arbitration Centre, formerly known as KLRCA). Further, he has contributed to various domestic and international publications and is the editor of the construction section of Atkin’s Court Forms (Singapore ed.). His most recent instructions have seen him being instructed on the development of some of the largest mixed-development projects in Singapore and on disputes relating to the construction of a hydroelectric power station and the modernisation of an international airport in neighbouring ASEAN countries.

Ho Chien MienAllen & Gledhill LLPOne Marina Boulevard#28-00Singapore 018989

Tel: +65 6890 7502Email: [email protected]: www.allenandgledhill.com



Chapter 26

Norton Rose Fulbright South Africa Inc.

Daniel McConnell

Emmanuel Tivana

South Africa

havethelegalcapacityandintentiontocreatebindingobligations.Consensusisusuallyachievedanddemonstratedbytheprocessofofferandacceptance.ConsiderationisnotarequirementunderSouthAfricanlaw.Contractsneednotbeinwritingtobevalid,exceptinrelationtospecialtransactions(usuallyprovidedforinstatutes),e.g.thesaleofimmovableproperty.Constructioncontractsneednotbeinwriting,thoughtheytypicallyare.Agreementstoarbitrate,whichareacommonfeatureofconstructioncontracts,mustbeinwriting,intermsoftheArbitrationAct42of1965.Notwithstandingthatavalidcontractexists,courtswillnotenforcean obligation, the performance of which will be against the lawor public policy. Construction contracts being concluded withgovernment bodies must comply with the requirements of therelevantgovernmentprocurementlegislation.


LettersofintentarearecognisedlegalconceptinSouthAfricaandcancreatelegallybindingobligations.Provisionswhichconstituteanagreementtoenterintoafurtheragreementinthefuture(“agreementstoagree”)arenot legallybinding. However,provisions relating tofixedandcertainobligations,e.g.thepaymentofcosts,areenforceable.Lettersofintentaresometimesusedintheconstructionindustryasastop-gapmeasurewheretheconclusionofacompletecontractisdelayedbut thepartieswish to commenceaportionof thework.Partiesshouldtakecarewhenconcludinglettersofintentinthesecircumstancestoensurethatallpossibleoutcomes(includingfailuretoconcludetheanticipatedcontract)andtheconsequencesthereofaretakenintoaccount.


There are no construction-specific statutory insuranceswhich arerequired.Intheircapacityasemployers,contractorsarerequiredtoregisterwiththeCompensationFundforOccupationalInjuriesandDiseases(oralicensedmutualassociation)undertheCompensation



ThestandardformsofconstructioncontractincommonuseinSouthAfricainclude:theFédération Internationale des Ingénieurs-Conseils(FIDIC) suiteofcontracts; theNewEngineeringContract (NEC3)suiteof contracts; the JointBuildingContractsCommittee (JBCC)formofcontract;andtheGeneralConditionsofContract(GCC)formofcontract. TheConstruction IndustryDevelopmentBoard,whichregulatesconstructionforpublicsectorentities,makesitmandatoryforpublicsectorclientstouseoneoftheseformsofcontract.ContractswhichplacebothdesignandconstructionobligationsoncontractorsincludetheFIDICyellow,silverandgoldbooks,andtheNEC3:EngineeringandConstructionContract.Design-only contracts are often concluded using one of thestandard form professional services contracts. These include theFIDIC white book, the NEC Professional Services Agreement,and theProfessionalConsultantsServicesAgreement (PROCSA)(endorsed by a number of the professional engineering servicesbodiesinSouthAfrica).Managementcontracting(alsoknownasengineering,procurementand construction management (EPCM) contracting) is notuncommoninSouthAfrica.


Avalidcontractrequiresconsensusbetweentwo(ormore)partiesregardingtheobligationstheyintendtocreateandthattheparties


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advanced payment guarantees and retention guarantees. Theseinstruments are usually issued by banks or insurance companies.The JBCC agreement contains a standard form of performanceguarantee which is endorsed by the CIDB. These instrumentstypicallycreateprimaryobligations.Parent-companyguarantees, in terms ofwhich a parent companyguarantees the performance of a subsidiary, are also common.Theseinstrumentstypicallycreatesecondaryobligations.Theterm“guarantee”inSouthAfricadescribeswhatisreferredtoasa“bond”inEngland.Therearenorestrictionsonthenatureofsuch bonds and guarantees. The nature of such instruments (i.e.whethertheyconstituteprimaryorsecondaryobligationsonthepartoftheguarantor)isdeterminedbyreferencetotheirwording.


Thecommonlawaffordscontractorssecurityintheformofalien(i.e.arightofretention),overworkscarriedoutuntiltheworksarepaidforbytheemployer.Inorderforthelientobeenforceable,paymentmust bedue to the contractor and the contractormust be in lawfulpossessionoftheworks.Theliencanbesupersededbytheprovisionofalternativesecurity(e.g.provisionofaconditionalguarantee/bond),inwhicheventthecontractormustrelinquishpossession.Employersoftenrequirecontractorstowaivetherighttorelyonthelien–thisisparticularlycommoninprojectfinancetransactions.



Constructioncontractsoftenprovideforaprofessionalthirdparty(engineer,architectorquantitysurveyor)toactasanagentonbehalfoftheemployerandsupervisetheworks.Inadditiontoactingastheemployer’sagent,suchthirdpartyoftenperformsquasi-judicialfunctions in terms of the construction contract (e.g. determiningclaimsbythecontractor)inrespectofwhichitmustactimpartially.Inothercircumstances(e.g.whencertifyingpaymentsorprogress),thethirdpartyactsastheemployer’sagentbutmust,nevertheless,acthonestlyandimpartiallyincarryingoutsuchfunctions.In project finance transactions, project funders usually require anadditional person, their agent (the lender’s technical adviser), tomonitortheworksontheirbehalf.Theroleofthelender’stechnicaladviseristoensurethattheinterestsofthefundersareprotected.


“Pay-when-paid” clauses are presently valid and enforceable,thoughtheyarestrictlyconstrued.Proposedregulationsunderthe

forOccupationalInjuriesandDiseasesAct,130of1993andwiththe Unemployment Insurance Fund under the UnemploymentInsuranceAct,63of2001.The following types of insurance are a common requirement inconstructioncontracts:■ contractors’all-riskinsurance;■ publicliabilityinsurance;■ professional indemnity insurance (if the constructionwork

also involves the rendering of professional services – e.g.designorengineeringservices);and

■ special risks insurance (strike, riot, civil unrest and/orterrorism),calledSASRIAinsuranceinSouthAfrica.


(a) There are no general statutory requirements in relationto construction contracts. However, contractors may notundertakeworkforapublicsectorentityunlessthecontractoris registered with the Construction Industry DevelopmentBoard(CIDB)intermsoftheCIDBAct,38of2000andhasthenecessarygradingtocarryoutthework.IntermsoftheHousingConsumers ProtectionMeasuresAct, 95 of 1998,nopersonmayconstructresidentialbuildingsunlesstheyareregisteredasahomebuilderundertheAct.

(b) SouthAfrica has a comprehensive set of labour laws withwhichcontractorsmust comply, including theOccupationalHealth and SafetyAct, 85 of 1993 (OHASA), the LabourRelations Act, 66 of 1995 and the Basic Conditions ofEmploymentAct,75of1997.SpecialistlabouradviceshouldbesoughtbycontractorsenteringtheSouthAfricanmarket.

(c) Employersarerequiredtodeducttax,mainlyintheformofPAYE(PayAsYouEarn),fromthewagesofemployeesforpaymenttotherevenueservice.Employersarealsorequiredto make deductions from employees for co-contributionsto the Compensation Fund for Occupational Diseases andInjuries and to the Unemployment Insurance Fund forunemploymentsocialbenefitsforemployees.

(d) SouthAfrica’s statutoryhealth and safety requirements arecontained in the OHASA. The Construction Regulations(2014),publishedunder theOHASA,containconstruction-specifichealthandsafetyobligations–theyaretheequivalentoftheEnglish“CDMRegulations”.


Yes, such provisions are common in construction contracts.Construction contracts often provide for an on-demand retentionguarantee(orbond)tobeprovidedbythecontractorinplaceofacashretention.


Contractorscommonlyprovideon-demandperformanceguarantees,

Norton Rose Fulbright South Africa Inc. South Africa


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Wherecauseofthedelayisthefaultoftheemployer(orathisriskin terms of the contract), the principle of prevention entitles thecontractor toanextensionof time (EoT). Thereare twoschoolsof thought regardingwhether a contractor is entitled tomonetarycompensationinadditiontotheEoT.OneschoolfollowsthecurrentEnglish lawposition,which is that thecontractor isgenerallynotentitled to monetary compensation in events of true concurrentdelay.Theotherschool,basedonthefactthatSouthAfricanlawdoes not recognise the apportionment of contractual damages,considersthatacontractorisentitledtomonetarycompensationifitcanshowthattheemployer’sactionswereacauseoftheloss.


Thiswilldependonthewordingoftheconstructioncontractusedbytheparties.Thefloatisownedbytheprojectincontractswhichonlyentitlethecontractortoanextensionoftimewhichdelayscompletion.Thisisalsothecaseifthecontractissilentontheissueoffloat.Ifthecontractprovidesthatthecontractorisentitledtoanextensionoftimeifthefloatisusedupattherequestoforduetothefaultoftheemployer,orifthecontractor’sprogressisdelayedbytheemployerthen the contractormay claim an extension of timewhenever thefloatisusedupduetoanactoromissionoftheemployer.


InSouthAfricanlaw,thePrescriptionAct,68of1969,statesthatclaims (subject to certain exceptions) are not actionable unlessbroughtwithinthreeyearsofthedateonwhichthe“debt”becamedueandenforceable.Thedebtisdueandenforceableonthedateonwhichaparty isawareofall thefactswhichgiverise to theircause of action (or ought reasonably to have become aware) andtheyareabletoissueproceedingstoenforcethedebt.TheActalsorecognisesimpedimentstoaparty’sabilitytoenforceadebt,whichdelaytherunningofprescriptionuntiltheimpedimentisremoved.Itispossible,byagreement,tovarythetimeperiodwithinwhichaclaimmaybebrought–usuallytoshortentheperiod.Such“timebar”provisions,whicharecommoninconstructioncontracts,havebeenheldtobeenforceableunderSouthAfricanlaw,providedthattheyarenotsoonerousastobreachpublicpolicy.South African courts have held that internal dispute resolutionmechanisms in construction contracts may delay the running ofprescriptionasthedebtis“unenforceable”untilthepartyhassatisfiedtherequirementsoftheinternaldisputeresolutionmechanism.


This is determined by the relevant contract; however, the defaultposition in law is that the contractor bears the risk for ground

CIDBAct(whichhavenotyetbeenpassedintolaw)will,ifenacted,prohibitpay-when-paidclausesinconstructioncontracts.


The Conventional Penalties Act, 15 of 1962, regulates theenforceability of liquidated damages clauses and contractualpenaltyclauses. TheActprovidesthatsuchclausesarevalidandenforceable. A party may apply to court (under theAct) if theamountofthepenaltyis“outofproportiontotheprejudicesufferedbythecreditor”.Thecourtmay,ifitconsidersthatthepenaltyisdisproportionatetotheprejudicesuffered,reducethepenaltyasitconsidersequitable.



Whether or not, and to what extent, an employer is entitled tovary theworks to be doneunder the contractwill dependon theprovisionsofthecontract.Therearenolimitationsimposedfromoutsidethecontract(e.g.bystatute)onanemployer’srighttovaryworks. Under the common law, an employermay not instruct avariationwhichfundamentallychangesthenatureoftheworks–thiswouldconstituteanewcontract. Whetheraparticular instructionconstitutesafundamentalchangetothenatureoftheworkswillbeaquestionoffact.


The right tovary is typicallydealtwithexpressly inconstructioncontracts.Thecommonlawprovidesthatanemployermaynotvarythecontract toomit itemsofworkwith the intentionofawardingthatwork to another contractor. Ifwork is to be omitted on theinstructionoftheemployer,itmustbeagenuineomission–inthesensethattheemployerhasdecidednottogoonwiththatparticularitemofwork. Thepartiesmayexpresslyagreethat theemployerwillbeentitledtoomitworkandawardittoanotherparty–thoughsuchaclausewouldbeunusual.


Yes,SouthAfricanlawrecognisesimpliedterms(i.e.theyflowfromexpress termsorare impliedbyoperationof law)and tacit terms(i.e.theyare“readin”asbeingnecessarilyincorporated,e.g.basedontheconductoftheparties).Impliedandtacittermswhichwouldcontradicttheexpresstermsofthecontractcannotbeimpliedintoacontract.



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Athirdparty,whichisnotparty toacontract,canonlyclaimthebenefitofacontractwherethatthirdpartyhasacceptedanexpressstipulationinthecontractofbenefittothethirdparty.Outsideofsuch a scenario, a party,which is not party to a contract, cannotclaimanybenefits thereunder. This is, however,oftendealtwithbyconcludingseparatecontracts(collateralwarranties)whichgiverightsunderthecontractto“thirdparties”.


Whentwopartiesarereciprocallyindebtedtooneanother,onedebtisautomaticallysetoffagainsttheother.Thiscanonlyoccurwherethepartiesbothhaveliquidatedclaims–itisnotpossibleforapartytosetoffadebttheyoweagainstadebtwhichwillbeowedtothatpartyinthefuture.


Whether there is a contractual dutyof carewoulddependon thetermsofthecontract.UndertheSouthAfricanlawofdelict,adutyofcarenottocauseharmtoanotherexistsincertaininstances,buteachcasewilldependonthecircumstances.Inconsideringwhetheradutyofcareexists,ourcourtshaveconsideredfactorssuchastheforeseeabilityoftheharmandpublicpolicy.


Yes.The“goldenrule”ofinterpretationfollowedbySouthAfricancourtsistogivethelanguageinthedocumentitsgrammaticalandordinarymeaning,unlessdoingsowouldresultinsomeabsurdity,repugnancy or inconsistencywith the rest of the document. Theprocess of interpretation must be undertaken having regard to,amongst other factors, the context in which the provision beinginterpreted is used, the purpose of the term or contract and thefactualmatrixsurroundingtheagreement–theexerciseisaunitaryexercise,i.e.allfactorsmustbeconsideredincontext.Ourlawalsorecognisesspecificsubsidiaryrulesofinterpretation,whichareappliedtoassistthecourtinarrivingatadetermination,theseincluderulessuchas:■ thepresumptionagainsttautologyorsuperfluity;■ thepresumptionthatachangeinlanguagedenotesachange

inintention;and■ thecontra proferentemrule–whichprovidesthatifwording

inacontractisincurablyambiguous,theprovisionshouldbeinterpretedagainsttheauthorofthecontract(astheyhadtheabilitytomakethemeaningplain).

conditions which were reasonably foreseeable. It is common inconstructioncontractsforthecontractortobeartheriskforgroundconditionsthe“experiencedcontractor”oughttohaveforeseen.


The contractwill specifywhobears the risk for a changeof lawaffecting completion. If the contract does not specifically dealwith the issue, eachparty is responsible for andbears the riskofcomplyingwith itsstatutoryobligations. It isan implied termofconstructioncontractsthatacontractorwilladheretotheapplicablebuildingandsafetyregulationswhencompletingtheworks.


Anemployerobtainsownershipofintellectualpropertydevelopedbyadesignerorcontractorinexecutionofaconstructioncontract,onceitispaidfor,unlessotherwisedeterminedbythecontract.


Thisisgovernedbythetermsofthecontract.Normally,acontractorisonlyentitledtosuspendworkswheretheemployerhasfailedtomakepaymentintermsofthecontract.Suspensionbythecontractoroutsideofcontractualprovisionswhichgrantsucharightmayresultinthecontractorbeingliableforbreachofcontractordelay.


A contract will typically set out the grounds on which a partymay terminate it,andanynoticeprovisions in that regard. Ifnotregulated in thecontract, amaterialbreachof contract (includingrepudiationoftheagreement)givestheinnocentpartytherighttoterminatethecontract.Theoffendingpartymustusuallybegivenareasonableperiodoftimetoremedyitsbreachbeforethecontractisterminated.


SouthAfricanlawrecognisestheconceptofvis maiororsuperveningimpossibility, i.e. an event, not the fault of either party, whichabsolutelypreventsperformance,whichwillthenrenderthecontractpartiallyorcompletelyvoid/unenforceable.ItisnotpossibleunderSouth African law to invoke supervening impossibility where acontract has become uneconomic. Notwithstanding the commonlawposition,theforce majeureprincipleiscommonlyincorporatedinto construction contracts. Force majeure provisions typicallyexcuse the parties from performing obligations affected by force majeureforthedurationofforce majeure.



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arbitratorbythepartiesandsetoutwhichruleswillapply.Oftenthese are theArbitration Foundation of SouthernAfrica (AFSA)rulesortherulesoftheAssociationofArbitrators(AoA).


Before December 2017, all arbitrations were governed by theArbitrationAct, 1965. Foreign arbitral awardswere enforced inaccordance with the Recognition and Enforcement of ForeignArbitral AwardsAct, 40 of 1977. The InternationalArbitrationAct, 15 of 2017, came into effect on 20 December 2017. TheAct governs all international arbitrations and awards. The Acteffectively adopts the UNCITRAL (United Nations Commissionon InternationalTradeLaw)ModelLawas the lawapplicable tointernationalarbitrationsinSouthAfrica.TheActprovidesthatforeignarbitralawardsmustbeenforcedandcourtsmust, on application,make foreign awards orders of courtsubject to the limitedgrounds for refusal in theModelLaw. Anawardwhichismadeanorderofcourtwouldbeenforceableinthesamemannerasajudgmentorordertothesameeffect.Domestic arbitrations continue to be governed by theArbitrationAct,1965.


TheSouthAfricancourtsrecogniseandenforceforeignjudgments.TheleadingSouthAfricancaseinthisregardisJones v Krok 1995(1)SA 677(A), where the court held that foreign judgments are notdirectlyenforceable,butconstituteacauseofactionwhichwillbeenforcedbyourcourts,provided:(i)thatthecourtwhichpronouncedthejudgmenthadjurisdictiontoentertainthecaseaccordingtotheprinciples recognisedbyour lawwith reference to the jurisdictionofforeigncourts;(ii)thatthejudgmentisfinalandconclusiveinitseffectandhasnotbecomesuperannuated;(iii) that therecognitionandenforcementofthejudgmentbyourcourtswouldnotbecontrarytopublicpolicy;(iv)thatthejudgmentwasnotobtainedbyfraudulentmeans;(v)thatthejudgmentdoesnotinvolvetheenforcementofapenalorrevenuelawoftheforeignstate;and(vi)thatenforcementofthejudgmentisnotprecludedbytheprovisionsoftheProtectionofBusinessAct,99of1978,asamended.


Court proceedings normally comprise either an action or anapplication.Anapplicationisbroughtonaffidavit,wherethereisno(foreseeable)disputeoffactandcanbebroughturgentlyorinthenormalcourse.Dependingonurgency,thecourtcanmakearulingeitherimmediatelyoraftersetsofaffidavitshavebeenexchanged,followedbyahearing.Non-urgentapplicationsnormallytakeeightto12monthstobefinalised,andanothersixtoeightmonthsifthereisanappeal.Actions are initiated by the plaintiff, who issues a combinedsummonswithparticularsofclaim,settingoutthegroundsoftheir


Generally,underSouthAfricanlaw,termsofacontractwhichareeitherunlawfulorcontrarytopublicpolicyareunenforceable.So-called“agreementstoagree”arealsounenforceable.


Adesigner’s liabilitywill depend on the terms of the contract inquestion.Itisanimpliedtermofcontractswithprofessionalsthatprofessionalswillexerciseduecareandskillintheperformanceoftheir obligations. Typically,where the designer is commissionedby the employer, the designerwillwarrant that the design is “fittobuild”,andwillbeliableifthedesignfails.Whereacontractorcommissions a designer within a “design and build” contractcommissioned by an employer, the designer is only liable fornegligence,andtheconstructorisliableotherwise.



The default position is that disputes, unless settled between theparties, are determined by a court with jurisdiction to hear thedispute.However,alternativedisputeresolution,suchasarbitration,has become the favoured approach, particularly in constructioncontracts.Recoursetoarbitrationisonlypossibleifthepartieshaveagreedtoitasthemandatorydisputeresolutionmechanism.Thiscanbedoneintheconstructioncontract(beforeanydisputesarise)or,lesscommonly,byagreementinwritingafterthedisputearises.


AdjudicationisadoptedbyagreementbetweenthepartiesinSouthAfricaandthenatureoftheadjudicationisdictatedbythetermsoftheagreement.Adjudicatorsareindependentandmaybeappointedeitherbythepartiesorbyanamedauthorityandarepaidbybothparties.Thedecisionoftheadjudicationisnormallyimmediatelybindingand,dependingonthetermsoftheagreement,thepartiesmaychallengethedecisionthrougharbitrationorlitigation.Absentanexpressprovisiontothecontraryinthecontract,anypartymayapply tocourt tohaveanadjudicationaward reviewedand/or setaside(thoughtherearelimitedgroundsfordoingso).TheCIDBhasissuedaProcurementPracticeGuideforadjudicationprocedures, including the appointment by the parties of theadjudicator,whichmaybeusedinanyformofcontractorsubcontract.ProposedregulationsundertheCIDBActwill, ifenacted,provideformandatoryadjudicationinconstructioncontracts.


ArbitrationclausesarecommoninconstructioncontractsinSouthAfrica. One would usually provide for the appointment of an



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aThe construction team at Norton Rose Fulbright is one of South Africa’s largest. We offer a comprehensive and commercially focused disputes and transactional service to major developers, lenders, employers, contractors, insurers, engineering professionals, concessionaires and other stakeholders in the construction and projects space. Our aim is to provide cutting-edge advice – from the planning stages of projects, through their development, the negotiation of relevant contracts, ongoing risk advisory services, occupational health and safety compliance advice and, when necessary, mediation, arbitration, litigation and other conflict resolution services.

We provide commercially astute advice in construction disputes across all recognised dispute resolution mechanisms. We draw on the substantial resources and experience of the firm’s wider litigation and dispute resolution practice, which is one of the largest litigation practices in South Africa and in Africa.

In the transactional space, the team offers a broad range of experience in high-profile and complex construction projects and is counsel to a number of international clients. The team works closely with our project finance, corporate, environmental, health & safety and real estate teams in order to offer a full-service solution to clients.

Daniel is a disputes and transactional construction lawyer based in Johannesburg. He is experienced in complex construction litigation. Daniel has particular expertise in projects subject to public-private partnership (PPP) requirements. He was a leading member of the team which advised Bombela Concession Company and Bombela Civils Joint Venture (CJV) in various disputes with the Gauteng Provincial Government pertaining to the Gautrain Rapid Rail Link megaproject. He is also assisting parties under the REIPPP programme in disputes against Eskom and subcontractors.

Daniel also works with the transactional members of our construction team, preparing and negotiating construction project agreements. In addition to his work on the South African REIPP programme and other renewable energy project transactions, he was part of the team providing advice on a 600MW coal-fired power station to be constructed under the SA baseload procurement programme.

Daniel McConnellNorton Rose Fulbright South Africa Inc.15 Alice Lane Sandton Johannesburg South Africa

Tel: +27 11 685 8923Fax: +27 11 301 3300Email: [email protected]: www.nortonrosefulbright.com

Emmanuel is a disputes and transactional construction lawyer based in Johannesburg. He is also a qualified Quantity Surveyor. He previously worked for a number of medium to large South African construction companies as a Quantity Surveyor for seven years. Since joining the legal fraternity five years ago, Emmanuel has gained experience in the preparation and negotiation of standard forms and bespoke contracts for construction projects, including JBCC, NEC, GCC and FIDIC. His practical knowledge and understanding of the construction industry ensures that clients are afforded practical legal solutions to problems.

Emmanuel is currently part of the team acting for Exxaro coal in a dispute with a state-owned electricity utility company. He was also part of the transactional construction team that advised a client on a 600MW coal power station in South Africa.

Emmanuel TivanaNorton Rose Fulbright South Africa Inc.15 Alice Lane Sandton Johannesburg South Africa

Tel: +27 11 685 8570Fax: +27 11 301 3200Email: [email protected]: www.nortonrosefulbright.com

Typically,thisisdonewherethereisaliquid(certain)debtandnobona fidedefence.Once an order has been granted (either following a summaryjudgmentapplicationortrial),apartymayappealtoeitherthefullbenchof theHighCourtor to theSupremeCourtofAppeal. Anactionnormallytakesabout12to18monthstofinalise,andanothersixtoeightmonthsif thereisanappeal. Courtdelaysareoneofthefactorstoconsiderwhendecidingwhethertoproceedbycourtproceedings or alternative dispute resolution, such as arbitration,whenoneispresentedwiththeoption.

claim. The defendant may then deliver a notice of intention todefendanddeliverapleaand, ifapplicable,acounterclaim. Theplaintiffmaythen,wherenecessary,deliverareplicationinresponsetothedefendant’spleaandapleatoanycounterclaim.Thereareanumberofstepsthattakeplacebeforetrial,includingdiscoveryandrequestsfortrialparticulars,expertwitnessreports,etc.Theprocedureforallocationofatrialdependsonthecourtinquestion.Incertaincircumstances,apartymayapplyforsummaryjudgment,inwhichtheyseekanearlyjudgmentwithouthavingtogototrial.



Chapter 27

Aleksey Pukha and Partners

Aleksey Pukha

Anna Gadiatska

Ukraine

Therefore,inUkraine,so-calleddesign and construction contractsconcluded by building employers with general contractors/contractorsaregenerallyused,whichlayacontractingorganisationundertheobligationtoprovidebothaprioritydesignofthebuildingproject,andforfurtherconstructionoftheproject.Atthat,inthecase of concluding a general contract, the general contractor hasthe right to involve subcontractors for the execution of certaintypesofwork, including thesupplyofproductsnecessary for theconstruction.Amongthedesign-only contractsunderthejurisdictionofUkraine,inadditiontotheconstructioncontractforprojectandsurveyworks,itisalsopossibletoconcludethefollowingcontracts:■ contract for the development and transfer of scientific and

technicalproducts;■ contract for the development and analysis of project

documentation;■ contractfortheexecutionofresearchworksordevelopment

andengineeringworks;■ contractfortheexecutionofworksonplanningtheterritory;■ contractfor thepreparationofcity-planningconditionsand

constraintsonlandplotdevelopment;and■ contractforthesearchforarchitecturalsolution,etc.

Ukrainian legislation also provides for the existence of anarrangement known as management contracting withonemainmanaging contractor. This typeof contract includes constructionthe management contract or engineering contract, which isconcludedbytheinvestor/employerwithaconsultingengineeringcompany,whichcarriesoutgeneralmanagementoftheconstructionfacilityinsteadoftheinvestor/employerandincludesactivitiesfortheprovisionofengineeringandtechnicalservices,amongwhichare preliminary feasibility studies and research, project expertise,development of construction financing programmes, organisationof preparing design documentation, holding competitions andtenders, identifying and searching for contractors, concludingconstructioncontracts,coordinationofallparticipants’activitiesintheconstruction,aswellascarryingouttechnicalsupervisionoverthe construction facility and offering consultations on economic,financialorotherissues.Inaddition to the listed typesofcontracts, the following typesofcontractsarealsowidelyusedinthefieldofconstruction:■ investmentcontracts;■ contracts for the acquisition of construction authorisation

documentation;■ contractsforthesupplyofmaterialsandequipmentnecessary

fortheconstruction;■ contractsfortheaccomplishmentofimprovementworks;



The commercial construction sector is quite extensive, both inUkraine and throughout the world, and therefore, in the courseof construction, business entities are engaged in awide range ofeconomicactivitiesregulatedbycontractsofdifferentkinds.TheUkrainianlegislationprovidesfordifferentkindsofeconomiccontractsthatcanbeconcludedbyeconomicentitiesinthecourseofconstruction.Ingeneral,allconstructionworksarecarriedoutonthebasisofsubordercontracts.The main types of suborder contracts, defined by Ukrainianlegislation,areasfollows:1. a constructioncontract (capital constructioncontract);both

primecontractandsubcontract;2. a construction contract for the execution of design and

research(survey)works;3. a construction contract for the execution of geological,

geodeticandotherworksnecessaryforcapitalconstruction;and

4. a construction contract in the field of capital constructionmaterialandtechnicalsupport.

Under the current legislation of Ukraine, business entities havethe right to conclude contracts containing elements of variouscontracts (mixed contracts). In this regard, in Ukraine in thefieldofconstruction, it ispossible toconcludecomplexcontractsbetweenthecustomerandthecontractingorganisationtocombinetheprovisions for theexecutionofvarious typesofworkaswellas conclude several different contracts between the constructionemployer and different contractors for each stage of the project(typeofwork)(forinstance,theemployermayconcludeaseparatecontractforthedesignandsurveyworkwithoneorganisation,anda separate construction contract with another organisation underwhich thecontractorundertakes tobuild theobject inaccordancewiththedesigndocumentationdevelopedbythefirstorganisation).


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■ warrantytermsofthecompletedworkquality(operationoftheconstructionfacility),andprocedureforeliminatingdefects;

■ responsibilityofthepartiesforviolationofthecontractterms;■ theprocedureforsettlingdisputes;and■ theprocedureforamendingthecontractanditstermination.

Contract form.Thecontractmustbeconcludedintheform,whichis prescribed by law, and, accordingly, the contract is consideredconcludedfromthemomentofthisform’ssubmission.Theconstructioncontractmustbeconcludedinwriting.


ThelegislationofUkraineprovidesforthepossibilityofconcludingaletter(protocol)ofintent,butthereisnocleardefinitionastotheprocedureandconditionsforitsconclusionandexecution.In addition, according to Ukrainian legislation, it is possible toconcludeapreliminarycontract,underwhichthepartiesundertaketo conclude a contract in the future (the main contract) withina certain period and on the terms stipulated in the preliminarycontract,whichshallbeconcludedinwriting.Apartythatevadestheconclusionofthemaincontractmustcompensatetheotherpartyfor damages caused by delay, or the other party has the right todemandtheconclusionofsuchacontractthroughthecourts.Inpractice,however,thepartiesmayconcludeaprotocolofintentforfuturecooperation,inwhichtheirdesiretoworktogetherinthefuturewillbedocumented,andthebasicframeworkforcooperationbetweenthepartieswillbedefined. However,unlikepreliminarycontracts,iftheprotocolofintentdoesnotcontainthewilloftheparties,providingitwiththeforceofapreliminarycontract,itdoesnotcreateanyobligationsfortheparties.Incaseofreadinesstoconductjointactivitythathasbeendiscussedin the protocol of intent, the parties will enter into a separatecontract, which will be legally binding for them and which willclearlyindicatethetermsofcooperation.


Thestandardinsurancecontractconcludedduringtheperformanceofconstructionworkunder the lawsofUkraine is thecontractofinsurance of risks of accidental destruction of, or damage to, theconstruction facility, and the contract of insurance of third-partyliability. Contracts of life insurance and accident insurancemayalsobeconcluded.Otherrisksrelatedtotheconstructionmayalsobeinsureduponamutualagreementoftheparties.Until 2005, the legislation of Ukraine stipulated the contractor’sobligation to insure the construction facility or a complex ofconstructionworks.Today,theinsuranceoftheconstructionfacilityoracomplexofworksisstillmandatory,butthelegislationlacksa clear provision related to the party that is responsible for theinsurance,leavingthisissuetothediscretionofthepartiesregardingthisobligationinthecontract.

■ contractsfortheimplementationofinnovationactivities;■ contractsforprojectdocumentationexpertise;■ contracts for the provision of services intended for the

acceptanceofthecompletedfacilityinoperation;■ contractsfortheconnectionofengineeringnetworks;and■ contracts forconstructiondesignand technicalsupervision,

etc.


Yes, the legislation of Ukraine establishes general and specialrequirementsnecessaryforconcludingalegallybindingcontract.Thefollowingaregeneralrequirements,compliancewithwhichisnecessaryforthecontract’svalidity:1. Requirementsforcontent.2. Requirementsforcompliancewiththeform.3. Requirements for the parties to the contract regarding their

legalstandingandqualification,asdiscussed inquestion1.5ofthischapter.

4. Freewillofthepartytothecontractandthecorrespondencetoitsinnerwill.

5. The contract should be aimed at real legal consequencesarisingfromit.

Contract content. The contract is deemed to be concluded ifthe parties have in a propermanner reached an agreement on allessentialtermsofthecontract.In particular, the essential conditions of the construction contractare:■ thenamesanddetailsoftheparties;■ theplaceanddateofthecontract;■ thesubjectofthecontract;■ thecontractualprice;■ thetermsofthebeginningandendofworks(constructionof

thefacility);■ rightsandduties;■ theprocedureforensuringcompliancewithobligationsunder

thecontract;■ conditionsfortheinsuranceofrisksofaccidentaldestruction

ordamagetotheconstructionfacility;■ theprocedurefortheprovisionoftheprojectdocumentation,

resourcesandservices;■ theprocedureforattractingsubcontractors;■ requirementsfororganisationofwork;■ theorderoftheresourcesqualitycontrolbytheemployer;■ conditions for the implementation of construction design

supervision and technical supervision over the execution ofworks;

■ thesourcesandproceduresforfinancingworks(constructionofthefacility);

■ theprocedureforcalculatingtheworkperformed;■ theprocedureforthecompletedworksacceptance(construction

facility);

Aleksey Pukha and Partners Ukraine


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These funds will be used to guarantee the fulfilment of thecontractualobligationsofthecontractorwithintheperiodspecifiedin thecontract; inpractice this isusuallyduring theexecutionofworkanditsacceptancebytheemployer.However,thereisalsoapossibilitytoreturnpartofthesefundsaftertheendofwork,andtheremainderaftertheendoftheguaranteeperiodofthequalityofwork,ortheentireamountimmediatelyaftertheguaranteeperiodends.


The possibility of securing an obligation under a constructioncontractbyabankguaranteeorthroughanotherfinancialinstitutionorinsuranceorganisation(hereinafter–theguarantor)isestablishedlegislatively. The guarantor is liable to the creditor for theperformanceoftheobligationsofthedebtorandpaysthecreditora sum of money in accordance with the terms of the guarantee.Requirementsfortheguaranteecontractmaybeprovidedforintheconstructioncontract,includingtheguaranteeamount.Additionally,thelegislationofUkraineprovidesforthepossibilityofusingaguarantee toensure theperformanceof thecontractualobligationsofthecontractor.Inthiscase,ifthecontractordoesnotfulfil theobligationsunder the constructioncontractproperly, theguarantorisobligedtoperformthembyhisownefforts.


Itiscodifiedbylawthatiftheemployerdidnotpaythesetpriceofworkorotheramountdue to thecontractor inconnectionwiththeperformanceoftheconstructioncontract,thecontractorhastherighttoholdbackthetransferofthecompletedworks(constructionfacility), as well as the equipment and the remainder of unusedmaterialandotherpropertyoftheemployerleftwiththecontractoruntilthemomentoffullpaymentbytheemployer.



Theimplementationofconstructiondesignsupervisionandtechnicalsupervisionduringtheconstructionofthefacilityismandatory.Technicalsupervisionmustbeprovidedbytheemployer.Itisquitecommonthat,duringtheexecutionoftheconstructioncontract,theemployerdelegateshisauthoritytocarryouttechnicalsupervisionandcontrol toa thirdparty, including tospecialisedorganisationsor relevant specialists with qualification certificates, their rolebeingdefined in the contract. Constructiondesign supervision is

Inaddition,theMinistryofRegionalDevelopmentandConstructionofUkrainehasadoptedRecommendationsoninsuranceofrisksinconstruction,whicharerecommendedforpartiestoacontract.


The lawestablishesgeneral requirements forpartiesentering intoa construction contract. So, the contractor is required to obtaina licence for the right to carry out certain types of constructionworks. The employer is required to obtain a permit to performconstruction work, obtain town-planning terms and restrictionson the development of the land plot, conduct a hydrogeologicalsurvey, conduct an examination of design documentation for theconstruction,etc.,incaseofnecessity,dependingonthecategoryofconsequences(compliance)oftheconstructionfacility.Concerning theworkforce, thecontractorcanfulfil itsobligationsfortheconstructionofthefacilityunderthecontract,bothwiththehelpofitsownemployees,workingonthebasisofanemploymentcontract, and with the help of third parties – subcontractors –accordingtothetermsofthesubcontractsconcludedwiththem.Requirements forworking conditions, rating and remunerationoflabour, durationofworkinghours and rest, labourprotection andsafety,insurance,socialbenefits,guaranteesandcompensationareestablishedbythelabourlegislationofUkraine,andeachcontractormustcomplywiththemwithrespecttoitsemployees.Thecontractorisresponsibleforitsemployeesinthecourseofconstruction.Requirementsfortaxation.Whenpayingemployeesworkingonthebasisofanemploymentcontract,thecontractorisobligedtopayasinglecontributionforcompulsorystatesocialinsuranceatarateof22%ofthesalaryofeachemployee,andisobligedtowithholdfromthewagesofeachemployee:■ personalincometaxintheamountof18%ofwages;and■ militarytaxintheamountof1.5%ofwages.


The law of Ukraine establishes that the fulfilment of obligationsundertheconstructioncontractcanbeensuredby:■ warranty;■ bail;■ forfeit;■ pledge,includingmortgageoftheconstructionfacilityorother

realestate;■ withholding;■ deposit;and■ othertypesofcollateralagreedbytheparties.

Therefore, the employer is legally empowered to withhold partof the funds when making settlements with a contractor for thework performed. Usually, the amount of such retention is set atapercentageofthecostoftheworkperformed.Thepartiesintheconstructioncontractdetermine the termsconcerning theamount,theorderofuseandreturnoftheretainedfundstothecontractor.



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exceed10%ofthepricespecifiedintheestimateanddonotchangethenatureoftheworkdeterminedinthecontract.However, if the cost of such additional works exceeds 10% ofthepricedeterminedintheestimate, theemployercanonlymakechangestotheestimatewiththeconsentofthecontractor.


Thecontractorisobligedtoperformalltheworksspecifiedinthedesignestimate. However,theconstructioncontractcanestablishthatsometypesofworkcanbeomitted;inthiscase,theemployercan perform these works both by his own efforts and throughanotherthirdparty.So, for example, under the agreement of the general contractor,the employer can conclude contracts with relevant specialisedenterprisesfortheperformanceofassemblyandotherspecialworks.


GeneraltermsofconstructioncontractsaredeterminedinaccordancewiththeprovisionsoftheCivilandEconomicCodesofUkraineandtheGeneralTermsforConclusionandImplementationofContractsinCapitalConstruction, approved by theCabinet ofMinisters ofUkraine (hereinafter – the General Terms). The General Termsestablish theconditions thatmustbeprovidedfor incontractsforcapital construction and they aremandatory for accountingwhenconcludingconstructioncontractsaslistedinquestion1.2above.Inaddition,theMinistryofConstruction,Architecture,Housing,andCommunal Services ofUkraine approved a SampleConstructionContractforcapitalconstruction,whichcanbeusedbythepartiesinconstructionasanadvisorywhendraftingaconstructioncontract.


If the delay in the facility and/orworks transfer to the employerisduetothefaultofthecontractor,thecontractorpaystheforfeitestablishedbythecontractandreimbursesthelossesinfull.Ifthedelayoccurredduetothefaultoftheemployer(forexample,failure to provide the construction site to the contractor, failureto transfer the project documentation, violation of the financingterms, etc.), the contractor shall not be deemed to have violatedthedeadlinesforthetransferofthecompletedworks(constructionfacility)shallbearnoresponsibility,andhastherighttoreimbursetheexpensescausedbythisviolation.


TheUkrainianlegislationdoesnotprovidefortheconceptknownasthe“float”whendeterminingthetimeforperformanceofworkundertheconstructioncontract.Thedeadlinesfortheperformanceofworks(constructionofthefacility)areestablishedinthecalendar

carriedoutbythearchitect,themanageroftheconstructionfacilityor thepersons authorisedbyhim in accordancewith the contractconcludedwiththeemployer.Inthiscase,actingonbehalfoftheemployer,intheeventofdetectingdeviationsfromthedesigndecisionsmadeduringtheconstructionofthefacility,andwhenthecontractorrefusestoeliminatethem,thepersoncarryingouttheconstructiondesignortechnicalsupervisionmustnotifytheemployer.In addition, to ensure compliance by both the developer and thecontractorwithrespecttotheconstructionofapprovedcity-planningandotherdesigndocumentation,statearchitecturalandconstructioncontrolandsupervisionisexercisedbyaspecialisedexecutivebody,whichactsimpartiallytowardsboththecustomerandthecontractor.


Ukrainian legislation does not provide for a “pay when paid”condition for the payment of a contractor’s services. Generally,paymentforworkismadeaftertransferoftheconstructedfacility(works performed) to the employer if another procedure forsettlementisnotprovidedforbyanagreementbetweentheparties;forexample,thecontractmayprovideforadvancepaymentfortheworkperformedorpaymentforindividualstagesofwork.


Yes, the parties have the right to stipulate in the constructioncontractaprovisionwhichstatesthecontractoreithershalldepositafixedamounttoaseparatebankaccountoftheemployer,ortoanotarydeposit,orconcludeabankguaranteecontractforthesameamountasasecurityforthefulfilmentofhisobligations. Incaseofdefectsintheconstructedfacilityorifthecontractordelayedthetransferofthefacilitytotheemployer,orincaseofotherbreachesofthecontract,theemployerisentitledtousethissecurityamountfor sanctions and payment of compensation for losses caused bythisfailureorimproperfulfilmentofobligations.If,however,thecontractorhasnotcommittedsuchviolations,andtheconstructionfacility has been transferred to the employer, these fundswill bereturnedtothecontractor.



Yes, according to the legislation of Ukraine, the employer hasthe right to make changes in the design estimate prior to thecommencement of works or at the time of their performance,providedthattheadditionalworkscausedbysuchchangesdonot



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Generally,themanageroftheconstructionfacility,and/ortheresultsofthework,and/ortheprojectdocumentation,isthepersonwhohascreatedthem(architect,contractor).Theresponsiblemanageralsohasthepersonalnon-propertyrightstointellectualproperty.Propertyrightstointellectualpropertyoftheconstructionfacilitybelongtothemanager/contractorwhocreatedtheconstructionfacility,jointlywiththeemployer.However,thepartieshavetherighttostipulateinthecontractadifferentprocedurefortheallocationofpropertyrightsofintellectualpropertyoftheconstructionfacility.Inaddition,it isstipulatedthattheuseoftheconstructionfacilitybytheemployerfor implementationbeallowedonlyonce,unlessotherwisestipulatedbythecontract.Repeateduseofsuchaprojectand the working documentation must be carried out exclusivelywith themanager’s consent andwith thepaymentof a royalty tohimorhissuccessors.


Yes,accordingtothecurrentlegislation,thecontractorisentitledtosuspendworkinthefollowingcases:■ in case of non-receipt by the employer within a reasonable

periodof timeofaresponsetoanotificationof theneedforadditional work with an appropriate increase in the designestimate, which was not taken into account in the projectdocumentationandwhichwasfoundduringconstruction;and

■ in case of the employer’s breach of obligations under thecontract,asa resultofwhich thebeginningorcontinuingofwork by the contractor is impossible or made significantlycomplicated.


The parties to the contractmay provide for any conditions upontheoccurrenceofwhich thecontractmaybe terminatedaheadofschedulebyoneof theparties. Inanycase, thecontractmaybeterminatedaheadofschedulebyanagreementbetweentheparties.In addition, certain conditions are established legislatively, underwhichapartymayinitiateterminationoftheconstructioncontractevenifthecontractdoesnotprovideforthepointsmentionedbelow.Theemployercanwithdrawfromtheconstructioncontract:■ ifthecontractordidnotstarttheworkinatimelymanneror

performsitsoslowlythatitisimpossibletofinishitwithinthetimelimitspecifiedinthecontract;and

■ atanytimebeforethecompletionofthework(constructionofthefacility),bypayingthecontractorforthepartoftheworkperformed,withcompensationfordamagescausedbysuchawithdrawal.

The contractor has the right to withdraw from the constructioncontract:■ in case the employermakes changes to the design estimate

documentation that require the performance of additionalworks,thecostofwhichexceeds10%ofthecontractprice;

■ incaseofanimpossibilitytousethematerial(parts,structures)orequipmentprovidedbytheemployer,withoutareductioninthequalityoftheworkperformed;

schedule, which is an integral part of the construction contract,which determines the start and end dates of all types (stages) ofworksprovidedforbythecontract.Theemployerhastherighttomakeadecisiononslowing,stoppingoracceleratingtheperformanceoftheworkbythecontractor,butwith the mandatory introduction of appropriate changes to thecontractonthetimingofwork.


Yes, the claims of parties involved in construction contracts aresubjecttothegenerallimitationperiodofthreeyears.Thelimitationoflegalclaimsarisingfromimproperqualityofworkundercontractsforcapitalconstructionissetfromthedaytheworkisacceptedbytheemployerandis:■ one year – relative to the shortcomings of non-capital

constructions;andtwoyears–intheeventthattheshortcomingscouldnotbedetectedintheusualmannerofacceptingwork;

■ threeyears–relativetotheshortcomingsofcapitalstructures;and10years–intheeventthattheshortcomingscouldnotbedetectedintheusualmannerofacceptingwork;and

■ thirty years – relative to recovery of losses caused to theemployerbytheillegalactionsofthecontractor,whichledtodestructionoraccidents.

If the construction contract establishes a guarantee period and astatement regarding the shortcomingsof thework ismadewithintheguaranteeperiod,thelimitationperiodstartsfromthedateofthedeclarationoftheshortcomings.


Thecurrent legislationdoesnotdeterminewhocarries theriskofaccidental destruction or damage to the construction facility, andleavesthisissuetothepartiestobedecidedinthecontract.Inpractice,itiscommonfortheriskofaccidentallossordamagetoaconstructionfacilitybeforeitsacceptancebytheemployertobebornebythecontractor,exceptwhensuchlossordamagehappenedduetocircumstancesduetothefaultoftheemployer,andalsofromthemomentoftheacceptanceofworksbytheemployer(ascodifiedbylawin2005).Anemployerwhohaspreviouslyacceptedseparatestagesofworkcarriestheriskoftheirdestructionordamagethatisnotthefaultofthecontractor,evenwhentheconstructioncontractprovidesfortheperformanceofworkwhentheriskisbornebythecontractor.If the contractor provides material and technical support for theconstructionunder the contract, thenhewill carry the riskof theimpossibility to use the material(s) or equipment that has beenprovided tohimwithout a consequent reduction in thequalityofwork.


AccordingtoUkrainianlegislation,theriskofachangeinlegislationthatwill affect the implementationof the constructioncontract isassignedtobothparties.Thepartieshavetherighttoprovideforadifferentprocedureofsettlementinthecontract.



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The possibility of giving credit to homogeneous claims with anexpired due date is provided for by Ukrainian legislation. Thepossibility of the acceptance of such claims must be expresslyprovidedforinthecontract,oritcanbeperformedattherequestofoneofthepartiestotheconstructioncontract.


Theconceptof“dutyofcare”isnotexplicitlycodifiedinUkrainianlegislation, but it indirectly finds expression in some norms thatgoverntheexecutionofaconstructioncontract.Inparticular:■ Thecontractorisobligedtotakeallmeasurestopreservethe

propertytransferredtohimbytheemployer,andisresponsibleforlossordamagetothisproperty.

■ Thecontractorhastherighttoconductworkeconomically,ifitsqualityisensured.

■ Thecontractor,atitsownexpense,musteliminateshortcomingsofworkormaterialusedforworkwhicharethefaultof thecontractor.

■ The contractor is obliged towarn the employer in a timelymannerofcircumstancesthathaveanimportantbearingontheperformanceoftheconstructionwork.

■ Theemployerisobligedtoassistthecontractorinperformingthework in the amount and in the order established by theconstructioncontract,etc.


Ifthetermsoftheconstructioncontractareambiguous,thepartiesmustpresenttheirinterpretationaccordingtotherulesspecifiedintheCivilCodeofUkraine.When interpreting thecontentsof acontract,wordsandconceptsthat have equal meaning in the whole content of the contractshall be taken into account, as well as the meaning of terms(literallyinterpreted)whicharegenerallyacceptedinthescopeofconstructioncontracts.Ifaliteralinterpretationdoesnotallowfortheclarificationof thecontentofcertainpartsof thecontract, themeaningshallbeestablishedbycomparingtherelevantpartofthecontractwiththecontentoftheotherparts,thewholecontent,andtheintentionsoftheparties.Typical terms (standard form contracts), such as the SampleConstruction Contract for capital construction, can also be takenintoaccountintheinterpretation.Ifthepartiesdonotreachajointdecisionregardingtheinterpretationof these terms, the courtmay decide on the interpretation of thecontractcontentsattherequestofoneorbothparties.


Certain conditions of the contract may be unenforceable by oneparty if they correspond to the obligation of the other party toperformcertainactions,withoutwhichthefirstpartycannotbegintofulfilitsobligationsunderthecontract.

■ whentheuseofmaterialresourcesprovidedbytheemployer,orcompliancewithhisinstructionsregardingtheperformanceofworks,threatensthelifeandhealthofpeopleorleadstotheviolationofenvironmentalorsanitaryrules,safetyrulesandotherrequirementsestablishedbylaw;and

■ intheeventoftheemployer’srefusaltoincreasethecontractualcostofworksduetoasignificantgrowthaftertheconclusionof the contractof the cost ofmaterials andequipment tobeprovidedbythecontractor,aswellastheservicesprovidedbythirdparties.


Yes, the legislation of Ukraine provides for the concept of force majeure,whichcanbeusedintheimplementationofconstructioncontracts.It is provided that, in the event of destruction or damage to theconstructionfacilitydueto force majeurebefore theexpirationoftheconstructionperiodspecifiedinthecontract,orintheeventofthe impossibility to complete the construction for other reasonsbeyondthecontroloftheemployer,thecontractorwillnothavetherighttodemandfromtheemployerpaymentforworkorpaymentfor expenses. However, the parties are entitled to provide in thecontract a different procedure for resolving the consequences offorce majeure.Force majeureisnotapplicabletotheclaimsofpartiesarisingfromthe fact that the contract hasbecomeeconomicallyunfavourable;therefore,thepartycannotsueforthisreason.However, it is provided that, in the event of a significant changeincircumstances(iftheyhavechangedsomuchthatifthepartiescouldhaveforeseenthem,theywouldnothaveconcludedacontractorconcludeditonotherterms),bywhichthepartieswereguidedinconcludingthecontract,thecontractcanbechangedorterminatedbyanagreementbetweentheparties.


Usually, third parties that are not parties to the contract are notentitledtoclaimfromoneofthepartiestothecontractifsucharightisnotprovidedfor in thecontract. Forexample, if theemployerdelegates his authority to perform technical supervision over theconstructiontoaspecialisedorganisationdesignatedassuchintheconstructioncontract,thespecialistwillhavetherighttolayaclaimto the contractor for the eliminationof identifieddeviations fromthedesignplanorotherconstructionshortcomingsmadeduringtheconstructionofthefacility.Iftheauthorityofthethirdpartytolayaclaimtooneofthepartiestothecontractisnotprovidedforintheconstructioncontract,itshalllayaclaimtothepartywithwhichithasenteredintoasubcontract,andthenthislatterpartycanlayaclaimagainsttheotherpartyundertheconstructioncontract.Forexample,iftheownerofthebuildingrevealsshortcomingsinthebuilding,ithastherighttolayitsclaimtothesellerofthebuilding(totheoriginalowner–theemployer),andthentheemployercanlayaclaimtothecontractorregardingthequalityoftheworkperformedundertheconstructioncontract.



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Disputesarisingfromacertainpartofconstructioncontractscanbetransferredbyanagreementbetween theparties forconsiderationtotheInternationalCommercialArbitrationCourtattheUkrainianChamber of Commerce and Industry (hereinafter referred to astheICAC). Inparticular, thefollowingmaybe transferred to theICAC:disputeson foreigneconomiccontracts, if thecommercialenterpriseofoneofthepartiesislocatedabroad;disputesbetweenenterpriseswithforeigninvestmentsandinternationalassociationsand organisations established on the territory of Ukraine; and/ordisputeswithotherorganisationssubjecttoUkrainianlaw.Anotherprerequisite, in thepresenceofwhich thedisputemaybereferredtotheICAC,istheexistenceofanarbitrationclausebetweenthepartiestotransferallorcertaindisputesthatariseormayarisebetweenthepartiesinconnectionwithanyspecificlegalrelations.TheproceedingsareinitiatedafterthesubmissionoftheclaimtotheICACwiththepaymentofaregistrationfee.Theparties,attheirowndiscretion,mayagreeon theprocedure for theconsiderationof thecaseat theICAC, the languageandplaceofconsideration,the law to be applied, the composition of the court and the like.In theabsenceofsuchagreement, thecourt shall review thecasein compliance with the provisions of the Law of Ukraine “OnInternationalCommercialArbitration”,theEnactmentoftheICACandtheICACRules.The termof the case’s considerationmustnot exceed sixmonthsfromthedateoftheformationoftheArbitrationCourt.TheICACPresidium,ifnecessary,hastherighttoextendthisterm.


Yes, according to the current legislation, decisions made byinternational commercial arbitration, regardless of the countryinwhich theywere awarded, are recognised and implemented inUkraine. If their recognition and enforcement are provided forbyaninternationalcontract,theirbindingnatureisgrantedbytheVerkhovnaRadaofUkraine,orviatheprincipleofreciprocity.Inordertograntapermittoexecuteadecisionmadebyinternationalcommercial arbitration in Ukraine, the claimant must submit anapplicationtotheKyivCityCourtofAppealwithinthreeyearsfromthe date the decision was made by the international commercialarbitrationifthedebtorhasaresidenceorlocationintheterritoryofUkraineorifitspropertyisintheterritoryofUkraine.Obstacles to the implementation of international commercialarbitrationdecisionsinUkrainearethedeterminationofaviolationofthearbitralproceedings,afailuretocomplywiththearbitrationagreement, or invalidity of such an agreementwhen the decisionhasnotyetbecomebindingontheparties,orhasbeenrevokedorsuspendedbythecourtofthecountryinwhichitwasadopted,orit is found that the dispute could not be referred to internationalcommercialarbitration.


UnderthejurisdictionofUkraine,thedecisionsofaforeigncourtare recognised and enforced in Ukraine if their recognition and


Whenexecutingadesigncontract,thecontractormustguaranteetotheemployerthatotherpersonsdonothavetherighttoobstructorrestricttheperformanceofworksbasedonthedesignandestimatedocumentationpreparedunderthecontract.The contractor bears absolute responsibility for projectshortcomingsanddefects insurveywork, includingshortcomingsdiscoveredlaterduringconstruction,aswellasintheprocessofthefacility’soperationbasedon thecompleteddesigndocumentationandsurveywork.Incaseofidentifyingshortcomingsinthedesigndocumentationorinthesurveywork,thecontractor,attherequestof the employer,must redesign theprojectdocumentation freeofchargeorperformthenecessaryadditionalsurveyworkandprovidecompensationforthelossesincurred.Thecontractorissubjecttocertaintimelimits;forexample,filingasuitagainsttheemployerforcompensationofdamagescausedbyprojectdeficienciescanbemadewithin10years,andifthelossestothecustomerarecausedbyillegalactionsofthecontractorthatledtodestruction,accidentsorcave-ins–30yearsfromthedateoftheconstructionfacilitybeingacceptedbytheemployer.



Generally, disputes arising from construction contracts are firstlyattemptedforresolutionthroughnegotiationsbetweentheparties.Thepartywhoserighthasbeenviolatedhastherighttoappealtoanotherpartywithawrittenclaim,whichissubjecttoreviewwithinamonthfromthedateofreceiptbytheotherparty.Ifanattemptatpre-trialsettlementhasnotyieldedanyresults,thepartywhoserightshavebeenviolatedhastherighttoapplywiththeappropriatesuittothecourts.


There is no process similar to “adjudication” in the Ukrainianlegislation;however,inadditiontoalawsuit, thepartiescanreferadisputearisingoutofaconstructioncontracttoanorderofwritproceedings or in a simplified lawsuit procedure and may use adispute resolution procedure involving a judge before the case isreviewedonthemerits.Certainrestrictions(limitationsonthedisputeprice,thegroundsforoccurrence,etc.) areestablished for theconsiderationofcasesbywayofasimplifiedlawsuitprocedureorwritproceedings.Theseprocessesaredistinguishedbytheirsimplifiedprocedureandlimited timeframe,where the case is processedmorequickly andwithasmalleramountoflegalexpensesincomparisonwiththefullprocess.Additionally, a dispute that falls within the jurisdiction of theeconomiccourtmaybereferredbythepartiestoanarbitrationcourt(permanentorarbitraltribunaltoresolveaparticulardispute(ad hoccourts))orinternationalcommercialarbitrationunderanagreementbetweentheparties.



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Preparatoryproceedingsmustbeheldwithin60daysfromthedateoftheproceedings’commencement.Inexceptionalcases,thisperiodmaybeextendedfornotmorethan30days.Theconsiderationofthecaseonthemeritsiscarriedoutwithin30daysfromthedateofstartingtheconsiderationofthecaseonthemerits.Nevertheless,inpractice,thepartiesmayviolatetheseterms.In case of a disagreement with the decision of the first instancecourt,thepartieshavetherighttoappealwithin20daysfromthedateofitsproclamation.Anappealagainstthedecisionofthefirstinstancecourtisconsideredwithin60days.Incaseof improperapplicationofsubstantive laworviolationofprocedurallawbythecourtsofpreviousinstances,thepartieshavetherighttofileacassationappealwithin20daysofthedateofitsproclamation.Acassationappealagainstjudicialdecisionsmustbeconsideredwithin60days.Inaddition,adecisionoftheeconomiccourtthathasenteredintoforce can be reviewed on the grounds of newly discovered orexceptionalcircumstances.

enforcementisprovidedforbyaninternationalcontract,thebindingnatureofwhichisgrantedbytheVerkhovnaRadaofUkraine,orviatheprincipleofreciprocity.InordertograntpermissiontoexecuteadecisionofaforeigncourtinUkraine, theclaimantmustfileapetitionwith thecourt at theplaceofresidenceorlocationofthedebtororatthelocationofitspropertywithinthreeyearsfromthedateofthedecision’sentryintoforce.


Disputesarisingfromconstructioncontractsaresubjecttoresolutionbyeconomiccourtsunderproperjurisdiction.Theproceedingsinthecourtoffirstinstanceconsistofthefollowingstages:■ preparatoryproceedings;and■ consideration of the case on the merits, which ends with a

decision.



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Aleksey Pukha and Partners is one of the leading Ukrainian law firms, with worldwide business contacts.

The headquarters of the Company is located in Kyiv, in the heart of Ukrainian business.

Aleksey Pukha and Partners cooperates with USAID, the World Bank Group and IDLO within international research projects.

The Company follows high standards of legal services and has vast experience in a wide range of industries and legal practices including agriculture, pharmaceuticals, real estate and construction, media and communication, insurance, intellectual property, banking and finance, capital market, trade, energy and natural resources, automotive, the oil and gas industry, the hotel and restaurant industry, the metallurgical industry, the primary industry, transport, the chemical and sport industries, and public-private partnerships.

Every day the Company provides legal services to international companies and individuals in Europe, North and South America, Asia, Australia and North Africa. Annually, the Company contracts with clients worldwide and from all continents. The total volume of company transactions for 2017 amounted to more than USD 100 million.

Aleksey Pukha graduated from “Yaroslav Mudryi National Law University” with a Master’s degree. Since 2009, he has been the managing partner of the law company Aleksey Pukha and Partners.

Today Aleksey Pukha and Partners Company is one of the leading Ukrainian law firms with worldwide business contacts. The Company cooperates with clients from more than 100 countries worldwide.

Aleksey Pukha is the head of the Commission in the Ukrainian League of Industrialists and Entrepreneurs. He is also a member of many professional legal organisations such as the Commission in the International Chamber of Commerce, Court of Arbitration, the Ukrainian Bar Association, the Union of Lawyers of Ukraine, European Business Association and the Taxpayers Association of Ukraine.

He specialises in corporate, global finance, investment, international trade, construction and engineering law, energy and natural resources, government contracts, public law, alternative dispute resolution, and public-private partnerships.

Aleksey PukhaAleksey Pukha and Partners21 John Paul II str., Office 416Kiev, 01042Ukraine

Tel: +380 44 528 30 94Fax: +380 44 528 30 54Email: [email protected]: http://puhaipartnery.com.ua/en/

Anna Gadiatska graduated from the Taras Shevchenko National University of Kyiv Law Faculty and received a Master’s degree in “Jurisprudence and Legal Business Consulting”.

Anna Gadiatska is a lawyer specialises in construction and engineering law, the real estate purchasing market, pre-trial and trial settlement of commercial disputes, support of international transactions, and case management in the areas of taxation and reporting, investment and customs law.

Anna Gadiatska has great experience in cases involving capital construction of commercial and residential buildings including contractual arrangement of a construction project, support of investment in construction, transaction management, obtaining licences and permits required by Ukrainian law in construction.

She is the author of numerous scientific publications concerning construction, engineering and real estate. Anna Gadiatska is also a member of the Ukrainian and international professional legal organisations.

Anna GadiatskaAleksey Pukha and Partners21 John Paul II str., Office 416Kiev, 01042Ukraine

Tel: +380 44 528 30 94Fax: +380 44 528 30 54Email: [email protected]: http://puhaipartnery.com.ua/en/



Chapter 28

Hamdan AlShamsi Lawyers & Legal Consultants Omar Kamel

United Arab Emirates

andbasicsof creating a contract; namely,Article125defines thegeneralinterpretationofacontractas:acontractisthemeetingofanofferissuedbyoneofthecontractingpartieswiththeacceptancemadeby theother party and their concordance in such amannerastoproducethelatterparty’seffectontheobjectofthecontract,whichresultsinabindingobligationoneachpartyinconsiderationof theobligationof theotherparty. Ameetingofmore than twomindsmayagree toproducea legaleffect. Article126states theobjectofacontract inaway thatparticularises themainsubjectsof any contract and in paragraph (d) opens the door widely forany other type of contracts. Article 126 states that the object ofa contract may consist of: a) property, movable or immovable,corporealor incorporeal;b)usufructof theproperty;c)aspecificactorservice;andd)anyotherthingthatisnotprohibitedbylaworviolatingpublicpolicyormorals.Article127addedmoreassurancetowhatisstatedinparagraph(d),mentionedabove,bystatingthat:anoffenceorviolationmaynotconstitutetheobjectofacontract.Additionally,Article128strictlylimitsanychangesormodificationstotheregulationofcontracts,asitstatesthatnominateorinnominatecontractsaregovernedbytherulescontainedinthislaw,andrulesexclusively applicable to certain contracts are specified in thespecialprovisionsregulatingthesame,whetherinthislaworanyother. Article 129 lists the essential elements in an agreement;thenecessaryelements for the formationof a contract are: a) themeetingofmindsofthecontractingpartiesonthemainelements;b)theobjectofthecontractmustbesomethingpossible,specifiedorspecifiable,andnegotiable;andc)theobligationsarisingoutofthecontractmusthavealicitcause.

Article874(CivilCode)statesthattheremustbeadescriptionofthe subjectmatter, a statementof the typeandextent thereof, themannerofperformance,theperiodoverwhichitistobeperformed,andtheamount tobepaid. AcontractmustnotnecessarilybeinwritingaspertheCivilCode.Article203(1)oftheCivilProceduresLaw, No. 11 of 1992 (the “Civil Procedures Law”) permits theparties to record that any dispute between them concerning theimplementationofaspecifiedcontractmaybereferredtoarbitration.Thepartiesmayalsoagree,byspecialconditions,toarbitrationofaparticulardispute.Apartywillonlybeabletoprovethatitwasagreedthatadisputemayberesolvedbyarbitrationifitproducesawrittenarbitrationagreement(Article203(2)).

Asfortendersinconstructionprojects,theusualpracticeintheUAEisthattheemployerorengineeronhisbehalfwillprovideaLetterofAwardtothecontractorwhomisselectedafterthetender,whichwill confirm his appointment and create a contract. The generalpracticethereafteristhatthecontractorandemployerstampsand/orsignsafullcontractbetweenoneanother.



Constructioncontractformsvary indifferentsectorsandbetweencontractors.Smallerandmorepersonalconstructioncontractswillgenerallybedraftedbytheengineer/consultantratherthanlawyers,andmid-sizeandlargeconstructionprojectsmaygenerallyapplyaFIDICcontract(withamendmentstothestandardFIDICcontract)orotherwiseaspecific,independentcontractverysimilartothatofFIDIC.There is a very small amount of design and build contracts usedin theUAE. Designandbuildcontractscansometimesbefoundindevelopmentprojectswherethecompaniesarerelativelycloselybound by many commercial arrangements or are affiliates or inthe case of specialised contractors who perform special projects.DesignandbuildcontractsgenerallyfollowFIDIC.Design-onlycontractsaregenerallyhandledbytheproject’sengineerandconsultant.Managementcontractinginitsstrictestformdoesnotexistbecausethemaincontractorisalwaysresponsibletowardstheemployerandtherightsofsubcontractorsarelimited;therefore,itmaybethecasethatthemaincontractorappointssubcontractorsforthewholescopeofworksanditispracticallynotnecessarilytohaveemployees.However,inmostinstances,themaincontractorsretain the civil and structural scope (unless it is specialised) andsubcontracttheotherworksinaprojecttosubcontractors.


Articles125–129and199–206oftheUAECivilTransactionsLaw,No.5of1985(asamended),setsouttheessentialunderstandings

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retentionmoneytobereleasedatcompletion,andthebalanceuponexpiryofthedefectsliabilityperiod.


Theuseofperformancebondsisverycommonand,whenitcomestojointventuresorspecialprojectvehicles,directagreementsandcorporateguaranteesarecommonpractice.


It is possible for contractors to make use of a clause to retainownership over the goods and supplies on-site and by contracttheycaninsertclausesstatingthattheownershipofthegoodsshallremaintheirsuntilfullpaymentismade.



Supervision of construction contracts on behalf of employers iscommon practice, but the law does not specifically regulate theimpartialityofengineers.Theemployercansometimesalsoappointa project manager, which is common for larger projects. Theengineer/consultant is governed by rules within the municipalityand the culture in the UAE that they act impartially and makeimportantassessments,oneofwhichistheactualprogressofworks,whichultimatelydecidestheamountthatthecontractorcanclaim.Theengineer/consultant ismentioned incontractsand is requiredto make decisions as to the progress of works and manage therelationshipbetweentheemployerandthecontractorinanimpartialmanner.


ThisarrangementisnotexpresslyprohibitedbythelawoftheUAEandthepartiesarefree to includesuchprovisions inconstructioncontracts,andtheywillbeenforceable.ThefreedomtocontractisrecognisedinArticle257(CivilCode),buttheprovisionsapplicableto contractual conditions will apply to these arrangements.However,mostpay-when-paidprovisionsarefoundinsubcontractsratherthanwithemployers.


This concept is known in the UAE, and is widely practised.Generallyinlaw,inordertobebinding,thepurposeandtermsmustbe unequivocal and the circumstances must leave no doubt thatthereismutualconsentwithregardtothesubjectmatterinquestion(Article132(CivilCode)).


NeithertheCivilCodenoranyspecificlawprescribesanyinsurancetobeinplacewhencarryingoutconstructionworks,butthepartiesare free, subject to the law, toagree thecontentof theircontract.Themostcommonformsofinsuranceunderconstructioncontractsin theUAE areConstructionAllRisk (“CAR”) and ProfessionalIndemnity (if there are designs provided by contractor). Thecontractorisresponsibleforanydeathsthathappentoitsemployeesonthesitebylaw.Withregardtohealthinsuranceforworkers,theDubaiHealth InsuranceLawNo.11of2013 is applicable and ismandatory,andthelawrequiresallnationalsandresidentswithaDubaivisatohavehealthinsurancecover.


The general requirements (i.e. formation, etc.) applicable tocommercial transactions, which include construction contracts,are covered by the Civil Code. All labour relations betweenemployersandemployeesaregovernedbyFederalLawNo.8of1980onRegulationofLabourRelations(the“LRA”).Employersare required to provide adequate protective equipment and havemeasurestoprotectemployeesagainstthedangersofaccidentsintheworkplace. Themunicipality is themain body that regulateshealth and safety on construction sites and can apply fines andsuspendacontractor’slicenceifthecontractorisfoundtonothavetherequiredhealthandsafetymeasuresrequiredbythemunicipality.EmployeesdonotpayincometaxintheUAE.


It is common practice in the UAE for employers to withholdretentionmoney. An amount equal to 10% of the contract priceis commonly reserved for retention. The parties are at liberty toagree the termswhichmust bemet prior to the retentionmoneybeingreleased.Inmostinstances,theusualpracticeisforhalfofthe

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contractormaybeentitledtoadditionalpaymentwhereitisproventhatapartofthedelayisnotconcurrent.


Thisissueisnotspecificallyaddressedbylegislation.Unlessthereisanexpressprovisiontothecontraryinthecontract,wherethereisremainingfloatintheprogrammeatthetimeofanemployerriskevent,itisanticipatedthatanextensionoftimewillgenerallyonlybegranted to the extent that the employer’s delay is predicted toreducetobelowzeroofthetotalfloatontheactivitypathsaffectedbytheemployer’sdelay.


Thegeneralruleisthatclaimsunderaconstructioncontractmustbebroughtforwardorclaimedwithinthetimelimitofsevenyears.In cases of structural defects (whether in the case of collapse ofthestructure,oradefectthreateningitsstability),thecontractorisresponsiblefor10yearsafterhandingovertheworks.Thedesigneris jointly liable with the contractor as above, unless he has notsupervised construction, in which case he will remain liable fordefectsinthedesign.


The consultant and contractor will be held jointly liable if thebuilding or installations collapse (totally or partially), or if thedefectthreatensthestabilityandsafetyofthebuilding,whetherasa resultofgroundconditions,or if theemployerconsented to theerectionofthedefectivebuildings.Thecontractorandconsultantwillhaveappointedasoiltestingcompanywhomaybefoundtoberesponsibletoo.


Theemployergenerallybearstherisk;acontractorcanberelievedfromliability,intheabsenceofanyagreementsotherwise,ifhecanprove that the change in law resulted in a loss or delay fromhispart.However,theemployerwillusuallybearthisriskunderFIDICcontracts.


The personwho owns the intellectual property in relation to thedesignisthepersonwhocreatedthedesign;inmostinstancesthatisthearchitect.


The contractor is entitled to suspendworks inmost constructioncontractsandinlaw(unlessstatedinacontracttothecontrary).In


Liquidated damages are enforceable in the UAE. According toArticle 390(1) (Civil Code), the partiesmay agree the amount ofcompensation inadvanceforabreachofcontract. Thecontractorcanfindhimselfpayingsumsthataremuchlargerthantheactuallosssufferedand,insuchanevent,andinaccordancewithcivillaw,hemayapplytothecourtsandthecourtmay,ontheapplicationofeitherparty(i.e.theemployerorthecontractor),varysuchagreementsoastomakethecompensationequaltotheloss(i.e.increaseordecreasetheamount),andanyagreementtothecontrarywillbevoid.



Generally,theemployerisgiventherighttovarytheworks–almostallemployersinsertsuchaclauseandconstructioncontractorsaremore likely tohavesuchaclause,allowing theemployer tohavethe absolute power tomakevariations. In the absenceof such aprovision,anyvariationwouldbeacceptedbythecourtssolongasitdoesnotcreateanunreasonableburdenonthecontractor.


Workmaybeomittedfromthecontract,buttheexactcircumstancesunderwhich theemployermayexecute theworkshimself,orgeta thirdparty todo so, aregenerallydeterminedby the termsandconditionsofthecontract.Ifthecontractisalumpsumcontract,thenincertaincases,evenifworksareomitted,theymaybeimpliedundercertaincircumstances.


Terms are not readily implied in contracts and if thewording ofa contract is clear, an alternative interpretationmaynot be giventoArticle265(1) (CivilCode). However, in theabsenceof clearwording, an examination of the mutual intention of the parties,the nature of the transaction, and the trust and confidencewhichshouldexistbetweenthepartiesinaccordancewithcustominsuchtransactions,willbemadeaccordingtoArticle265(2)(CivilCode).


Generally,concurrencyofdelayingeventswillleadtoanextensionof time being awarded, but without additional payment. The



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Aprescribed level of duty of caremay bemade by contract andcanbeenforcedagainstthecontractor.Thelawdoesnotprovideadefinitedutyofcare.


TheCivilCodestatesthatthebasicprincipleincontractsisthatthepartiesmusthavereachedanagreementregardingtheirobligations.TheCode goes on to state that the primary rule of interpretationis that words should have their true meaning interpreted and awordmaynotbe construedfigurativelyunless it is impossible togive it its directmeaning. TheCivilCode states that there shallbenoscopeforinterpretationofclearwords.TheCivilCodealsostatesthatifthereisscopeforaninterpretativeconstructionofthecontract, an enquiry shall be made into the mutual intentions ofthepartiesbeyondtheliteralmeaningofthewords,andguidancemaybesoughtinsodoingfromthenatureofthetransaction,andthetrustandconfidencewhichshouldexistbetweenthepartiesinaccordancewiththecustomcurrentinsuchdealings.


Any contractual condition which conflicts with a mandatoryprovisioninthelawisunenforceable,suchasprovisionsexemptingthecontractororthedesignerfromliability,orprovisionslimitingsuchliability.Therefore,anytermaimingtolimittheliabilityofapartyinacontractwhichiscontrarytotheprovisionsofthelawisunenforceable.


Thecontractor and thearchitect are jointly liable for any totalorpartial destruction within 10 years of the buildings they haveconstructed. If thearchitectdidnotsupervise theconstructionoftheworks,hisliabilitywillbelimitedtoanydefectsintheplansforaperiodof10years.



Disputes in the UAE are generally resolved through UAE-basedarbitrationcentresforconstructioncontractsorthroughthecourts.


Adjudicationisnotregulatedbylegislationin theUAE. It isnotanuncommonmethodofdisputeresolution,butthepartiesmaynotbeabletoenforceanadjudicator’sawardthroughthecourts.There

mostinstances,thecontractorcansuspendworksfornon-paymentorbreachofcontractbytheemployer.


Thepartiesdonotneedtodetailtheconditionsforterminationinacontract,asisthecaseinacommonlawjurisdiction,asthegroundsfor terminationaresetout in theCivilCode. It ispermissible toexplicitly agree that a contract will be considered automaticallycancelled if a party fails to perform its obligations under thecontract.TheCivilCoderequiresthat,unlessthepartieshaveagreedotherwise,noticeofcancellationmustbegiven.Furthermore,ifoneofthepartiesdoesnothonourhiscontractualobligations,theotherpartymay,aftergivingnotice to thedefaultingparty, require thatthecontractbeperformedorcancelled.Thejudgemayalsoorderspecificperformance,deferperformanceorordercancellationandpaymentofcompensationinanycase,ifappropriate.


Force majeure is an established concept in the UAE. If force majeure makes the performance of the contract impossible, thecorresponding obligation shall cease, and the contract shall beautomaticallycancelled.TheCivilCodealsonotesthat,inthecaseofpartialimpossibility,thepartofthecontractwhichhasbecomeimpossible toperformshallbeextinguished. It isnotpossible tosuccessfully argue that a contractwhichhasbecomeuneconomictoperformconstitutesforce majeure;however,suchacircumstancecanallowforajudgetoamendtheperformancethatisrequiredorotherwiseamendtheamountofcompensationforsuchperformance.


Most commercial termsmay not be enforced by the new ownerunlessthird-partyrightsarespecificallycreatedinthecontract.Inrespect of obligations created by law, some of these obligationsagainstacontractormaybeclaimedbyanewownerintheabsenceofanyassignmentofthetermsofacontract.


Set-offmaybemandatory,occurbyoperationoflaw,byagreementbetweentheparties,orjudiciallybyvirtueofanorderofthecourt.Foramandatoryset-offtoapply(thatis,byoperationoflaw)eachof the parties must be in debt to the other, the obligations mustbeof the samekind anddescription,must be equallydue andofequalstrengthorweakness,andtheset-offmustnotprejudicethirdparties,irrespectiveofthecausegivingrisetotheobligation.



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enforcearbitrationawards if theawarddoesnot complywith theUAElawsandrequirementsforanarbitrationawardtobeenforced.


Ingeneral, thetesttoenforceforeignjudgmentsishigherthanthatofenforcingforeignarbitralawardsasthereisnotreaty,suchastheNewYorkConvention,thatgovernsthisissue.TheUAEmayapplyaforeignawardfromaforeigncourtsolongastherewasnojurisdictionfortheUAEtobeginwith;asanexceptionUAElawprovidesthatthepartiescanopttoresolvetheirdisputeinothercourts.


ThecourtsoftheUAEareeasilyapproachableandanypartymayregisteranyclaimtheywish.Thefirstinstancecourtsmaytakeuptoone-and-a-halfyearstoresolveadisputeandprovideajudgment;however, in very rare circumstances, they may take longer. Adecisionbythefirstinstancecourtscanbeappealedandtheappealcourtsmay issue a decision in the same amount of time or less.Therefore,appealcourtdecisionscanagainbeappealedonpointsoflawtothecourtofcassationorthesupremecourts.

areinstanceswheredisputesareresolvedbyadjudicationundertheauspicesoftheInternationalChamberofCommerce,ortheDisputeAdjudicationBoardasestablishedundertheFIDICcontracts.Iftheagreementstatesthatanadjudicator’saward,orthatoftheDisputeAdjudicationBoard,isbindingontheparties,thenfailuretocomplywiththeawardmaybeconsideredtobeabreachofcontract.


Almostallconstructioncontractsprovideforarbitrationasadisputeresolutionmechanism;arbitrationclausesgenerallyrefertorulesofacertainarbitrationcentre. Themostpopulararbitral institutionsare the International Chamber of Commerce (“ICC”), the DubaiInternationalArbitrationCentre(“DIAC”),theDubaiInternationalFinancial Centre – London Court of International Arbitration(“DIFC-LCIA”),andtheAbuDhabiCommercialConciliationandArbitrationCentre(“ADCCAC”).


TheUAE acceded to theNewYorkConvention in 2006withoutreservation.TheUAEcourtsenforcearbitrationawardsandintheveryunlikelyevent,thelawofferscertainprotectionsandwillnot



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Mr. Kamel has a Master’s degree in Commercial Law and has been a member of Jordanian Bar since 2001. He is an experienced corporate counsel, possessing strong post-qualification experience in commercial practices in MEA and is profoundly skilled in corporate and restructuring matters, investments, corporate actions, intragroup transactions and service arrangements. Mr. Kamel also specialises in general mergers and acquisitions, strategic transactions and corporate restructurings, draft documents incidental to formation and ongoing business operations of corporations, partnerships, and limited liability companies. He advises on corporate governance matters (including resolutions, preparing board and committee meeting materials and agendas and maintaining corporate records), and has experience in cross-border transactions, real estate and commercial finance transactions covering licensure, development and supply agreements.

Omar KamelHamdan AlShamsi Lawyers & Legal ConsultantsOffice 1611, 16th FloorAl Manara Tower, Al Abraj StreetBusiness Bay, DubaiUnited Arab Emirates

Tel: +971 4 346 9262Email: [email protected]: www.alshamsilegal.com

Hamdan AlShamsi Lawyers & Legal Consultants was established in 2011. It has since become a name synonymous with success and is well-known in the legal circuit. The success of the law firm is due to its specialisation in advising on commercial issues, insurance, due diligence, family law, intellectual property law, banking, companies law and other matters locally, and its dedication towards offering unparalleled, high-quality and culturally sensitive legal services, while adhering to the highest standards of integrity and excellence.

With nearly a decade of successful litigation experience across the United Arab Emirates, Mr. Al Shamsi has built one of Dubai’s most reputable and respected law practices. He is widely regarded as a top litigator in the Dubai Courts, with extensive experience in corporate, banking and finance and insurance law. Mr. Al Shamsi advises both local and international companies and governmental entities in cases involving complex litigation. He appears regularly before the Appeals Court and the Court of Cassation, as well as UAE’s Federal Supreme Court. Mr. Al Shamsi has been described as being “…very thorough and highly efficient – Hamdan faced each challenge with strategy,professionalism and confidence which ultimately resulted in oursuccessful outcome”. It is no surprise that he has been awarded as one of the most influential young leaders in the Middle East and the young achiever award, amongst many more.

Hamdan Al ShamsiHamdan AlShamsi Lawyers & Legal ConsultantsOffice 1611, 16th FloorAl Manara Tower, Al Abraj StreetBusiness Bay, DubaiUnited Arab Emirates

Tel: +971 4 346 9262Email: [email protected]: www.alshamsilegal.com



Chapter 29

Oles, Morrison, Rinker & Baker LLP

Douglas Stuart Oles

Alix K. Town

USA

typically participate on a complex construction project, althoughthatbalancecaneasilybelostwhentheformsareheavilymodifiedtofavourtheinterestsofaparticularparty.In the U.S., construction management contracting is typicallyhandledbyaconstructionmanager.Someofthem(“atrisk”)alsoholddirectagreementswithtradecontractors,whileothers(“notatrisk”)merelyaskasadvisorstoanemployer(usuallyreferredtoasthe“owner”intheU.S.).


California, themost populous state and generally a common lawjurisdiction, and the state of Louisiana, a civil code state, havebothdevelopedcivilcodesthatincludemanyprinciplesapplicableto construction law. Purchase of equipment and other goods forincorporation into a constructionproject is typically governedbythe Uniform Commercial Code (“UCC”), which also resemblesa civil law approach. TheUCCacts as a gapfiller for contractsinvolvingsalesor security interests ingoodswhen theapplicablecontractsdonotaddressspecificissuessuchasimpliedwarrantiesorremedies.Althoughthedifferentstateshavestatutesaddressingvarious specific aspects of construction contracting,most of theirlawapplicabletoconstructioniscreatedthroughthecommonlawsystemofreportedcases.Whereastatelacksapplicablecaselawonaparticularsubject,itscourtsoftenlooktofederalcaselawortodecisionsinneighbouringstates.UnderU.S.common law,abindingcontract typically requiresanoffer, acceptance, and consideration. Consideration can be veryminimal (including themere exchange of reciprocal obligations).Mostrequestsforproposalarewrittenasinvitationsfortenders,sothattheydonotconstituteoffersinthemselves.Employerstypicallytreat the tenders as offers and try to reserve broad discretion indecidingwhichone(ifany)toaccept.Thestateshavevariousrequirementsastowhichkindsofcontractsmustbeinwritingtobevalid(so-called“statutesoffrauds”).Sometermscanbeimpliedfromindustrypracticeorfromwhateveracourtdeems tobe“reasonable”,butkey terms suchas scopeandpricemustusuallybeinwriting.Inclosecases,courtswilloftenfindavalidcontractwhenevertheyperceiveclearmutualintenttoenterintoabindingagreement.Moreover,acceptancecanbebyallowing



With itsfifty (50) separate states, theUnitedStatesoffersawidevariety of contract types. Before the 1980s, therewas a generalpreference forfixed-pricedesign-bid-build contracts, basedon anemployer advertising a fully completed set of design documents.Time-and-materials arrangements have also long been used,especially where it is difficult to estimate a fixed price or whenconstructionmustbeginbeforethereistimetocompleteadesign.In recent decades, however, statutory changes have facilitated amuch increaseduse of design-build contracting and its variationssuch as engineer-procure-construct (EPC) contracting. Theevolvingtechnologiesusedinconstructionhaveledtoanincreaseduseofdesign-buildcontractinginspecialtytrades.Althoughpublic-privatepartnerships(P3)andIntegratedProjectDelivery(IPD)havehadarelativelyslowstartintheUnitedStates,theiruseseemstobegraduallyincreasing. Nonetheless,manysegmentsoftheU.S.construction industryremain largelyunfamiliarwith thoseprojectdeliverysystems.ThereisnostandardformofconstructionagreementintheUnitedStates.Thereare,however,somepublishedformsthataregenerallyrespected and widely used. Federal construction projects aregenerallygovernedbytheFederalAcquisitionRegulation(“FAR”),which is essentially a collection of individual clauses that arecombinedintoasinglecontractasapplicable.Onlocalgovernmentprojectsandprivateconstruction,theGeneralConditionsandotherforms published by theAmerican Institute ofArchitects (“AIA”)are probably themost widely used. Other well-known suites ofcontract forms are published by ConsensusDocs, the EngineersJoint Contract Documents Committee (EJCDC) and the DesignBuildInstituteofAmerica(DBIA).Thesepublishersallofferformsfor design agreements, prime construction contracts, constructionsubcontracts,andotherpurposes.Alloftheseformsmakeaneffortto achieve a degree of balance between the various parties that


USA

Policiescommonlyincludewaiversofsubrogationthatpreventaninsurer from seeking indemnity from other parties on the projectwherealossoccurs.


(a) Many aspects of the construction process are governedby government statutes and regulations, and there isconsiderablevariationbetweenthoserulesamongthevariousstates. Government contracts generally require so-called“MillerAct” bonds, giving security for both payment andperformance.Contractorsarealsorequiredtoholdbusinesslicences and construction licences in their particularfields.Contractors on private projects typically have lien rights,giving them a security interest in the land on which theyconstruct improvements, and there are many regulationsgoverninguseandimproperreleaseofhazardoussubstances.

(b) IntheU.S.,labourrelationsbetweenworkersandemployersare primarily governed by federal statutes and regulations,creating substantial uniformity between the states.ExamplesincludeTitleVIIoftheCivilRightsAct,theAgeDiscrimination in Employment Act, the Immigration andNationalityActof1952,andtheAmericanswithDisabilitiesAct.MinimumwageratesareestablishedbytheWageRatesRequirements(formerlyDavis-BaconAct)andotherlaws,asarerulesforpayingpremiumsforovertimelabour.Separateunionagreementsoftengovernthebenefitsthatmustbepaidtoconstructionworkersortotheirlabourunions.

(c) In the U.S., most taxes are assessed either by the federalgovernment or by the individual states. State taxes varyconsiderably. There is no federal sales tax or VAT, butmoststateschargesalesandexcisetaxesthatapplytomanyconstruction projects. The federal government chargesincome tax on individuals, as do most state governments.Thefederalgovernmentalsochargesacorporateincometax,although itwassubstantially reduced in2018. Thefederalgovernment also charges taxes to support Social Security(retirement), Medicare (medical care for seniors), andunemploymentinsurance.Municipalgovernmentsmayaddtheirownsalestaxes,propertytaxesandfueltaxes,andNewYorkCityhasitsownincometax.

(d) Healthandsafetyareheavilyregulated,bothatafederalandstatelevel.ThefederalOccupationalSafetyandHealthAct(OSHA)and its implementing regulations areprobably thebestknown. Individual stateshave theirownoccupationalsafetylaws,andthefederalJonesActhasspecificremediesforinjuriesoccurringduringworkonashiporbarge.


U.S. employers are generally entitled to withhold a portion of acontractor’spriceassecurityforfinalcompletionofaconstructionproject. Suchwithholdingmustbeauthorisedbycontract, and itistypicallyintherangeof5%to10%ofthecontractprice.Manycontracts provide that the percentage of retention declines aftertheworkisat least50%complete,andit isoftenpossibleforthecontractor to obtain release of the retention balance by posting aspecial bond as substitute security for the employer. It is notcommontoallowretentionafterfinalcompletion,e.g.,assecurity

worktoproceedevenwithoutasignedagreement.Iftheevidenceindicatesthattherewasno“meetingoftheminds”withregardtoessentialcontractterms,however,abindingcontractisunlikelytoexist. Therearevarious legal theories inwhichapartyperformswork for another in good faith reliance on what it reasonablyunderstood as anoffer to contract by another party (e.g., impliedcontract,quasi-contract,quantum meruit,andequitableestoppel).


In theU.S.,acourt is likely todetermine theenforceabilityofanagreementbasedonitssubstanceratherthanonitstitle.Aletterofintent,however,maybeunenforceable if itappears tobenothingmorethananagreementtoagree.Ifpartiesintendtohaveabindingagreement, it ismore customary to record certain key terms in a“memorandumofunderstanding”or“memorandumofagreement”,and leave the details for later negotiation. It is not unusual forpartiestoenterintoapreliminaryagreement,contingentupononeparty later being able to confirm that it can complete the desiredtaskwithinaspecifiedcostrange.Itisalsocommon,however,forthe employer to promise at least some level of compensation fora contractor to perform under the initial preliminary agreement,especiallyifitrequiressubstantialeffort.Anothercommonlyused technique isa limitednotice toproceed,allowing certain preliminary and/or long lead activities to beginwhile the parties continue negotiating to price the balance of theplannedproject.


ThereisaconsiderablevarietyofinsuranceproductsandinsuranceapproachesonU.S.projects.Projectstypicallyrequirecontractorstoprovidecoveragesforgeneralliabilityandexcessliability,whichcoverpersonalinjury,deathandpropertydamage.Applicablelawsalso typically require insurance for losses caused by automobilesand for worker’s compensation. It is also common to requireinsurance against environmental pollution and coverage forcompleted operations. Employers often procure builder’s risk orall-riskinsurancecoveringdamagetotheprojectasitisconstructed.Onsomejobs,thereisalsoinsuranceagainstbreachesbylowertiercontractors(Subguard).To avoid the cost associated with multiple tiers of contractorsprocuringoverlappingpolicies, it is common forprojects tohavea single consolidated Contractor Controlled Insurance Program(CCIP)orOwnerControlledInsuranceProgram(OCIP).Whereacontractcalls forarchitecturalorengineeringservices, ittypicallyrequiresprofessionalliabilityinsurance.Policiesvaryinmanydetails, includingself-insuredordeductibleamounts,policylimits,andexclusionsfromcoverage.Somelevelofinsuranceistypicallyrequiredasalegalconditionofholdingacontractinglicence.

Oles, Morrison, Rinker & Baker LLP USA


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There are relatively fewownerson commercialprojectswhohavesufficient in-house experience to manage a complex constructionprojectwith their own personnel. Therefore, as noted in question1.1 above, many employers hire a constructionmanager who canprovide that experience. Construction managers typically do notowe any duty to act impartially between employer and contractor.Traditionally, however, the construction manager role in the U.S.wasoftenfilledbyaprojectarchitectorengineer.Forexample,theAIAcontractformslongrequiredthattheemployer’sarchitectwouldadjudicateclaimsbetweentheemployerandcontractor,andRule2.4oftheNationalCouncilofArchitecturalBoardsrequiresanarchitecttoactimpartiallywheninterpretingcontractdocumentsbetweentheotherparties. Manystateshaveadoptedsomeformof this rule intheirCodesofProfessionalResponsibilityforarchitects,andasimilarstandard is included in theAIAformB101designcontract. Manycontractors nonetheless felt that architects and engineers tended tofavourtheemployers(whowerepayingfortheirservices).Inrecentyears,architectsandengineershaveindicatedincreasingreluctancetogetinvolvedindisputesbetweenemployersandcontractors,leavingthatroletodisputereviewboardsandotherindustryneutrals.


It is common to see clauses indicating that the employer’s primecontract payments are a “condition precedent” for lower tieredcontractorsgettingpaid (“pay ifpaid”),and it isalsocommon tosee clauses indicating that lower tier contractors should wait togetpaidaftertheprimecontractorispaid(“paywhenpaid”).Theenforceabilityof“payifpaid”clauseswaschallengedsuccessfullyin California on the theory that it conflicted with statutory lienrights.Wm. R. Clarke Corp. v. Safeco Ins. Co.,15Cal.4th882,938P.2d372,64Cal.Rptr.2d578(1997). Manystatecourtshavenotyetspecificallyaddressedthisissue,butitseemslikelythata“payifpaid”clausewillnotoverrideacontractor’sstatutorylienrightsorrightsunderprescribedpaymentbonds.Thisisbecausecourtstendtosympathisewithlowertiercontractorswhohavenoknowledgeorinformationabouttheemployer’sabilitytopayfortherequiredwork.Inmanyinstances,however,asubcontractcanvalidlyrequirethelowertiercontractoratleasttowaitareasonabletimesothattheprimecontractorcanpursuepaymentfromtheemployerbeforetheprimecontractorisrequiredtopayforthesubcontractedservices.In federal contracts, FAR 52.232.27 generally requires primecontractors to pass progress payments through to subcontractorswithin seven days after receiving money from the FederalGovernment. State governments generally have similar “promptpayment”statutesfortheirownprojects.Insomestates,thereisalsoa“stoppayment”law,allowinganunpaidsubcontractortointerruptemployer payments to a prime contractor who is failing to passthroughmoneywhenrequiredtodoso.

for performance of post-completion warranty claims that havenot yet arisen. For specialty contractors performing early stagesofwork(e.g., foundations,shoring,orgroundimprovement), it iscommontoprovideforreleaseoftheirretentionwhentheirworkisdone,ratherthanholdingbackmoneyuntilamuchlaterdatewhentherestoftheprojectiscompleted.


Performance bonds are commonly used in the United States,and most contractors have established relationships with suretycompanies so that they are prepared to provide bonding whennecessary. Banks are not typically involved in providingperformancebonds,andlettersofcreditaremuchlesscommonasprojectsecuritythaninmanyothercountries.Whereperformancebonds are required,U.S. employers also typically requirepostingofpaymentbonds(likethe“MillerAct”bondsonfederalcontractsandthesimilar“littleMillerAct”bondsonstatecontracts).Formsofbondsaregenerallynotprescribedbylaw,althoughsomeforms(liketheonespublishedbytheAIA)arewidelyusedandcontractsoftensetspecificrequirementsforthedocuments.Suretybondsongovernmentprojectsmayneedtocomefromgovernment-approvedsureties, and contracts often prescribe certain minimum “rating”levelsfortheissuerofbonds.Parentcompanyguaranteesareusedonmanyprivateprojectsandonsomepublicjobs.Thereisnoconsensusstandardformforsuchguarantees.


If a commercial contract is silent as to ownership of deliveredmaterialsandequipment,thecontractor’sownershiprightsinthose“goods” are likely to be governed by the Uniform CommercialCode. On most commercial projects, however, prime contractsandsubcontractsbothprovidethattitlepassesuponinstallation(oreven at the time of being stored at the site). The normal rule isthat titlepassesno later than the timewhenacontractor receivespaymentfordeliveredgoods,althoughthecontractoroftenretainsliability for protecting and insuring the goods until the employertakesbeneficialoccupancyoftheproject. Ifacontractordefaultsonitsobligations,theemployertypicallyreservesarighttotakethecontractor’smaterialsandequipmentasneededtocompletethejob.Thecontractor’spaymentsecurityisprotectedinotherways,suchasstatutorylienrightsand/orpaymentbonds.



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mechanismusedtopricetheadjustment.Variationsnormallyhavetobeexercisedingoodfaith,andanemployermaybeconstrainedfromluringcontractorsintosubmittingtendersonabroadscopeofworkandlaterusingdeductivechangestoremoveonlytheeasiestor most profitable portions of the scope. However, changes onpublicprojectsarenot required tobesubmittedforpublicnotice,andtheygenerallycannotbeusedtoarguethatadifferentcontractorshouldhavebeenawarded theoriginalcontract. If achange isacardinalchange,however,a third-partycontractormaybeable tochallengethechangeandarguethat thechangeitselfshouldhavebeen submitted for competition,but theoriginal contractwill notbedisturbed.Most contractsprovide that theparties shouldendeavour topricevariations by mutual agreement. Some contracts may specifyformulas for pricing costs andmark-ups on variations, and somemayincludeunitpricingand/orequipmentratesthatcanbeusedforthatpurpose.Othersmaysetforththatintheabsenceofagreement,additivevariationswillbepricedonatime-and-materialsbasis.Manycontractsprovidethatifworkisdeletedthroughavariation,thecontractormaynotrecoverlostprofitontheworkthatwasnotperformed. Inother cases, however, courtshaveheld thatwheresomeworkisdeleted,thecontractormaybeentitledtoahighermark-upontheundeletedscopeinordertoobtainequitablecompensationforitsinabilitytospreadlearningcurveandmobilisationcostsoveralargervolumeofwork.


Whereanitemofworkisunintentionallyomittedfromacontract(e.g.,a“scopegap”),employersmaytypicallyadditbyissuingavariationasachangeorder(seequestion3.1above).Alternatively,theemployermaygenerallyperformtheomittedworkwithitsownforcesorwithanotherprimecontractor.Employerstypicallyrequireintheiragreementsthateachprimecontractormustcoordinateitsworkwithotherprimecontractors(ifany),anditisnotuncommonforemployers tosupplysomeof themajorequipment themselvesto avoid paying the usual mark-ups on having it supplied by acontractor.


IntheU.S.,everycontractpartyowesanimplieddutyofgoodfaithand fairdealing. Asacorollary to thisduty,partiesare typicallyheldtooweanimplieddutythattheywillnothinderordelayeachother.An employer who provides plans and specifications for use inconstructionimpliedlywarrants that theyaresuitableforuse,andemployersaretypicallyheldresponsibleforerrorsandomissionsintheircontractdocumentsunlessthecontractorassumesresponsibilityfor reviewingandcompleting thedesignasadesign-builder (andeveninthatcasethecontractormaybeabletoplacesomedegreeofrelianceontheemployer’spartialdesignand/orsiteinformation).Manycourtshaveheld thatanemployerowesan impliedduty todiscloseany“superiorknowledge”aboutthesiteortheprojectthatacourtfindsshouldhavebeendisclosedtothecontractor.Whenfurnishingmaterialsorequipmentforaconstructionproject,the seller typically owes implied duties that the goodswill be of“merchantable” quality and that they will be reasonably fit fortheir intendedpurposes. SeeU.C.C.§2-314,315. Such impliedwarrantiesmay,however,effectivelybedisclaimedbycontract.


Liquidated damages are very widely used on U.S. projects todeterminethepricethatacontractorwillpayforunexcuseddelaysin completing its work, especially where it will be difficult toforecast theemployer’s resultingfinancialdamages. When likelydelaycostsareunusuallyhigh(e.g.,fromhighrevenue-producingfacilitieslikepowerplantsandcasinos),liquidateddelaydamagesarealsousedtocapmonetaryliabilityfordelaybecauseitwouldbedifficult to attractfixedprice tenderswithout suchassurances.Employerswillgenerallybeunabletoenforceliquidateddamagesthatareheldtobeapenalty,i.e.thatdonotrepresentareasonableforecast of fair compensation for anticipated delay-related costs.Thereasonablenessof liquidateddamages is typicallydeterminedas of the time of contracting, rather than later when a breachoccurs. Liquidated damages are sometimes invalidated when acontractorcanshow that theemployersufferednoactualdamageduetoadelay(e.g.,damagesassessedaftertheemployerhastakenbeneficialoccupancyofthefacility),andliquidateddelaydamagesaregenerallynotchargeableifanemployerhascausedconcurrentdelaysduringthetimeperiodatissue.Liquidateddamagesarealsousedtodeterminecontractorliabilityfor other types of breaches. On power plants, for example,liquidated damages are typically used to limit liability based onfailuretoachievekeyperformanceguaranteessuchasheatrateandoverallpoweroutput.Whenanemployerorprimecontractagreestoliquidateddamagesfor delay or for some other breach, those damage rates typicallypreclude a separate claim for “actual” damages arising from thesamebreach.Ifliquidateddamagesaretiedtospecificmilestones(e.g., mechanical or substantial completion), the employer isunlikelytohavearightofclaiming“actual”damagesforfailuretoachieveothermilestones.Althoughliquidateddamagesarelikelytobetheonlymonetaryliabilityforthespecifiedbreach,however,theytypicallydonotprecludeexerciseofothernon-monetaryremedies(e.g.,directedaccelerationand/ordefaulttermination).



Almost every construction contract contains language giving theemployera right to increaseordecrease thecontractor’sscopeofworkbyissuingawrittenvariation,normallycalleda“changeorder”in theU.S. Where the parties cannot agree on such a variation,employers often reserve a right to issue a unilateral directive toachievethevariation.Thereare,however,normallysomelimitsontheexerciseofthispower.Ifitresultsinfundamentallychangingthe nature or scope of work, it may be treated as a “cardinalchange”, i.e. essentially abreachof contract by the employer. Amajor deletion may also be treated as a partial termination forconvenienceratherthanadeductivechange,whichmayaffectthe



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Statelawstypicallyincludea“statuteofrepose”,settingthenumberofyearsinwhichaconstruction-relatedclaimmustaccrue(i.e.thetime inwhich theymustgenerallybediscovered). After a claimhasaccrued, stateshave separate statutesof limitation thatdefinethenumberof years inwhich thediscovered claimmust befiled(in court or arbitration). Some states may also allow extendedperiodsinwhichfavouredplaintiffs(e.g.,residentialcondominiumpurchasersand/orschooldistricts)mayassertclaimswithoutbeingrejectedasuntimely.Some construction contracts and agreements with insurers orsuretieswillspecifyshortertimelimitsformakingclaimsthantheperiodsallowedunderstatestatutes.Itiscommonforconstructioncontracts to specify that contractor claimsneed tobe assertednolaterthanthereceiptoffinalpaymentfromtheemployer.


MostU.S.commercialconstructioncontractseffectivelytransfertheriskofunforeseensubsurfaceconditionstotheemployer,assumingthattheemployernormallyhasmoretimeandopportunitytostudytheground thatwillbeexcavated. This is typicallyhandledbyaDifferingSiteConditionsclause,ofwhich the leadingexample isthe federal clause at FAR 52.236-2. A Differing Site Conditionclause typically allows compensation if a contractor encounterslatentsiteconditionsthatdiffermateriallyfromthoseindicatedinthecontractdocuments(“type1”)orlatentconditionsofanunusualnature thatwouldnotnormallyexpected in the typeofgroundatissue (“type 2”). Such clauses usually require the contractor togivepromptwrittennoticewhenencounteringsuchconditions,andbothpartiesmayoweadutytomitigateresultingcostsanddelays.ContractorrightstoclaimDifferingSiteConditionsmaybelimitedif the contractor is paid to conduct its own pre-bid investigationof subsurface conditions or if a particular contractor has actualknowledgeoftheconditionbasedonpriorworkatthesite.


In the U.S., responsibility for unforeseen later changes in laws,regulationsorbuildingcodesisoftenallocatedbycontract.TheAIAGeneralConditions(FormA-201)typicallyassignresponsibilitytothe employer unless the contractormakes the situationworse byfailing to comply with the changes when they have been made.Costsresultingfromlegalchangesthatarereasonablyforeseeableat the timeofcontractcanprobablybeallocatedbycontract toacontractor.Wherethechangeswerenotforeseen,however,theyaremore likely tobe treatedasexcusablebutnon-compensable force majeureevents.


Ownershipofprojectintellectualpropertyisincreasinglyspecifiedby contract, andmany contracts treat project-specific design as a“work for hire” that belongs to the employer. Absent a contractclausetothecontrary,anarchitectprobablyhascopyrightprotection

Statestatutesmayprovidethathomebuildersoweanimplieddutythattheresultingresidencesmeetcertainstandardsfor“habitability”.Inconstructionserviceagreements,contractorsaregenerallyheldtoanimplieddutythattheywillperformina“goodandworkmanlike”manner.Andindesigncontracts,architectsandengineersmaybeheldtoanimpliedobligationtoperformtothe“prevailingstandard”establishedforsimilarservicesintheareawheretheworkisdone.Inmulti-prime contracts, employersmayowe an implied duty tocoordinate their various prime contracts, and prime contractorswillprobablybeheldtoanimplieddutytocoordinatetheirvarioussubcontractorsandsuppliers.Althoughtheforegoingdutiesarelikelytobeimpliedbycommonlaw,itisalsocommonforthemtobestatedexpresslyinawrittenconstructionagreement.


Whencontractorsandemployerscauseconcurrentdelays,therearetypicallytwogeneralapproachesusedbycourtsandarbitrators.Ifthedelaysaretrulyconcurrentandcannotbesegregated,themostcommonapproachisthatneitherpartymayrecovermonetarydelaydamagesfromtheotherpartyduringtheperiodwhenbothofthemwereindependentlycausingdelay.Insomecases,however,courtsandarbitratorswillmakeanefforttoapportiondelaycostsbetweenthetwoparties.Insomecases,apartycanshowthatitslowedpartsofitsworkafterrealisingthatthejobwasalreadybeingdelayedbytheotherparty.Avoluntaryslow-downtoaccommodateanotherparty’sdelayisnotproperlyaconcurrentdelay.Theissueiscomplicatedwhendelaysaffectanactivitywith“float”onthecriticalpathprojectschedule.Ifoneparty’sdelaybeginsfirst,itmaycausenodelaytotheoverallprogramme,whichisimpactedonlywhenthefirstparty’sdelayisexacerbatedbythesecondparty’slaterdelay.Inthatcircumstance,acourtmayfindthatdelayliabilityshould be imposed only on the partywho caused delay after theaffectedactivitymovedontotheoverallcriticalpathofthejob.


Someconstructioncontractsattempttoprescribewhichparty“owns”thefloattimeinthecriticalpathprogramme.Somepartieswillalsoarguethat theyhavenoliabilityfordelayingtheotherpartyunlessdelayscontinueafterusingupallthefloatdaysintheaffectedactivity.Asapracticalmatter,however,theconsumptionoffloatonmultiplenon-criticalactivitiescanleadto“stacking”oflabourandsubstantialcostinefficiencies,eveniftheoverallcompletiondateoftheprojectisnotextended.Thereisnoconsistentnationalconsensusonhowfloattimeinaconstructionprogrammeshouldbeallocated.Ifacontractissilentonthissubject,courtswilloftenconcludethatfloatdaysinaconstructionprogrammeareownedby“theproject”,meaningthatitmaybeusedbywhicheverpartyneedsitfirst.Onceacontractor’swork isdelayed toapointwhere itbegins toaffectoverallcompletionofthejob,itisverylikelythatU.S.courtswilltreatsuchadelayasabasisforequitablecompensationtothecontractor.



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Theconceptof force majeure iswellknown inU.S. constructioncontracting. Although some contracts allow compensation toa contractor whose progress is interrupted by such unexpectedevents,most contractsmerely allow an uncompensated extensionoftime.Force majeureeventsaretypicallydefinedtoincludeonlyunforeseeneventsoutsidethecontrolofbothcontractparties,andlabour strikes may be excluded from this category if they arisefrom specific acts or omissions of the affected contractor (i.e. tobedistinguishedfromnationalorregionalstrikes).Thefactthataprojectbecomesmoredifficultorcostlyduetorisingcostsoflabourormaterialsisgenerallynotregardedasaforce majeurecondition,althoughcourtsmayregardsuddenandextremepriceescalationsinthiscategory.Insomelimitedcases,performanceofaconstructioncontractmayalso be excused (i.e. effectively allowing its termination) if thecontractorcanshowthatthespecifiedworkwaseitherimpossibleorcommerciallyimpracticable.


Under U.S. common law, third parties may possess rights underagreements between two other parties if such rightswere clearlyintended. For example, a prime contractor may effectivelyrequire a subcontractor to indemnify the employer for errors inthe subcontractor’s work. Warranties on special materials andon installed equipment are often set up to flowdirectly from themanufactureror supplier to theend-useremployer. Lendersmayrequiresubcontractstobeassignabletothemiftheprimecontractordefaultsonitsobligations.Residentialdevelopersgenerallyrequirebuilderstomakedirectwarrantiestopurchasersofnewhomes.Itisalsocommonforagreementstoprovidethatrightsandobligationsinaprimecontract toflowdownto lower tiersubcontractorsandsuppliers. Absent an applicable contract provision, however,U.S.courtsmaybereluctant toallowclaimsbythirdpartieswhocannotshowthattheyweretheintendedtobenefitfrompromisesinsomeoneelse’scontract.Contracts often provide that warranties or other contractorobligationsareassignable if theemployer transfers its rightsand/orobligationstoathirdparty.Claimsarisingfromdefectsinnewconstruction may be limited to initial purchasers, and it cannotbe assumed that statutesof common lawwill transfer suchclaimrightstoanysubsequentpurchaseroftheimprovedproperty.Mostconstructioncontractsspecifythecircumstancesinwhichtherightsandobligationsofeitherpartymaybeassigned.


It is generally understood that a party’s payment obligations ona particular contractmay be set off againstmonetary obligationsowedbythepayeeunderthesamecontract(e.g.,progresspayments

foritsplans,drawingsandotherdesignworkproductasstatedintheArchitecturalWorks Copyright ProtectionAct of 1990. ThemostcommonprocessinU.S.designcontractsisthatthedesignerretainsownershipbutgrantsaroyalty-freeperpetuallicencetotheemployeranditssuccessorsforuseontheprojectsite.


Construction contracts generally specify rights of the employerto suspend work for its own convenience, while saying little ifanything about a contractor’s right to suspendwork. Contractorrightstosuspendworkareoftenlimitedtothesituationinwhichanemployerorprimecontractoriscommittingadefaultbyfailingtoissueundisputedprogresspayments,andcontractorsmusttypicallygive written notice and a reasonable opportunity to cure beforesuspendingwork. Subcontractor rights to suspendworkdue toaprimecontractor’swithholdingofundisputedpaymentsmayalsobeguaranteedbyastate“promptpayment”statuteorlienlaw.Mostcontractsalsospecify,however,thatagenuinelydisputedpayment(e.g., compensation for a variation that has not yet been priced)doesnotexcuseasuspensionofworkbythecontractor,whomustcontinueworkingonunchangedworkdespitethependingdispute.Other circumstances that may justify a contractor’s temporarysuspensionofworkmay includeanemployer’s failure toprovidepermitsorsiteaccess,discoveryofunforeseenhazardousmaterialsinthegroundthatimpedeprogress,theemployer’sfailuretomakekey required decisions (e.g., approving submittals), encounteringunexpected archaeological remains, or other unanticipated force majeureeventsoutsidethecontractor’sreasonablecontrol.


Rightsof terminationaretypicallyspecifiedbycontract,althoughan employer’s right to terminate a defaulting contractor afterallowing reasonable opportunity to cure is supported by U.S.commonlaw.Underlyingdefaultsmaybeofvariouskinds,suchasfailuretomakerequiredpayments,failuretoprosecutework,failingto correctdefects, failing toprovide requiredbondsor insurance,failuretoprovideessentialpermitsorsiteaccess,oraparty’sfilingforbankruptcywithoutreasonableassurancethatthecontractwillbecompletedbythetrusteeinbankruptcy.Anemployer’sattemptto fundamentally change the nature or scope of the job (e.g., a“cardinalchange”underfederallaw)mayalsojustifyaterminationofworkbythecontractor.By contrast, an employer’s right to terminate all or part of acontractor’s scope for the employer’s convenience (i.e. withoutany default by the contractor) is not based on common law andwill probably only be allowed when specified by contract. Oneexception is contractswith theFederalGovernment. If a federalcontract fails tocontaina terminationforconvenienceclause, thecourtwillreadoneintothecontractonthebasisofpublicpolicy.Contractsarealsocapableofbeingterminatediftheyarefoundtobe illegalorotherwisevoid (e.g.,due tomutualmistakeor someotherdefectinformingthecontract).



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Many contracts seek to minimise ambiguities by establishingan “order of precedence” that can be applied if various contractdocumentsarefoundtobeinconsistent.Somecontractsalsorequirethecontractortoreviewthevariousdocumentsandprovidepromptwrittennoticeifandwhenconflictsorambiguitiesarediscovered.Whilesomeemployersmaywriteone-sidedcontractsthatattemptto transfer the riskof undiscovered ambiguities to the contractor,suchclausesarelikelytobechallengedasviolatingtheemployer’simplied obligation to provide proper plans and specifications ondesign-bid-buildprojects.


As discussed elsewhere in these answers, there are a variety oftermsthatareunenforceableorvoidinconstructioncontracts.Theunenforceabilitymayresultfromastatuteorfromcommonlawcasedecisions.Theinvalidclauseswillvaryfromonestatetoanother.Terms that tend not to be enforced include: a) requirements toindemnifyanotherpartyagainstitsownfault;b)clausesrequiringwaiveroffundamentalrightsguaranteedbyconstitutionsorstatutes;c) pre-construction waivers of statutory lien rights; d) liquidateddelaydamagessethigherthanthecontractee’sreasonablyanticipateddamages; e) damages precluding one party from recovering anydamagesfordelaysorbreachesbytheotherparty;f)“payifpaid”clausesmakingasubcontractorspaymentsabsolutelyconditionaloncorrespondingpaymentsfromtheemployertotheprimecontractor;andg)clausesthatviolateanyotherlaworpublicpolicy.


Although some design contracts attempt to impose a standard ofdefect-freedesign,mostdesignerswillinsistonapplyingthecommonlawstandardthatclaimsofprofessionalnegligencerequireproofthatthe defendant violated the prevailing standard of professional careforcomparableservices.Thatprevailingstandardclearlyallowsforsomeleveloferrororimperfection,andcasesallegingprofessionalnegligence typically require evidence from a licensed professionalwhocanexplainhowprevailingstandardsapplytothefacts.Designcontractsoftenspecifythatthedesignerwillcorrecterrorsindesignatitsowncost,butdesignerswillgenerallynotagreetoanunqualifiedguarantee that theirwork is freeof defects. Design contracts alsotypicallyincludeanaggregatecaponmonetaryliabilityforbreachofcontractbythedesignprofessional.



Under a Federal Government contract, disputes are ultimatelysubjecttoresolutioninafederalcourtoragencyboard,withoutajury.Understate,localorprivatecontracts,disputesareultimatelysubject to resolution in a court (most often with a right to jury)unless thepartieshaveagreedotherwise. Although some federalagencyboardshavesignificantexperienceinconstructiondisputes,mostcourtshavelittlesuchexperience,andpartiesoftenagreebycontractthatdisputeswillbereferredtomediationandultimatelytobindingarbitration.

beingwithheldtopaycostsofcuringdefectivework).Absentanyapplicablecontractprovisiontothecontract,U.S.commonlawmayalsoallowapartytooffsetobligationstoanotherpartywithsumsowedbythatotherpartyonanotherseparateproject.Suchset-offsare only likely tobe allowed, however,when theparties onbothprojectsarethesame(e.g.,notmerelyjointventuresincludingotherpartiesormerecommonownershipofseparatecontractors).Common law rights of set-off are often limited by contract ifnot by law. For example, contracts commonly provide that theemployer’sprogresspaymentsshouldbe treatedasa“trust fund”infavourofpersonsprovidinglabourormaterialsonthejob,whichisinconsistentwiththeideaofdivertingthefundstopayoneofthecontractor’sobligationsonanotherjob.Aprimecontractor’spowertowithholdmoneyfromasubcontractorbasedondebtsonanotherjobmayalsobelimitedbytheemployer’scontractorbylanguageinanapplicable“promptpayment”statute.


With regard to supplying materials and equipment, the normalstandardofcare is that thegoodsmustbe free fromdefects. Onconstruction services, the prevailing standard is one of “goodworkmanship”, i.e. something clearly less than perfection. Ondesign contracts, thenormal standard is defined as theprevailinglevelofcareexercisedbyothersprovidingcomparableprofessionalservicesinthesamelocationorindustrysegment.Theemployer’simplieddutytoprovideplansandspecificationsfreefromdefectsisgenerallyregardedasahigherstandardthanadesigner’sobligationtomeettheprevailingstandardofcare.AllU.S. jurisdictions have enactedworker compensation statutesrequiringthatifaworkerisinjuredorkilled,thatperson’semployermust pay a specified level of compensation, regardless of fault.Thatobligationistypicallysubjecttoinsurance,whichistypicallybacked up by a contractual right of indemnity against all partieswhosenegligenceorintentionalfaultcontributedtotheloss.Undertheso-called“economiclossrule”,manystatesprohibittort-based claims for purelymonetary damages against another partywithwhomtheclaimanthasnocontract. Applicablestatutesandcaselawarelikelytoallowsuchtort-baseddamageclaims,however,wheretheallegedwrongdoingalsocreatedpersonalinjury,death,orphysicalpropertydamage.


Following the principle of contra proferentem, U.S. courts oftentend to construe ambiguous contract terms against the partywhowrotethem.Normally,anambiguityonlyexistsifitisreasonablysusceptibletoat least twoalternativemeanings. Onceaclauseisfoundtobeambiguous,moststateswillallowtheircourtstolookatevidenceoutsidethewrittencontract(“parolevidence”)toassistininterpretation.Forexample,courtsoftenlookattheparties’courseofperformancebeforeadisputearose,commonunderstandingofcertaintermsintheconstructionindustry,adesiretogivemeaningtoeveryterm,andadesiretoavoidinterpretationsthatresultinaninequitableforfeiturebyoneparty.Somestatesmayalsoallowuseofparoleevidencetohelpclarify(butnotflatlycontradict)awrittencontractevenifitdoesnotimmediatelyseemambiguousonitsface.



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Arbitral awards are generally final and enforced in the U.S.,althoughstatutesallowverylimitedappealsinextraordinarycases(e.g., arbitrators who fail to disclose conflicts, going beyond theparties’contractualsubmissiontoarbitration,obviouspartiality,orfundamentaldenialofdueprocess).


TheUnitedStates is a signatorynation to theConventionon theRecognitionandEnforcementofForeignArbitralAwards(the“NewYorkConvention”),andtheU.S.complieswiththisagreementbyenforcing arbitral agreements and awards issued in internationalarbitrations.ConsistentwithArticleVoftheNewYorkConvention,defences to enforcement of a foreign award include lack of dueprocess,aconclusionthatenforcementwouldbecontrarytopublicpolicy,andotherlisteddefences.Chapter2oftheFederalArbitrationActprovidestermsunderwhichcourtsoftheUnitedStatesshallenforceforeignarbitrationawardsinaccordancewiththeNewYorkConvention.


TheUnitedStateshasnotsignedanygeneralagreementtoenforceforeign court judgments thatwould be equivalent to enforcementof foreign arbitral awards under theNewYorkConvention. TheFederalArbitrationAct also contains nogeneral requirement thatU.S. courts must recognise a foreign court judgment. Severalstateshavenonethelessadoptedthe2005UniformForeignMoney-JudgmentsRecognitionAct,whichsetsforthcriteriaunderwhichsignatorystatesagreetoenforcejudgmentsfromforeigncourts.Asunder theNewYorkConvention, principal concerns are assuringthattheforeignproceedingalloweddueprocessandthatitsultimatejudgmentdoesnotviolateU.S.publicpolicy.Some individual states have their own bilateral agreements withother jurisdictions that facilitate enforcement of court judgments.Seethe1962UniformForeignMoney-JudgmentsRecognitionActand the 2005Uniform Foreign-CountryMoneyRecognitionAct,whichhavebeenadoptedin23statesandtheDistrictofColumbia.


Federalcourtstypicallyallowjurisdictiononlytolimitedcategoriesof cases (e.g., claims for damages over $75,000 between partieslocatedindifferentstates).Statetrialcourtshavebroadjurisdictionoverpartiesdoingbusinesswithintheirborders,andpartiesinsuchcasesoftenareentitledtodemanduseofajury.Court actions typically begin by filing a written “complaint”identifyingparties,key facts, andbasic legal claims. Defendantsaregenerallyrequiredtofileawritten“answer” to thecomplaint,and the answer may also assert one or more counterclaims. Arespondingpartymayalsoassertcross-claimsagainstthirdpartieswhoaresubjecttothecourt’sjurisdiction.

Constructioncontractsfrequentlyprovideformulti-stepalternativedispute resolution procedures. Many contracts refer disputes tohigh-level officers or executives of the parties before they maybesubmittedtoacourtorarbitrationpanel. ManylargecomplexprojectsalsoestablishaDisputesReviewBoardthathelpstoresolvedisputesbeforeaproject iscompleted. Non-bindingmediationisalsoverycommonlyusedtoresolvecomplexconstructiondisputes.A number of companies provide mediation and arbitrationservices.TwoofthelargestprovidersaretheAmericanArbitrationAssociation (AAA) and JAMS, each ofwhich publishes detailedrulesformediationandarbitrationwhenpartiesagreetoutilisetheirservices.Althoughpartieshavearight toacivil jury inmanyconstructiondisputes, the greatmajority of construction disputes are resolvedwithouttheuseofajury.


TheUnitedStateshasnotyet adopted“adjudication”of thekindthatisnowwidelyusedintheUnitedKingdom.Onlargecomplexprojects, however, it is fairly common for a contract to requiresubmission of disputes to a Dispute Review Board (“DRB”),typically a panel of three individuals who have substantialconstructionindustryexperience.AlthoughDRBrecommendationsare typically subject to appeal, they resolvemany issues and areoftengivenconsiderabledeference.As discussed in question 4.1 above, it is also common forconstructioncontracts toreferdisputes tobindingarbitrationbyasingleneutralarbitratororbyapanelofthreearbitrators.


Manyofthemostwidelyusedconstructioncontractformsprovidefor mediation and ultimately for binding arbitration as a meansof resolving construction disputes. Arbitration is generally notused, however, in resolving disputes under federal governmentconstruction contracts. Where an unpaid contractor or supplierseeks to enforce security rights against real property (e.g., undera statutory lien), that lien foreclosure action must generally beprosecutedinastatecourt.Arbitrationistypicallycommencedwhenaclaimantfilesademandforarbitrationwiththeadministrativeentityinchargeofhandlingthearbitration.Therespondentmayanswerindetail(andmayserveacounterclaim),anditsfailuretodosowillgenerallybetreatedasadenialoftheclaimsasserted.Respondingpartiesmayalsoassertcross-claimsagainstthirdpartieswhohaveconsentedtoarbitration.The arbitral administrator may assess filing fees based on theamountsbeingrequestedin theparties’claimsandcounterclaims,andpartieswillgenerallyberequiredtodepositsufficientadditionalfunds to cover the expected charges of the arbitrator(s). Unlikeinternational arbitration, domestic arbitrations in the U.S. oftenallowatleastalimitednumberofdepositions,althoughpre-hearingdiscoveryisoftenconsiderablymorelimitedthanwhatisallowedbythecivilrulesinaU.S.court.Some arbitration agreements adopt the same civil rules used incourts,butgreatercostefficiencycanoftenbeachievedbyadoptingrules aimed at streamlining the exchange and presentation of theparties’evidence.



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havemuchheavierschedules thanothers,anda longbacklogcandelayschedulingofahearing. Largercaseswithmorewitnessesand complex issues are likely to experience significantly longerdelays in getting a trial date. Inmost cases, however, a hearingcanbesetbetweenoneand threeyearsafteracomplaint isfiled.Dependingon the jurisdiction, it can then take severalmonthsoryearstoreceiveadecision.U.S.courtrulesallowforpurelylegalissuestoberesolvedpriortotrialunderwhatiscalledasummaryjudgmentmotion.

After the parties’ initial exchange of written positions, they aretypically required to exchange relevant documents and producewitnesses for oral examination (depositions). Parties are alsogenerally allowed to requireopposingparties to answera limitednumberofwrittenquestions(interrogatories). ManycourtsintheU.S. may impose some limits on this pre-hearing discovery, butallowable discovery is usually substantially more extensive thanwouldbeallowedinaninternationalarbitrationorlitigation.Thedelaybetweenfilingofacaseandcommencementofthehearingwillvarysignificantlyfromonejurisdictiontoanother.Somecourts



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Established in 1893, Oles Morrison Rinker & Baker LLP is one of the West Coast’s most experienced law firms with more than 30 attorneys practising at offices located in Alaska, California and Washington. We have been providing legal counsel to public and private companies throughout the nation and internationally in all phases of construction and government contracting since the 1930s. Our attorneys play integral roles in a wide range of leading infrastructure projects, transportation systems and real estate developments. In addition to our primary practice areas of construction and government contracts, our clients look to us for our legal counsel on commercial litigation, business and real estate. Our international work has included a variety of transactional assignments in addition to a growing volume of dispute resolution assignments between international companies.

Douglas Oles is an arbitrator, mediator and lawyer in private practice, who has devoted more than 30 years to helping avoid and resolve disputes on complex construction and supply contracts. He is a board member of the Global Engineering & Construction panel at JAMS and a senior partner in Oles Morrison Rinker & Baker LLP (Seattle, Anchorage & Oakland). His activities include:

■ ABA Forum on Construction Law: national chair (2005–06).

■ American College of Construction Lawyers: national President.

■ Best Lawyers in America: selected.

■ Canadian College of Construction Lawyers: Honorary Fellow.

■ Chartered Institute of Arbitrators: Fellow.

■ International Academy of Construction Lawyers: Fellow.

■ International Bar Association: Panel speaker at SEERIL Conference (Berlin 2014) and IBA Annual Meetings (Vienna 2015 & Washington DC 2016 & Sydney 2017).

■ Society of Construction Law: Program coordinator 2008 (London), 2010 (Hong Kong), 2012 (Melbourne), 2014 (Kuala Lumpur), and 2016 (São Paulo).

For many years, Mr. Oles has worked as a litigator and as a drafter and negotiator of commercial contracts. His work includes energy facilities, airports, major highways, bridges, foundations, hotels, universities, hospitals, and numerous other projects. He also has extensive experience with U.S. federal contracts.

Mr. Oles has written or contributed to numerous books and articles on construction law. The most recent include: The Legal Maze of the Keystone XL Pipeline (Int’l Constr. Law Rev. 2016); Construction ADR (ABA 2014) (chapter on international Choice of Law and Venue); and Construction Damages and Remedies, 2nd edition (ABA 2013) (chapters on Theories of Recovery, Elements of Damages, and Proof of Damages). Mr. Oles received his undergraduate degree (with distinction) in history from Stanford University (Phi Beta Kappa). He was Executive Editor of the Washington Law Review and received his juris doctor (with honours) from the University of Washington.

Douglas Stuart OlesOles, Morrison, Rinker & Baker LLP701 Pike StreetSuite 1700Seattle, WA 98101USA

Tel: +1 206 623 3427Email: [email protected]: www.oles.com

With a focus on public procurement, Alix Town frequently represents owners, general contractors and subcontractors on a broad range of government and private contracts, including contract formation and administration matters, government investigations, and contract claims and disputes.

Ms. Town frequently writes for the federal government contracts blog, The Procurement Playbook. She is a member of the ABA Public Contracts Law Section, Pacific Northwest Defence Alliance and a past president of the National Contract Management Association, Portland-Vancouver Chapter.

Ms. Town received her undergraduate degree from Trinity College in Hartford, Connecticut and received her juris doctor from The George Washington University Law School. She is currently enrolled at the University of Nottingham, pursing an LL.M. in Public Procurement Law and Policy.

Alix K. Town Oles, Morrison, Rinker & Baker LLP701 Pike StreetSuite 1700Seattle, WA 98101USA

Tel: +1 206 623 3427Email: [email protected]: www.oles.com



Chapter 30

ECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT Abogados José Luis Echevarría Petit

Uruguay


LettersofIntent(LOIs)arecommondocumentsinUruguay.Letters of Intent can either contain actual obligations (bindingLOIs) or only willingness (non-binding LOIs). They are oftensignedsimultaneouslywithanon-disclosureagreement. There isnorestrictionastothecontentofsuchlettersunderUruguayanlaw.

1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors all risk insurance?

The only compulsory insurance set by law is labour accidentinsurance,whichisunderthemonopolyoftheStateInsuranceBank,andisprovidedthroughsocialsecuritypayments.Theconstructionsector has a special regime for social security payments that arebornenotbytheConstructor,butbytheownerofthelandonwhichtheconstructionisbuilt.Contractor’s all risk insurance is also common. Under theUruguayanCivilCode,thecontractorcarriestheriskofdestructionoftheworksuntilpreliminaryacceptancebytheemployer,atwhichpointthebuildingispassedovertotheowner.Civilliabilityinsuranceisrequestedinpracticallyallconstructioncontracts.Vehicle and machinery insurance is usually requested by theContractingParty under construction,EPC, build-operate-transferandPPPcontracts.


Under Uruguayan law, whatever the contract’s provisions, allconstructioncontractsmustrespectthelabourlawsandsafetyandhealthrulesthataremainlysetforthbydecreesoftheExecutive.



BeforethePPPlawwaspassedin2011,mostcontractswereturnkeycontracts,withtheContractingPartyprovidingthedesign.Thiswasalsothemostcommoncontractinpublicprocurement.Since then, Design-Build, Design-Finance-Build, Design-Finance-Build-OperateandDesign-Finance-Build-Operate-Maintaincontractshavebecomemorecommon.Thecontractsbetweenspecialpurposevehicles and construction companies in public-private partnership(PPP)projectsareengineering,procurementandconstruction(EPC)contracts.PPPcontractsarecurrentlybeingusedfortheconstructionofpenitentiaries,highwaysandschools.Managementcontractingiscurrentlyusedforbigindustrialprojects,suchasthepulpplantsofMontesdelPlataandUPM.

1.2 Are there either any legally essential qualities needed either to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any specific requirements which need to be included in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?

Under Uruguayan law, construction contracts can be oral (notnecessarilywritten),thoughimportantconstruction,concession,andPPPcontractsareusuallywritten(bothpublicandprivate).PublicprocurementisruledbylawscompiledintheTexto Ordenado de Contabilidad y Adminisitración Financiera (“StateAccountingandFinancialAdministrationCompilation”).Notwithstanding exceptions set by law, State agencies have tofollowapublicbidprocedureoranothercompetitiveprocesssetbylawforprocurement.Theawardofaproposal,oncenotified,createsthe contract, thoughunwrittencontracts areusually formalised inwritingafterwards.


Uru

guay


Thereisnorightofretentionoftitle.Thecontractorisentitledtosuspendtheworkswhenitisnotpaid,buthasnorighttoretainthegoodsthatareincorporatedintotheworks.


2.1 Is it common for construction contracts to be suspended on behalf of the employer by a third party? Does any such third party (e.g. an engineer or architect) have a duty to act impartially between contractor and employer? Is that duty absolute or is it only one which exists in certain situations? If so, please identify when the architect/engineer must act impartially.

Inmostconstructioncontracts,eachpartyappointsanengineertoactonitsbehalf.Itiscommontoseeclausesthatfunctionasrealpowersofattorneyforthoseengineers.Theseengineersarenotimpartial,butratheractasrepresentativesofeachparty.The Contracting Party’s engineer usually has the power to issueorders, and in most contracts, the engineer is entitled to issuechangeordersthatmaymodifythescopeofwork,theschedule,etc.,obviouslywithcompensationforadditionalworkperformedbythecontractorordamagescausedbythoseorderstosuspend.Thelackofanimpartialpartydeterminestheimportanceofstatingan alternativeway to solve technical disputes among the parties.Expertdeterminationhasshowntobetime-andcost-effective.Expertdeterminationordisputeboards(ICC),canavoidarbitrationsand litigation with great results for both parties. This kind oftechnicalalternativedisputeresolutionispossibleunderUruguayanlawandthoughnotgenerallyused,itispartoftheauthor’scommonpracticetoincludesuchclauses.


UnderUruguayanlaw,suchaclauseisviableaspartofthefreedomofwilloftheparties,whichisacardinalprincipleforcontracts.This clause, though not common, is sometimes found in certainsubcontractsinwhichpaymentdelaysbytheownerareforeseeable;butlogicallythishasacost.


TheUruguayanCivilCodehasclearprovisionsregardingbreachofobligationsandtheconsequencesthereof.

Arecent lawpassedby theParliament (whoseconstitutionality isdiscussed)statesthecriminalliabilityofemployerswhenabreachof the safety rulesendangerspersonnel. Criminal lawacademicsargue that “danger crimes” are unacceptable, but in fact, whenaccidentshappen,thereisariskofbeingheldliableunderthislaw.As stated above, social security rules regarding construction aredifferent from those of other sectors. Social security paymentsare the owner’s responsibility, not the construction company’sobligation.Theconstructioncompanyreportsthenumberofdaysworked by employees monthly, and the landlord pays the socialsecuritycharges.Certaincontractsstatethatthepriceofthecontractincludes social securitypayments. Theseagreementsarebindingamongtheparties,buttheSocialSecurityAuthority(BPS)maytakedirectactionagainsttheowner,whoisresponsible.Thissaid,theseagreementsarenotrecommendedforowners,becausetheyareanincentiveforunder-declarationbytheconstructioncompany,whilethefinalresponsibilityandliabilityfallstotheowner.This determines that, in many contracts in which social securitypaymentsareincluded,theownerhastopaycloseattentiontothepaymentsmadeby thecontractor,andcloselycontrol thepayroll,topreventthecontractorfromneglectinginitsdeclarationcertainemployeesortheirworkingdays.Another very important law regarding construction contractsis outsourcing law. The law states that the prime contractor isliableforlabourandsocialsecuritypaymentsandaccidentsofitssubcontractors’employees.Thisseveralliabilityofthecontractorand subcontractor canbecome subsidiary if the contractorprovesthatcorrectpaymentofsalariesandsocialsecuritychargeshavebeenpaideachmonthandaccidentinsurancepoliciesofsubcontractors’personnelhavebeentakenout.


Inmostcontracts,besidesaperformancebondof5%to10%ofthecontractprice,thereareretentions(5%oftheamountinvoicedforeachadvancecertificate)inordertorepairanydefectsdetectedatprovisional transfer of a construction,whichmust be included inthepunchlist.Contracts usually state that, upon substantial completion, partiesmustissueaminuteofProvisionalAcceptanceand,fromthatdate,thereisaguaranteeforacertainperiod,whichdiffersaccordingtothetypeofconstruction.Inthatminute,apunchlistofdefectsisincluded,andtheyhavetobesolvedwithinareasonableperiod.Once the guarantee period expires, the parties issue a DefinitiveAcceptanceMinute.WiththisDefinitiveAcceptance,theretentionisreleasedtothecontractor.


Theissuanceofperformancebondsisstandard. Theyareusuallyissuedfor5%ofthecontractprice.TheseareusuallyissuedbytheStateInsuranceBankformostlocalsmalltomid-sizecontracts,andinmanycontracts,afirstdemandbank guarantee is needed. There is a wide range of options forperformancebondsbothinpublicandprivatecontracts.

ECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT Abogados Uruguay


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orderrules thatcannotbeneglectedbytheparties inconstructioncontractsisa10-yearguaranteeagainstdefectsbytheConstructorandtheArchitect.


The general rule is that each party is liable for its own faults orbreaches.Ifthereisnospecialclauseinthecontract,thecontractorshouldbegrantedanextensionoranindemnityforthecostoverrunsduetothedelayscausedbythefaultorriskoftheemployer.Thecontractorwouldnotbeentitledforanextensionorindemnityfor delays or cost overruns arising from its own cause or theoccurrenceofariskassumed.Thereisageneralprinciplethatstatesthatnopartycanmakeaclaimbasedonitsownguilt.The contractmay assign cost overrun or delay risks to a certainparty,andtherighttoobtainanextensionoranindemnitydependsonsuchclauses.UnderUruguayanlaw,acertainpartycanaccepttoassumetherisksofsuchdelaysorcostoverruns.Apartycanevenholdtheriskofforce majeureoractsofGod.Thatsaid,clausesunderwhichonepartyassumestheotherparty’sbadperformanceasariskarescarcelyseen,andthevalidityofsuchaclausecouldbedisputed,becausesuchaclaimwouldbebasedontheclaimant’sownguilt.


If such “float” is agreed in favour of the contractor, it cannot beexpendedduetobydelayscausedbytheotherparty.Therefore,avariationofthefloatagreementdecidedbytheemployerthat impliesmore time to perform the scope of the contractmayentitle the contractor to ask for an extension and an indemnity ifthereisnospecialclausetothecontraryinthecontract.Theemployerhasnorighttousethefloatforvariationsorextensionsofthescopeofthecontract.


The Civil Code states that theArchitect and the Constructor areliableiftheconstructionisruinedtotallyorpartiallyduetodefectsinthesoil,designormaterialswithina10-yearperiodafterreceptionofthework.Thisisapublicorderrulethatcannotbechangedbyagreementoftheparties.Alawpassedin1885,stillvalidtoday,statesthattheConstructoris liable for other hidden defects (not those causing ruin that arecoveredbytheCivilCode)whichmayappearinthat10-yearperiod,providedtheywereunnoticedatthetimeofreception,andthatthosedefectsconstitutemorethan“normalimperfections”.It is important to point out that when the defect appears withinthat 10-year period, the employer is entitled to claim, and underUruguayan law, that right toclaimdoesnot expireuntil20yearshavepassed.

Incaseofbreachofcontract,theotherpartymayeither(i)terminatethecontractandclaimdamages(directdamages,lossofprofitandevenmoraldamage),or(ii)demanditsfulfilment(whenpossible)andclaimonlythedamagesofthedelay.Additionally,thepartiescansetpenaltiesandifnothingissaidtothecontrary,theyaredeemedtobeliquidateddamages.Ifthepartiesagree a penalty as liquidated damages, neither the judge nor thearbitratorhasthepowertoconsiderwhetherthatamountindamagesreflectstheactualdamagessufferedasaconsequenceofthebreach.Notwithstanding the foregoing, there is a rule of proportion thatapplieswhennothingto thecontrary issaid in thecontract. Thisproportionrulestatesthat,whenliquidateddamagesareagreed,theamountofdamagestobepaidisproportionaltotheimportanceofthebreach.Itisacommonsuggestiontoclientstostatethatthisproportionalruledoesnotapply,sothereisnodecreaseofincentivetoaccomplishobligationsasthecontractisunderexecution.



In private contracts, any change of the contract shall be agreedamongtheparties,withnoexceptions,aslongasthereisnospecialclauseallowingsuchchange.Inpubliccontracts,thepublicauthorityhastherighttoincreasethescopeofworkbyupto20%ordecreaseitbyupto10%withoutneedingtheconsentofthecontractor.Inpublicprocurement,parties canagree further increases,with acapof100%.Inprivatecontracts,amendmentscanbeagreeduponbetweenthepartieswithnolimit.


Article 1.291 of the Civil Code states that all contracts have tobe accomplished by the parties in good faith, and therefore theyare bound to what is specifically set forth, and also to what ismandatorily required, in good faith. Therefore, if a contract setsthescopeindetail,andacertainmandatoryaspectisomitted,thecontractorhastoaccomplishthataspectingoodfaith.Thisisnottosaythatthescopeofworkcanbe“stretched”inbadfaithbytheContractingParty.Certain construction contracts involve different contractors; oftenthere is a prime contractor and various subcontractors. In suchcases, the scope of those different contracts shall be perfectlymatchedtoavoiddisputes.TheomittedpartofthecontractcanbeperformedbytheContractingPartyitselforanythirdparty.Ifacontractordoesnotperformpartofthescopeofthecontract,theContractingPartyhastherighttoaskathirdpartytodoitandchargethebreachingparty.


Thegeneralprincipleisfreedomofthepartiestoagree.Thereareveryfew“publicorder”lawprovisions.Oneoftheveryfewpublic

UruguayECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT Abogados


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thecontractunderarticle1431oftheCivilCode.Thisisanimplicitterminationclausethatisvalidevenagainstcontractclauses.Force majeure and acts ofGod can determine termination due toimpossibleperformance.Inthiscase,ifnopartyassumedsuchrisks,thecontractcanbeterminatedwithnoresponsibilityoftheparties.


Thepartyaffectedbyforce majeureisreleasedfromitsobligationifperformanceofthecontractbecomesimpossible,andisnotliableorsubjecttopenaltiesordamages,providedithasnotassumedsuchrisk.Itishighlydifficulttosuccessfullyclaimforce majeureasagroundfor the contract becoming uneconomic because of thepacta sunt servandaprinciplerulesinprivatelaw.Such a claim could be successful in a public contract case if theConstructor invokes the rebus sic stantibus principle, whichis regularly accepted as a public law principle, but only whensucheconomic factorcouldnotbe foreseenand isnotdue to thenegligenceorfaultoftheprivateparty.


Thegeneralprincipleisthatcontractualclausescanonlybenefitthepartiestoacontract.This a disputed issue. The general principle has determinedmany judicialholdingsagainst subsequentowners’claimsagainstConstructors andArchitects, but the right of a subsequent ownerto claim fordefectswithin the10-yearperiodhasbeengenerallyaccepted.


Set-offisautomaticunderUruguayanlaw,providedbothobligationsareliquidandenforceable.Set-offispreventedifoneobligationissubjecttoatermandtheotherisnot.Inmanycontracts,theownerretainstherighttoset-offtocoverpenalties.Thisisquiteunfairifthereisnothirdparty(arbitrator,judge)determiningthepenalty.


Dutyofcaredoesnothavetobesetinthecontract,asitconstitutesactingingoodfaith,withminimaldiligence.

3.16 Where the terms of a construction contract are ambiguous are there rules which will settle how that ambiguity is interpreted?

There are certain contract interpretation rules in the Civil Code.


BoththeArchitectandtheConstructorbeartheriskofruinoftheconstructionduetogroundconditions.Inpublicprocurementcontracts,thetermsofreferenceusuallystatethat the bidder declares that it has inspected the site and knowsall thedetails, and thereforewaives anyclaimof costoverrunorovertimebasedonthegroundconditions.In these cases, the validity of this clause is arguable because itis absolutely clear that thebidder has no chanceof performing athoroughstudyofthesoilbeforethecontractisawarded.TherehavebeenveryimportantcasesinwhichtheConstructorwasdeclared to be entitled to compensation for the cost overrun andtermextension,duetounforeseenconditionsofthegroundoreventheseabed,despitecontractclausesstatingotherwise.Accordingtotheabove,theruleisthatwhentheConstructorortheArchitecthas theresponsibility todetermineif theconstructionisfeasibleonacertainareaofsoil,thentheyareliableforthatdecision.When a bidder receives from the administration technicalinformationwithmistakes,suchadministrationisliableandhastocompensatedelaysandcostoverrunsduetounforeseenfeaturesofthesoilnotdisclosedinthetechnicalinformation.TherehavebeenmanyprecedentsinthissenseinUruguay.


There is no written rule in this sense. In private contracts, theconsequencesofachangeoflawshouldbenegotiatedbetweentheparties,unlessotherwiseprovided.In public contracts the solution is different. There is a principlestating that the economic and financial equilibrium shall remainunchanged during the performance of the contract (generallyreferred to as the “economic-financial equation” or ecuación económico financierainSpanish).Ifthatequilibriumisbrokenbyachangeinlaw,thenthecontractorhastherighttosubmitaclaimtorebalanceit.


Economic rights from intellectualpropertydependoncontractualprovisions.Moralrightsalwaysremainwiththedesigner.


Onlywhentheemployerdoesnotpay,andprovidedthecauseisnotadefaultofthesamecontractor.Insomecases,lackofdefinitionoftheblueprintsorfailureoftheContractingPartytoanswerquestionsonundefinedaspectsoftheprojectmayconstituteajustifiedcausetosuspendworks.

3.11 On what grounds can a contract be terminated? Are there any grounds which automatically/or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly?

Breachofcontractbyapartyentitlestheinnocentpartytoterminate



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access to fundamental evidence; decisions not claimedbyparties(ultra petita or extrapetita);oromissionofdecidingissuesclaimedbytheparties.Inthefirstthreecases,nullityisgeneral,andintheothers,nullityonlyreferstoinvaliddecisions.


The arbitration clausemust be set forth in the contract. When apartywishestostartarbitration,anarbitrationcommitmentmustbeexecuted before a notary public, setting the issues to be decided,theappointmentofarbitratorsandtheprocedure.Ifnoprocedureis agreed, the general procedure is applicable. Some arbitrationinstitutionshavetheirownprocedures.Itcanbebasedinlaworinequity.

4.4 Where the contract provides for international arbitration do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement.

UruguayisasignatoryoftheNewYorkConvention,sointernationalarbitrationawardscanbeenforcedinUruguay.


Generally, foreign rulings can be enforced, following a certainprocedure,aslongasdueprocessruleswerefollowedintheforeignruling.TherightofthepartiestochooseforeignlawandforeigncourtsforcontractsagreedandperformedinUruguayisoftendeniedbytheUruguayancourts.However,aforeignarbitrationtribunalorvenuemaybeaccepted.


The procedure starts with a written claim with all the availabledocuments, a written answer to the claim with all the availabledocuments, a term for submission of other evidence (witnesses,expertopinionsandthird-partyinquiries)andafinalrulingthatcanbechallengedbeforeanappealtribunalofthreejudges.Ifthefirstandsecondrulingsdifferandtheamountisoveracertainthreshold,thesecondrulingcanberevisedoncertainlimitedgroundsbeforetheSupremeCourtofJustice.Typically, first instance rulings can take from one-and-a-half totwo years, and the second instance from eightmonths to a year.SupremeCourtappealstakeabouteightmonths.Arbitrationtakesfromonetoone-and-a-halfyearsbutisfinal(canonlybechallengedonnullitygrounds).Theseareestimatedtermsthatmayvarysignificantlydependingontheissuesdiscussedandthenatureandquantityofevidence,aswellaspossibleinternationalaspects.

Themaincriterionistofindthemutualintentionoftheparties.Ifonepartyhasdrafted thecontract, theambiguousclausemustbeinterpretedagainstthatparty.


Thegeneralprincipleisforfreedomoftheparties,soonlyclausesagainstpublicorder rulesareunenforceable (asnoted inquestion3.3).


Iftheconstructiondecayswithin10yearsorifthereareimportanthiddendefects that appearwithin10years fromconstruction, thedesignerisliable.



Disputesareresolvedbyeitheracourtresolutionorarbitration.


Disputesarisingfromconstructioncontractscanbesolvedby thepartiesamicablyordecidedbyexperts,arbitratorsorjudges.TheUruguayanGeneralProcedureCodehasageneralprocedure,inwhichapartyfilesaclaiminwriting,includingalldocumentaryevidenceandenumeratingalltestimoniesandthird-partyinquiriesinitsfavour.Thecourtthengivesnoticetotheotherparty,whohas30calendardaystoanswertheclaiminwritingwithallthedocumentsandproofinitsfavour.Thereisaninitialhearinginwhichpartiescansettle,andifnot,thejudgedeterminesthediscussedissues,theevidence thatwillbeconsideredandfixesahearingforreceivingtestimoniesfromwitnessesandexperts.Onceevidenceisreceived,both parties present in writing their conclusions on the findings(usuallyinwritingbutcanbedoneorally)andthejudgehas30daystoissuetheholding.The general Procedure Code has also rules on arbitration. TheCodegivesfreedomtothepartiestosettheprocedureanddecidewhethertheholdingshouldbeissuedaccordingtolaworequity.Ifthepartiesdonotagreeontheprocedure,theonedescribedaboveisthedefaultprocedure.Judicialholdingscanbeappealedbeforeatribunalofthreejudges,andexceptionallycanendupattheSupremeCourtofJusticewhenholdingsofthefirstjudgeandthesecondtribunaldifferandwhentheamountofthesuitissubstantial.Arbitrationdecisionsarenotappealableandareonlysubject toanullity challenge on very specific grounds, including: decisionsissued out of term; lack of due process, or the tribunal is denied



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Echevarría Leunda & Echevarría Petit Abogados was founded in 1951.

The firm specialises in Corporate Law, M&A, Commercial Law, Administrative Law, Public Procurement and Infrastructure, Civil Law, Labour Law, Customs and Foreign Trade, and Energy Law, and litigation and arbitration on these matters.

The members of the firm are: Dr. José Luis Echevarría Petit (Founder and Managing Partner); María Jesús Caulin (Senior Partner); Ignacio Alonso Reybaud (Senior Partner); Florencia Sela Bonino (Junior Partner); and María Inés Echevarría Uriarte (Junior Associate).

Construction, PPP and Concessions practice includes roads and highways, public and private buildings, hospitals, and sports facilities.

All members have vast experience in Arbitration and Litigation.

Echevarría Leunda & Echevarría Petit Abogados provides comprehensive legal services to corporate clients from a wide range of sectors, both advising and litigating. Partners develop and maintain strong professional and personal relationship with our clients.

For further information, please see www.echevarriaabogados.com.

José Luis Echevarría Petit is the Managing Partner of Echevarría Leunda & Echevarría Petit Abogados.

He is a Doctor in Law and Social Sciences (University of the Republic, Uruguay, 1990) and holds a Master’s in Business Law (University of Montevideo, Uruguay 1994) and a Master’s in Administrative Law (University of Montevideo, 2014).

José Luis Echevarría Petit is an Arbitrator of the International Arbitration Court of the Uruguay Chamber of Commerce.

He is the sole member of the Surveillance Committee of a 380 MM infrastructure bond managed by a subsidiary of CAF. He was appointed an Academic of the National Academy of Economy in 2017.

He specialises and advises on Public-Private Partnerships, Construction (roads, buildings, hospitals), Concessions (highways and airports), and Renewable Energy, and is a consultant to the Inter-American Development Bank on the financing of Public-Private Partnership projects in Uruguay.

José Luis has vast experience in arbitration and litigation.

He is the Director of the Master in Administrative Law of the University of Montevideo, and Professor of Administrative Contracts for the Master’s in Administrative Law qualification at the University of Montevideo.

He was engaged by the Government of Canada to conduct research on PPP in Canada in 2002.

José Luis is author of various articles and co-author of several books and has spoken at several conferences on Procurement and PPP in the US, Mexico, Canada and Uruguay.

José Luis Echevarría PetitECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT AbogadosAndes 1365/901CP 11.100, MontevideoUruguay

Tel: +598 2900 0400 / 2901 4010Fax: +598 2902 2777Email: [email protected]: www.echevarriaabogados.com



Chapter 31

Wintertons Legal Practitioners

Nikita Madya

Farai Chigavazira

Zimbabwe

ContractualPenaltiesAct[Chapter8:04]andConsumerContractsAct [Chapter 8:03], which impose consumer protectionism andthereby limit the freedom to contract. Although the general lawof contract is Roman-Dutch Law, parties are free to prescribe alawapplicable to theiragreement (lex loci)aswellas thedisputeresolutionmechanism.Forinstance,partiescanagreetoresolutionofdisputesthrougharbitrationproceedingstobeheldataplaceofarbitrationinanotherjurisdictionunderagreedarbitrationrules.


Theconceptsof“LettersofIntent”,“ExpressionsofInterest”and“MemorandumsofUnderstanding”arecommoninourjurisdiction.Subjecttoagreementbetweentheparties,thesecanbebindingornon-binding.Sucharrangementscanprovidemechanismsforexit/terminationofrightsandobligationssubjecttocertaincircumstances.It is not uncommon for parties to provide for payment of costsincurredby theaggrievedpartypursuant to the transaction in theeventofthesubstantivecontractsnotbeingconcludedforreasonsattributabletotheotherparty.


Yes.Theconstructionindustrynormallyrequiresall-riskinsurance(includingthird-partyliability)duetothehighincidenceofaccidentsin the construction sector. It is also common for professionalconsultants to obtain professional indemnity insurance. In largeconstructionprojectswhicharefundedbyinternationalinstitutions,lenders have also started to request procurement of political riskinsurance, and completion risk insurance. The contractors arealsorequiredtoprocureinsurancecoverfor theworkers involvedinconstructionworkundertheNationalSocialSecurityAuthority(NSSA)AccidentPreventionandWorkersCompensationScheme(NoticeNo.68of1990).



Thereisnostandardorprescribedcontractandpartiesarefreetoenterintoacontractoftheirchoiceaslongasitcomplieswiththebasic common law requirements. However, in large constructionprojects, parties are increasingly adopting the Fédération Internationale des Ingénieurs-Conseils(FIDIC)FormsofContract.Contracts which place both design and construction obligationsuponcontractorsarenotuncommonandreliance isplaced in thisregardontheFIDICYellowBook. Design-onlycontractsarenotcommon.Thearrangementknownasmanagementcontracting,withonemainmanagingcontractorandwiththeconstructionworkdonebyaseriesofpackagecontractors,isverycommoninZimbabwe.


Thegeneralconceptsofofferandacceptanceandthe intentiontocreate binding legal relations (animus contrahendi) are essentialrequirements to anyvalid contract inour jurisdiction. Generally,thereisnorequirementforcontractstobeinwrittenform.Verbalagreementsareequallybindingwherethetermsofsameareclearor easily ascertainable. However, parties are generally advisedtoenter intowrittenagreements,as it iseasier toprove the termsin the event of disputes arising. The parties’ freedom to agreeon the contractual terms is subject to certain statutes such as the


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Typically,paymentswillbemadebytheemployertothecontractoratintervalsbasedontheproductionofprogresscertificates,whichmust state the amount payable. The contract normally providesthat a certain percentage of each of these payments stated in thecertificatebewithheldastheretentionmoney.Theexactamountof theretentionmoney,andwhentheretentionmoneyispayable,willdependonthetermsofthecontract.Whereretentionmoneyisnotprovidedfor,performanceguaranteesfrom the contractor and subcontractors are normally required.Sometimesbothretentionandperformancebondsareagreedupon.


Performancebonds,insurance,bankandparentcompanyguaranteesareusedextensively inconstructionprojects. Thenatureof suchbondsandguaranteesissubjecttoagreementbetweenemployerandcontractor.Therearenorestrictionsonthenatureofsuchbondsorguarantees.


Itispossibleforcontractorstohaveretentionoftitlerightsinrelationtogoodsandsuppliesusedintheworks,dependingonthetermsoftheagreementregulatingtherelationship.Inprinciple,itispermissibleandnormalforcontractorstohaveretentionoftitlerightsinrelationtogoodsandsuppliesusedintheworks,andtoremovegoodsandmaterialsfromthesiteifpaymentisnotforthcoming.However, it should be noted that our common law of propertyrecognisestheprincipleofaccession.Ifthematerialspermanentlyaccedetothestructureandtheland,theybecomepartofthestructureandcannotberemoved ifsuchremovalwillcausedamage to thestructure.Itisalsonotpossibletocontractoutofthecommon-lawprinciplesrelatingtoaccession.Zimbabwean law also recognises a builder’s or contractor’s lien,whichoperatesbylawandisaformofenrichmentlien.Thelien(ius retentionisorrightofretention)entitlestheholderthereof,inthiscasethebuilder, toretainpossessionof thepropertyuntil theexpenses incurredby thebuilder in respectof thepropertywhichare recoverable by the builder are paid to the builder. A lien isdischargedaftertheclaimissatisfied.



Yes, it is common for employers to engage project managersto supervise their projects. Subject to agreement, third parties


There are no specific statutory requirements in respect ofconstruction contracts. Generally, the law in Zimbabwe requireseverycompanyinvolvedinconstructiontocomplywithlabour,tax,healthandsafetylaws.Generally,occupationalhealthandsafety laws thatareapplicabletoallemployersandemployeesacrosssectorsaretheLabourAct[Chapter 28.01] and theNSSAAccident Prevention andWorkersCompensationScheme (NoticeNo. 68of 1990). At a secondarylevelthereistheProtectionfromSmoking(PublicHealth(Controlof Tobacco)) Regulations S.I.264 of 2002 that prohibit smokingin enclosed public places including workplaces, and the LabourRelations (HIV and AIDS) Regulations S.I.202 of 1998 whichprohibit discrimination on the grounds of AIDS/HIV status, thePneumoconiosisAct[Chapter15.08]andtheFactoriesandWorksAct[Chapter14.08]anditsregulations.Constructioncontractorsareallowedtoemployexpatriateworkerswith specialised skills, subject to the granting of the relevantworkpermitsandresidencypermitsbytherelevantgovernmentalauthorities. Zimbabwe’s tax system is a residency-based, asopposed to a source-based, system. The contractor is obliged todeductpay-as-you-earn(PAYE)taxfromthesalariesofalltaxableemployeesandremitthesametothefiscalauthorities.All qualifying contractors are required to pay corporate taxes tothe fiscal authorities. A new business is required to be registeredwith the Zimbabwe RevenueAuthority (ZIMRA) within 30 daysof incorporation. All companiesmust appoint a public officer ofthecompanywithinonemonthof theestablishmentofsuchofficeorplaceofbusiness. ThepublicofficerhastobeapprovedbytheCommissionerGeneralandisanswerableforallcompanytaxmatters.Whereacontractorisnotregisteredfortaxpurposes,theemployeris obliged to deduct withholding tax from any paymentmade tosuchcontractorpursuanttothecontract,andremitsametothefiscalauthorities.Under theWorkersCompensationScheme, theemployer is liableforanyamountsdueinrespectoftheworkerscontributionstotheschemeuntilsuchtimeasthecontractorisassessedbyNSSA.TheemployerisentitledtorecoveranyamountspaidtoNSSApursuanttothis.


This normally depends on the provisions of the contract. Inpractice,provisionisnormallymadeforretentionmoney,whichismoneythatiswithhelduntilthetakingoveroftheworksortheendof the defects liability period,whichever the parties agree to. Itisnotuncommonforparties toagree to the releaseofpartof theretentionmoneyuponthetakingoveroftheworks,withthebalancebeing paid upon expiration of the agreed defects liability period.The retention money is based on a certain percentage (usuallybetween5%and10%)of theamountpayableby theemployer tothecontractor.

Wintertons Legal Practitioners Zimbabwe


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Themainrequirementisthatthepenaltyratemustbeagreedbybothparties in thecontractandshouldbe in the frameworksprescribedin the law (min–max). However, if the intent of the party is tocompensatethefinancialloss,theamountmustbeevidencedbyfacts.



Normallythisistobestipulatedoraddressedinthecontract,whichordinarilyprescribesthenatureandscopeoftheallowablevariationsand the procedure to be adoptedwhere a variation to the agreedworksissought.Ifthecontractdoesnotprovideforvariationstotheworks, anyvariationof the scopeofworkmaybeperformedonlyonthebasisofanadditionalagreementsignedbybothpartiesinaccordancewiththecontract’snon-variationclause. VariationsfromdesigndocumentationrequireadditionalapprovalfromStateauthorities.


It is normal for parties to agree to omission of certainworks forvarious reasons. Such agreed omissions should preferably berecorded in the construction contract. Theomittedworks canbecompletedbytheemployerorathirdpartyengagedbytheemployer.


Wherethepartieshavenotspecificallyaddressedthis,certaintermsare implied into a construction contract by law or practice. Forinstance, all contractsmust complywithapplicable laws, and thecontractor shall be obliged to follow construction norms, health,safetyandenvironmentalrules,andanyotherlawimposedbytheState,atalltimes.Normally,generalprinciplesofcontractapplyinthisregard.Certainterms, which necessarily arise from the contractual relationshipbetween the employer and the contractor, orwhich arenecessaryinthebusinesssensetogiveeffecttothecontract,willbeimplied.Impliedtermsmayincludethattheemployerwillco-operatewiththecontractor,orthattheemployerwillnotdeprivethecontractorofpossessionof theconstructionsitesave inaccordancewith thetermsoftheagreement.Itmayalsobeanimpliedtermthatthecontractorwilldotheworkinagoodandworkmanlikemanner,usesuitablematerialandperformhisobligationsinsuchawayastoconformtotheapplicablebuildingregulations.Thesearejustexamplesofimpliedterms.Thesecanofcoursebeexpresstermsintheconstructionagreement.


In theeventofaconcurrentdelayattributable tobothparties, thecontractorwouldnormallybeentitledtoanextensionoftime.The

may act as an employer’s representative, inwhich case theywillinterfacewiththecontractor,supervisecompliancewiththetermsof theconstructioncontractandtakeremedialactionifnecessary,andgive instructions to thecontractoronbehalfof theemployer.Alternatively, the third party could play a limited advisory rolewhereitwillmonitorthecontractor’sperformance,reportandmakerecommendationsto theemployerwhowillengagethecontractoritself.Thethird-partyprojectmanager/supervisormustexerciseitsdutiesprofessionallyand,totheextentpossible,impartially,inordertoensurecompliancewiththetermsofthecontractandapplicablelawsandby-laws.It shouldbenoted that there are also regulatory requirements forevery construction site to be inspected/supervised by State/localgovernmentauthorities(aspartoftheauthorisationforconstructionworks). In supervising construction projects, the respectivegovernmentauthoritiesmaysuspendconstructioncontractswherethereisabreachoflaw,constructionnormsorregulations,andonlythroughapetitiontothecourtsorusingthecourts’administrativemeans.However,indoingso,theywillbeactingonbehalfoftherelevant local government authority or administrative institution.Each local government authority has by-laws that regulate thestandardstobeobservedincarryingouttheconstructionworks.


The construction contract, like any commercial contract, recordsthe terms agreed to by the partieswho are at liberty to agree onany terms and conditions which are not prohibited by law andwhichdonotoffendpublicpolicy.Inthisvein,dependingonthecircumstancesofthecase,thepartiesmayagreethattheemployerwillpaythecontractorwhentheemployeritselfhasbeenpaid.


Itispermissibleforthepartiestoagreeinadvancetothequantumofliquidateddamagesorpenaltiespayablebythecontractortotheemployerintheeventofparticularbreaches,e.g.liquidateddamagesfor late completion. This is usually fixed as a percentage of thecontractvalue, and isnormallycappedat10%. These liquidateddamagesorpenaltiesare,however,subjecttotheprovisionsoftheContractual PenaltiesAct [Chapter 8:04] where applicable. Thecourt can reduce thepenalty in caseswhere thepenalty is out ofproportion to the loss or damage suffered at the invitation of theotherparty.Partiesmayagreeonthecontractualpenaltybeingpayableincaseofabreachoftheparties’obligationsundertheconstructioncontract.Zimbabwean lawdoesnot require that the amountdetermined asapenaltymustbeagenuinepre-estimateof loss. Invariably, theagreeddamagesarecappedatamountsfarlessthantheactuallossincurred.



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Itwilldependontheprovisionsofthedesignagreement.Normallythe designer is the owner of the intellectual property and theemployerhasrightsofuse.


Yes,thecontractorisentitledtosuspendworkswhentheemployerfailstofulfilitsobligationsundertheconstructionagreement,suchas payment, failure to providematerials, equipment, or technicaldocumentationasmaybeapplicable.


A contract is usually terminated through performance, novation,release, delegation, settlement, set-off, merger, prescription,superveningimpossibilityandonnoticegivenbyanaggrievedpartyinaccordancewiththerelevantcontractualprovisionsif theotherpartyhascommittedamaterialbreachofthecontract.In addition, the construction contract often provides for theemployer’s right to terminate the contract if there is a significantdelay in the contractor’s execution of the works, or for defaultslistedinthecontract.Itisgenerallypreferabletoexpresslysetouttheterminationrights,andtheconsequencesofsuchterminationinthecontract,althoughfailuretodosodoesnottakeawaytheaggrievedparty’sterminationrightsatlaw.


Yes, the use of force majeure clauses in commercial contracts,includingconstructioncontracts,iscommonpracticeinZimbabwe.Force majeure circumstances provide full release from liabilitiesunderthecommercialcontract.Force majeureeventsmaywidelybe defined as extraordinary, unpreventable and unforeseeablecircumstances caused by a natural phenomenon (such as anearthquake,landslide,hurricane,droughtandothers)orsocialandeconomiccircumstances(suchaswar,blockade,importandexportbansintheStateinterestandothers)whicharenotcontrollablebythewilloractionofeitherpartyandduetowhichthepartiescannotperformtheircontractualobligations.Themerefactthatacontracthas becomeuneconomic is not sufficient grounds for a claim forforce majeure. Thepartiesarealsofreetoagreeontheeventsorcircumstancesconstitutingforce majeure.


Contracts made for the benefit of a third party are binding ifacceptedbyathirdpartyforwhosebenefittheyweremade.Asa

contractorwouldnormallynotbeentitledtorecovercostinrespectoftheconcurrentdelay.Inallinstances,however,regardmustbehad to the facts,as therearecaseswhere it isappropriate for thecoststobeshared.


Suchspecificsmustbeaddressedintheconstructioncontract. Thescheduleofworksmustbeapartofthecontractandeveryactivityshould be agreed upfront, including floats. Any such variationsinitiatedbytheemployerentitlethecontractortoanextensionoftime.


Asageneralrule,thelimitationperiodforprescriptionofaclaim(usually debts) for disputes arising from contracts is three years.The prescription period starts to run from the date the cause ofactionarises,thatbeingthetimefromwhichtheclaimantbecameawareofallthefactswhicharenecessarytoenableittoproveitscauseofaction. Ordinarily, thelimitationperiodstartsuponfinalacceptanceoftheworks(takingover),evenifthecontractprovidesfor partial acceptances. However, if the contract provides for awarranty period longer than the prescription period then claimsundersuchwarrantycanbemadeatanytimeduringthesubsistenceofthewarranty.


Normally, construction is carried out on the basis of designdocumentation. A geotechnical survey is required to be donebefore the constructionworks begin. If such survey is providedby the employer, the contractor acts on the basis of relied-uponinformation. Contractors are usually permitted to verify theinformationbeforeaconstructioncontractcomesintoeffect.Afterit comes into effect, the contractor bears the responsibility forunforeseengroundconditionssavewherethefailuretoforeseesamewas a consequence of the professional negligence of the personsconductingthegeotechnicalsurvey.Inanyevent,theobligationsintheeventofunforeseengroundconditionsmustbeaddressedintheconstructioncontract.


Since changes in law affecting contractual relations are regardedas force majeure circumstances, both parties will bear the risk.However,inbigconstructionprojectsofnationalinterestwhicharefundedby international institutions, theProjectCompanyusuallyenters into an ImplementationAgreement pursuant to which theGovernment undertakes to provide relief to theProjectCompanywhereitisadverselyaffectedbysuchchangesinlaw.



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The designer bears the risk for his design, but the extent of hisliability can be limited contractually. Itmust be borne inmind,however,thattheliabilityofthedesignertoathirdpartycannotbeexcludedcontractuallyandintheeventofthedesignerbeingguiltyofadelict,suchasnegligence,andsuchdelictcausingdamagetoathirdparty,thedesignerwillbeliabletothatthirdparty.



Disputescanberesolvedeitherbyapproachingacourtorthroughalternative dispute resolution, such as mediation, arbitration orreferral to an expert. Construction agreements typically containarbitrationclausesintermswhereofpartieswillsubmittoarbitrationintheeventofadispute.


Theconstructioncontracttypicallysetsouttheprocedurethatmustbefollowedintheeventofadispute.Ifthecontractprovidesforarbitration, the disputes will be settled in terms of the relevantarbitrationclause.Wherethereisnopre-agreeddisputeresolutionprocedure,disputesareresolvedthroughthecourtsystem.TheHighCourthasoriginalandinherentjurisdictiontohearandadjudicateuponallcivildisputes,althoughwithlow-valuedisputesitmaybeeconomictoinstituteproceedingsintheMagistratesCourt.


Construction contracts in Zimbabwe commonly have arbitrationclausesprovidingforreferralofdisputestooneormorearbitratorsappointedeitherbyagreementbetweenthepartiesorbysomeotherbodysuchastheCommercialArbitrationCentreofZimbabwe.TheproceduretobefollowedinarbitrationproceedingsisstipulatedintheArbitrationAct[Chapter7:15].


Yes. Zimbabwe ratified the Washington Convention on theSettlementofInvestmentDisputesbetweenStatesandNationalsofOtherStateswhichwasincorporatedintoZimbabweanLawbytheArbitration(InternationalInvestmentDisputes)Act[Chapter7:03].TheConvention on theRecognition andEnforcement of ForeignArbitralAwardsrequirescourtsofcontractingstatestogiveeffectto private agreements to arbitrate and to recognise and enforcearbitrationawardsmade in thecontractingcountries. In termsofArticle3oftheConvention,eachcontractingstateshallrecognise

generalrule,duringtransferoftitletotheproperty(building), thenewowneracquiresrightsandobligationsrelatedtosuchproperty.Inthecircumstances,subsequentownersofabuildingmaybeableto claim against the original contract in relation to defects in thebuilding only if such defectswere revealed during the guaranteeperiodprovidedbytheoriginalcontract.


Set-off is recognised under common law in Zimbabwe. A debtqualifiesforset-off if it isadmittedor if it iscapableofeasyandspeedyproof.Inotherwords,onlyliquidateddebtsmaybesetoff.Furthermore,set-offisonlypossibleifthedebtsarebothdueandpayableatlaw.Thepartiescanregulatethequestionofwhetherset-offshouldapplyintheircontract.


Parties toa constructioncontractgenerallyoweadutyof care toeachother.Shouldeitherofthepartiescommitadelictualact,asopposedtoabreachofthecontract,suchdelictualactcouldgiverisetoadamagesclaim.Adelictisabreachofageneraldutyimposedbylawwhichwillgroundanactionfordamagesinthesuitoftheperson to whom the duty was owed andwho has suffered harminconsequenceofthebreach. Atypicaldelictualclaimwillarisewhereapartyhassuffereddamagesasaresultofthenegligenceorotherunlawfulconductof theotherparty. Thepartiesarefree tolimitthecircumstancesinwhichsuchliabilitymayarise.


Thenormalruleisthat,wheninterpretingacontract,thelanguageusedinthecontractmustbegivenitsordinary,grammaticalmeaning.If thiscreatesambiguity,ourcourtshavedevelopedvarious rulessettingouthowcontractsmaybeinterpreted.Thepurposeoftheserulesistoestablishthetrueintentionoftheparties.Thecourtsareguided,inconstruingcontractualprovisions,byjudicialprecedent.Partiesgenerallyregulatewhatcommonrulesshouldapplyin theinterpretationofthecontract.


Aconstructioncontract,likeanycommercialcontract,recordsthetermsagreed toby theparties,whoareat liberty toagreeonanyterms and conditionswhich are not prohibited by law andwhichdonotoffendpublicpolicy. Generally,constructioncontractsareunenforceableiftheyareagainstanyapplicablelawsorareagainstpublicpolicyandmorality(contra bonos mores).



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thebasisofwhichfreshproceedingsmaybeinitiatedincourts inZimbabwe.


Wheretherearenofactualdisputes,apartycanapproachthecourtbywayofaCourtApplicationinstitutedbywayofnoticeofmotionaccompaniedbysupportingaffidavits.If,however,thereisafactualdispute,thecorrectproceduretofollowistoapproachthecourtbywayofaction,whichisinstitutedbysummons.Ordinaryactionsorapplicationsareusuallyresolvedbythecourtoffirstinstancewithinsix(6)tofourteen(14)months.Dependingontheurgencyofthematter,apartycanbringanapplicationtocourtonanurgentbasis,inwhichcasetherulesofcourtrelatingtotimeperiodsarerelaxed.AppealsagainstdecisionsoftheHighCourtmaybedirectedtotheSupremeCourtanditnormallytakes6(six)to12(twelve)monthsforanappealtobeheardanddetermined.Wheretheissueraisesaconstitutionalquestion,itmaybedirectedtotheConstitutionalCourt.All decisions and proceedings of any inferior court and of anytribunal, board or officer performing judicial, quasi-judicial oradministrativefunctionsmaybetakenonreviewintheHighCourt,inrespectofgraveproceduralirregularitiesorillegalitiesoccurringduringthecourseofsuchproceedings.

arbitralawardsasbindingandenforcetheminaccordancewiththerulesofprocedureoftheterritorywheretheawardisreliedupon.UndertheConvention,anarbitrationawardissuedinanycontractingstatecangenerallybefreelyenforcedinanyothercontractingstate(savethatsomecontractingstatesmayelecttoenforceonlyawardsfromothercontractingstates–the“reciprocity”reservation).Additionally, Zimbabwe adopted (with amendments) the ModelLaw on International Commercial Arbitration adopted by theUnited Nations Commission on International Trade Law on 21June1985,togiveeffecttotheConventionontheRecognitionandEnforcementofForeignArbitralAwardsadoptedinNewYorkon10June1958. AwardsfrominternationalarbitrationproceedingsarerecognisedandenforcedinZimbabwesubjecttocompliancewiththeproceduresintheModelLaw.Apart from the above, the Civil Matters (Mutual Assistance)Act [Chapter 8:02] allows for the registration of awards from aninternationaltribunalasmaybedeclaredfromtimetotime.


Yes. TheCivilMatters (MutualAssistance)Act [Chapter 8:02]allows for the registration of a foreign judgment in Zimbabweprovidedthejudgmentwashandeddowninadesignatedcountry.Inrespectofcountriesthatarenotonthelistofdesignatedcountries,thejudgmentfromaforeigncourtconstitutesacauseofactionon



Wintertons – formerly Winterton, Holmes and Hill – was founded in 1902 and provides a full array of legal services. Our commitment is to deliver the highest quality legal services for our clients. We understand the importance of accurately interpreting our clients’ needs and delivering quick, reliable and cost-effective legal advisory and representation services to our clients. We pride ourselves on being a modern, full-service, commercial law firm. Our mixture of youth and experience enables us to maintain stability whilst creating innovative solutions for our customers’ needs.

Wintertons has been highly recommended as a Leading Firm in General Business Law and its Partners have been rated consistently as Leading Lawyers by Chambers Global over the past decade.

Nikita joined the firm on 1 July 2000 and became a partner on 1 July 2003. He heads the firm’s Energy, Infrastructure and Natural Resources Department and is co-head of the Commercial and Corporate Department. He has a large commercial practice and advises several listed and unlisted companies in relation to acquisitions, mergers, disposals and various types of contracts. He is currently involved in greenfield projects in the energy sector with work covering all aspects including the construction elements involved in such projects. He has handled several completed transactions for companies listed on the Zimbabwe Stock Exchange including share option schemes, rights issues, mandatory offers to minorities, Zimbabwe Stock Exchange Rules compliance and related matters. He has acted and continues to act as local counsel for a number of international law firms handling investment transactions into Zimbabwe. He is also involved in advising local, regional and international financial institutions in various loan transactions.

Nikita MadyaWintertons Legal PractitionersBeverly Corner, 11 Selous AvenueP.O. Box 452Harare Zimbabwe

Tel: +263 4 250 113/29Email: [email protected]: www.wintertons.co.zw

Farai Chigavazira is a Legal Practitioner in Wintertons’ Energy, Infrastructure and Natural Resources Department, where he has gained considerable experience. His practice involves corporate & commercial law, infrastructure & energy, mining, investment, regulatory compliance and regulatory risk management matters. Prior to joining the firm, he worked for Coghlan, Welsh & Guest and for the Law Society of Zimbabwe as a Legal Assistant. He graduated with a Bachelor of Laws (LL.B.) from the University of Fort Hare and went on to graduate from the same University with a Master of Laws (LL.M.) in International Trade and Business Law. He focuses particularly on corporate and commercial regulatory compliance, regulatory risk management matters, drafting and reviewing contracts such as power purchase agreements, concessions, co-ordination and joint venture agreements, together with general due diligence on renewable energy projects.

Farai ChigavaziraWintertons Legal PractitionersBeverly Corner, 11 Selous AvenueP.O. Box 452Harare Zimbabwe

Tel: +263 4250 113/29Email: [email protected]: www.wintertons.co.zw


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