ICLG The International Comparative Legal Guide to: & 2017

4th Edition

A practical cross-border insight into construction and

Published by Global Legal Group, with contributions from:

Advokatbyrån Hellgren Linander AB Matheson Advokatfirmaet Thommessen AS Mattos Filho, Veiga Filho, Marrey Jr e Allen & Gledhill LLP Quiroga Advogados Ashurst Melnitsky & Zakharov, Attorneys-at-Law City Development Law Firm Moravčević Vojnović i Partneri in cooperation Clyde & Co with Schoenherr COMAD, S.C. Nagashima Ohno & Tsunematsu Norton Rose Fulbright Inc. Duane Morris LLP Osterling Abogados FALM – Sociedade de Advogados, SP, RL Rose LLP Galadari Advocates & Legal Consultants SBH Law Office Kachwaha & Partners Simmons & Simmons LLP Kyriakides Georgopoulos Law Firm Skrine Lahsen & Cía. Abogados Stassen LLP Rechtsanwälte und Notare Makarim & Taira S. TUGA|ARAT Law Offices Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law Wintertons Legal Practitioners The International Comparative Legal Guide to: Construction & Engineering Law 2017

General Chapters:

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

2 Construction Insights in Africa: A Short Comparative Guide – Richard Dyton, Simmons & Simmons LLP 4 Country Question and Answer Chapters: Contributing Editor Tim Reid, Ashurst 3 Clyde & Co: Kon Nakousis & Teodor Lomaca 10 Sales Director 4 Belarus SBH Law Office: Alexander Filipishin & Vitaly Tvardovskiy 20 Florjan Osmani 5 Brazil Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados: Account Director Oliver Smith Eduardo Damião Gonçalves & Thiago Moreira 28 Sales Support Manager 6 Rose LLP: Peter A.K. Vetsch & Courtney C. Kachur 37 Paul Mochalski 7 Chile Lahsen & Cía. Abogados: Eduardo Lahsen Matus de la Parra Sub Editor & Pedro Mery Reyes 44 Hollie Parker Senior Editors 8 China City Development Law Firm: Cao Shan 51 Suzie Levy, Rachel Williams 9 England Ashurst: Tim Reid & Michael J. Smith 57 Chief Operating Officer Dror Levy 10 Finland Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law: Aimo Halonen Group Consulting Editor & Ieva Kovarskyte 69 Alan Falach 11 Germany Stassen LLP Rechtsanwälte und Notare: Anne Schoenbrunn Publisher & Florian Diestelmann 74 Rory Smith 12 Greece Kyriakides Georgopoulos Law Firm: Elisabeth Eleftheriades Published by Global Legal Group Ltd. & Kimon Tsakiris 81 59 Tanner Street London SE1 3PL, UK 13 Deacons: Kwok Kit Cheung 89 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 14 India Kachwaha & Partners: Sumeet Kachwaha & Dharmendra Rautray 95 Email: [email protected] URL: www.glgroup.co.uk 15 Indonesia Makarim & Taira S.: Heru Mardijarto & Alexandra Gerungan 102 GLG Cover Design 16 Ireland Matheson: Rhona Henry & Nicola Dunleavy 109 F&F Studio Design 17 Japan Nagashima Ohno & Tsunematsu: Naoki Iguchi 118 GLG Cover Image Source iStockphoto 18 Malaysia Skrine: Janice Tay & Richard Khoo 124 Printed by 19 Mexico COMAD, S.C.: Roberto Hernández García Ashford Colour Press Ltd. July 2017 & Adrián Roberto Villagómez Alemán 131

Copyright © 2017 20 Norway Advokatfirmaet Thommessen AS: Jacob F. Bull & Henrik Møinichen 137 Global Legal Group Ltd. 21 Peru Osterling Abogados: Gabriel Loli León & Miguel Delgado Ramos 145 All rights reserved No photocopying 22 Portugal FALM – Sociedade de Advogados, SP, RL: António André Martins ISBN 978-1-911367-62-8 & Joana Maltez 151 ISSN 2054-7560 23 Russia Melnitsky & Zakharov, Attorneys-at-Law: Semion Melnitsky & Olga Kruglova 156 Strategic Partners 24 Serbia Moravčević Vojnović i Partneri in cooperation with Schoenherr: Slaven Moravčević & Ivana Panić 166 25 Allen & Gledhill LLP: Ho Chien Mien 173 26 South Africa Norton Rose Fulbright South Africa Inc.: Emmanuel Tivana & Daniel McConnell 180 27 Sweden Advokatbyrån Hellgren Linander AB: Bo Linander & Mikael Lindberg 186 28 Turkey TUGA|ARAT Law Offices: Şeref Can Arat & Umut Tuğa 192 29 Galadari Advocates & Legal Consultants: Thanos Karvelis & Niel Coertse 200 30 USA Duane Morris LLP: Charles B. Lewis & Jeffrey L. Hamera 207 31 Zimbabwe Wintertons Legal Practitioners: Edmore Jori & Farai Chigavazira 215

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WWW.ICLG.COM EDITORIAL

Welcome to the fourth edition of The International Comparative Legal Guide to: Construction & Engineering Law. This guide provides corporate and international practitioners with a comprehensive worldwide legal analysis of construction and engineering and . It is divided into two main sections: Two general chapters. These chapters focus on: contractual interpretation; and construction insights in Africa. Country question and answer chapters. These provide a broad overview of common issues in construction and engineering laws and regulations in 29 . All chapters are written by leading construction and engineering and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor Tim Reid of Ashurst for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 1

Some Thoughts on Contractual Interpretation

Ashurst Tim Reid

of claims or complaints registered with the FSA, the Financial Introduction Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period in the construction and engineering sector typically prior to the Completion Date pertaining to any mis-selling or contain a number of different contractual mechanisms to manage suspected mis-selling of any insurance or insurance related product risk, including warranties, , and limitation and exclusion or service.” clauses. In Wood v Capita Insurance Services Limited [2017] UKSC 24, the English Supreme was asked to rule on It was accepted by all that the clause was open to interpretation. the meaning of an provision forming part of such a Competing interpretations were argued for: complex risk allocation regime. Although not a construction case, BY CAPITA BY THE SELLERS the decision is useful as it illustrates the current approach of the (1) all actions, proceedings, (1) all actions, proceedings, English towards contractual interpretation when a clause has losses, claims, , costs, losses, claims, damages, costs, competing meanings. charges, expenses and liabilities charges, expenses and liabilities suffered or incurred, and suffered or incurred, and In line with the principles most recently restated by the Supreme (2) all fines, compensation or (2) all fines, compensation or Court in Arnold v Britton [2015] UKSC 36, the Supreme Court remedial action or payments remedial action or payments confirmed that the court will look to both the language used imposed on or required to be imposed on or required to be (textualism) and the commercial context in which it was drafted made by the Company following made by the Company (contextualism) in order to ascertain the objective meaning of the and arising out of claims or [and in each case:] clause in question. The decision demonstrates the importance complaints registered with the FSA, the Financial Services A. following and arising out of of careful drafting and of ensuring that your works as a Ombudsman or any other claims or complaints registered cohesive whole. Authority against the Company, with the FSA, the Financial the Sellers or any Relevant Services Ombudsman or any Person other Authority against the Company, the Sellers or any Background (3) and [in the case of both (1) Relevant Person and (2)] which relate to the B. (i) and which relate to the Capita bought a specialist classic car insurance company (the period prior to the Completion Date pertaining to any mis-selling period prior to the Completion ‘Company’) from Mr. Wood and two others (the ‘Sellers’) under or suspected mis-selling of any Date (ii) pertaining to any mis- a sale and purchase agreement (the ‘SPA’). Under the terms of the insurance or insurance related selling or suspected mis-selling SPA, the Sellers: product or service. of any insurance or insurance related product or service. ■ Gave warranties to the effect that the Company was not in breach of any regulations or laws and they were unaware of any action or claims against it. Written notice of a warranty The Sellers’ more restrictive interpretation would mean Capita claim had to be given to the Sellers within two years, could not recover under the indemnity unless there had been a claim otherwise they were time-barred. made against the Company, or a complaint registered. Since Capita ■ Indemnified Capita in respect of losses derived from the mis- had referred the Company themselves to the FSA, this would not selling or suspected mis-selling of insurance products prior to apply. In contrast, Capita’s interpretation would, in principle, allow the sale. it to recover the compensation on the footing that this would fall Capita later discovered that the Company might have mis-sold within (1). insurance to customers. It was obliged to inform the Financial Services Authority (the ‘FSA’) and in due course agreed to put in The Commercial Court Decision place a remediation scheme to compensate customers who might have been affected. The Commercial Court preferred Capita’s interpretation. In Capita sought to recover its losses under the indemnity which particular, the thought that there was no good reason why provided that the Sellers would indemnify Capita against: “all the happenstance of what triggered an FSA investigation should actions, proceedings, losses, claims, damages, costs, charges, determine the Sellers’ obligation to indemnify. In addition, a expenses and liabilities suffered or incurred, and all fines, number of more minor linguistic and syntactical points supported compensation or remedial action or payments imposed on or this construction, such as the comma after “incurred” at the end of required to be made by the Company following and arising out (1) and the absence of any such comma after “Company” in (2).

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On the facts, the Supreme Court acknowledged that applying The Court of Appeal Decision business common sense helped identify the purpose of the clause: to protect Capita against the adverse consequences of mis-selling. The Court of Appeal disagreed, and determined that the indemnity However, that has to be considered against the language used and did not apply in the absence of claims or complaints registered with the contractual context. The Supreme Court preferred the Sellers’ the FSA. more limited construction of the clause, the balance being tipped Christopher Clarke LJ preferred the Sellers’ construction: the clause in its favour by both the language used and, more importantly, the naturally appears to start with an obligation to indemnify against contractual context. two categories of loss, both qualified by the requirements that follow On language, the Court agreed with the Court of Appeal’s analysis. and arising out of claims or complaints registered with the FSA or It also rejected detailed points of style and syntax which it thought others. In addition, it would not make sense if the second part of (A) were of little assistance in construing an opaque clause. The “against the Company, the Sellers or any Relevant Person” did not contractual context favoured a more restrictive approach. Although apply to provision (1) as that fails to contain any provision about the Capita clearly had an interest in obtaining as broad an indemnity person against whom the action must be sought. against mis-selling as possible, the Sellers had already covered Christopher Clarke LJ also considered the contractual context, similar matters by giving warranties which the parties had agreed in particular, the fact that Capita could have claimed under the should be limited in quantum and time. The Sellers had an interest warranties before the two-year time limit expired. He stated “the in limiting any further exposure after that time had elapsed. The fact that the deal may have been, in this respect from Capita’s view, scope of the indemnity, therefore, had to be assessed against those a poor one, is not, in my view, a circumstance which should dictate warranties. It was not “contrary to business sense” for the parties a different interpretation from that which, for the reasons that I have to agree wide-ranging warranties which were subject to a time limit, stated, I derive from the words used”. and in addition to agree a further indemnity that is not subject to a time limit but is triggered only in limited circumstances (i.e. claims or complaints to the FSA). The Supreme Court Decision Had the indemnity stood on its own, and not formed part of an Agreeing with the Court of Appeal, the Supreme Court dismissed overall risk allocation regime, the Court may well have reached a the appeal. In doing so, the Court rejected an argument based on the different conclusion. proposition that Arnold v Britton had altered the guidance given in an earlier case, Rainy Sky SA v Kookmin Bank [2011] UKSC Comment 50, making it more likely that a literal rather than commercial interpretation of contractual provisions would be favoured. The The decision of the Supreme Court adds clarity to the Arnold Supreme Court clarified that the approach taken in Arnold and decision by confirming that when ascertaining the objective Rainy Sky was consistent: the “recent history of the of meaning of an unclear clause, both the language of the clause contractual interpretation is one of continuity rather than change”. and the commercial context in which it was drafted will be taken As such, the Supreme Court confirmed that the courts will look to into account. Business common sense may assist but has to be both the language of the clause (textualism) and the commercial considered against the language used and the commercial context. context in which it was drafted (contextualism) in order to ascertain In any event, the interrelation of these interpretative tools will the objective meaning of the clause in question. The extent to always be determined by the specific facts of each case. which each is used will vary according to the circumstances. Most importantly for the construction and engineering industry, Greater emphasis is likely to be given to textual analysis where the Wood highlights the willingness of the courts, when looking at the dispute concerns complex agreements agreed between sophisticated commercial context, to consider all of the contract mechanisms and parties and with the assistance of skilled professionals. Conversely, not just the relevant clause. Careful and precise drafting is essential commercial context will play more of a role where the agreement not only in relation to each individual clause, but to the contract as is more informal, or lacking in detail. That said, there are always a whole. exceptions and every case will be decided on its own facts.

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Tim Reid Ashurst Broadwalk House 5 Appold Street London EC2A 2HA

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

Tim Reid is a partner in London and specialises in the resolution of disputes in the energy and construction and 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 . In addition to the successful conduct of proceedings, Tim also has considerable experience of the successful conduct of , (national and international) and a large number of . As well as being a 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 UK Guide for Construction.

Ashurst is a leading 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 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, disputes and international .

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Simmons & Simmons LLP Richard Dyton

Nations Department of Economic and Social Affairs (“UNDESA”), 1 Introduction Nigeria’s urban population increased by 20.4% between 2011 and 2015, and is expected to grow by a further 19.4% from 2015 to 1.1 The following chapter represents a comparative analysis of laws in key African states where construction appears 2020. to be most prevalent. We have picked jurisdictions in East The Nigerian government’s ‘Vision 2020’ is aimed at developing the Africa, West Africa and Southern Africa, which are the country’s road, rail and airport infrastructure. fastest growing regions at 4.9%, 4.5% and 2.7% growth, An example is an agreement signed by the Government in May 2014 respectively. North African states, though not specifically with China Railway Construction Corporation agreeing to invest covered in this chapter, such as Egypt and Algeria, have stabilised since the Arab Spring and the projects in those US$13.1bn in the expansion of the country’s railway network. countries are increasing by 45% (value increasing by 195%) Centenary City, a proposed ‘smart city’ to rival the likes of Dubai and so we continue to monitor the political situation and the and Singapore, which is being planned (with UAE developer Eagle consequent changes in as the previous turmoil Hills) in Abuja, demonstrates Nigeria’s ambitious construction returns to normal. There is massive development potential plans. on the African continent (as can be seen below from the analysis of activities and trends). While global macro- economic factors have meant projects are stalled in some 2.3 South Africa jurisdictions, the overall trend from increasing urbanisation and the use of sovereign debt means the long-term overall As one of sub-Saharan Africa’s big four economies, there continues approach is upwards and we have found increasing interest to be significant construction activity in South Africa. However, from investors in all of the 54 states within Africa where we have provided advice. the spike in the run up to, and following, the 2010 World Cup has largely subsided. Despite accounting for nearly 50% of projects By providing a comparative analysis of some of the in Southern Africa, stagnating economic growth has seen the most relevant factors in construction such as liability, environmental approvals and corporate structures, the reader suspension of some large-scale infrastructure projects, such as the should be able to discern how the general approach of the US$7.5bn Durban Dig Out Port. laws in particular regions will affect the specific construction Despite some challenging years, in 2016 the Government entered project concerned. into a transformative agreement with seven major infrastructure companies with combined annual construction revenue of circa US$3.3bn. 2 Activities and Trends There continues to be significant real estate and energy projects, particularly the construction of two high-value coal-fired power 2.1 Kenya stations at Kusile and Medupi (with an estimated cost of US$15bn combined), alongside a number of water and hydropower projects. Kenya is home to a quarter of the large infrastructure projects taking place in East Africa, including the US$3.8bn Mombasa-Nairobi 2.4 Tanzania railway, the second most valuable in East Africa. In its ‘Vision 2030’ initiative, the country aims to become a middle As with Nigeria, Tanzania has a long-term development strategy in income economy by 2030. The construction industry is expected its ‘Vision 2025’ plan. At the heart of this is the development of to grow at an average compound annual growth rate of 6.8% until the construction sector, seen as permeating other industries to spark 2020, with the main drivers being port, rail and housing projects. growth in social and economic infrastructure. Until recently, the country boasted the Bagamoyo Port Project, valued at US$11bn and 2.2 Nigeria which would have become the largest port in East Africa. But a new, more austere, government decided to shift focus to ports at Through various government initiatives to support construction Dar es Salaam and Mtwara. Construction still remains central to and promote international investment in infrastructure projects, the government strategy. Nigerian construction industry is thriving. According to the United

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rights, insurance proceeds, authorisations and licences, IP and 3 What Is the Approach To Clauses tangible assets. The charges can take the form of fixed or floating. Excluding or Limiting Liability In Importantly for the construction sector, security can be granted to Construction Contracts? lenders over future assets. For a company granting security, this would be subject to the company’s constitutional authority and an 3.1 Kenya assessment of whether it is in the company’s commercial interest. Finally, guarantor arrangements are also possible to secure the obligations of third parties. The Kenyan legal system is based on the English common law system and, as such, similar principles apply in respect of clauses In terms of enforcement, generally there are no restrictions on seeking to exclude or limit liability. enforcing security interests over assets in Kenya. However, if a creditor has taken security by way of possession of an ownership In the absence of any restrictions, such clauses will depend on the document, it must seek the approval of the court in order to take negotiation strength of the parties. control of or sell the land. Enforcement of security over shares is effected via Power of Attorney and Share Transfer Form. 3.2 Nigeria

4.2 Nigeria It is commonplace for contractors in Nigerian construction projects to exclude liability for indirect or consequential loss. The construction contract may also exclude liability for economic loss. Nigerian law provides for the granting of security over a whole range of assets including real , plant and machinery, equipment, It is likely any such exclusion clauses will be subject to mitigation receivables, cash and shares. Generally, such assets can be wholly by the contractor and be subject to guarantees in respect of or partially assigned, sub-leased, pledged, mortgaged, charged, performance; however, such protection is usually limited by a hypothecated or subject to any security interest as applicable. specified maximum amount recoverable from a contractor inthe form of liquidated damages. Security can be enforced without any specific restriction. As with other developed construction industries, the Nigerian courts would be unwilling to uphold any exclusion clauses relating 4.3 South Africa to wilful breach, or . Nigerian law also prohibits exclusions of liability arising from and death. South African construction projects follow recognised limited recourse transaction structures. The security therefore reflects the 3.3 South Africa requirements of lenders, and is typically granted over the entire issued share capital in the project SPV, mortgages over any real As the use of FIDIC and NEC contracts are common in South property, security over bank accounts and rights to take the benefit Africa, the relevant regime for limitation and exclusion of liability of any project agreements. The security over the shares in the will be applicable. project SPV is usually tied to funders’ step-in rights. Contractors will generally limit liability by reference to available In addition, there may be specific registration requirements if the professional negligence cover, and will seek to exclude damages for grant or enforcement impacts on existing licences. For example, any consequential loss entirely. In addition, contractor damages will be security granted over a mineral right requires registration within 60 capped as a percentage of the contract price, to be negotiated based days of grant at the Mineral and Petroleum Titles Registration Office. on the bargaining strength of the parties. Delays as a result of the contractor are covered by time extensions, 4.4 Tanzania rights of suspensions and liquidated damages, with anything outside the power of the parties being covered by force majeure. Four types of security exist in Tanzania: mortgages; charges; ; As a result of the volatility of the South African Rand, fluctuations in and pledges. These serve to operate in the same way as they do under exchange rate can have a dramatic effect on the price of commodities, English law, meaning that security can be taken over the same types raw materials and labour for international companies. As such, a of assets and in the same way as Kenya, Nigeria and South Africa. contractor would often seek to negotiate a cap for currency risk (as a percentage of the contract price), in addition to and separate from an overall cap on liability. 5 Common Business Structures

3.4 Tanzania 5.1 Kenya

Similar to Kenya, the inclusion of limitation of exclusion of liability Kenyan law allows for three kinds of companies: sole proprietor; clauses in the contract is largely down to the bargaining position of partnership; and limited liability companies (“LLCs”). the parties. However, the restrictions on ownership/management can be somewhat onerous. Partnerships are limited to between two and 4 How Can Security Be Taken By Creditors? 20 partners and LLCs are limited to between two and 50 owners. Further, in order to operate as a builder or contractor, the business must be registered with the National Construction Authority, which 4.1 Kenya oversees construction activities. Depending on the scale of the construction activity, directors may be required to hold a construction- Comprehensive security can be taken over assets under Kenyan law. related Bachelor’s degree, a diploma or to sit a trade test. Security can be granted over shares, bank accounts, land, contractual

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provides extensively for foreign workers rights, national labour 5.2 Nigeria and immigration policy and practice is to decline applications for residence permits where local skills are available to meet Limited liability companies are most commonly used for Nigerian employment requirements. Therefore, by inference, companies construction projects. It should be noted that foreign companies that operating in Tanzania will be obliged to source labour locally if at intend to carry on business in Nigeria must incorporate a separate all possible. local entity for that purpose. In addition, foreign contractors cannot carry out construction works unless registered with the Contractors Registration Board. 5.3 South Africa 7 How Does the Law Deal With Generally, South Africa follows recognised corporate structures for construction projects; however, the country allows for the use of Environmental Protection? private and public companies, joint ventures, SPVs and partnerships. Parties can also choose an external company structure, which is a 7.1 Kenya foreign company registered to carry on business in South Africa. The main oversight body mandated to regulate and coordinate 5.4 Tanzania environmental issues is the National Environment Management Authority (“NEMA”). Based on the Environmental Management Foreign companies can operate by way of a group subsidiary in the and Coordination Act, developers of certain projects are required form of a limited liability Tanzanian company or by registering a to undertake an Environmental Impact Assessment (“EIA”). limited liability company in Tanzania as a branch of the foreign These projects include the construction of new roads, tunnels, company. the establishment of industrial estates and housing developments exceeding 30 housing units. In addition, the Cabinet Secretary on the recommendation of NEMA sets noise emission standards for 6 Local Labour construction sites.

6.1 Kenya 7.2 Nigeria

Part of the reason the National Construction Authority (“NCA”) Environmental compliance in Nigeria is generally regulated by the was constituted was due to a spate of building collapses following Environmental Impact Act (“EI Act”). Similar to Kenya, under unskilled labourers working on construction sites. The NCA now the EI Act any activity likely to have a significant effect on the accredits and registers qualified labourers in an effort to drive up environment due to its extent, nature or location requires an EIA. local skilled employment. The EIA requires a written submission to the Federal Ministry of the As a member of the East African Community (“EAC”), Kenya has Environment (“FME”), including an overview of the project and committed to implementing the free movement of people from the analysis of the risk to the environment. This is followed by the other member states. Work permit fees have been eliminated for completion of an EIA and submission of a report to the satisfaction of citizens of member states, but for other foreign workers, a permit will the FME, after which the applicant is issued with an Environmental only be granted if that person offers a benefit to Kenya. Therefore, Impact Statement in respect of the project. workers are free to take up roles which cannot be filled by local In addition, companies whose operations may have a potential impact labour. Companies that employee foreigners are also required to on the environment must comply with the National Environmental submit a report to the Government. Standards and Regulations Enforcement Agency, which addresses issues such as noise, air and sea pollution, water quality and climate change. 6.2 Nigeria

Requirements exist under industry-specific legislation regarding 7.3 South Africa domestic labour. For example, the Mining Act of Nigeria requires mineral title holders to conclude community development There are a number of environmental laws which apply to the agreements prior to commencing operations. The agreement obliges construction sector in South Africa, including but not limited to: the transfer of social and economic benefits to the relevant project (i) Environmental Conservation Act 73 of 1989; area through scholarships, apprenticeships, local employment, (ii) National Forests Act 84 of 1998; infrastructure development and support for local SMEs. (iii) National Water Act 36 of 1998; (iv) NEM: Air Quality Act 39 of 2004; 6.3 South Africa (v) NEM: Biodiversity Act 10 of 2004; (vi) NEM: Protected Areas Act 57 of 2003; All foreign nationals must obtain a work permit to work in South (vii) NEM: Waste Act 59 of 2008; and Africa, unless the foreign national has been granted permanent residency . There are no rules obliging the hiring of local (viii) National Environmental Management Act (“NEMA”) 107 of 1998. nationals. NEMA provides a list of activities which cannot be carried out without an EIA. Generally, each of the above also set out minimum 6.4 Tanzania standards and restricts certain activities, breach of which is punishable by fines of ZAR5 million – ZAR10 million and 10 years’ Although, the Non-Citizens (Employment Regulations) Act 2015 imprisonment.

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In addition, the Occupational Health and Safety Act and the Construction Regulations also regulate health and safety in the 8.3 South Africa construction industry, providing minimum standards for working practices, use of equipment and machinery and welfare of workers. South Africa has advantageous investment and tax treaties with over 50 countries in Africa, Europe and Asia. However, South Africa’s approach to investment protection has shifted and since 2012, South 7.4 Tanzania Africa has cancelled Bilateral Investment Treaties (“BITs”) with Belgium-Luxembourg, Spain, Germany, Switzerland, Netherlands The main law governing this area is the Environmental Management and Denmark. It is expected that the remaining European BITs will Act 2004 (“EMA”). It sets a general prohibition that no developer be cancelled, and discussions are ongoing regarding South Africa’s shall implement a project likely to have a negative environmental BIT with China. impact or, if an EIA is required, before it is obtained. In November 2015, the Protection of Investment Act was passed Developers must submit a project report to the National in Parliament and is expected to eventually replace South Africa’s Environmental Management Council (“NEMC”) which then decides BITs. if a project will have a significant impact on the environment. If the project report does not detail sufficient mitigating circumstances, it will require an EIA. 8.4 Tanzania Similarly to Kenya, any developer of a project of the type specified Tanzania currently has double taxation agreements with 10 under the EMA for which an EIA is required must undertake an countries: Canada; Denmark; Finland; India; Italy; Norway; South environmental impact study prior to commencing the project. Any Africa; Sweden; Switzerland; and Zambia. permit or licence issued for the purpose of carrying out a project will not entitle the developer to undertake the project, unless an EIA Tanzania has also entered into BITs with a number of countries certificate has been issued in accordance with EMA. including the United Kingdom, Denmark, China, Canada, Finland, Germany, Mauritius, Italy, the Netherlands, Sweden, Switzerland The developer is responsible for the monitoring and auditing of and Turkey. the environment which includes verifying the impact of its project on the environment, adhering to the Ministry of Energy and Minerals approved plans, taking measures to mitigate impact on the 9 Are There Any Restrictions On the environment and to comply with the terms and conditions of the Transfer Of Funds In/Out Of the Country? EIA certificate. The developer is also required to prepare a decommissioning report, indicating its commitment to rehabilitating the project site. 9.1 Kenya

There are no restrictions on the transfer of funds into and out of 8 Has the Country Signed Any Favourable the country. However, for amounts over US$10,000, all banks in Tax/Investment Treaties Through Which Kenya are required to obtain of the source of funds for Investors Can Structure Investments? anti-money laundering compliance. Such information must be disclosed by customers undertaking these transactions and in turn the financial institution must disclose the information to the Central 8.1 Kenya Bank of Kenya.

Kenya has 10 bilateral tax treaties which are in force. These treaties were concluded with: Norway; Denmark; Sweden; the United 9.2 Nigeria Kingdom; Germany; France; Canada; India; Zambia; and South Africa. Where foreign currency or capital is brought into Nigeria to be invested, a certificate of capital importation must be issued by Kenya has also signed bilateral treaties with several other countries an authorised dealer (i.e. a bank licensed by the Central Bank of but is yet to ratify them. These countries are: South Korea; Nigeria to deal in foreign exchange) within 24 hours of receipt of Qatar; Seychelles; Iran; United Arab Emirates; Netherlands; the funds in Nigeria. The certificate is evidence that the funds were Mauritius; Nigeria; Kuwait; Italy; and the East African Community brought into Nigeria for investment and enables the investor to (constituting Tanzania, Uganda, Rwanda and Burundi). access official foreign exchange markets and allow repatriation of It should be noted that the application of tax treaties is subject to dividends and profits. the limitation of benefits provisions contained in Kenyan domestic legislation. 9.3 South Africa

8.2 Nigeria The South African Reserve Bank (“SARB”) supervises the transfer of funds into and out of South Africa. There are no restrictions on Nigeria currently has in force double tax treaties with Belgium, the transfer of funds into South Africa, provided the receiving bank Canada, China, Czech Republic, France, the Netherlands, Pakistan, is satisfied the transaction is at fair market value. The approval of the Philippines, Romania, Slovakia, South Africa, and the United the South African Reserve Bank is required to transfer funds outside Kingdom. By virtue of these treaties, the withholding tax rate on of the country. interest, dividends and royalty payments to persons/entities in these South Africa is a member of the Financial Action Task Force and jurisdictions is reduced from 10% to 7.5%. the Eastern and Southern Africa Anti-Money Laundering Group, Investments in Nigeria may also be made through offshore therefore relevant anti-money laundering provisions apply. investment entities situated in other jurisdictions.

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the courts of Kenya in accordance with the Convention on the 10 How Does the Law Deal With Recognition and Enforcement of Foreign Arbitral Awards (New Government Expropriation? York Convention) on application to the High Court of Kenya under Section 36 of the Arbitration Act (Act No. 4 of 1995). In 10.1 Kenya accordance with article I (3) of the Convention, the Government of Kenya has declared that it will apply the New York Convention to the recognition and enforcement of arbitral awards made only in The of Kenya protects against government the territory of another contracting state. The arbitral award will, expropriation by way of Article 40 on the right to property. No however, not be enforced in Kenya if such award is contrary to person in Kenya may be deprived of property except in cases of eminent domain or if the land or interest in land is acquired for the public policy of Kenya or falls within the exclusions set out in reasons of public interest. Section 37 of the Arbitration Act. The Constitution of Kenya provides that any law that arbitrarily deprives a person of property of any kind or of any interest in, or 11.2 Nigeria right over, any property of any kind is illegal. The Foreign Investment Protection Act also guarantees investors Foreign arbitration awards are enforceable in Nigeria through: against expropriation of private property by the Government. (i) instituting an action in court, which requires the claimant For example, in the mining industry, the Mining Act provides for to prove the validity of the award under an arbitration payment of full and prompt compensation by the Government in the agreement; event of expropriation. (ii) registration under the Foreign Judgments (Reciprocal Enforcement) Act (Chapter F35), LFN 2004 and the Reciprocal Enforcement of Judgments Ordinance 1922, Cap. 10.2 Nigeria 175, LFN 1958, which will require the arbitration award to be enforceable by a court in the foreign before any There are limited instances where expropriation of assets is award is made; and/or prescribed by law; however, generally speaking, Government (iii) enforcement under Section 51 or Section 54 of the Arbitration acquisition of immovable property (e.g. a mineral title) is prohibited. and Conciliation Act (Chapter A18) LFN 2004, which In addition, the NIPC Act guarantees that no enterprise will be recognise foreign arbitration awards on application. nationalised or expropriated, except in cases of national interest or for a public purpose. 11.3 South Africa In the case of nationalisation of expropriation, the person/entity is entitled to prompt payment of fair and adequate compensation, and Foreign arbitration awards are enforceable in South Africa through a right of access to the courts to determine the investor’s interest the Foreign Arbitral Awards Act. The effect of the act is to classify or right to such compensation. In addition, the Government must foreign arbitration awards as an order of the South African court, authorise repatriation of any compensation paid to a convertible therefore allowing for direct enforcement, subject to certain currency where applicable. restrictions (e.g. if enforcement would be contrary to public policy). South Africa is also a contracting state to the New York Convention. 10.3 South Africa 11.4 Tanzania Sections 25(2) and (3) of the Constitution of South Africa allows for the expropriation of property for a public purpose for the public Tanzania has ratified the New York Convention, but the treaty has interest, subject to compensation agreed between the affected parties not been enacted to give it legal effect in Tanzania. A foreign award or approved by court. Property in this context could include specific is therefore enforceable in the High Court of Tanzania either by an rights or licences, for example, mining rights. action or as if it were a of the court. Enforcement of the award will only be permitted if certain conditions 10.4 Tanzania laid out in the Arbitration Act Cap 15 are met. The foreign award must have been: The Constitution of Tanzania is the main source of law governing (i) made in pursuance of an agreement to arbitrate which is valid protection against expropriation. Article 24 guarantees the right to under the law by which the agreement is governed; own property and to protect the property in accordance with the law. (ii) made by a provided for in the agreement or Deprivation of property for nationalisation or any other purpose constituted in a manner agreed by the parties; without the authority of law which makes provision for fair and adequate compensation is unlawful. (iii) in conformity with the law governing the arbitration procedure; In terms of protection for investors, the Tanzania Investment Act (iv) final in the country in which it was made; and 1997 contains provisions that prohibit expropriation of property without due process of law and the guarantee of fair compensation. (v) in respect to a matter which may lawfully be referred to arbitration under the laws of Tanzania. A foreign arbitral award will not be enforced in Tanzania if the 11 How Does the Country Account For court is satisfied that: the award has been annulled in the country in Foreign Arbitration? which it was made; the party against who it is being enforced has not been given sufficient notice; or the award does not deal with all the questions referred to or contain decisions on matters beyond the 11.1 Kenya scope of the agreement for arbitration.

Foreign arbitral awards would be recognised and enforceable by

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12 Conclusions Richard Dyton Simmons & Simmons LLP 12.1 Construction investment in infrastructure and capital projects City Point, One Ropemaker Street is an important aspect for enabling GDP growth in African London, EC2Y 9SS jurisdictions. In October 2016, the International Monetary United Kingdom Fund revised its global growth forecast downward for 2017 and only Kenya, with dramatic demographic and urban changes, is Tel: +44 20 7825 4203 Mob: +44 77 8751 8409 bucking the trend and growing at a rate to be expected of an Email: [email protected] emerging economy – close to 6%. Investment in infrastructure URL: www.simmons-simmons.com through construction is providing populations access to basic services such as water, education and healthcare. It also increases business confidence while lowering transaction Richard is Head of the International Projects Group and specialises in non-contentious in the UK and internationally. costs by making it easier for businesses to move people, goods and services. The long-term trend is therefore for increased In addition to being a member of the Society of Construction Law, construction to fuel the demand for infrastructure in many Richard is also an accredited adjudicator at the Institution of Civil African jurisdictions. In order to navigate the construction . He holds an MSc in construction law and arbitration from King’s College, London. He is also one of the authors of the process, it is essential for sponsors, investors and lenders to “’s Legal Handbook”. understand the legislative framework in that jurisdiction. The above snapshots on relevant areas will guide that intelligence Richard acts on all stages throughout the construction process from and for more in-depth risk analysis further electronic the provision of building contracts, performance bonds and guarantees to insurance arrangements. He has experience in advising clients in a information is available. Simmons & Simmons is currently in range of construction matters, including: the process of producing an innovative new product to assist clients looking to invest in Africa and having advised in every ■■ SNC-Lavalin on its contractual arrangements for the Ambatovy African jurisdiction, we are in a good position to provide that mining project in Madagascar; and level of advice. ■■ Credit Suisse on the construction documentation for implementation works replacing building management systems. Acknowledgment The author would like to thank Mohamed Omer, Matthew Caley and Michael Nguyen for their significant and valuable assistance in the preparation of this chapter.

We are a leading international law firm with fully integrated teams working across 21 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; and 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.

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Australia Kon Nakousis

Clyde & Co Teodor Lomaca

■ ABIC SW-2008 – Simple Works Contract (standard contract 1 Making Construction Projects for non-housing work – except for QLD where SW-C 2011 is used); 1.1 What are the standard types of construction contract ■ ABIC BW-1 2002 – Basic Works Contract (works up to in your jurisdiction? Do you have contracts which AU$50,000); and place both design and construction obligations upon ■ ABIC EW-1 2003 – Early Works Contract. contractors? If so, please describe the types of The International Federation of Consulting Engineers also produces contract. Please also describe any forms of design- only contract common in your jurisdiction. Do standard form contracts for civil engineering construction projects you have any arrangement known as management internationally. contracting, with one main managing contractor There are a number of other standard forms available through and with the construction work done by a series industry associations, such as the Master Builders, along with public of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction authorities and government bodies (e.g. GC 21). contracts” as an abbreviation for construction and engineering contracts.) 1.2 Are there either any legally essential qualities needed to create a legally binding contract (e.g. in common Standards Australia produces a number of standard form contracts law jurisdictions, offer, acceptance, consideration for use in Australia, which include: and intention to create legal relations), or any specific requirements which need to be included in a ■ AS 4000 – 1997 – General Conditions of Contract – construct- construction contract (e.g. provision for only contract for major projects; or any need for the contract to be evidenced in ■ AS 2124 – 1992 – General Conditions of Contract – civil writing)? engineering, building, electrical, mechanical engineering contract; There are three essential qualities to create a legally binding contract ■ AS 4902 – 2000 – General Conditions of Contract for Design in common law jurisdictions such as Australia: and Construct – imposes design and construct obligations on 1. an agreement; the contractor; 2. consideration; and ■ AS 4300 – 1995 – General Conditions of Contract for Design and Construct commercial design and construct contract; 3. an intention to enter into legal relations. ■ AS 4915 – 2002 – Project Management – General Conditions; For a valid agreement to form, an offer by one party needs to be ■ AS 4916 – 2003 – – General accepted by the other. An invitation to tender is not considered as Conditions; an offer, submitting a tender will, however, be considered an offer: ■ AS 4122 – 2010 – General Conditions of Contracts for Spencer v Harding (1870) LR 5 CP 561. Consultants; The offer or promise must be supported by consideration: Dunlop ■ AS 4916 – 2002 – Construction Management General Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 at 853. Conditions; and The terms of the agreement may be express or implied and may be ■ AS 4917 – 2003 – Construction Management Trade Contract partly written or partly oral; however, the terms must be sufficiently – General Conditions. certain in their operation to be enforced in a court of law: Elizabeth In 2015, Standards Australia proposed to replace AS 4000 – 1997 Bay Developments Pty Ltd v Boral Building Services Pty Ltd (1995) and AS 2124 – 1992 with a new standard, AS 11000. However, after 36 NSWLR 709. Certain Contracts for the performance of domestic conducting a process of stakeholder engagement, a decision was building work must be in writing. made to cancel the project. Both AS 4000 – 1997 and AS 2124 – Questions of intention to enter into legal relations may arise through 1992 will continue to operate, while further stakeholder consultation contract negotiations, for example, a situation may arise where the takes place. The Australian Building Industry contract suit also parties have settled on key terms but have not yet agreed to be bound provides a number of standard form contracts, including: by those terms, Ratto v Trifid Pty Ltd [1987], although in the context ■ ABIC MW-2008 – Major Works Contract (standard contract of construction contracts, this is unlikely. for non-housing work – except for QLD where MW-1 2003 is used);

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changed employers. Each of the various schemes are funded 1.3 In your jurisdiction please identify whether there is by either a levy on building and construction work (paid by a concept of what is known as a “letter of intent”, in the person for whom the work is being performed) or a levy which an employer can give either a legally binding or calculated on a percentage of wages paid by the employer. non-legally binding indication of willingness either to (b) Labour enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether The Fair Work Act 2009 (Cth) (FWA) is the primary or not a full contract is ever concluded. regulating the employment of the majority of Australian employees (note that it does not apply to some public sector Preliminary agreements, such as a letter of intent or heads of employees). agreement, are sometimes used to enable progress on a project while The FWA and related regulations establishes minimum the final terms are being negotiated. However, parties need to be conditions of employment, sets out the rights of workers Australia (including apprentices and foreign workers) and the industrial clear as to the intention of the preliminary agreement and whether relations obligations of most employers. Other employment parties intend for it to be legally binding: Masters v Cameron (1954) matters such as health and safety, long service leave, 91 CLR 353, Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] of apprentices and equal opportunity obligations NSWCA 227. are largely regulated by the States and Territories (although in To prevent a preliminary agreement from becoming a contract, some circumstances Federal legislation may apply). Foreign parties should include the terms ‘subject to contract’. workers are required to hold a valid visa allowing them to work in Australia. (c) Taxation 1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to Taxation is regulated by the Federal government. There are have in place when carrying out construction work? no specific tax laws or regulations relating to construction For example, is there employer’s liability insurance workers. However, workers who are required to live away for contractors in respect of death and personal from their normal residence may be entitled to concessional injury, or is there a requirement for the contractor to tax treatment in the form of a living away from home have contractors’ all-risk insurance? allowance. The allowance is designed to compensate the worker for the additional expenses incurred. There are no ‘construction industry’ specific compulsory or statutory (d) Health and Safety insurances. Common insurances required under a construction Legislation and regulations in each of the states and territories contract include: impose rigorous obligations in relation to health and safety. ■ professional indemnity insurance; Obligations are imposed on persons conducting a business or undertaking, officers, workers and others including members ■ public liability insurance (for on- and off-site work); of the public who enter the site (duty holders). Duty holders ■ construction works insurance; are required to ensure the health and safety of workers and ■ transit insurances for the transport of items to be used on site; other persons, so far as reasonably practicable. The duties are concurrent and overlapping, meaning that both the employer ■ property insurance for completed works, supplies on site and and contractor may hold the same duty in relation to the same plant and equipment; work. Legislation imposes consultation, cooperation and ■ motor vehicle property insurance; and coordination obligations on each of the duty holders. Further, ■ motor vehicle third party property damage and personal the duties are not transferrable; a party cannot contract out injury insurance. of their obligations. Additional obligations are imposed on principal contractors in relation to the management of General insurances required include workers compensation building and construction work. insurance along with motor vehicle third party personal injury insurance for registered plant and motor vehicles. Key obligations exist in relation to providing a safe workplace, plant and equipment, systems of work, information, instruction and training and supervision of workers. Penalties for failure 1.5 Are there any statutory requirements in relation to comply with work health and safety legislation can result to construction contracts in terms of: (a) general in significant financial penalties for both the organisation and requirements; (b) labour (i.e. the legal status of those individuals. Officers of an organisation who fail to comply working on site as employees or as self-employed with their personal obligations face the additional penalty of sub-contractors); (c) tax (payment of income tax of a term of imprisonment. employees); or (d) health and safety? Each of the states and territories excluding Victoria and Western Australia adopted the Model Work Health and Safety (a) General Requirements legislation in an effort to develop a nationally consistent In each of the States and Territories, domestic or residential system of regulation. Western Australia is in the process of building work over a certain monetary value must be in adopting the model laws. Victoria has elected to maintain its writing, signed by the parties and particularise the work to be current system of regulation. undertaken.

Security of Payment legislation operates in each of the States 1.6 Is the employer legally permitted to retain part of and Territories prohibiting ‘paid when paid’ provisions the purchase price for the works as a retention to be in contracts and requiring progress payments to be made. released either in whole or in part when: (a) the works Contract clauses purporting to include ‘paid when paid’ are substantially complete; and/or (b) any agreed provisions are rendered void. defects liability is complete? Portable long service schemes operate in each of the States and Territories where workers continuously accrue long Retention amounts are common practice under Australian service leave independent of the employer they are engaged construction contracts to ensure proper performance of the contract. by. The schemes were designed to prevent a situation where Retention or security often takes the form of insurance bonds, workers would lose any accrued entitlement when they

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retention funds and bank guarantees. Retention funds are generally held as a percentage of progress payments up to an upper limit 2 Supervising Construction Contracts (generally a percentage of the contract price). A party may have access to the security where permitted under the 2.1 Is it common for construction contracts to be contract. Generally, the security may be called upon if the contractor supervised on behalf of the employer by a third defaults under the construction project, to rectify defects during the party? Does any such third party (e.g. an or architect) have a duty to act impartially between project or for the cost of rectification of defects during the defects contractor and employer? Is that duty absolute or is liability period. it only one which exists in certain situations? If so, Queensland is the only jurisdiction that regulates security and setting please identify when the architect/engineer must act limits on the amount of retention monies including the amounts that impartially. Australia may be deducted from progress payments to be held for security: Part 4A of the Queensland Building and Construction Commission Within Australia, it is common for construction contracts to be Act 1991 (Qld). supervised by a third party on behalf of the employer. Supervisors are often known as the “superintendent” or “principal representative”.

1.7 Is it permissible/common for there to be performance The superintendent has an obligation to act in a fair, just, unbiased bonds (provided by banks and others) to guarantee and skilful manner when acting independently of the contractor performance, and/or company guarantees provided to and employer, this may be express or implied: Perini Corp v guarantee the performance of subsidiary companies? Commonwealth [1969] 2 NSWLR 530. Are there any restrictions on the nature of such bonds However, in practice, the role and responsibilities of the and guarantees? superintendent are dependent on the contract defining their duties. The contract may also specify that the superintendent is an agent of Bank guarantees are often used as security under construction the employer and thus impartiality is not required. contracts, are typically unconditional, and can be called upon on demand. Parent company guarantees are also common practice whereby the parent company guarantees the performance of the 2.2 Are employers entitled to provide in the contract that subsidiaries obligations under the contract. Alternatively, the parent they will pay the contractor when they, the employer, company may step into the shoes of the contractor to perform its have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when obligations under the contract. paid” clause? Often a contract will impose conditions that must be first satisfied before a party can call upon a form of security. Employers are not entitled to pay contractors upon their own Courts will only restrain a beneficiary from calling on a performance payment. Since 2009, all Australian jurisdictions have implemented guarantee in limited circumstances, such as where the contract Security of Payment Legislation, rendering “pay when paid” clauses between the parties clearly restricts the right to call on the guarantee: or similar provisions void. Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty Ltd [2011] FCA 1337. 2.3 Are the parties permitted to agree in advance a fixed Queensland is the only jurisdiction that imposes conditions sum (known as liquidated damages) which will be when calling on security: Queensland Building and Construction paid by the contractor to the employer in the event of Commission Act 1991 (Qld). 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. 1.8 Is it possible and/or usual for contractors to have does the sum to be paid have to be a genuine pre- retention of title rights in relation to goods and estimate of loss, or can the contractor be bound to supplies used in the works? Is it permissible for pay a sum which is wholly unrelated to the amount of contractors to claim that until they have been paid financial loss suffered? they retain title and the right to remove goods and materials supplied from the site? Parties are permitted to agree in advance on liquidated damages in the event of particular breaches subject to some restrictions. The Contract clauses purporting to retain title over goods until payment predominant restriction is that the liquidated damages cannot be a is made by the employer are common practice, see Aluminium penalty. Liquidated damages will be considered a penalty if they Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] WLR 676, are ‘extravagant and unconscionable’ or a set amount that does not however, if the materials or goods have been fixed in position and consider the degree of the breach: Dunlop Pneumatic Tyre Company incorporated into the project as part of permanent works, title rights Limited v New Garage and Motor Company Limited [1915] AC 79. in relation to those goods will transfer to the employer rendering the Most construction contracts calculate damages as an amount for clause ineffective: Otis Elevator Co Pty Ltd v Girvan (Qld) Pty Ltd every day that a prerequisite is not met under the contract, and (QSC 23 August 1990). therefore proportionate to the loss suffered. Retention of title clause gives rise to a ‘security interest’ as Further liquidated damages have to be a genuine pre-estimate of the defined under the Personal Property Securities Register Act 2009 cost of the loss when considering the parties knowledge at the time of Cth, which created a national scheme for registration of security the agreement: Esanda Finance Corporation v Plessnig [1989)]166 interests. In order for the security interest to be effective, it needs CLR 131. Liquidated damages are commonly sought for delays in to be registered. completion of the contract or for failure to meet previously agreed performance standards.

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obligations. A term which will also be implied is that each 3 Common Issues on Construction party will do all that is necessary to secure performance of Contracts the contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] 144 CLR 596. ■ Progress payments/certificates: If there are no amounts 3.1 Is the employer entitled to vary the works to be done included in the contract, the contractor will be entitled to under the contract? Is there any limit on that right? be paid a reasonable amount for work done: Horton v Jones (No 2) [1939] 39 SR (NSW) 305. The Security of Payment The employer has limited ability to compel the contractor to vary the Legislation (SOPA) in each Australian jurisdiction provides scope of work under a contract unless there is express contractual for entitlement to progress payments. provision for this. That said, most construction contracts will ■ Good faith: this remains an unsettled area of Australian Australia feature an express right to vary the scope of works and make the law. However, there is authority supporting the existence resultant alterations to the contract sum and time for performance. of a duty of good faith in commercial contracts: Macquarie In contracts which include an express right to vary, that right must be International Health Clinic Pty Ltd v Sydney South West Area exercised reasonably: CW Pty Ltd v Condux Corp Ltd Health Service [2010] NSWCA 268; Cordon Investments Pty Ltd v Lesdor Pty Ltd [2012] NSWCA 184. (NSWSC, Rogers CJ Comm D, 13 October 1989, unreported). In addition, there is no power to vary the contract after a certificate of In addition, courts that are reluctant to imply any good faith practical completion has been issued; Jamieson Constructions Ltd duty in a contract may be willing to imply a duty of honesty and v Christchurch City (High Ct (Christchurch), Cook J, 8 November reasonableness: Renard Constructions v Minister for Public Works 1984, unreported). (1992) 26 NSWLR 234. In order to make the adjustment to the contract sum resulting from any variation, the payment is usually calculated by reference to 3.4 If the contractor is delayed by two events, one the rates agreed under the contract or the actual costs uncured, together fault of the contractor and one the fault or risk of with an allowance for profits and overheads. In contracts which do his employer, is the contractor entitled to: (a) an not provide for agreed rates, variations are usually claimed by the extension of time; or (b) the costs occasioned by that concurrent delay? contractor at a ‘reasonable rate’, which will commonly be assessed by the contract superintendent. A contractor’s entitlement will depend upon whether the delay events are actually concurrent (e.g. events that are independent but 3.2 Can work be omitted from the contract? If it is which occur at the same time and affect progress at the same time), omitted, can the employer do it himself or get a third or are different delays with concurrent effects. In practice, actual party to do it? concurrent delays will rarely arise in construction agreements. If a contractor and an employer both caused delay, events are treated Unless there is clear provision for it in the contract, work cannot as sequential delays with concurrent effects, and a process of factual be omitted from the contract: Carr v JA Berriman Pty Ltd [1953] enquiry is required to determine the true cause of the delay. If the 89 CLR 327. true cause of the delay is due to the employer, the contractor is In cases where work is permitted to be omitted from the contract, usually entitled to an extension of time and delay costs. However, if express provision is a requirement to allow the work to be either be the true cause of the delay is a result of the contractor, the contractor carried out by the employer themselves or carried out by another is generally not entitled to time or money. contract: Commissioner for Main Roads v Reed & Stuart Pty Ltd In the case of a true concurrent delay, the position in Australia is not [1974] 131 CLR 378. It has previously been attempted to side-step settled. It is likely that Australian courts would adopt the English this restriction on omission and reallocation of work by separating position; that is, the contractor is entitled to an extension of time out the omission of the work from the award of the works to an where a breach or delay caused by the employer is not the dominant alternative contractor but this too has been prohibited: Bethlehem cause of delay, but at least has equal “causative potency” with the Singapore Private Ltd v Barrier Reef Holdings Ltd (NSWSC, 15, delay caused by the contractor or any other matter causing delay: 27 October 1987). Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd [1999] 70 Con LR 32. 3.3 Are there terms which will/can be implied into a Most Australian standard form contracts expressly provide that construction contract? an entitlement to delay costs flows from an entitlement to an extension of time. Consistent with the English position, however, ■ Statutory warranties: legislation it is likely that the Australian courts would require the contractor to and sale of goods legislation in all Australian jurisdictions demonstrate a clear causal connection between any delay costs it imposes warranties regarding title, merchantable quality and reasonable fitness for purpose standards. incurred and the matter caused by the employer. ■ Reasonableness: It will be implied in contracts that each This usual position, however, may be modified by the express terms party will act reasonably in the performance of the contract: of the construction contract as agreed between the parties. Renard Constructions (ME) Pty Ltd v Minister for Public Works [1992] 26 NSWLR 234. 3.5 If the contractor has allowed in his programme a ■ Materials and workmanship: It is implied that works will period of time (known as the float) to allow for his own be built in a workmanlike manner with proper materials: delays but the employer uses up that period by, for Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC example, a variation, is the contractor subsequently 454. entitled to an extension of time if he is then delayed ■ Cooperation: A term will be implied that each party must after this float is used up? do all things necessary to enable the other parties to have the benefit of the contract and be able to perform their The generally accepted view is that if there is a period of time in the

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contractor’s programme that enables it to accommodate certain risks (e.g. inclement weather or industrial activity), this “float” time is a 3.9 Who usually owns the in relation buffer and risk management tool for the benefit of the contractor. to the design and operation of the property? In situations where a contract provides that an extension of time Section 35(2) of the Copyright Act 1968 (Cth) (Copyright Act) or variation will be granted only if the delay affects achieving provides that largely, the author of the work retains ownership completion by the contract completion date, then the effect is that of copyright. In circumstances where the obligations of the the float has to be used prior to an extension of time being due. author’s employment under either a contract of service (or even Australian courts are reluctant to imply an obligation on either the apprenticeship) required the carrying out of the design work, Principal or the contractor to preserve the float and/or achieve the section 35(6) provides that the owner of the copyright is in fact the target completion date. This obligation would arise only if it were

Australia employer. expressed as a term of the contract: Glenlion Construction Limited v It is important to note that a party does not necessarily need to be The Guinness Trust [1987] 39 BLR 89. the copyright owner in order to make use of the copyright material. Under the drafting of many of the Australian standard form contracts, Certain associated rights can be licensed (either expressly or the Contractor owns the float. Accordingly, the Contractor will be impliedly) by the owner of the copyright. For example, there is an entitled to an extension of time for the effect of a risk event caused implied licence in favour of the owners of land to use architectural by the Principal (e.g. the variation) on the target date for completion, drawings and plans for the purpose they were contracted for. This even though this may not delay achievement of completion beyond implied licence also generates an in favour of the contractual date for completion. the successors in title: Concrete Pty Ltd v Parramatta Design & Developments Pty ltd [2006] 229 CLR 577. 3.6 Is there a limit in time beyond which the parties to Exclusion or modification of these general rules is possible by a construction contract may no longer bring claims agreement (section 35(3)), including by way of an assignment at against each other? How long is that period and from law (s196(1)). what date does time start to run?

The time limit for bringing a claim for is, 3.10 Is the contractor ever entitled to suspend works? generally speaking, six years, of which time occurs from the date of the breach (e.g. s14 Limitations Act 1969 (NSW)) (Limitations There is no common law right to suspend works for any reason. In Act). The time limit is extended to 12 years in circumstances where the event that there is suspension without sufficient lawful cause, the the contract is made under a (e.g. s16 Limitations Act). suspension can entitle the innocent party to claim that the contract The majority of the standard form construction contracts contain has been repudiated by the unlawful party and to terminate the provisions relating to a “final certificate”Final ( Certificate). The contract on the basis of said repudiation: Foran v Wight [1989] 168 Final Certificate is to be issued at the completion of a project and deals CLR 385. with all claims which arise from or in relation to the contract. The A limited right to suspend the work without terminating the contract Final Certificate is also often used, with some exceptions, as evidence is provided for in the standard form contracts, or in cases where the of compliance with the contract and some claims may be extinguished employer directs suspension of the works as a result of default. In all depending on the express wording of the Final Certificate. Australian jurisdictions, a claimant under the Security of Payment legislation has a statutory right to suspend works in circumstances where money is due and payable as a result of an unpaid claim. 3.7 Who normally bears the risk of unforeseen ground conditions? 3.11 On what grounds can a contract be terminated? Are Except for where the matter is addressed expressly, the contractor there any grounds which automatically or usually will bear the risk where the completion of the project is made more entitle the innocent party to terminate the contract? Do those termination rights need to be set out problematic by unexpected ground conditions: Pearce v Herford expressly? Corporation [1968] LGR 747; Thiess Services Pty Ltd v Mirvac Queensland Pty Ltd [2006] QCA 50. Three circumstances give rise to a right to terminate a contract Several of the Australian standard form contracts enable the at common law: Koompahtoo Local Aboriginal Land Council v employer and contractor to share the risk between them. In these Sanpine Pty Ltd [2007] 233 CLR 115. These are: provisions, where conditions are such that they would not have been ■ where the term breached is a “condition” or an essential term foreseen when the project was tendered for, the contractor will be of the contract; able to claim an extension of time where delays occur and also claim ■ where the term breached is “intermediate” in nature but it is a for the extra costs incurred in order to bring the project to completion serious breach with serious consequences; and that have arisen as a result of the unanticipated conditions. ■ repudiation. In circumstances where misleading or deceptive information was The right to terminate on any of these grounds exists regardless provided by a party prior to contract, the Australian Consumer of any termination provisions embodied in the contract, unless the Law (schedule 2 if the Competition and Consumer Act 2010 (Cth)) termination clause expressly excludes the common law rights and (Australian Consumer Law) may provide a remedy. is a ‘code’ or complete statement of circumstances in which the contract can be terminated. 3.8 Who usually bears the risk of a change in law Repudiation occurs when one party evinces a clear intention to no affecting the completion of the works? longer be bound by the contract or only to perform the contract in such a way that it is substantially inconsistent with the fundamental The majority of Australian standard form contracts may allocate the obligations of that party: Shevill v Builders Licensing Board risk of a change in law to the employer. [1982] 149 CLR 620. The required intention will be determined

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objectively but can be established by the parties’ words, conduct or obligations will be discharged: Codelfa Construction Pty Ltd v State actual inability to perform: Sunbird Plaza Pty Ltd v Maloney [1988] Rail Authority (NSW) [1982] 149 CLR 337. While the common law 166 CLR 245. In order to terminate the contract, the innocent party position is that loss resulting from a frustrating event lies where it must accept the repudiation. In the case of construction contracts, falls, some Australian jurisdictions have altered this position with repudiation notably gives the contractor an opportunity to seek legislation. damages for loss of bargain, or alternatively, recover on a quantum meruit basis. 3.13 Are parties which are not parties to the contract Both parties are discharged from the obligation of further entitled to claim the benefit of any contract right performance following termination of the contract although all which is made for their benefit? E.g. is the second or accrued rights and obligations remain: Southern Han Breakfast subsequent owner of a building able to claim against Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd the original contracts in relation to defects in the Australia building? [2016] HCA 52. Separately, express rights of termination may also be provided The position at common law is that there is no entitlement for an for in the contract, detailing which breaches are of such serious a individual to claim the benefit of a construction contract if they are nature as to entitle the party to terminate the contract or otherwise, not in fact a party to that contract. This stance has been modified providing a cure regime, for example, when a contractor is no longer by legislation in the Northern Territory, Queensland and Western in compliance with the contract programme. In these cases, either Australia. party may issue a show cause notice which would specify a deadline by which the breach must be rectified. Therefore, the original building contract cannot be enforced by any subsequent owner. It is the case, however, that a subsequent building In addition, the contract may make provision for termination for owner may be owed a duty of care by the builder to avoid pure convenience without default of either party. Reliance on such clauses economic loss (which includes defective work and/or materials). may depend on the right being exercised in good faith, but this will Generally speaking, the courts will not foist such a tortious duty turn on the terms of the contract itself: Apple Communications v of care in circumstances where the injured party was reasonably Optus Mobile [2001] NSWSC 365; Sundararajah v Teachers capable of taking steps to protect themselves, for example, by Federation Health Ltd [2009] NSWSC 1443. controlling the physical events which lead to the loss, obtaining contractual warranties in respect of the standard of work and 3.12 Is the concept of force majeure or frustration known materials used or notably, obtaining insurance against the economic in your jurisdiction? What remedy does this give loss which had been suffered: Woolcock Street Investments Pty Ltd v the injured party? Is it usual/possible to argue CDG Pty Ltd [2004] 216 CLR 515; Brookfield Multiplex Limited the successfully that a contract which has become Owners-Corporation Plan 61288 (2014) 254 CLR 185. uneconomic is grounds for a claim for force majeure?

Although a doctrine of force majeure does not exist in Australian 3.14 Can one party (P1) to a construction contract which law, the incorporation of a force majeure clause in a construction owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any contract is often seen. The clause makes provision for the allocation limits on the rights of set-off? of risk in circumstances where the performance of the contract becomes impossible due to supervening events beyond the control The existence of a right to set-off turns on the provisions of the of the parties. It can be said that reliance on such clauses is individual contract in question. The terms of contract must more frequent and extensive than on the common law doctrine of demonstrate a clear intention to allow an employer to withhold any frustration. monies from a certified amount under the contract for any such right The effect of a force majeure clause is normally that the affected to be rightfully and lawfully exercised: Leighton Contractors Pty party’s obligations to perform the contract will be suspended in Ltd v East Gippsland Catchment management Authority [2000] the event of a force majeure event. The clause also often provides VSC 26. that either party may acquire the right to terminate the contract in circumstances where the effects of the force majeure event continue for a pre-established duration. The fact that the contract has become 3.15 Do parties to construction contracts owe a duty of more expensive (or impractical) to perform is usually not in and care to each other either in contract or under any other legal doctrine? of itself a force majeure event: Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235. There are a number of implied duties owed to an employer under a A frustrated contract on the other hand, is a contract which, contract, additional to those duties expressly stated in the contract. following its formation, and without default by either party, is These implied duties are: incapable of being performed due to an unforeseen event, resulting 1. to carry out and complete work in a careful and competent in the obligations under the contract being radically different from manner, in accordance with the law and within a reasonable those contemplated by the parties at the time of contracting: Codelfa time; Construction Pty Ltd v State Rail Authority (NSW) [1982] 149 CLR 2. to ensure that any materials supplied are of a good and 337. The establishment of frustration of contract is not without acceptable quality and reasonably fit for the purpose for its challenges, and will not be found in circumstances where the which they are required; and occurrence of the particular event was foreseen by the parties or 3. to ensure that any dwelling constructed is reasonably fit for made provision for in a force majeure clause: Davis Contractors habitation. Limited v Fareham Urban District Council [1956] AC 969. In addition to any contractual obligations, a duty of care to prevent The effect of frustration of a contract is not that the contract will personal injury, to prevent damage to property and, in some cases, be void from its commencement, but instead will be automatically to avoid pure economic loss may be owed. terminated at the point of the frustrating event and all future

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Where the contractor or subcontractor has acted negligently, the law undoubtedly permits the persons injured or whose property has 3.18 Where the construction contract involves an element been damaged to hold those contractors liable, even in cases where of design and/or the contract is one for design only, are the designer’s obligations absolute or are there there have been subsequent post completion failures or accidents limits on the extent of his liability? In particular, does which have been caused by that same negligence. A contractor, the designer have to give an absolute guarantee in under express terms, will ordinarily indemnify the employer for any respect of his work? claims for personal injury or property damage which arise as a result of the contractor carrying out the work. The imposition of a tortious In the absence of any express modification in the contract, at duty of care to avoid pure economic law is, however, less easily common law, a designer must exercise reasonable care and skill ascertained. On the whole, the courts are less likely to impose such in undertaking any design duties: Voli v Inglewood Shire Council Australia a duty of care where the injured party was easily capable of taking [1963] 110 CLR 74. The standard applied is that of a reasonably the necessary steps to either control the events which gave rise to competent person exercising that particular skill: Mutual Life & the loss or by obtaining contractual warranties in respect of the Citizens’ Assurance Co Ltd v Evatt [1970] 122 CLR 628. standard of work and materials used or notably, obtaining insurance Professional Standards Acts operate in all Australian jurisdictions against the economic loss which had been suffered: Woolcock Street and permit the limitation of liability of professionals under approved Investments Pty Ltd v CDG Pty Ltd [2004] 216 CLR 515; Brookfield schemes. Multiplex Limited the Owners-Corporation Plan 61288 (2014) 254 CLR 185. Proportionate liability legislation also exists in all Australian jurisdictions, facilitating limitation of the liability of a party to reflect their proportion of the responsibility, in circumstances where 3.16 Where the terms of a construction contract are their negligence has caused economic loss, combined with the ambiguous, are there rules which will settle how that actions of other parties. ambiguity is interpreted?

The objective intent of the parties is used to settle any ambiguity in 4 Dispute Resolution a contract. This means that the terms of the contract are interpreted in the way that a would take them to mean. Ordinarily, this involves consideration of the actual text of the 4.1 How are disputes generally resolved? contract but also the context within which the parties came to agree the contract, including their knowledge at the time and the drive In the construction industry, disputes are often resolved in accordance and objective for making the agreement: Newey v Westpac Banking with pre-agreed processes. Construction contracts generally provide Corporation [2014] NSWCA 319; Mount Bruce Mining Pty Ltd v for a sequenced dispute resolution process. This process varies from Wright Prospecting Pty Ltd [2015] 256 CLR 104. contract to contract, but will usually mandate some combination of The courts have taken to considering the surrounding circumstances the following steps: a conference between the parties, , in order to unravel any ambiguity. But, it should be noted that this arbitration and expert determination. Usually, these steps are taken, does not extend to considering the parties’ subjective intentions or required to be taken, before the parties litigate in court. These at the time of contract and evidence of this, or prior negotiations dispute resolution clauses are generally enforceable provided they between the parties is inadmissible. are drafted with sufficient clarity and certainty. Even if the contract does not require the parties to engage in these dispute resolutions There is uncertainty in Australian law as to whether courts can have processes, parties often opt to engage in these processes to avoid the regard to the factual matrix where the terms of a clause disclose cost and hassle of court proceedings. no apparent ambiguity: Western Export Services Inc v Jireh International Pty Ltd [2011] 282 ALR 604; Technomin Australia With respect to court proceedings, building and construction disputes Pty Ltd -V- Xstrata Nickel Australasia Operations Pty Ltd [2014] are generally resolved in State and Territory courts. The litigant’s WASCA 164 (S). choice of court is generally determined by the availability of the remedy being sought (for example, the amount of compensation sought). 3.17 Are there any terms in a construction contract which are unenforceable? In addition to the above processes, each State and Territory has legislated to create a ‘security of payment’ regime. It is common for parties to make use of these regimes to resolve (at least temporarily) Per question 2.3 above, penalties are unenforceable. payment disputes. These statutory regimes allow persons who While there are no other specific provisions in a contract which are provide construction work (and/or related goods and services) to unenforceable, it is possible that where the contract as a whole is recover staged payments (known as ‘progress payments’). The determined by a court to be unconscionable under the Australian security of payment regimes were designed to ensure that parties Consumer Law. who perform construction work have an enforceable right to interim There may also be circumstances where contractual provisions payment despite clauses in construction contracts that purport to which attempt to contract out of certain legislative requirements are limit or block the ability of parties to recover payments. If the parties held to be unenforceable. For example, section 44 of the Security disagree on the right to, or quantum of, a progress payment, the of Payment Act 2009 (ACT) provides that it is prohibited for a security of payment regimes allows for an expedited adjudication party to attempt to ‘contract out’ of compliance with the Act and process whereby an independent adjudicator determines the the provisions will be deemed void which are inconsistent with the entitlement to, and quantum of, the progress payment due. Act or have ‘the effect of excluding, modifying or restricting’ the operation of the Act. Other states have similarly worded provisions in their equivalent legislation.

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arbitration in Australia is governed by the International Arbitration 4.2 Do you have adjudication processes in your Act 1974 (Cth) (IAA). The IAA adopts the 1985 UNCITRAL jurisdiction? If so, please describe the general Model Law. The IAA is applicable to all international commercial procedures. arbitrations conducted within Australia, except insofar as the parties contract out of the IAA and choose an alternative (for example, the Yes. Each State and Territory has a ‘security of payment’ regime domestic commercial arbitration procedure). which is a legislative regime designed to resolve, on an interim basis, disputes over progress payments in relation to construction work. 4.4 Where the contract provides for international In general, the regimes confer a statutory right to progress payments arbitration, do your jurisdiction’s courts recognise on persons who have undertaken to carry out construction work (or and enforce international arbitration awards? Please provide related goods and services) under a construction contract. advise of any obstacles to enforcement. Australia The legislation also provides for an expedited adjudication process to resolve disputes regarding entitlement to, and quantum of, Yes. The enforcement of international arbitration awards in progress payments. Australia is subject to the legislative framework of the 1958 New In general, a person who has carried out construction work York Convention on the Recognition and Enforcement of Arbitration will serve a ‘payment claim’ on the recipient of that work. The Awards, which was enacted as law in Australia by the International recipient of the work then must serve a reply known as a ‘payment Arbitration Act 1974 (Cth) (‘IAA’). The IAA also provides that schedule’ within a designated period. If no payment schedule is UNCITRAL Model Law on International Commercial Arbitration provided, the claimant can take steps to enforce the payment has effect in Australia. claim via adjudication or via the courts. If a payment schedule The IAA provides a relatively simple and succinct process of is provided, but proposed to pay an amount that is less than what recognition and enforcement of international awards. The basic was claimed in the payment claim, the claimant has the option of structure of the IAA is that international arbitration awards to which taking the matter to adjudication to be resolved by an adjudicator. the Act applies are presumed to be enforceable in Australia unless To commence adjudication, the claimant must prepare and serve an one of the defences prescribed by the IAA applies. adjudication application on the respondent and on an ‘authorised The grounds for refusing enforcement of a foreign arbitral award are nominating authority’. The authorised nominating authority then listed in section 8 of the IAA and are largely based on Article 5 of nominates an adjudicator to determine the adjudication application. the New York Convention. One minor difference is that the public The respondent may provide an ‘adjudication response’ in reply to policy ground is further elaborated on in the IAA. Under the IAA, the adjudication application. The nominated adjudicator must then an award is deemed to be contrary to public policy if: determine the claimant’s entitlement to the progress payment, the due date for payment, the interest rate on unpaid amounts and the ■ the making of the award was induced or affected by fraud or corruption; or parties’ liability for the adjudicator’s fees and expenses. Once the adjudicator issues their determination, and if the respondent fails to ■ a breach of the rules of natural occurred in connection pay the amount determined by the adjudicator, the claimant can take with the making of the award. steps to enforce the adjudicator’s determination in court. The various stages of the adjudication process are very condensed, 4.5 Where the contract provides for court proceedings and the entire process (from the payment claim to the adjudicator’s in a foreign country, will the of that foreign determination) may occur in a matter of weeks. The various court be upheld and enforced in your jurisdiction? deadlines for each step of the process are strictly enforced and lateness can be fatal to a party’s position. Yes, but only if certain further conditions are satisfied. In Australia, there are two ways to enforce a foreign judgment: (1) pursuant to the common law; and (2) pursuant to the Foreign Judgments Act 4.3 Do your construction contracts commonly have 1991 (Cth). arbitration clauses? If so, please explain how arbitration works in your jurisdiction. Enforcement at common law The recognition or enforcement of a foreign judgment at common Yes. Standard form construction contracts in Australia often law depends on the theory of obligation (i.e. that there is an possess arbitration clauses. Arbitration is often used where the obligation on the part of the judgment debtor to pay a sum of money dispute involves technical or commercial questions and it is a to the judgment creditor and that the foreign judgment is evidence of fairly common dispute resolution process within the building and that obligation). However, the obligation is not enforceable because construction industry. Parties to a construction contract will often of the foreign judgment – the obligation is strictly only enforceable pre-agree on the arbitration body, or the process of nominating when adjudged to be enforceable by a court in the forum, and the arbitrator. In the construction industry, most arbitrations are accordingly, reduced to the form of a judgment of the forum court. commenced pursuant to arbitration clauses. The outcome of the For an Australian court to accept that a judgment made in a foreign arbitration process is generally intended to be final and binding, country creates an obligation on the part of the judgment debtor that subject to limited review by the courts. Arbitration proceedings are the forum court is prepared to recognises and enforce, the judgment generally private, however, there may only exist limited rights of must satisfy the following for conditions: confidentiality in relation to the documents and materials produced 1. the foreign court must have ‘international jurisdiction’ (e.g. for the arbitration. the judgment debtor was present in the foreign place at the In Australia, international arbitration and domestic arbitration are time they were served with the initiating process for the proceedings in the foreign court, or the judgment debtor governed by separate legislative schemes. The law and procedure of submitted to the jurisdiction of the foreign court); domestic arbitration is governed largely by the uniform Commercial Arbitration Acts in each State and Territory. These Acts have been 2. the judgment must be final and conclusive; reformed so that they align with the UNCITRAL Model Law on 3. the judgment must be for a fixed sum; and International Commercial Arbitration. International commercial 4. the parties must be identical.

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However, the foreign judgment will not be enforced at common law First Instance when the foreign judgment was obtained by fraud, when there was In general, proceedings are usually commenced by way of a written a denial of natural justice, where enforcement would be contrary to application (or ‘originating process’) which is filed in the court and public policy or where the judgment is penal or revenue in nature. served on the defendant. The defendant may then file and serve a Further, some Australian courts can use their inherent equitable response. These documents serve to set out the nature and facts jurisdiction to give effect to foreign judgments without requiring of the dispute and to narrow the relevant issues for the court’s that the foreign judgment be made judgment of the forum court. determination. Parties are then required to prepare and serve their Enforcement pursuant to the Foreign Judgments Act 1991 (Cth) evidence. This may involve seeking an order for discovery from The Foreign Judgment Act 1991 (Cth) allows registration of the court. Parties will then compile legal submissions which will judgments from both superior and inferior courts of proclaimed be filed with the court and served on the other party. The dates for Australia places. A judgment creditor is able to apply for registration of these steps can be agreed by the parties or mandated by the court. a foreign judgment in the Supreme Court of a State or Territory. Proceedings culminate with a before one or more , who In order for a foreign judgment to be registered, the following then proceed to write and issue a judgment which decides the issues requirements must be satisfied: between the parties. The time between the trial and the handing down of the judgment can vary greatly (from days to months). 1. the application for registration of the foreign judgment must be made within six years of the date of judgment or (where Proceedings can vary in total duration (from months to years) there have been proceedings by way of appeal against the depending on a range factors such as the complexity of the issues, judgment) the date of the last judgment in those proceedings; the volume of evidence required to be prepared and adduced, the 2. the foreign judgment must be an ‘enforceable money occurrence of interlocutory disputes, the preparedness of the parties judgment’; and the nature and complexity of the trial. Some Australian State 3. the enforceable money judgment must be final and conclusive; courts have special building and construction lists (for instance, and the Technology and Construction List in the Division of the 4. the enforceable money judgment must be given by a court of New South Wales Supreme Court), which seeks to facilitate quicker a country to which the Act extends. resolutions of such disputes. Once these requirements have been satisfied, the court must order Appeal registration of the foreign judgment. On registration in the Supreme In some circumstances, a party may have a right to appeal a decision Court, a foreign judgment has the same force and effect as a judgment of a court. In other circumstances, the party will be required to of that court and is deemed to be made on the date of registration obtain leave (permission) of the appellant court to appeal a decision (which is taken to be the date of the court’s order). The foreign of a lower court. The availability and scope of a party’s right to judgment can be enforced by all the normal processes of execution appeal will depend on a number of factors including the nature of available in that court. Note there are a number of grounds on which the proceedings and the rules of relevant courts. a judgment debtor can apply to have the registration of the foreign Generally, a party only has a short period (generally within 28 days) judgment set aside. in which to lodge an appeal. The process to make an appeal varies depending on the relevant court rules, but it often involves filing a 4.6 Where a contract provides for court proceedings in notice of appeal. If a party fails to make an appeal in time, they may your jurisdiction, please outline the process adopted, lose their ability to make an appeal. any rights of appeal and a general assessment of The time between the lodging of the appeal and the decision of the how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a appellant court varies greatly depending on the complexity of the decision by the final court of appeal. matter. However, given the appellant court’s role is generally more limited (especially in relation to fact finding) than the court of first The process, rights of appeal and duration of proceedings can vary instance. Thus an appeal court is generally able to hand down a greatly based on the nature of the proceedings and the particular court judgment faster than a court of first instance. that the proceedings are brought in. Disputes in the construction industry are general resolved in State or Territory courts, rather than Federal courts.

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Kon Nakousis Teodor Lomaca Clyde & Co Clyde & Co L15, 333 George Street L15, 333 George Street Sydney, NSW, 2000 Sydney, NSW, 2000 Australia Australia

Tel: +61 2 9210 4416 Tel: +61 2 9210 4931 Email: [email protected] Email: [email protected] URL: www.clydeco.com URL: www.clydeco.com

Kon specialises in construction and engineering law with a focus Teodor is an experienced front-end construction , with significant Australia on infrastructure, building, rail, energy and resources and acts for expertise in public-private partnerships, drafting and negotiating some of the leading participants in those sectors. Kon has an acute commercial agreements, identifying suitable project delivery methods, understanding of the array of complex technical, legal and commercial conducting extensive risk analysis and undertaking general contract issues that underpin successful project delivery. administration. He has acted for both government and contractors throughout the life cycle of a project, and has a strong understanding He is experienced in providing strategic advice to market participants of differing stakeholder imperatives. on the structuring, negotiation, drafting and administration of contracts across a broad range of projects across Australia, including residential Teodor currently advises a diverse range of clients on D&C, O&M, CM, and commercial developments, roads, bridges, airports, sporting procurement and JV/alliance agreements, as well as subcontractor facilities, and process and power plants. management. 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.

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. Clyde & Co has one of the few truly dedicated projects and construction teams in Australia and is supported by over 150 projects and construction lawyers working as one team globally – ensuring agility and responsiveness in ways that other firms simply cannot. Our lawyers understand the key issues that our clients will need to address throughout the full lifecycle of a construction project. The breadth and depth of expertise in our team allows us to advise clients from planning and finance through to construction and long term operation. Our firm and individuals are frequently recognised in legal directories for our leading construction and engineering expertise, including inChambers and Partners and The Legal 500. Clients have commented in this year’s Chambers and Partners guide that we are “a go-to for major construction disputes”.

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Belarus Alexander Filipishin

SBH Law Office Vitaly Tvardovskiy

responsible for the eventual delivery of the project. However, 1 Making Construction Projects please note that certain administrative functions will, in any event, remain with the employer. 1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which 1.2 Are there either any legally essential qualities needed place both design and construction obligations upon to create a legally binding contract (e.g. in common contractors? If so, please describe the types of law jurisdictions, offer, acceptance, consideration contract. Please also describe any forms of design- and intention to create legal relations), or any only contract common in your jurisdiction. Do specific requirements which need to be included in a you have any arrangement known as management construction contract (e.g. provision for adjudication contracting, with one main managing contractor or any need for the contract to be evidenced in and with the construction work done by a series writing)? of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and Yes, several types of pre-conditions exist. They can be widely engineering contracts.) grouped as follows: 1. Requirements of form. Belarusian law provides for several types of construction-related 2. Requirements of content. contracts. The main types are: 3. Compliance requirements for the employer and the contractor. 1. contracts for construction works; 4. Tendering requirements. 2. contracts for design and survey works and contracts for Requirements of form architect’s supervision; 3. engineering services contracts, where the following sub- All construction contracts must be in writing. Contracts for types exist: construction works, as well as contracts for design and survey works, must be executed as “one document”, meaning that they a. contracts for technical supervision services, which are largely similar to services, as they are must exist as a document signed by both parties. termed in other jurisdictions; and This means that construction contracts made by correspondence or b. other engineering services, including general site any other exchange of documents signed by one of the parties will management; and run afoul of this requirement. Where this occurs, the contract is 4. pooled investment (“dolevoye not invalidated, but the parties may not rely on witness testimony stroitelstvo”) contracts, where the developer raises funds to prove the existence of such a contract and the content of its from a pool of investors subject to the undertaking to provide conditions. each investor with a specific part of the property. The Requirements of content developer then contracts with the designers, the construction contractors, et al. As mentioned above, contracts must include “material conditions” as provided by the law. If this requirement is not met, the courts A specific contract form is provided by the law only for pooled may not enforce a construction contract. Lately, the practice of the investment in residential and related properties. courts has become more flexible in this respect and the courts in For other types of construction-related activities, no specific forms many cases consider whether a contract lacking material conditions as such are prescribed; however, strong requirements exist for so- is executory or executed. If the lack of specific material conditions called “material conditions”, which the contracts must contain, does not per se limit the court’s ability to enforce an executed often in specific forms, under the pain of nullity of the contract. contract, in many cases the courts will consider the respective claim Yes, a single contract may contain both design and construction for enforcement on its merits. obligations. The list of material conditions in construction contracts is very Yes, it is possible for the employer to sign a general construction wide: scope of work; starting and completion dates; pricing; contract and a contract for engineering services for the general payment; procedure for the certification of works; and even specific management of construction activities and thereby appoint a general requirements for how the details of the parties are given in the contractor and an engineering company who will be completely contract.

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Compliance requirements for the employer and the contractor 1.3 In your jurisdiction please identify whether there is The law sets certain pre-conditions which the employer and the a concept of what is known as a “letter of intent”, in contractor must satisfy prior to entering into a construction contract. which an employer can give either a legally binding or For the employer, these pre-conditions include, among others: non-legally binding indication of willingness either to possession of construction and design permits; specific evidence of enter into a contract later or to commit itself to meet rights to the land; design documentation where the contract does certain costs to be incurred by the contractor whether not provide that this should be developed by the contractor; and or not a full contract is ever concluded. compliance with licensing requirements when these exist for the employer, et al. There is no legal concept of an LoI. While such letters may be sent by employers to contractors, they do not have any legal significance. For the contractor, these pre-conditions are as follows: compliance Belarus with licensing (attestation) requirements for the contractor; and its personnel. 1.4 Are there any statutory or standard types of insurance Where these pre-conditions are not observed, the contract may be which it would be commonplace or compulsory to invalidated as a contract made in violation of the law upon a claim have in place when carrying out construction work? For example, is there employer’s liability insurance from a party with locus standi. for contractors in respect of death and personal Tendering requirements injury, or is there a requirement for the contractor to have contractors’ all-risk insurance? Some construction contracts and related contracts over a certain threshold are subject to mandatory tendering. Generally, the necessity of tendering depends on the source of funding of the There is only one such requirement. A construction contractor, construction. If there is an involvement of the government funds upon completion of construction of residential and various types of (budget funding or government-owned legal entity), the tendering social or community properties, is required to provide the employer is mandatory. with a security for the performance of the contractor’s obligations of rectification of defects. One such possible type of security is The table below sets out the requirements: insurance of the contractor’s liability. Otherwise, the law does Contract type Threshold for tendering not have any insurance requirements. However, contractors may Contract for construction works voluntarily insure constructions risks. The policies used by most between a government owner Over 100,000 basic values* insurance companies are largely based on Munich Re rules. The (shares at least partially owned by average insurance premium ranges from 0.12% to 0.36% of the the government) and contractor value insured. Other voluntarily used insurance types in the industry Government or municipal include insurance of liability for damage caused by defective work contracts for construction works and contracts whose funding has Over 6,000 basic values and services and general civil liability insurance. been guaranteed by government The law does provide for mandatory insurance for industrial or municipal authorities accidents and work-related medical conditions for employees. Contracts for housing Over 6,000 basic values Companies which operate equipment and facilities which are construction classed as presenting an industrial hazard are required to insure risks Other contracts made by owners for projects where tendering of construction is mandatory related to the operation of such. Design and mandatory feasibility Must be tendered regardless of studies value 1.5 Are there any statutory requirements in relation Engineering contracts 3,000 basic values to construction contracts in terms of: (a) general Procurement of equipment, 3,000 basic values requirements; (b) labour (i.e. the legal status of those materials, inter alia working on site as employees or as self-employed Construction contracts for sub-contractors); (c) tax (payment of income tax of 3,000 basic values specific disciplines employees); or (d) health and safety?

* Basic values are nominated in Belarusian roubles and are subject For most projects, the employer is required to first commission a to review and approval by the Council of Ministers. They serve to “pre-investment study”, which is directed at the evaluation of the tie certain regulatory values to the rate of inflation. At the time of architectural, engineering and financial feasibility of the project and writing, one basic value is 23 BYN, which is roughly equal to 12 the assessment of its environmental impact. A decision to proceed USD. with the project must be taken with regard to the study. Procurements for selection of sub-contractors must be held only if Another general requirement is the attestation of companies involved that was mentioned in the main contract or the decision was made in construction activities. This includes the employer, designers, by the main contractor. all contractors and providers of engineering services. Attestation Private companies are exempt from mandatory construction involves verification of compliance with multiple requirements, tendering. However, for concluding construction contracts, it is including the qualification of employees, health and safety, as well recommended to carry out a negotiating procedure, which is less as quality management policies, certification of works and services, formal, but still regulated by law. financial standing, availability of necessary equipment, staff, etc. Notably, projects financed exclusively by foreign investors are Employers may be exempted from attestation if they retain an exempt from mandatory tendering and from negotiating procedure. engineering company for “comprehensive management” of the construction project. Failure to tender a project where this is mandatory may have two negative outcomes: a court may invalidate the contract as one made Prior to the start of any construction project, the employer must take in violation of the law; and the employer may be required to pay a out construction and design permits in respect of that project. substantial administrative fine to the authorities. Health and safety, as well as other labour-related requirements (duration of a working day, length of rest periods, life and health

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insurance, protective equipment and measures and wages) are all regulated in accordance with existing labour laws and construction 1.8 Is it possible and/or usual for contractors to have regulations. The contractor is vicariously liable for its employees. retention of title rights in relation to goods and supplies used in the works? Is it permissible for Contractors, as with all other companies, are required to withhold contractors to claim that until they have been paid from the employees’ wages and pay the following: they retain title and the right to remove goods and ■ income tax at 13% of the wages paid and most fringe benefits materials supplied from the site? provided to employees; and ■ a social security contribution of 1% of the wages paid and Yes, the Civil Code and the Rules for the Conclusion and most fringe benefits provided to employees. Performance of Construction Contracts specifically provide for such

Belarus Beyond that, contractors, again as with all companies, are required a right. to pay (without withholding) an employers’ social security contribution, which is in most cases equal to 34% of the total payroll 2 Supervising Construction Contracts and total fringe benefits provided to employees. One must also keep in mind that technical regulation and administrative regulation in the Belarusian construction industry is 2.1 Is it common for construction contracts to be quite exhaustive, contained in a plethora of standards and regulatory supervised on behalf of the employer by a third party? Does any such third party (e.g. an engineer instruments. or architect) have a duty to act impartially between contractor and employer? Is that duty absolute or is 1.6 Is the employer legally permitted to retain part of it only one which exists in certain situations? If so, the purchase price for the works as a retention to be please identify when the architect/engineer must act released either in whole or in part when: (a) the works impartially. are substantially complete; and/or (b) any agreed defects liability is complete? Yes, it is common for the employer to appoint an engineering company to supervise the construction process and/or as a site This practice recently began to take hold, and contractors are supervisor (technical supervisor). As mentioned above (see accepting retention conditions for projects they find attractive. The question 1.6), in most cases an engineering company is appointed legal treatment of such conditions by the courts is inconsistent. for “comprehensive management” of the construction project when The law directly provides for a similar measure, but the retention the employer does not have the attestation for the construction money in this case is held in a separate bank account of the contractor. activity. Under this rule, the contractor in a project for construction of There are no direct legal provisions which require the technical residential and various types of social or community properties must supervisor to act impartially. However, in the event of an unjustified provide the employer with one of the following: suspension, the parties to the construction contract are entitled to ■ a reserve of 1.5% of the cost of the works actually performed claim any resulting damages and losses to them from the engineering for the duration of the warranty period in a separate bank company and the specific person who gave the instructions to account. Regular transfers from this account are not permitted suspend the works. and the funds may only be used in the manner provided for in the law; 2.2 Are employers entitled to provide in the contract that ■ a bank guarantee; or they will pay the contractor when they, the employer, ■ insurance for his liability for default or defective performance have themselves been paid; i.e. can the employer of his duties in the course of the warranty period. include in the contract what is known as a “pay when paid” clause? The funds reserved in the separate account may be used by the contractor only to finance the works needed for the rectification of defective work. The law also provides a schedule for the release of “Pay when paid” clauses are not recognised by Belarusian law. the reserved funds and the treatment of the funds in the event of the contractor’s insolvency. 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 1.7 Is it permissible/common for there to be performance particular breaches, e.g. liquidated damages for late bonds (provided by banks and others) to guarantee completion? If such arrangements are permitted, are performance, and/or company guarantees provided to there any restrictions on what can be agreed? E.g. guarantee the performance of subsidiary companies? does the sum to be paid have to be a genuine pre- Are there any restrictions on the nature of such bonds estimate of loss, or can the contractor be bound to and guarantees? pay a sum which is wholly unrelated to the amount of financial loss suffered? Performance bonds provided in the form of bank and/or company guarantees are permissible, but rarely used except in particularly Yes, this is possible. The parties to the contract can foresee any massive projects. This is because few contractors can afford such penalties in a fixed amount, which must be paid in case of a default securities, mostly due to the high cost of funds. The law directly or defective performance of an obligation, in particular in the case provides for bank guarantees for some types of projects (see the of a delay in performance. The party entitled to such penalties is answer to question 1.6 above). No particular restrictions on the not required to prove the damages caused, so such penalties can be nature of bonds and guarantees exist. unrelated to the amount of losses. However, courts may reduce the amount of damages, which they consider as overestimated.

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to envisage in the context of Belarusian law. If the contractor 3 Common Issues on Construction experiences delay due to delays by the employer (e.g. late delivery Contracts of materials by the employer), the contractor may be entitled to an extension of time. 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? 3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims According to the Civil Code, the employer has the right to demand against each other? How long is that period and from amendments to the design and estimate documentation when such what date does time start to run?

amendments will not entail additional costs for the contractor. At Belarus the same time, in accordance with Article 699 of the Civil Code, the A standard prescription period of three years is applicable. It starts contractor is entitled to demand a review of the estimates in case from the date when the party entitled to claim has learned or should the cost of actual work exceeds the values provided in the estimates have learned of the events giving cause to a claim (violation of by 10% or more, due to reasons outside of the contractor’s control. the respective party’s rights). Where the law and/or the contract provides for a warranty term and the employer has made a claim Any other variations may only be agreed by the parties as a written for a rectification of defects within this term, the prescription period addendum to the original contract. starts from the date of this claim.

3.2 Can work be omitted from the contract? If it is omitted, can the employer do it himself or get a third 3.7 Who normally bears the risk of unforeseen ground party to do it? conditions?

Yes, where the contract directly provides for this. Where the The general rule is (applicable not only to unforeseen ground contract does not provide so, an omission can only happen by way conditions), that if the contractor discovers that additional work of a written addendum to the contract. not provided for in the design documentation (this would normally include design solutions based on geodetic and geological data) is Work omitted in accordance with the contract may be done by the necessary, he must immediately give notice to the employer. If the employer personally or he can retain another contractor to perform employer does not respond with instructions within 10 days (the it. contract may provide for a different time period), the contractor must suspend work and will be entitled to a claim for costs because 3.3 Are there terms which will/can be implied into a of the delay. The employer will not be liable for costs if he proves construction contract? that the additional work was not necessary. If the contractor does not follow the above procedure, he will not be Relevant provisions of the Civil Code and mandatory requirements entitled to a claim for costs unless he proves that immediate actions of the Rules for the Conclusion and Performance of Construction were necessary to prevent the demise of or damage to the project. Contracts, as well as certain other and regulatory Otherwise, prior to the employer taking over, the contractor bears instruments, are always implied in a construction contract. Unless the risks of damage to or demise of the project, unless this was the parties agree otherwise, dispositive terms contained in the above caused by materials and components provided by the employer, or regulations are also implied. where this resulted from incorrect instructions by the employer and the contractor gave the employer notice of the respective risks. 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 3.8 Who usually bears the risk of a change in law extension of time; or (b) the costs occasioned by that affecting the completion of the works? concurrent delay? Generally, where changes in the law make it impossible to complete The courts would consider such situations on a case-by-case basis. the project as designed, this risk is borne by the employer, except They would consider such factors as: the nature of each event; where the contract provides for both design and construction. This whether the two events are interconnected (did one cause the other is subject to the frustration, force majeure and “material change of or prevent the other from ending?); whether the contractor gave circumstances” doctrines as described below. notice to the employer of the obstacles to due performance; and Where changes in law make it impossible to complete the project whether each party took sufficient efforts to mitigate the situation. altogether, the risk is borne by the employer and the contractor must be compensated for the work performed. 3.5 If the contractor has allowed in his programme a period Where changes in law make it substantially more expensive to of time (known as the float) to allow for his own delays complete the project as designed, different situations are possible: but the employer uses up that period by, for example, a 1. Where the contract is cost-plus or a unit price contract, the variation, is the contractor subsequently entitled to an risks are borne by the employer. extension of time if he is then delayed after this float is used up? 2. Where the contract is fixed-price, only certain risks are borne by the employer: Belarusian law does not expressly provide for the concept of a a. changes in ; and programme and, as explained above, only variations which do b. changes in certain regulatory indices and values, which not entail an additional cost for the contractor may be unilaterally the contractor used to calculate its price. initiated by the employer. Therefore, this situation is difficult

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Belarusian law also provides for a “material change of 3.9 Who usually owns the intellectual property in relation circumstances” (“MCC”), describing it as follows: “a change of to the design and operation of the property? circumstances is material, if it is such that had the parties been able to reasonably foresee it, they would not have entered into a contract Intellectual property rights to the design and operation of the or would have entered into it on significantly different conditions”. property traditionally belong to the author of the creative work. The Where the parties are unable to renegotiate the contract in light of contractor, engineer or designer can be the author of the construction the MCC, any one of them may apply to the court with a claim to project as the case may be. Employers must require the contractors have the contract terminated or changed. Termination is allowed to assign to the employers the ownership and/or financial rights by the court if: pertaining to the relevant intellectual property rights under the Belarus special agreement or special clauses in the construction agreement. ■ at the time of entering into the contract the parties had relied on the assumption that the MCC in question would not occur; ■ the MCC arose due to reasons which the interested party 3.10 Is the contractor ever entitled to suspend works? could not overcome by acting reasonably and in good faith; ■ performance of the contract in accordance with its conditions Yes, he is. There are three different situations when this may occur would substantially deprive the interested party of the (all are described here in general terms, though the law sets them benefits it could otherwise reasonably anticipate as a result of out in greater detail): performance not under the MCC; and 1. The contractor discovers that due to omissions in the design ■ the MCC is not the interested party’s risk. documentation, certain additional costs may be incurred. In exceptional situations, the courts may change the contract rather 2. There are factors outside of the contractor’s control which than terminating it. may negatively impact the result of the work. However, the MCC rule is rarely applied by Belarusian courts and 3. The employer is not performing his duties (e.g. delivery of the application of that rule is decided on a case-by-case basis. materials, transfer of design documentation) on which the result of the work depends, or it is obvious that the employer will delay such performance. 3.13 Are parties which are not parties to the contract In each of these cases, the contractor is required to give notice to the entitled to claim the benefit of any contract right which is made for their benefit? E.g. is the second or employer and await his instructions. subsequent owner of a building able to claim against the original contracts in relation to defects in the 3.11 On what grounds can a contract be terminated? Are building? there any grounds which automatically or usually entitle the innocent party to terminate the contract? This is only possible if such benefit to a third party is specifically Do those termination rights need to be set out mentioned in the contract in respect of the particular party. expressly? The subsequent owner can claim damages only under the contract on the basis of which he acquired the property. For example, a In general terms, contracts may be terminated on the following buyer of a property under a sales contract may have a claim against grounds: the seller for defects in the property. 1. Material breach by one of the parties (the law describes several situations in which material breaches can be deemed to exist). 3.14 Can one party (P1) to a construction contract which 2. Failure by one of the parties to provide performance on which owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any the performance of the other party is based (called “reciprocal limits on the rights of set-off? performance”). 3. Termination for “good reasons” by the employer. Yes, set-off is possible. Set-off may occur in respect of debts which Contracts may provide for additional grounds. Those mentioned are due or which are due when they are claimed or the maturity above do not need to be set out in a contract in order to entitle a of which is not defined. Set-off is not possible in respect of debts party to termination. for some activities (which are normally not related to construction activity) and when the prescription period for which has expired, if 3.12 Is the concept of force majeure or frustration known P1 or P2 specifically mentioned it. Contracts may also limit rights in your jurisdiction? What remedy does this give of set-off. 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? 3.15 Do parties to construction contracts owe a duty of care to each other either in contract or under any other legal doctrine? In Belarusian law, force majeure is termed “circumstances of insurmountable force”. The law does not clearly define the meaning A duty of care is a common law doctrine which does not have of this term but provides that entities acting in an “entrepreneurial exact counterparts in the law of the Republic of Belarus. However, capacity” are exempted from liability for default if the default is according to Article 705 of the Civil Code, if for the performance caused by such circumstances. Therefore, force majeure normally of the contract any obstacles were found, the employer and the provides defence to a party defaulting on the contract. contractor should take all reasonable actions to eliminate these However, most contracts contain a “loss of interest” clause obstacles. If any expenses are incurred by one of the parties for the incorporated into the force majeure section, whereby any party to purpose of elimination, the obstacles should be compensated by the the contract may terminate it, where force majeure lasts for more other party if this is specifically mentioned in the contract. than a certain prescribed time period.

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The rules of the Civil Code on work production contracts (a more additional duties, a designer’s liability is limited to correspondence general contract category to which construction contracts belong), of the design to the assignment of the client, the client’s needs of also provide that the work result must be fit for its purpose defined in which the designer is aware and the compliance of the design with the contract, or if no such purpose is defined, for purposes, for which the applicable regulations. such a work result would normally be used. Furthermore, the contractor is liable to the employer for any 4 Dispute Resolution detriment caused to the property of the latter, which was provided to the contractor for the performance of the contract. There is also some regulation for compensation of damages which 4.1 How are disputes generally resolved? should be mentioned. Belarus Contractors and employers are liable to each other for any damage Where disputes are concerned with rights to real estate, Belarusian caused not just by breach of obligations, but also under the civil state economic courts have exclusive jurisdiction. However, for delict doctrine. other contractual matters, parties have a choice of arbitration or state economic courts. Construction sites and equipment are considered hazardous objects. Under Belarusian law, before the employer takes over the project, the Most construction contracts have amicable resolution clauses, contractor is, subject to certain exceptions, considered to be in control whereby attempts at resolution by negotiations is required prior to of the site and therefore by default liable to all other persons on the filing a law suit. site for damage incurred by them or damage caused to their property. Furthermore, the Code of Commercial Procedure requires that, prior The Civil Code also contains provisions against “abuse of rights”, to filing a suit, the aggrieved party must send a claim (“pretenziya”) i.e. exercise of rights, which is prejudicial to others. In construction to the other party, setting forth the merits of the claim, enclosing contracts, this will apply to almost any interaction between the evidence, citing relevant legal authorities to support the claim and, parties, but it is hard to envisage how a Belarusian court would where the claim is for damages or penalties, providing a calculation award damages based on an abuse of rights by any party to a of the respective amount. construction contract. The court would rather refuse to enforce a Unless the contract provides for a shorter term, court proceedings right which is exercised in an abusive manner. may be commenced only upon the expiration of 30 days after the other party has received the claim. Importantly, the law suit may not go beyond the substance of the claim. 3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that ambiguity is interpreted? 4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general The initial position is that contracts are interpreted in keeping procedures. with the literal meaning of words and phrases used in them. If the content of the contract cannot be thus determined, the courts must No, there is no equivalent to adjudication in Belarus. determine the “true will of the parties, taking into consideration the goal of the contract”. For this, the courts will consider “all 4.3 Do your construction contracts commonly have relevant circumstances”, including preparatory documentation for arbitration clauses? If so, please explain how the contract, negotiation material, regular practice of the parties and arbitration works in your jurisdiction. their subsequent behaviour. Usually, construction contracts for a high total contract value contain 3.17 Are there any terms in a construction contract which arbitration clauses. Arbitration in Belarus is primarily regulated by are unenforceable? the Law of the Republic of Belarus “On international commercial arbitration” (hereinafter – “ICA Act”), dated 09.07.1999, the Law Whenever a construction contract purports to deprive or limit a right of the Republic of Belarus “On arbitration courts” dated 18.07.2011 which is provided in the law without the wording “unless otherwise and the Civil and Economic Procedural Codes of the Republic of provided in a contract” or vice versa, i.e. it attempts to state otherwise Belarus (hereinafter – “CPC” and “EPC”). The ICA Act is based on an imperative provision of the law, these terms will be unenforceable. the UNCITRAL Model Law on international commercial arbitration One notable example is that the law provides for a minimum threshold 1985 in its primary form, without the changes and amendments of penalties on both parties: on the contractor for late delivery; and adopted in 2006. on the employer for late payment. It is impossible to set lower In order to initiate arbitration, a party should submit the request penalties in the contract. Another notable example discussed above for arbitration to the arbitral institution based on the arbitration are “pay when paid” clauses. A third example is a transfer to an clause. Further process is regulated by the relevant rules of the engineering company of the employer’s power to certify the works arbitration institute. The main arbitration institute in Belarus is in the last instance or approve design documentation. However, this the international arbitration court at the Belarusian chamber for is not limited to the examples provided. commerce and industry; however, several specialised construction arbitration courts also exist. 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, 4.4 Where the contract provides for international are the designer’s obligations absolute or are there arbitration, do your jurisdiction’s courts recognise limits on the extent of his liability? In particular, does and enforce international arbitration awards? Please the designer have to give an absolute guarantee in advise of any obstacles to enforcement. respect of his work? According to Article 245 of the EPC, foreign arbitral awards are In the absence of any contractual provisions which impose

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recognised and enforced by the national courts if such recognition of the court’s judgment on the appointment of the case for trial. In and enforcement is stipulated by legislation or by an international exceptional cases, taking into account the particular complexity treaty, or on the basis of the reciprocity principle. of the case, the term of the proceedings may be extended to four Belarus ratified the New York Convention on the Recognition and months, and cases involving foreign persons outside the Republic of Enforcement of Foreign Arbitral Awards on 13 September 1960, and Belarus by up to one year. it came into force on 13 February 1961. A judgment enters into force after the expiration of 15 days from the According to Article 45 of the ICA Act, international arbitration date of its adoption, unless appealed. On the basis of the judgment awards (regardless of the country in which they were made) shall be after its entry into force, the court issues a writ to the claimant, recognised and enforced in accordance with the economic procedural except in the case of immediate execution, when the writ is issued immediately after the decision. Belarus legislation of the Republic of Belarus and its international treaties. The procedure of recognition and enforcement of Foreign Arbitral A first instance judgment can also be appealed to the appellate court Awards is set forth in Chapter 28 of the EPC and Annex 4 of the within 15 days from the date of the judgment of the first instance CPC. court, and considered within 15 days. Under the of Belarus, grounds for refusal in the The judgment of the appellate court may be appealed to the court recognition and enforcement of foreign arbitral awards are similar of cassation within one month from the date of the judgment of the to those specified in Article 5 of the New York Convention. appellate court, and considered within one month. The decision of the court of cassation may be subject to review via a supervision procedure in a period not exceeding one year from the 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign date when the cassation judgment entered into force. court be upheld and enforced in your jurisdiction? Acknowledgment Unless regarding an international agreement whereby Belarus recognises and agrees to enforce the judgment of foreign courts, a Mr. Ivan Martynov, partner of the SBH law office, and Ms. Hanna Belarusian court will recognise and enforce a foreign judgment on Shalbanava, an associate in Arbitration Practice, have both provided the basis of reciprocity. The general position is that reciprocity is invaluable contributions to this chapter. presumed by the court unless a party to a dispute shows otherwise.

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.

Construction cases are considered by the economic court of first instance within a period of not more than two months from the date

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Alexander Filipishin Vitaly Tvardovskiy SBH Law Office SBH Law Office Krasnoarmeiskaya 20A/1, offices 26–27 Krasnoarmeiskaya 20A/1, offices 26–27 Minsk 220030 Minsk 220030 Belarus Belarus

Tel: +375 17 327 53 77 Tel: +375 17 327 53 77 Email: [email protected] Email: [email protected] URL: www.sbh-partners.com URL: www.sbh-partners.com Belarus Alexander Filipishin received his international law diploma with private Vitaly Tvardovskiy is an Associate of the Construction and Investments international law specialisation in 2004 from the Belarusian State Practice at SBH law office. He has been a practising lawyer since University in Minsk. 2014. Vitaly specialises in real estate and construction, foreign investments, contract, corporate, labour and migration law. Recently, Alexander is a Senior Associate of the Construction and Investments he has participated in many projects related to obtaining all the Practice at SBH law office. Alexander specialises in international necessary permissions for construction activity in Belarus for foreign trade law, contract law and litigation. Alexander also specialises companies, involving the attraction of investments into the country in legal advice for construction organisations in Belarus, support of amounting to more than USD 1 billion. He also provides legal support investment activities, real estate transactions, including for the establishment, restructuring and liquidation of legal entities of real estate, and has significant experience in the foreign economic and representative offices for both residents and non-residents of the business segment. He is a native speaker of Belarusian and Russian Republic of Belarus. and he is fluent in English. He is also a confident German speaker. Alexander has been a practising lawyer since 2004 and he is a member of the Minsk Region Association.

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 , with an emphasis on mergers and acquisitions, inbound foreign investment, insurance, banking, arbitration and litigation, real estate and construction. For over 20 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 groundbreaking 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.

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Brazil Eduardo Damião Gonçalves

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados Thiago Moreira

several contractors. The selected contractor will be in charge to 1 Making Construction Projects detail the basic design provided by the employer and, once it is approved by the employer (or by the employer’s technical advisor/ 1.1 What are the standard types of construction contract engineer), the selected contractor shall perform the construction in your jurisdiction? Do you have contracts which services in accordance with such detailed design. place both design and construction obligations upon Alliance Agreement contractors? If so, please describe the types of contract. Please also describe any forms of design- This is a co-operative method of contracting which still represents a only contract common in your jurisdiction. Do very small portion of the projects developed in Brazil, by means of you have any arrangement known as management which the parties work together and align their commercial interests contracting, with one main managing contractor in order to share the risks and rewards resulting from the contract. It and with the construction work done by a series is also common to establish in the contract the goals to be achieved of package contractors? (NB For ease of reference by the parties in exchange for bonuses and with penalties for throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and underachievement. engineering contracts.) 1.2 Are there either any legally essential qualities needed Most of the projects developed in Brazil use tailor-made contracts to create a legally binding contract (e.g. in common (i.e. contracts specifically drafted for a particular project) rather than law jurisdictions, offer, acceptance, consideration standard forms. Notwithstanding that, it is becoming more usual to and intention to create legal relations), or any use contracts based on international standard forms such as FIDIC specific requirements which need to be included in a (Fédération Internationale des Ingénieurs-Conseils) and NEC (New construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in Engineering Contract) whenever a foreign player is involved (e.g. a writing)? sponsor, partner or lender). Such projects, however, still represent a very small percentage of the projects developed in Brazil. In order to create a legally binding contract under Brazilian law: The most common contractual structures used in Brazil are the (i) the contracting parties shall have full capacity and authority to following: contract; (ii) the object of the contract shall be lawful, possible, Engineering, Procurement and Construction (EPC) determined or determinable; and (iii) the formalities required by law, An EPC contract provides for a single point of responsibility. The if any, shall be observed. Even though there is not a requirement for employer hires a contractor to provide the design, all necessary the contract to be evidenced in writing, it is highly recommendable materials and equipment and the construction services for the to do so as well as to provide for balanced consideration. project. In large projects involving construction and erection works, as well as equipment supply (such as power plants and factories), 1.3 In your jurisdiction please identify whether there is the contractor can be hired to provide its services on a turn-key a concept of what is known as a “letter of intent”, in basis, in which case it becomes responsible for taking over the which an employer can give either a legally binding or project in order to allow the employer to be ready to operate it upon non-legally binding indication of willingness either to completion of the works by the contractor. enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether Engineering, Procurement and Construction Management or not a full contract is ever concluded. (EPCM)

This type of contract reflects the arrangement known as management Letters of intent are commonly used in construction projects in contracting, in which the contractor acting as an agent of the Brazil. Such instruments can be binding or non-binding, depending employer enters into separate contracts with different contractors on the type of works, project deadlines, risks involved, etc. In most who provide the materials, equipment and construction services cases, the purpose of the letter of intent is to make possible the necessary for the project. commencement of certain activities related to the works and even Design-Bid-Build (DBB) the mobilisation of some contractors’ resources before the detailed In this type of procurement, the employer contracts a designer to design is totally concluded and/or approved by the parties. An provide the basic design of the project and, once such basic design incomplete binding letter of intent may face enforceability issues is completed, the project is submitted to a bidding process involving in Brazilian courts.

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1.4 Are there any statutory or standard types of insurance 1.5 Are there any statutory requirements in relation which it would be commonplace or compulsory to to construction contracts in terms of: (a) general have in place when carrying out construction work? requirements; (b) labour (i.e. the legal status of those For example, is there employer’s liability insurance working on site as employees or as self-employed for contractors in respect of death and personal sub-contractors); (c) tax (payment of income tax of injury, or is there a requirement for the contractor to employees); or (d) health and safety? have contractors’ all-risk insurance? (a) General Requirements Brazilian rules contemplate mandatory insurance and the most Engineers and agronomist engineers must be registered before important are those described in Article 20 of Decree-Law No. 73/66 the Regional Council of Engineering and Agronomy (CREA) Brazil (regulated by Decree No. 61,867/67), namely: (i) bodily injury and and architectures and urban planners must be registered before physical damage to passengers in commercial flights; (ii) civil the Council of Architecture and Urbanism (CAU). Any services liability for aircraft owners and for air carriers; (iii) civil liability for related to such professionals can only be performed by individuals real estate contractors of urban zone constructions with respect to duly registered with CREA or CAU. Without these registries, bodily injury and physical damage injuries and property damages; professionals may suffer sanctions, both of a civil and criminal (iv) assets encumbered as guarantees of loans or financings granted nature, which may affect the regular development of the project. by public financing institutions; (v) guarantee of compliance Further to that, in construction projects the standards and regulations with the obligations of the real estate developer and constructor; issued by the Brazilian Standards Association (ABNT) shall be (vi) guarantee of payment incumbent upon the borrower related observed. Specific standards applicable to certain industries are also to construction, including real estate obligations; (vii) buildings common practice. divided into autonomous units; (viii) fire and transportation of goods pertaining to entities located in or transported throughout Brazil; (b) Labour (ix) export credit, whenever deemed convenient by the National In Brazil, employees’ basic labour rights are set forth in the Federal Counsel of Private Insurance-CNSP; (x) bodily injury and physical Constitution, which also establishes the minimum contractual damage caused by roadway automotive vehicles and vessels, or by conditions that must be complied with in employment relationships. their cargo, to individuals being transported or not; and (xi) civil The labour rights and minimum contractual conditions are also treated liability of land, maritime, river and lake transporters for damages in federal laws and most of them are restated in the Consolidation caused to the cargo. of Labour Laws (CLT). There are also mandatory regulations, In addition to the mandatory insurances set forth by Article 20 of established by means of collective bargaining agreements executed Decree-Law No. 73/66, there are specific laws for the construction between one or more employers’ unions representing the companies, market that also refer to certain aforementioned insurance coverage, and one or more trade unions representing employees. The such as: (i) Article 13 of Law No. 4,591/64, which establishes that relationship between the contracting party and contractor, however, all units of residential buildings shall be insured against fire and is governed by the Brazilian Civil Code. other casualties that may cause full or partial destruction of the Hiring service providers through an intermediary company is building; (ii) Articles 1 and 2 of Law No. 4,864/65, which establish possible. Recently, a new law regarding outsourcing (Law No. that the buyer of a financed real estate building with a maximum 6,019/1974) was enacted by the Brazilian Congress, in order to value corresponding to three hundred (300) times the minimum reduce the unemployment rates and labour disputes related to wage in Brazil must purchase life insurance (“seguro de vida de outsourcing. Before the new law, the Superior Labour Court used to renda temporária”); and (iii) Paragraph 1 of Section II of Article 56 rule based on No. 331, which provides that companies are of Law No. 8,666/93, which determines the obligation to purchase allowed to outsource their non-core businesses only. Now, under a performance bond for public services and constructions whenever the new law, the labour courts will be required to provide a clear the same is requested in the invitation to bid. understanding on the matter by defining which type of business will Notwithstanding the above-mentioned mandatory insurance be able to be outsourced or not. coverage directly and indirectly related to the construction market, (c) Tax contractors and related service providers usually purchase the (c.1) Employees following coverage, which may be part of one or more insurance In general terms, salaries paid to employees of Brazilian policies: companies are subject to withholding of Social Security (a) engineering risks; Tax at the maximum rate of eleven per cent (11%) up to a maximum of six hundred and eight Reais and forty four (b) property; cents (R$ 608.44), and to withholding of Income Tax (WTH) (c) third parties’ civil liability; at progressive rates ranging from zero per cent (0%) up to (d) automobile liability; twenty-seven-and-a-half per cent (27.5%), as per the table (e) employer’s civil liability; below (applicable as from April 2015): (f) bodily injury and physical damage and life coverage for constructor’s employees; Monthly Tax Portion to be Tax Rate (%) (g) coverage for the transportation of equipment to be used in the Basis (R$) Deducted (R$) construction works; Up to 1,903.98 – – From 1,903.99 to (h) performance bond; and 7.5 142.80 2,826.65 (i) environmental risks. From 2,826.66 to 15.0 354.80 Despite any market practices, we advise companies to seek the 3,751.05 assistance of an insurance broker who shall be able to assess all risks From 3,751.06 to 22.5 636.13 inherent to a given project and determine the most suitable coverage 4,664.68 for each type of project. Over 4,664.68 27.5 869.36

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In addition to the above, Brazilian companies are subject to The size of the CIPA will vary in accordance with the number Social Security Taxes at an approximate global rate of twenty- of employees of a company. eight per cent (28%) on payroll. The legal taxpayer of such (d.4) Programme for Medical Control of Occupational taxes is the employer, differently from the ones mentioned Health (Programa de Controle Médico de Saúde above, in which case the employer is only responsible for the Ocupacional – PCMSO) withholding. The Programme for Medical Control of Occupational Health It is important to clarify that there is an alternative to aims to promote and maintain the health of employees, the Social Security Tax on payroll for most construction emphasising the clinical and pathological aspects instrumental companies, which is the payment of four-and-a-half per cent in addressing the relationship between health and work, from (4.5%) on gross revenue. Such alternative is not mandatory; both an individual and collective perspective. Brazil however, it may represent tax savings for companies with high payroll expenses. (d.5) Personal Protective Equipment (Equipamentos de Proteção Individual – EPI) (c.2) Self-Employed Sub-Contractors (Individuals) The company shall provide its employees with personal The payment of income by Brazilian companies to self- protective equipment, aiming to neutralise/reduce the employed individuals is also subject to WTH as indicated above. Please note, however, that payments to self-employed exposure to chemical, physical and/or biological agents. individuals are subject to withholding of Social Security Tax (d.6) Environment Risk Prevention Programme at a rate of eleven per cent (11%) (considering the offset (Programas de Prevenção de Riscos Ambientais – PPRA) authorised by law of nine per cent (9%) subjected to a The environment risk prevention programme aims to maximum amount of one thousand one hundred and six Reais provide consulting services in the assessment and control of and twenty six cents (R$ 1,106.26). environmental risks, such as noise, heat, chemical agents, etc. In this case, Brazilian companies paying fees to self- employed sub-contractors are also subject to Social Security Tax at a rate of twenty per cent (20%) on these payments. 1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be The alternative reported above also applies here, and instead released either in whole or in part when: (a) the works of contributing twenty per cent (20%) over the payroll, some are substantially complete; and/or (b) any agreed construction companies may contribute a rate of four-and-a- defects liability is complete? half per cent (4.5%) on gross revenue. Brazilian companies are also obligated to withhold eleven per The employer is allowed to retain part of the purchase price to be cent (11%) of payments made to other companies that render certain services. released either in whole or in part when the works are substantially complete and/or any agreed defects liability period has expired as In case the renderer of the service is subjected to the payment long as the retention is supported by a clause in the contract. of Social Security Tax on gross revenue, the withholding shall be made at a rate of three-and-a-half per cent (3.5%). The retention right is meant to protect the employer against potential (d) Health and Safety breaches by the contractor; nevertheless, it may not be abusive, otherwise it might be challenged by the contractor. In Brazil, health and safety are included among the main concerns in a construction contract and are regulated by: (i) the Federal The Brazilian Civil Code establishes that private contracts are Constitution, which establishes the employee’s rights and governed by the principle of good faith and pacta sunt servanda, includes, among others, the reduction of risks inherent to works which means that contracts are laws with binding force between through compliance with health, hygiene and safety rules; (ii) parties, and requires that every contracting party must keep his the Consolidation of Labour Laws (CLT); (iii) Administrative promise and fulfil his obligation. Therefore, the amount ofthe Rulings (Ordinance No. 3,214/78 of the Ministry of Labour and retention and the conditions for its release shall be agreed upon by Employment); (iv) rules and standards issued by ABNT; and (v) the parties to the contract. International Labour Organization Conventions. The Ministry of Labour and Employment enacted Normative 1.7 Is it permissible/common for there to be performance Resolutions regarding health and safety standards which establish bonds (provided by banks and others) to guarantee rules that must be complied with by the contractor and its employees. performance, and/or company guarantees provided to The most important points are: guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds (d.1) Previous Inspection and guarantees? The company must request a previous inspection by the Ministry of Labour and Employment before starting its In Brazil, it is common for construction contracts to provide for activities. a performance bond and/or a parent company guarantee in order (d.2) Specialised Work Safety and Medicine Service to guarantee the fulfilment of the contractor’s obligations under (Serviços Especializados em Engenharia de Segurança e the construction contract. The performance bond may be a bank em Medicina do Trabalho – SESMET) guarantee or an insurance bond. The parent company guarantee Companies hiring more than fifty (50) employees must have is often requested when the contractor is not in a good financial a Specialised Work Safety and Medicine Service, aiming to standing and/or does not have sufficient assets to guarantee a promote the protection of health and safety in the workplace. possible default. The sizing of SESMET will vary in accordance with the risk of a company’s business (established by law) and the number Although, in theory, performance bonds are not “on demand” of employees of a company. guarantees in Brazil, as they are an accessory of the principal obligation, in practice bank guarantees work as if they were “on (d.3) Accident Prevention Commission (Comissão Interna de Prevenção de Acidentes – CIPA) demand”, given that local banks will rarely challenge or even discuss their foreclosure by the employer. However, considering the current Companies hiring more than twenty (20) employees must crisis scenario in Brazil, the trend is that performance bonds are used have an Accident Prevention Commission (CIPA), aiming to prevent an occupational accident or disease. more often than bank guarantees, because their cost is much lower.

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duly performed its contractual obligations – i.e. has supplied the goods 1.8 Is it possible and/or usual for contractors to have and services contracted – without receiving the related payments. retention of title rights in relation to goods and supplies used in the works? Is it permissible for The inclusion of a “pay when paid” clause is not possible in contractors to claim that until they have been paid contracts entered into with public/governmental entities (Public they retain title and the right to remove goods and Contracts). However, a private contractor may include a “pay when materials supplied from the site? paid” provision in the sub-contracts related to a Public Contract as long as the relevant Public Contract allows a sub-contracting part Brazilian law does not expressly provide for the right to retention of of the works. title in relation to goods and supplies used in the works. Brazil Notwithstanding, scholars, as well as parts of relevant , 2.3 Are the parties permitted to agree in advance a fixed understand that the contractor may retain the title in relation to sum (known as liquidated damages) which will be goods and supplies used, as well as the right to remove any goods paid by the contractor to the employer in the event of and materials supplied from the site, provided that: (i) the contractor particular breaches, e.g. liquidated damages for late has a credit right against the employer; (ii) there is a link between completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. the credit and the goods/materials retained; (iii) the retention or the does the sum to be paid have to be a genuine pre- possession of the goods/materials is lawful; and (iv) the parties did estimate of loss, or can the contractor be bound to not agree otherwise in the contract. Such situation may be altered pay a sum which is wholly unrelated to the amount of in case the employer is subject to a judicial recovery procedure financial loss suffered? (recuperação judicial). Brazilian law allows the parties to agree in advance on a penalty amount to be paid by the defaulting party in the event of a breach 2 Supervising Construction Contracts of the contract. Unlike common law, the Brazilian legal system accepts contractual penalty clauses, which may be due for delay/ 2.1 Is it common for construction contracts to be breach (penalty for delay) in performing a specific obligation or as supervised on behalf of the employer by a third compensation (compensation penalty) in case the entirety of the party? Does any such third party (e.g. an engineer contract is breached. or architect) have a duty to act impartially between The amount of the penalty clause does not necessarily need to contractor and employer? Is that duty absolute or is it only one which exists in certain situations? If so, represent a genuine pre-estimate of loss; however, in any case, it please identify when the architect/engineer must act must be limited to the value of the breached obligation and may impartially. even be lowered in court should it be deemed patently excessive vis-à-vis the committed breach or if the main obligation has been In Brazil it is common that, under construction contracts, the partially performed. employer hires a third party to supervise the progress of works on Both the penalty for delay and the compensation penalty may have his behalf. However, in Brazil, such third party does not have a duty a similar function to liquidated damages (pre-determined damages), to act impartially between contractor and employer. If the parties whereby the creditor may collect the penalties irrespectively of intend to have a third party to act impartially between the contractor having incurred actual damages and the parties may agree that no and the employer, the parties should hire an independent engineer further damages will be due in this case. The parties may, however, or architect, or even an expert, as the case may be, to execute this agree that the contractual penalty does not prevent the claiming of specific task. An example of this is dispute boards, which emerged additional indemnification for damages arising out of the breach. in the United States in the 1960s, and which are gaining more In such case, the amount of damages specified in the contract is importance in Brazilian construction contracts. A dispute board is deemed to be the minimum amount of indemnification due. If the a committee composed by experienced and impartial professionals damages exceed this minimum amount, it is possible to recover (in most cases, they are engineers), hired before the commencement additional indemnification from the breaching party. In addition of the construction project to monitor the progress of the works, to this, according to the Brazilian Civil Code, the party to which encouraging the parties to avoid disputes and assist them in solving the penalties for delay are owed also has the right to require the those that cannot be avoided. The advantage of the dispute boards performance of the delayed obligation. is that they can be appointed at the commencement of the project, taking responsibility to conduct regular visits to the site and to be directly involved in the works from the beginning, making 3 Common Issues on Construction recommendations and influencing the behaviour of the parties. Contracts

2.2 Are employers entitled to provide in the contract that 3.1 Is the employer entitled to vary the works to be done they will pay the contractor when they, the employer, under the contract? Is there any limit on that right? have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when In private contracts, variations on the works usually may be ordered paid” clause? by the employer at any time prior to taking over the works. The “pay when paid” clause is commonly found in sub-contracts, and Generally, construction contracts include “change order provisions” purports to indicate that the payments to be made by the contractor whereby the parties shall discuss the impact of the respective to the sub-contractor shall only occur upon receipt by the contractor variation and, in case of material changes, negotiate a price of the payments made by the final client i.e.( the employer). adjustment and/or an extension of time. Although the inclusion of this clause is not uncommon, such provision In case the contract does not provide for such variations’ may be challenged as being abusive if the sub-contractor has fully and provisions, the Brazilian Civil Code will apply and the employer

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will be responsible for paying the additional costs arising from the variations requested by him. Notwithstanding, in case the variations 3.4 If the contractor is delayed by two events, one the requested by the employer are disproportional to the design already fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an approved, the contractor has the right to refuse the variation, even if extension of time; or (b) the costs occasioned by that the employer agrees to pay the additional costs. concurrent delay? Additionally, variations to reduce the scope of work are only allowed if expressly provided for in the contract and/or agreed between the The consequences arising from a delay caused by concurrent parties, otherwise the employer may be required to indemnify the events may be contractually agreed by the parties in the contract. contractor for the losses and damages arising from such reduction. Otherwise, in principle, each party will be responsible for the Brazil With respect to Public Contracts, the employer (i.e. the public/ consequences of the portion of the delay it has caused. governmental entity) may unilaterally vary the works whenever it Considering that the contractor’s fault contributed to the delay, is necessary to: (i) modify the design or the project specifications the employer shall not be required to pay the total costs related to to better achieve the technical aims of the project; or (ii) increase the concurrent delay and the contractor shall not be entitled to an or reduce the scope of the works. In both cases, the contractor extension of time with respect to the whole period of the delay. The is obliged to accept such variations under the same contractual purpose is to avoid any imbalance and to proportionally compensate conditions, provided that such increases or reductions to the works, the employer’s delay with the contractor’s concurrent delay. services or purchases is not higher than twenty-five per cent (25%) of the original price. This limit may be increased by up to fifty per cent (50%) in case of increases related to restoration of buildings or 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own equipment. In all cases, the economic and financial balance of the delays but the employer uses up that period by, for agreement shall be ensured. example, a variation, is the contractor subsequently The same limits related to increases or reductions of the works entitled to an extension of time if he is then delayed apply to contracts entered into by state-owned companies and after this float is used up? mixed capital companies. However, Federal Law No. 13,303/2016 provides that these modifications can only be implemented by Unless otherwise provided in the contract, the float belongs to the means of negotiation between the parties. Therefore, state-owned contractor and as long as the fixed milestones of the works’ time companies and mixed-capital companies cannot increase or reduce schedule are not delayed, the employer should not interfere with it. the scope of the works without the private party’s consent. Generally, variations are subject to negotiation by the parties with respect to their impact on costs and time, independently of any float 3.2 Can work be omitted from the contract? If it is existing in the time schedule included in the contract. omitted, can the employer do it himself or get a third party to do it? 3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims Please see our answer to question 3.1 above regarding the reduction against each other? How long is that period and from of the scope of work by the employer. what date does time start to run? In case of reduction of the contractor’s scope of work, the employer may perform such works by himself or contract a third party to do it. Brazilian law establishes a different statute of limitations depending on the case. The general rule provides for a ten-year period, usually With respect to Public Contracts, public tenders comprise a succession counted from the date of the illicit act or violation, for the plaintiff of steps provided for in the applicable laws that do not admit to file its claim. The Brazilian Civil Code also states some specific discretion on their fulfilment, except in specific cases contemplated cases in which the statute of limitations ranges from one (1) to five by the law based on convenience and opportunity of the government; (5) years, counted from the date of certain events described in it. in such cases the tender may be waived. Therefore, it is unlikely that the public employer would reduce the scope of a Public Contract to The Brazilian Civil Code also establishes that for constructions enter into another one in order to perform part of the scope of the comprising substantial equipment or buildings, the contractor shall Public Contract in place. Nevertheless, there is no express prohibition be liable for the soundness and safety of the works performed of such practice. Therefore, if the work is completely omitted, the during five (5) years counted from the issuance of the taking-over employer may do it himself or get a third party to do it. certificate for the works. Such five-year warranty period may not be reduced by the parties in the contract. In case a defect is found during such period, the plaintiff may be required to file the claim 3.3 Are there terms which will/can be implied into a within one hundred and eighty (180) days from the date it becomes construction contract? aware of the defect. Certain scholars and parts of case law maintain that such term may be extended up to ten (10) years. In the absence of a specific contractual obligation to the contrary, all applicable legal provisions which are not expressly stated in the contract shall apply to the contract (e.g. five-year guarantee, time- 3.7 Who normally bears the risk of unforeseen ground bar, force majeure, limitation of liability with respect to indirect conditions? damages and termination). The parties may expressly waive the application of certain legal provisions as long as they are not The allocation of the risk of unforeseen ground conditions will considered mandatory or to be of public policy. depend on the type of construction contract. Usually, in EPC lump- sum contracts the rule is that such risk lies with the contractor. However, under Brazilian law, the risk is shifted to the employer when such unforeseen ground conditions are an extraordinary supervening event that places an excessively onerous obligation on the contractor.

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The purposes of such legal provision are clearly to: (i) prevent the of the employer since he is the beneficiary of the 3.12 Is the concept of force majeure or frustration known works; and (ii) indicate that the employer, as the final beneficiary in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue of the work, shall bear bad ground conditions whenever such successfully that a contract which has become conditions are unforeseeable and make the performance of the uneconomic is grounds for a claim for force majeure? works excessively onerous to the contractor. Although Brazilian law provides that in such extraordinary cases The concept of force majeure is known and enforceable in Brazil. the risk of unforeseen ground conditions lies with the employer, the According to the Brazilian Civil Code, force majeure shall be parties can alter it contractually. considered as “the necessary event, whose effects were impossible to avoid or impair”. The affected party shall not be responsible for Brazil 3.8 Who usually bears the risk of a change in law losses resulting from force majeure events, unless such responsibility affecting the completion of the works? was expressly stated in the contract. Thus, under Brazilian law, force majeure is a legal exemption of The employer normally bears the risk of a change in law, mainly performance and liability during its occurrence. Therefore, under a with respect to a tax burden and technical matters except if provided contractual relationship, the party affected by a force majeure event otherwise in the contract. shall not be held liable for damages arising from it, provided that: (i) such party submits enough evidence of the event; and (ii) such event was unforeseeable and beyond the party’s control. 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? Although, in principle, each party shall bear their respective expenses and costs resulting from a force majeure event, it is common in EPC Generally, the contract establishes which party owns the intellectual contracts to allocate the force majeure risks to the employer. property rights in relation to the design and operation of the The parties may agree upon a contractual definition offorce majeure property. In most cases, the designer or the contractor, as the case and even waive the application to the contract of the concept of force may be, grants to the employer a perpetual licence for the use of majeure established in the Brazilian Civil Code. It is common to the intellectual property related to the design or operation of the expressly exclude from the concept of force majeure events such as: property. (i) changes affecting the economic balance of the contract, even if the contract becomes uneconomic; (ii) labour or materials shortage; and (iii) strikes restricted to the contractor’s employees. 3.10 Is the contractor ever entitled to suspend works?

In the absence of contractual provisions to the contrary, the 3.13 Are parties which are not parties to the contract contractor may suspend the works without paying an indemnity to entitled to claim the benefit of any contract right the employer due to: (i) employer’s fault (such as delay in obtaining which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against the applicable licences or authorisations); (ii) occurrence of force the original contracts in relation to defects in the majeure events; (iii) changes resulting from unforeseeable events building? (such as geological, hydraulic or similar events), which affect the economic balance of the contract resulting in excessively onerous According to the Brazilian Civil Code, a party that is not a party obligations on the contractor; and (iv) disproportional change to a contract is entitled to claim the benefit of any right under said orders requested by the employer with respect to the project already contract as long as the contract was executed for its benefit. approved, even if the employer agrees to pay the additional costs. Brazilian law provides for a five-year guarantee with respect to the soundness and safety of the project. Therefore, a subsequent owner 3.11 On what grounds can a contract be terminated? Are of a building may bring a claim against the contractor in case of any there any grounds which automatically or usually defect in the building during this period of time. entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly? 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums In case the contract does not provide for the cases in which it could due to P2 the sums P2 owes to P1? Are there any be terminated by the parties, Brazilian law provides that it may be limits on the rights of set-off? terminated in the following events: (i) fundamental breach; and/ or (ii) occurrence of an extraordinary supervening event, which The set-off of credits is permitted by the Brazilian Civil Code, was unforeseeable to the parties and results in excessively onerous provided that debts have the same legal nature, are clear and obligations on the party claiming the termination. In such cases, defined, overdue and of fungible goods. Therefore, in this particular the claimant must request the termination from the relevant court or example, it is most likely to be possible. arbitral tribunal, as the case may be. The parties are allowed to provide in the contract the termination 3.15 Do parties to construction contracts owe a duty of events that shall apply, and even the termination at the convenience care to each other either in contract or under any of either or both of them. The most common termination events other legal doctrine? are: (i) bankruptcy or insolvency; (ii) breach not remedied within a specified period; (iii) delays in the works attributable to contractor; The concept of duty of care is not applicable under Brazilian law. and (iv) force majeure events continuing for a determined period of The parties are liable to each other in accordance with the terms of time agreed in the contract. the contract and the provisions of the applicable law.

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3.16 Where the terms of a construction contract are 4.3 Do your construction contracts commonly have ambiguous, are there rules which will settle how that arbitration clauses? If so, please explain how ambiguity is interpreted? arbitration works in your jurisdiction.

Ambiguity is settled by general rules of interpretation of the law, Yes, construction contracts normally provide for an arbitration which are provided by the Brazilian Civil Code, such as: (i) all clause. contracts must be interpreted in accordance with good faith and In sum, Brazilian arbitration is regulated by federal law (Law No. customary rules of the place of execution; and (ii) declarations must 9,307/96, as amended by Law No. 13,129/15, which is based on be interpreted in the real sense of the intention of the parties rather

Brazil the UNCITRAL Model Law and the 1958 New York Convention than by the literal wording of the documents. on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Therefore, some important principles and 3.17 Are there any terms in a construction contract which features may be applied, such as due process, the right to be heard, are unenforceable? impartiality and independence of arbitrators, kompetenz-kompetenz and separability of the arbitration agreement, among many others. Contractual provisions contrary to public policy or mandatory law Any party that can enter into a contract is permitted to submit will be unenforceable. However, such assessment can only be done disputes to arbitration. However, the dispute must relate to rights on a case-by-case basis. and assets that can be freely transferred by the parties. Domestic awards – those rendered inside Brazilian territory – are 3.18 Where the construction contract involves an element considered as final judgments and do not require any confirmation of design and/or the contract is one for design only, by courts for the purposes of enforcement. Foreign awards, on are the designer’s obligations absolute or are there the other hand, are subject to recognition proceedings within the limits on the extent of his liability? In particular, does Superior Court of Justice (STJ), in accordance with the New York the designer have to give an absolute guarantee in Convention. respect of his work? Parties are allowed to choose an arbitral institution to administer the The designer can be contracted to provide design services either (i) case, the language, the law applicable to the dispute and the number without any interference in the performance of the works, or (ii) of arbitrators to constitute the tribunal, as well as other procedural with the additional incumbency to supervise the works and give aspects related to the arbitration. directions to the contractor. In the first case, the responsibility of the designer is limited to the 4.4 Where the contract provides for international soundness and safety of the works related to the project for a five- arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please year period counted from the issuance of the taking-over certificate advise of any obstacles to enforcement. for the works. With respect to the second case, in addition to the above, the designer is also responsible for the damages caused to There is no legal concept that determines what international the employer for any omission related to the supervision of the arbitration means. Foreign arbitral awards (understood as those performance of the works. rendered outside Brazil) do require recognition in order to be Please also note that, under Brazilian law, the employer is enforced in Brazil. However, it is fair to say that Brazilian courts not allowed to modify the design without the approval of the tend to be friendly to enforcing arbitral awards. designer, except if the change is not relevant or if it is required The Superior Court of Justice has exclusive jurisdiction to recognise due to supervening events or technical reasons making the project foreign arbitral awards, which must be made through a recognition inconvenient or excessively onerous. In the case that the design is proceeding subject to STJ’s Internal Rules, and in accordance with changed without the designer’s approval, the designer will not be some requirements, such as authentication by a Brazilian consulate liable for any damages resulting from such change. and a sworn Portuguese translation. The defendant can object. The grounds for opposing enforcement 4 Dispute Resolution of a foreign arbitral award are, however, limited to those provided for in the New York Convention, the Brazilian Arbitration Law and STJ’s Internal Rules, which are the following: (i) incapacity of the 4.1 How are disputes generally resolved? parties; (ii) invalidity of the arbitration agreement according to the law chosen by the parties or, failing any indication thereto, the law If no amicable settlement is reached, disputes are usually resolved by of the place of the arbitration; (iii) absence of proper notice and arbitration. If no arbitration clause is provided for in the contracts, other impediments to presenting a proper defence; (iv) the award the disputes are resolved through court litigation. is rendered outside the scope of the arbitration agreement; (v) the arbitration proceedings were conducted contrary to the arbitration 4.2 Do you have adjudication processes in your agreement; (vi) the award is not yet binding, or it was annulled or jurisdiction? If so, please describe the general suspended by the courts of the country of the seat of the arbitration; procedures. or (vii) the award is not contrary to Brazilian public policy, human dignity or sovereignty. The parties may only start the enforcement Brazilian law does not provide for statutory adjudication as in the proceedings in the courts where the defendant is located after the UK. However, the inclusion of dispute boards in construction award is recognised. Once recognition is granted, the creditor may contracts has become more usual in the past few years, which in file for enforcement before a federal court. practice creates a contractual adjudication mechanism for certain projects.

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losses and damages caused to the plaintiff; and (b) enforcement 4.5 Where the contract provides for court proceedings procedure – by which the plaintiff uses the contract as a title (título in a foreign country, will the judgment of that foreign extrajudicial) to enforce compliance with a specific contractual court be upheld and enforced in your jurisdiction? obligation or payment of a specific amount of money. In the ordinary procedure, a should normally comply with Enforcing a foreign judgment is only possible after such judgment the following steps: (i) written statements of the plaintiff and the is recognised by the Superior Court of Justice. Therefore, a party defendants; (ii) mediation or preliminary conciliatory hearing; seeking to enforce a foreign court judgment must fulfil some legal (iii) taking of evidence; (iv) final statements; and (v) first instance procedural requirements, described in question 4.4 above, which judgment. Prior to judgment, only a few decisions can be appealed. include, among other requirements contained in STJ’s Internal However, all first instance judgments are subject to appeal. The court Brazil Rules and the Code of : to prove that the decision is of appeals is entitled to reanalyse facts and legal arguments of the protected by ; to indicate the jurisdiction of the authority parties, therefore confirming, annulling or modifying the judgment/ that granted the decision; and to present the sworn translation of the decision. The court of appeals’ decision can also be submitted to decision into Portuguese. Further to that, foreign judgments must the Superior Court of Justice in case of violation or incongruent not violate public policy, human dignity or Brazil’s sovereignty. application of any federal law, or to the Federal Supreme Court in case of violation of any constitutional right. 4.6 Where a contract provides for court proceedings in Enforcement proceedings end by satisfaction of the debt/obligation your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of or by withdrawal by means of a specific motion called embargos“ ”. how long proceedings are likely to take to reduce: (a) Embargos follows the same steps and procedural rules of an a decision by the court of first jurisdiction; and (b) a ordinary procedure. decision by the final court of appeal. In terms of the timing of civil court procedures, this depends on the complexity of the case and the courts in which the lawsuit is There are different court proceedings in Brazil. In a private being processed. A fair assessment would be between five (5) and contractual relationship, two proceedings could be used: (a) ordinary ten (10) years if the case goes to the higher courts. In the courts of procedure – by which a party requests a declaration or recognition first instance, ordinary procedures take one (1) to five (5) years and of a right and seeks to hold the other party liable to comply with in the courts of appeals another six (6) months to three (3) years, a contractual obligation, pay a certain amount or indemnify for depending on the jurisdiction where the lawsuit is filed.

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Eduardo Damião Gonçalves Thiago Moreira Mattos Filho, Veiga Filho, Marrey Jr e Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados Quiroga Advogados Alameda Joaquim Eugênio de Lima, 477 Praia do Flamengo, 200 São Paulo – SP, 01403-001 Rio de Janeiro – RJ, 22210-901 Brazil Brazil

Tel: +55 11 3147 7608 Tel: +55 21 3231 8115 Email: [email protected] Email: [email protected] URL: www.mattosfilho.com.br URL: www.mattosfilho.com.br Brazil

Eduardo Damião Gonçalves has experience as both a counsel and Thiago Moreira is a partner in the infrastructure practice of Mattos Filho. arbitrator in a wide variety of domestic and international arbitrations, Mr. Moreira has previously worked in the Inter-American Investment having been involved in disputes administered under the International Corporation (IDB Group) in Washington, D.C. He concentrates his Chamber of Commerce (ICC), the United Nations Commission on practice on construction contracts and construction-related litigation, International Trade Law (UNCITRAL) and Brazilian domestic rules. BOTs and other equipment supply contracts, project development and His practice involves complex arbitration disputes in a wide variety infrastructure-related transactions. He has advised both owners and of industries, such as construction, insurance, information technology, constructors in the drafting, negotiation, pre-arbitration and arbitration telecommunications, energy, and oil and gas, among others. Mr. involving EPC/EPCM/Alliance agreements and other construction and Gonçalves was also Chairman of the Brazilian Arbitration Committee supply contracts. He also has advised Brazilian and foreign clients (CBar) and currently serves as a Vice-Chair of the Americas Initiative of with respect to general corporate and matters in Brazil. His the Institute for Transnational Arbitration (ITA), and is a member of the experience also includes assisting clients in the drafting and negotiating ICC Latin American arbitration group, the ICC Arbitration Commission of several supply and construction contracts related to energy, metro, and the Board of the Federation of International Arbitration Advocacy rail, naval construction, oil & gas and hotel sectors and industries. (FIAA). Mr. Gonçalves has also been a frequent Lecturer in Law at the Mr. Moreira is also a member of the Society of Construction Law of Fundação Getulio Vargas (FGV) and other universities in São Paulo London and of the International Construction Projects Committee of and was a visiting scholar at Boston University School of Law. He was the International Bar Association – IBA. also named among the top 45 arbitration experts under the age of 45 by Global Arbitration Review (GAR) in 2011.

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 work 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 nonprofit organisations.

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Canada Peter A.K. Vetsch

Rose LLP Courtney C. Kachur

1 Making Construction Projects 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 1.1 What are the standard types of construction contract and intention to create legal relations), or any in your jurisdiction? Do you have contracts which specific requirements which need to be included in a place both design and construction obligations upon construction contract (e.g. provision for adjudication contractors? If so, please describe the types of or any need for the contract to be evidenced in writing)? contract. Please also describe any forms of design- only contract common in your jurisdiction. Do you have any arrangement known as management In Canada, formation of contract in the construction law context contracting, with one main managing contractor follows general principles of contract law, which are similar both and with the construction work done by a series in common law provinces and under the Québec Civil Code. Thus, of package contractors? (NB For ease of reference a binding contract requires offer, acceptance and consideration. throughout the chapter, we refer to “construction Accordingly, with the exception of a construction project that also contracts” as an abbreviation for construction and involves a sale of land, construction contracts may be oral or in engineering contracts.) writing. Agreements that involve a sale of land must be in writing to comply with the Statute of . In addition, a contract may be There are a wide range of project delivery models in use across found invalid or void for uncertainty if it lacks one of the following the industry in Canada. The most popular design and construction three basic components: parties; price; and product. While there are delivery methods include: (i) design-build, where the owner no special requirements needed to form a construction contract, such contracts with a single entity to perform both design and construction contracts are often based on standard form agreements developed scopes of work, with the design scope then generally subcontracted; by, and widely used in, the construction industry. (ii) design-bid-build, in which an engineer or architect performs design work before putting the construction scope out to tender; and (iii) construction management, in which the owner enters separate 1.3 In your jurisdiction please identify whether there is contracts with a construction manager and a design consultant, who a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or coordinate the design and construction scopes of work and enter into non-legally binding indication of willingness either to trade contracts and sub-consultant contracts for its performance as enter into a contract later or to commit itself to meet the owner’s agent. certain costs to be incurred by the contractor whether Large industrial projects will often use an engineering, procurement or not a full contract is ever concluded. and construction management (“EPCM”) or engineering, procurement and construction (“EPC”) delivery model, in which an engineering Parties may use a “letter of intent” to identify high-level objectives firm is responsible for these respective scopes of work andwill or their intention to enter into a full-scale contract at some point in typically award construction contracts (EPCM) or subcontracts (EPC) the future. In the construction context, letters of intent are often used to a number of different contractors. to allow contractors to commence performance of a limited scope of Many commercial projects are delivered using standard form contracts work prior to the completed negotiation and execution of a more developed by the Canadian Construction Documents Committee fulsome construction contract. In such instances, letters of intent (“CCDC”) or Canadian Construction Association (“CCA”), among (if properly drafted) are considered contracts in their own right and others. Standard form architecture contracts have been developed are legally binding. Where a party seeks to rely on a letter of intent by the Royal Architectural Institute of Canada (“RAIC”). Industry to allege a binding obligation, a court will determine whether the associations, such as the Construction Owners Association of Alberta, document evinced offer, acceptance and consideration, whether its maintain standard forms for their specific industries. terms were sufficiently certain and whether the parties acted on it as if entering into contractual relations.

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labourers who register liens out of a holdback fund typically set at 1.4 Are there any statutory or standard types of insurance 10% of payments made by the owner in respect of a project. It is which it would be commonplace or compulsory to not possible to contract out of the statutory liability, although in have in place when carrying out construction work? practice some owners agree to forego the retention of this holdback For example, is there employer’s liability insurance for contractors in respect of death and personal and thus assume the risk of having to pay the statutory 10% twice in injury, or is there a requirement for the contractor to the event of a lien claim. have contractors’ all-risk insurance? On large projects, financial security may replace the lien holdback such that funds can be advanced without deduction. Some Many different insurance products are used in the construction provinces, such as Saskatchewan, provide for the early release of industry and a construction contract will often require parties to holdback funds on large projects of long duration. Canada carry certain types of insurance coverage. Contractors are often asked to carry all-risk property insurance for tools and equipment, 1.7 Is it permissible/common for there to be performance commercial general liability insurance, automobile liability bonds (provided by banks and others) to guarantee insurance, pollution liability insurance and (for and performance, and/or company guarantees provided to engineers performing professional services) errors and omissions guarantee the performance of subsidiary companies? insurance. Some projects employ project-wide coverages insuring Are there any restrictions on the nature of such bonds all parties present on site, including wrap-up liability coverage for and guarantees? third party liability and course of construction (builders’ all-risk) insurance for property damage to the project itself. The most Performance bonds are issued by construction on common type of mandatory insurance regime in the Canadian some private construction projects and are frequently issued on construction industry is each province’s workers’ compensation government projects. Performance bonds generally adhere to a programmes, which cover workplace injuries on a no-fault basis. standard form and create a relationship between the licenced , who issues the performance bond, the project owner (or obligee) and the contractor (or principal). In theory, a performance bond will 1.5 Are there any statutory requirements in relation to construction contracts in terms of: (a) general guarantee that the owner ends up with a completed project at the requirements; (b) labour (i.e. the legal status of those original contract price (plus approved change orders). working on site as employees or as self-employed In order for the contractor to obtain a performance bond from a sub-contractors); (c) tax (payment of income tax of surety, it will be required to go through an extensive prequalification employees); or (d) health and safety? process which may also entail the provision of personal guarantees from the principals of the contractor. A performance bond is often The Canadian provinces have constitutional jurisdiction over complimented by a labour and material payment bond, which property and civil rights in each province, and as a result the insulates the project subcontractors from payment issues stemming statutory regime for these matters may vary widely from province from the contractor. It is common for the performance bond and the to province. Provincial employment legislation imposes minimum labour and material payment bond to each be valued at 50% of the standards relating to working conditions and compensation that may initial contract value. be varied to a limited extent by contractual agreement. Provincial Alternatively, letters of credit may be requested by the project owner occupational health and safety legislation imposes a duty on owners and then issued by banks or other lenders on behalf of the contractor. and contractors to ensure the safety of their employees and others Letters of credit are flexible security that can be called upon by the attending at site, and may stipulate the manner in which these duties owner at any time. Unlike performance bonds, where the surety are to be carried out. issuing the bond will review and assess any alleged default before The federal government has jurisdiction over criminal matters, and responding, letters of credit are payable immediately on demand construction safety issues may attract criminal prosecution. The and without further substantiation, making them useful security for federal government also has exclusive jurisdiction over certain owners. specific industries such as aviation and interprovincial transportation, Parent company guarantees are also commonly used and assist and federal labour and employment legislation applies to construction in protecting the owner from the contractor’s default or failure projects undertaken in these industries such as airports and inter- to perform by equally binding a larger, more financially secure provincial pipelines, railways and highways. parent entity to the same obligations. Such guarantees can bind the Revenue Canada is responsible for collecting income tax for both parent to financially respond and pay for any contractor liability, the federal government and the provinces (other than Québec), and or to physically perform the underlying contractual obligation, or legislation imposes responsibilities on employers to deduct income both. Parent guarantees may have some utility to contractors over tax and other amounts from payroll. other types of security because they do not require the payment of premiums (as are required with both bonds and letters of credit). 1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be 1.8 Is it possible and/or usual for contractors to have released either in whole or in part when: (a) the works retention of title rights in relation to goods and are substantially complete; and/or (b) any agreed supplies used in the works? Is it permissible for defects liability is complete? contractors to claim that until they have been paid they retain title and the right to remove goods and In Canada, parties are free to contract with respect to these matters materials supplied from the site? as they see fit. Owners are not required to hold back funds in relation to deficiencies but often do so (or request alternate forms of The timing of the transfer of a contractor’s title to goods and security) as a risk management strategy. supplies provided to a project is often dictated by the wording of the That said, provincial builders’ lien legislation imposes a statutory contract: it is common for title to transfer to the owner contractually liability on owners to pay unpaid subcontractors, suppliers or in conjunction with either payment for or delivery of the goods

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in question, although it can also pass earlier. Each common law province also has its own Personal Property Security Act which 2.3 Are the parties permitted to agree in advance a fixed governs the majority of dealings between secured creditors and sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of their debtors relating to personal property. Québec has functionally particular breaches, e.g. liquidated damages for late analogous laws relating to the “hypothec” that are set out in Articles completion? If such arrangements are permitted, are 2660–2802 of the Civil Code. This legislation generally contains there any restrictions on what can be agreed? E.g. provisions to permit the secured party to take possession of the does the sum to be paid have to be a genuine pre- secured property upon default. estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of Unpaid contractors and material suppliers may also make use of financial loss suffered? provincial builders’ lien legislation, which entitles them to register Canada a lien against the project lands (within a set amount of time) in Liquidated damages clauses are permissible in Canadian relation to unpaid goods which have been furnished to the project construction contracts and are generally used in the context of delay site, and then call upon those lands as security for unpaid holdback provisions and key personnel replacement. In Canada, courts have amounts. Provincial lien legislation also includes trust provisions generally followed British and other Commonwealth authorities as an additional remedy to unpaid contractors; however, the which have sought to distinguish between a clause that sets out extensiveness of the trust that is created varies from province to a genuine pre-estimate of damages and one that seeks to punish province. In certain circumstances, unpaid contractors who have the offending party. The parties will be bound to a liquidated not yet delivered goods or materials can also assert a possessory lien damages clause that can reasonably be construed as an attempt to over such materials. pre-estimate damages. In contrast, a penalty clause that requires a party to pay extravagant or unconscionable sums is not enforceable. 2 Supervising Construction Contracts Penal clauses are addressed in sections 1622 through 1625 of the Québec Civil Code, which generally allow courts to reduce the amount payable under such provisions in certain circumstances. 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 3 Common Issues on Construction or architect) have a duty to act impartially between Contracts 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 3.1 Is the employer entitled to vary the works to be done impartially. under the contract? Is there any limit on that right?

Third party consultants are often engaged by an owner to administer Most construction contracts will expressly address the right of the and supervise a construction project. The role and authority of the owner to make changes to the scope of work under the contract, consultant is derived from the terms of its contract with the owner, and will usually stipulate a method for adjusting the contract price to whom it generally owes a duty of care. The consultant is required or time as necessary to account for permitted change. Typical to perform its duties in a reasonable and competent manner but often contractual change mechanisms include change orders, which will acts as the owner’s representative or agent under the terms of the normally provide for an agreed adjustment to the contract price and contract and is thus not obliged to be impartial in all cases. In some time, and change directives, which will normally be used where instances, however, particularly where the consultant is contractually the parties are not yet agreed on the impacts of a change, allowing empowered to act as initial arbiter of changes or disputes, a duty of the owner to require its performance ahead of achieving cost and impartiality may be expressly stated in the construction contract. In schedule alignment. addition, if the consultant is an engineer or architect, its duties will be informed by its professional/ethical obligations. Contracts usually have notice requirements relating to change- related claims, such that contractors will be required to advance claims in a timely manner or risk losing their entitlement to recover 2.2 Are employers entitled to provide in the contract that additional amounts for it. Generally speaking, a change in scope to they will pay the contractor when they, the employer, a contract must remain within the overall contemplated scope of the have themselves been paid; i.e. can the employer project and cannot extend to something wholly different. include in the contract what is known as a “pay when paid” clause? 3.2 Can work be omitted from the contract? If it is “Pay when paid” clauses are commonly found in Canadian omitted, can the employer do it himself or get a third construction subcontracts. These clauses seek to transfer the party to do it? risk of non-payment by the owner from a general contractor to a subcontractor. Such provisions are permissible in Canada but have The subsequent omission of work from the original contract scope been narrowly construed by the courts and will only be found to of work will usually be governed by contractual provisions relating have true “pay-when-paid” effect when the wording of the clause to changes to the work or termination for convenience. Absent explicitly limits the contractor’s entitlement to payment, failing contractual agreement that work may be removed from the original which they will be considered mere timing mechanisms. scope, an owner could face a claim in contract for lost revenues or lost profits were it to self-perform that work or award it to another contractor.

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however, this basic limitation period stretches up to six years in 3.3 Are there terms which will/can be implied into a some jurisdictions. construction contract? In addition, the provincial limitation statutes provide for an ultimate limitation period that does not rely upon the discoverability of the Courts will imply a term into a contract if: (i) the contract is of a claim. The ultimate limitation period varies in length from province kind in which the implied term has historically been found; (ii) the to province, but is often either 10 or 15 years from the date when the term arises from custom or usage in the trade where the contract injury or harm occurred or the first accrued. is used; and (iii) the implied term is consistent with the parties’ presumed intentions and not inconsistent with the agreement’s While legislation is the main source of limitations law in Canada, express terms. Implied terms are often modified or excluded by the equitable doctrines governing limitations of actions (i.e. laches and Canada stated terms of the contract. Examples of terms that may be implied acquiescence) continue to be of general effect. Limitation periods into construction contracts include: a term that the parties will give may be extended by the contract; however, they may not be shorted, reasonable notice for performance or termination; an obligation unless the applicable provincial limitation legislation expressly of honest performance; a term that the party will make payments permits it. within a reasonable period of time; a term that the owner will not interfere and will do everything reasonable to allow the contractor 3.7 Who normally bears the risk of unforeseen ground to complete its work; an obligation to provide good workmanship conditions? and materials; and a term that the actual cost of the project will bear a reasonable relationship to the initial budget. Construction contracts often include provisions requiring a contractor to inspect and accept a work site. Such provisions generally seek 3.4 If the contractor is delayed by two events, one the to insulate the owner from liability arising from unexpected site fault of the contractor and one the fault or risk of conditions. However, site inspection clauses will not protect an his employer, is the contractor entitled to: (a) an owner that negligently misrepresents site conditions, at least absent extension of time; or (b) the costs occasioned by that a very clear exclusion clause. In the absence of site inspection concurrent delay? provisions, the owner will likely bear the risk of unforeseen ground conditions. This obligation derives from the owner’s implied Construction contracts often contain delay provisions such that obligation to make the site available to the contractor and from the the ramifications of delay are spelled out in the express terms specific confines of the contractor’s limited scope. of the agreement. Delay provisions may grant the contractor an extension of time, but no damages, for delay that is caused by the 3.8 Who usually bears the risk of a change in law owner. In general, however, any delay caused by the contractor will affecting the completion of the works? be considered a breach of the contract that, in the absence of any contrary provision, will give rise to damages. Where both parties The risk of a change in law is usually carried by the contractor at contribute to the delay, or where there are concurrent delay events, common law. However, this risk is often addressed and allocated in each caused by a different party, fault will generally be divided and the contract, either by way of general provisions relating to changes, apportioned among the parties based on the extent to which each specific provisions tied to changes in law (including, at times, as part delay caused any resulting losses. of a force majeure clause), or specific allocations of risk for matters such as environmental permits, labour relations, or land use. 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 3.9 Who usually owns the intellectual property in relation example, a variation, is the contractor subsequently to the design and operation of the property? entitled to an extension of time if he is then delayed after this float is used up? As a matter of contract, an owner will normally require the designer to agree that all intellectual property in the underlying design (apart The contractor’s time, schedule, change and delay related claims from pre-existing IP that predates the contract) passes to the owner will often be the subject of specific contractual provisions, and and that the designer will not use the design for any other project. As courts will generally enforce these agreements according to their a matter of common law, and where the contract does not otherwise terms. The contract may provide that the contractor owns the float stipulate, the designer retains copyright over its design and grants or that it does not. Normally an owner-caused variation will result the owner an express or implied licence to use the design in relation in a change that, if contractual notice and other requirements are to the project, in which case the owner may need permission to use followed, will entitle the contractor to a schedule extension and the design on another property or to alter the design. therefore not impinge on the float.

3.10 Is the contractor ever entitled to suspend works? 3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims The contract may afford the contractor a right to suspend the work against each other? How long is that period and from by reason of non-payment or the owner’s insolvency. Owner- what date does time start to run? imposed change may give the contractor the right to suspend work where the parties cannot agree on the adjustments arising out of the Each province has its own limitations legislation which governs change and where the contract does not include provisions allowing the time period within which a claimant may advance a claim by the owner to mandate performance in any event. Force majeure commencing legal proceedings. In most Canadian jurisdictions, provisions in the contract may afford the contractor or owner (or the basic limitation period gives a claimant two years to bring an both) additional rights to suspend the work by reason of qualifying action from the date that the claimant first knew, or ought to have events of force majeure. known, that the injury or harm underlying the claim had occurred;

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set-off must be certain (i.e. liquidated or ascertained) and must be 3.11 On what grounds can a contract be terminated? Are “mutual” (i.e. between the same two parties). Equitable set-off, in there any grounds which automatically or usually contrast, allows parties to set off claims that are closely connected. entitle the innocent party to terminate the contract? Do The general requirement for equitable set-off is that the opposing those termination rights need to be set out expressly? claims flow from the same transaction or relationship. The required level of connection may require more than cross-claims arising Termination rights should be, and almost always are, addressed under the same contract. Contractual terms can attempt to expand expressly. Most construction contracts provide for termination in the the breadth of a party’s set-off rights. event the contractor becomes insolvent or breaches its contractual obligations and fails to rectify such breach within a set cure period.

Unless otherwise set out in the contract, the common law doctrine 3.15 Do parties to construction contracts owe a duty of Canada care to each other either in contract or under any of repudiation will apply where one party unequivocally indicates other legal doctrine? its intention not to be bound by the terms of the contract. In such instances, the innocent party may promptly elect to accept the breach, The Supreme Court of Canada has recently identified good faith as a bringing the contract to an end, or to affirm the contract, in which case basic organising principle of contract law in Canada. According to the contract continues. Whether it accepts the repudiation or affirms this principle, parties to a contract owe one another a duty of honest the contract, the innocent party may sue for breach of contract. contractual performance. Beyond that duty of honesty, a duty of care will arise as between contracting parties according to the 3.12 Is the concept of force majeure or frustration known general principles of law. Canadian law recognises that many in your jurisdiction? What remedy does this give parties to construction contracts (architects, engineers, contractors, the injured party? Is it usual/possible to argue subcontractors, etc.) may have concurrent duties in contract and successfully that a contract which has become tort. These duties may be, and often are, excluded or limited in uneconomic is grounds for a claim for force majeure? construction contracts.

Frustration is a concept that is recognised in Canadian common law provinces. Canadian construction contracts and the Québec Civil 3.16 Where the terms of a construction contract are Code equally recognise the concept of force majeure. Frustration will ambiguous, are there rules which will settle how that generally result in the termination of a contract if the circumstances ambiguity is interpreted? have changed such that performance becomes impossible. Parties will then be discharged from any further obligations. Frustration will not Construction contracts follow the general principles of contractual be established merely because a contract has become more difficult, interpretation. A contract is to be construed as a whole such that the less beneficial, uneconomic or more onerous than initially expected. words of the contract are read in light of the factual matrix. Courts Force majeure normally grants the affected party an extension of time prefer a common-sense approach to determine the intentions of to perform those obligations delayed by the relevant force majeure the parties over the application of technical rules of construction. event, but such events do not extend to mere difficulties that render Courts will thus consider the ordinary and grammatical meaning the agreement uneconomic or less profitable to perform. of the words, in light of the surrounding circumstances at the time the contract was entered into. If a contract so interpreted remains capable of two equally plausible interpretations, ambiguous 3.13 Are parties which are not parties to the contract provisions may be resolved by considering extrinsic evidence, entitled to claim the benefit of any contract right including parol evidence. If such provisions remain unclear, courts which is made for their benefit? E.g. is the second or may construe the contract contra proferentem, i.e. against the party subsequent owner of a building able to claim against the original contracts in relation to defects in the that drafted the agreement. building? 3.17 Are there any terms in a construction contract which A party is not normally entitled to claim a right or benefit under are unenforceable? a contract to which it is not a party at common law. In Québec, section 1440 of the Civil Code states: “A contract has effect only Certain contractual terms may be unenforceable if they are illegal, between the contracting parties; it does not affect third persons, contrary to public policy, or too uncertain to be enforceable. For except where provided by law.” Thus, a subsequent owner is unable example, a provision providing for interest at a rate in excess to advance a contract claim against a builder to whom it has no of 60% per annum runs contrary to the Canadian Criminal contractual relation. A subsequent owner may, however, advance Code. An agreement that was entered into under duress or that a tort claim against a builder, architect or engineer who originally is unconscionable will be found contrary to public policy and worked on the building, although there are limits around any such thus void. Finally, a term that is so unclear or uncertain that an claims for pure economic loss. In addition, contractual protections objective bystander would be unable to ascertain its meaning may such as limitations of liability may extend to third party beneficiaries be considered void due to vagueness. In some circumstances, the in circumstances where this is expressly contemplated or implied, term may be potentially viewed as a fundamental error going to the but these do not give rise to their own separate causes of action and root of the contract that thus invalidates the entire agreement. can only be relied on in defence of a claim.

3.18 Where the construction contract involves an element 3.14 Can one party (P1) to a construction contract which of design and/or the contract is one for design only, owes money to the other (P2) set off against the sums are the designer’s obligations absolute or are there due to P2 the sums P2 owes to P1? Are there any limits on the extent of his liability? In particular, does limits on the rights of set-off? the designer have to give an absolute guarantee in respect of his work? Canadian law recognises legal and equitable set-off. Legal set-off allows parties to set-off mutual debt obligations. The amounts to be The liability of a designer for errors and omissions in its work will

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normally arise concurrently in contract and tort law. Accordingly, proceedings, and parties thus at times choose to adopt third-party specific contract terms may address the designer’s obligations, rules (or a variation of them) such as the CCDC Rules for Arbitration standard of care, and liability, as well as any limits or exclusions to of Construction Disputes or the UNCITRAL Arbitration Rules. that liability. Absent such provisions, a designer’s liability will be Canadian courts will assist in the enforcement of arbitral awards. unlimited, but its standard of performance will likely not be that of Arbitration is being used more frequently in Canada as access to perfection, but will instead be tied to prevailing reasonable industry the court system is taking longer and becoming more expensive. standards. The ability for parties to agree upon a schedule for hearing the A designer may be liable to an owner for the cost of corrective proceedings, choose their own adjudicator to decide the dispute, measures to address defects regardless of any actual injury. and keep the proceedings confidential collectively add to the allure Statutory regimes such as building codes and safety codes may of arbitration in Canada. Canada be highly relevant to claims against designers in both contract and tort, as a means to establish liability for breach of contract or the 4.4 Where the contract provides for international applicable standard of care. arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement. 4 Dispute Resolution Pursuant to various conventions that Canada and its provinces have 4.1 How are disputes generally resolved? signed, a foreign arbitral award will generally be enforced in Canada unless it violates public policy. By way of example, the recognition Disputes are generally resolved in Canada pursuant to the provisions and enforcement of foreign arbitral awards in Alberta is governed by set out in the underlying contract. If there is no dispute resolution the International Commercial Arbitration Act, which incorporates process set out in a contract and the parties do not otherwise agree, both the Convention on the Recognition and Enforcement of Foreign disputes are resolved by way of litigation. Arbitral Awards and the UNCITRAL Model Law on International Commercial Arbitration. Contractual dispute resolution processes often require the parties to adhere to (or participate in) various stages which may include The time period for enforcing a foreign arbitral award may be negotiation, mediation and then arbitration or litigation. Dispute an obstacle to enforcement as the Supreme Court of Canada has resolution clauses often set out timelines for providing notice of a recently confirmed that the time to commence an action to recognise dispute and then to progress through the dispute resolution stages. a foreign arbitral award must adhere to provincial limitation periods. The parties are generally required to continue to perform their obligations under the contract while the dispute resolution process 4.5 Where the contract provides for court proceedings is ongoing. in a foreign country, will the judgment of that foreign If the contractual dispute resolution clause requires disputes to court be upheld and enforced in your jurisdiction? be settled through mandatory arbitration, Canadian courts will normally not take jurisdiction over the dispute, and will stay any Enforcement of a foreign judgment is within the jurisdiction of each litigation proceedings previously commenced with the court. Canadian province. Canadian courts will generally enforce foreign judgments as long as the following prerequisites are met: (i) a “real and substantial connection” to the dispute existed in the foreign 4.2 Do you have adjudication processes in your jurisdiction and the foreign court properly asserted jurisdiction; (ii) jurisdiction? If so, please describe the general the judgment was final and conclusive; and (iii) the judgment was procedures. for a definite and ascertainable sum of money. Underlying this, Canadian courts will only enforce a foreign judgment that is fair and There are no formal adjudicative processes for construction disputes does not offend Canadian public policy. in Canada. The administration of construction litigation varies from province to province. In Ontario, a specialised construction lien Many of the provinces in Canada, and some international countries court has been created which is administered by case management and states, have mutual registration arrangements with respect to the masters, who are provincially appointed judicial officers. This reciprocal enforcement of judgments. specialised court only has jurisdiction for projects within the City of Toronto. 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 4.3 Do your construction contracts commonly have how long proceedings are likely to take to reduce: (a) arbitration clauses? If so, please explain how a decision by the court of first jurisdiction; and (b) a arbitration works in your jurisdiction. decision by the final court of appeal.

Construction contracts in Canada often but do not always include Disputes resolved through the court system are commenced by one arbitration clauses, and the rules and procedures included in these party filing a commencement document, or claim, as prescribed by clauses are not standardised. Arbitration clauses in construction the Rules of Court for each provincial jurisdiction (and in Québec, contracts can be simple or complex, can require mandatory the Civil Code). The responding party will then be required to participation or be permissive, and can set the size of the arbitration defend and will also have the option to counterclaim or file third panel and the other rules of conduct and procedure or be silent in party claims, all within a set period of time. Once the pleadings are this regard. closed, relevant records to the dispute are exchanged and the parties Each province has its own Arbitration Act which governs the may then examine the other party under oath through the process arbitration proceedings in each provincial jurisdiction. These Acts of questioning/discovery. The parties will often choose to retain do not provide a comprehensive set of rules for the arbitration experts whose reports are prepared and circulated before trial.

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Due to a shortage of judicial resources in Canada, the length of Acknowledgment time for a matter to proceed to trial is increasing. On complex construction cases, it would not be uncommon for the matter to take The authors would like to thank the lawyers from Rose LLP who over five years to proceed to trial and have a decision rendered. As provided assistance in preparing this chapter, specifically Shaun W. a result, the courts encourage settlement through mediation or other Hohman (Tel: +1 403 776 0508 / [email protected]), alternative dispute resolution processes. The provincial Rules of Joshua D. Fraese (Tel: +1 403 776 0507 / [email protected]), Court also provide for the potential for formal settlement offers and and Michael R. Oxman (Tel: +1 403 776 0517 / Michael.Oxman@ dictate cost consequences if the proposed settlement offer is better RoseLLP.com). than the final award issued at trial. A right of appeal exists for parties to the litigation and will be heard Disclaimer Canada at the respective provincial appellate courts. The Supreme Court The above information is general information and not intended to of Canada is the final appeal court and may hear appeals from the constitute or advice. Please note that the lawyers of provincial appellate courts. To appear before the Supreme Court of Rose LLP are not civil law practitioners and all discussions of the Canada, leave must be obtained, which requires the party to show Québec Civil Code are strictly for reference only. that the issue at appeal has some national importance.

Peter A.K. Vetsch Courtney C. Kachur Rose LLP Rose LLP 333 – 5th Avenue SW, Suite 810 333 – 5th Avenue SW, Suite 810 Calgary, Alberta Calgary, Alberta Canada T2P 3B6 Canada T2P 3B6

Tel: +1 403 776 0524 Tel: +1 403 776 0527 Email: [email protected] Email: [email protected] URL: www.rosellp.com URL: www.rosellp.com

Peter is a partner at Rose LLP whose practice is focused primarily Courtney’s corporate/commercial litigation practice includes on construction law, contract drafting and negotiation, and project comprehensive experience with construction dispute resolution, administration and risk management advice. He has created and , commercial real estate disputes, and energy matters. negotiated tailored suites of contracts covering all facets of execution She further specialises in construction matters, with a focus on builders’ on a number of different mega-projects, from conceptual design and lien and surety claims, as well as advising on project procurement, risk bid phases through to construction and commissioning. assessment, and contract documents. Her experience also extends to advising clients on matters relating to the enforcement of domestic Peter previously worked as corporate counsel for a global EPC and foreign judgments, labour and employment issues, and insurance contractor where he played a lead role in drafting and negotiating a claims. broad range of engineering, consulting, procurement, construction, construction management, maintenance, turnaround and other Courtney has acted as counsel at the Alberta Court of Appeal, Alberta contracts covering all phases of a wide variety of oil and gas and Court of Queen’s and the Provincial Court of Alberta. She has industrial projects across Canada and the United States. also successfully resolved a broad range of matters through alternative forms of dispute resolution including negotiations, mediations and In addition, Peter has prior experience working in the construction arbitrations. department of a large national law firm, where he handled both project work and construction litigation matters, representing clients in all types of commercial and industrial construction disputes, including those relating to builders’ liens, delay/productivity claims, defective workmanship, cost overruns and bidding and tendering disputes.

Rose LLP was formed by a group of Calgary’s most esteemed and experienced construction and litigation practitioners with a view to providing the highest calibre of legal representation on significant and complicated construction and commercial matters in a focused boutique setting. Our lawyers practise in all aspects of construction law and commercial dispute resolution. We have been successful in prosecuting and defending complex claims for significant players in the oil and gas, construction, financial services and manufacturing industries across Canada and around the world. Rose LLP has taken leading trial and appellate advocacy roles, including in Supreme Court of Canada references, and our counsel have handled and resolved numerous billion-dollar disputes arising from oil and gas facilities transactions, industrial plant construction issues and pipeline development, as well as precedent-setting litigation involving rights of first refusal, oil and gas leases, and mining development in the CanadianArctic. We have assumed key contract drafting and advisory roles on complex multi-billion dollar energy and infrastructure projects. As project counsel, we craft and negotiate detailed, tailored engineering, procurement, construction and other contracts required for the proper execution of large projects and provide overarching strategic advice to guide these mega-projects to successful completion. Rose LLP’s targeted approach to legal service delivery and its boutique setting offer an unrivalled combination of expertise, specialisation and flexibility.

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Chile Eduardo Lahsen Matus de la Parra

Lahsen & Cía. Abogados Pedro Mery Reyes

only a part of the tasks involved in the works. While this limit is 1 Making Construction Projects determined statutorily for public contracts, between private parties, the limit to subcontracting is allowed to be determined in the terms 1.1 What are the standard types of construction contract and conditions of their respective contracts. in your jurisdiction? Do you have contracts which place both design and construction obligations upon 1.2 Are there either any legally essential qualities needed contractors? If so, please describe the types of to create a legally binding contract (e.g. in common contract. Please also describe any forms of design- law jurisdictions, offer, acceptance, consideration only contract common in your jurisdiction. Do and intention to create legal relations), or any you have any arrangement known as management specific requirements which need to be included in a contracting, with one main managing contractor construction contract (e.g. provision for adjudication and with the construction work done by a series or any need for the contract to be evidenced in of package contractors? (NB For ease of reference writing)? throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.) As a general rule, offer and acceptance are the only essential qualities required to create a legally binding contract, fitting necessarily The Chilean construction and engineering market has no regulating in a purchase agreement or a contract of services. However, it is entity that provides standard forms of contracts for the use of private commonplace for construction contracts to be evidenced in writing parties. Nonetheless, the terms and conditions of construction and to cover terms and conditions in detail. contracts in our jurisdiction are highly consistent and are rarely a Public works contracts are more elaborate in that they have several source of dispute. specific requirements, such as being authorised, created, amended For contracts that imply a significant investment from the and terminated by formal administrative acts, some of which are employer, EPC (Engineering, Procurement, Construction) and required to be approved by the General Comptroller of the State of EPCM (Engineering, Procurement, Construction and Management) Chile. Firstly, the administrative bases and technical specifications contracts are preferred, which usually place both design and of the contract are published so that they can be reviewed by construction obligations upon contractors, and the terms and interested parties and potential bidders. A reasonable time frame conditions of the contracts are provided in great detail. is given to study the contract’s background and prepare the bids. The execution of these contracts is usually separated by stages, each During this study, terrain recognition is often required and a window one with different obligations and payment structures. BOT (Build, is opened for bidders to ask a series of questions to the employer Operate, Transfer) contracts are also common in the private sector, about the project, the terrain and the contract. The answers the and what they all have in common is that they can be performed employer provides to these questions become a part of the contract by a main contractor which employs specialised subcontractors for and are binding on both parties. After this, bidders are required specific tasks that require a certain level of expertise. to make two bids, a technical and a financial one. Technical bids are reviewed first, and only the ones that comply with the contract On the other hand, public works often have design-only contracts specifications and standards are approved. Financial bids are opened and construction-only contracts, the former being entered into by only for those bidders that have had their technical bid approved, engineering consultants and the latter by contractors. This is the and the cheapest one is awarded the contract. general rule for contracts that involve roads, bridges, airports and ports. However, there is an emerging tendency to tender contracts that place both design and construction obligations upon contractors 1.3 In your jurisdiction please identify whether there is in public works that involve architecture and the construction of a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or buildings, such as hospitals and medical facilities, sports stadiums, non-legally binding indication of willingness either to public schools and other administrative buildings. In all public enter into a contract later or to commit itself to meet works contracts, negotiation of clauses is not allowed, and formal certain costs to be incurred by the contractor whether procedures established by are followed in the tendering or not a full contract is ever concluded. and awarding of those contracts. Management contracting is not commonly employed in local In the private sector there can be conventional preliminary construction contracts and subcontracting is usually limited to agreements that can be established in a legally binding fashion

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between the parties involved. However, for them to be enforceable done monthly, and a value-added tax (VAT), which currently has a they need to specify the terms and conditions with which the 19% rate. Other relevant taxes may be applicable depending on the employer agrees to comply. chosen business model. In public works, as a general rule there is no recognition of preliminary On matters of health and safety, the company is bound by law to acts, and costs incurred by the contractor are not reimbursed by the issue and provide its employees with a hygiene and safety rulebook employer. However, in contracts signed under the mode of payment applicable to all its workers and workplaces. The company also upon receipt, in which bidders are required to design and offer has to establish a joint committee of order, hygiene and safety, their own project, the administrative bases, established by Supreme composed of representatives of the employer and employees. Decree 108, do determine that compensation is to be paid to the This committee is in charge of compliance with safety and health bidders who were placed second and third in the tender and were regulations, most of which are aimed at preventing work accidents Chile not awarded the contract. This compensation amounts to 0.6% and and sicknesses. 0.4% of the estimated value of the contract, which is determined by the employer. 1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be 1.4 Are there any statutory or standard types of insurance released either in whole or in part when: (a) the works which it would be commonplace or compulsory to are substantially complete; and/or (b) any agreed have in place when carrying out construction work? defects liability is complete? For example, is there employer’s liability insurance for contractors in respect of death and personal In private infrastructure contracts, the employer is not allowed injury, or is there a requirement for the contractor to to retain part of the purchase price based on its sole discretion, have contractors’ all-risk insurance? but withholdings can be agreed upon in the contract as a form of warranty in his favour. Both public and private infrastructure works are required to have In public works, these retentions or withholdings are based on employer’s liability insurance to cover accidents and professional regulatory law and in most cases they imply a 10% withholding of sickness suffered by employees directly working on the project. each payment until 5% of the total price of the contract is reached. Public works regulations also impose the requirement to have civil These withholdings can be exchanged for performance bonds in liability insurance in favour of third parties and “contractors’ all-risk order to have liquid assets if such a thing is required. insurance” (TRC in Spanish). Aside from those, it is commonplace for constructors to take out machinery and equipment insurance and professional liability insurance. 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 1.5 Are there any statutory requirements in relation guarantee the performance of subsidiary companies? to construction contracts in terms of: (a) general Are there any restrictions on the nature of such bonds requirements; (b) labour (i.e. the legal status of those and guarantees? working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of It is permitted and in most cases expected that the contractor employees); or (d) health and safety? guarantees its performance and other obligations with performance bonds issued by banks or insurance policies that allow immediate In public works, the main requirement is to be registered as a execution. In public works, this kind of guarantee is required by contractor in the respective public registries kept by the Ministry regulatory law for at least 3% of the total price of the contract. of Public Works (MOP). These registries have different categories based on each area of construction and engineering and the size of the required investment, and to become a part of them the contractor 1.8 Is it possible and/or usual for contractors to have must prove a certain level of experience and financial capacity, retention of title rights in relation to goods and among other things. Other public employers have specialised supplies used in the works? Is it permissible for contractors to claim that until they have been paid registries based on their specific needs, in areas such as mining or they retain title and the right to remove goods and housing. For particularly big investments or projects, the MOP may materials supplied from the site? create ad hoc registries that require pre-qualifications, tailored for foreign investment and consortiums. Private works do not have this Once the materials and supplies are incorporated into the works, kind of general requirement and only require sectoral permits for they become the property of the employer, and the contractor holds involved activities. no retention rights over them. This usually happens under civil law Regarding labour, people working on site are considered employees when the works are approved by the employer, at which point the and they must be hired with a written contract that specifies their role, materials become a part of the works as a whole and are legally salary, work schedule and other obligations. Also, all organisations owned by the employer. The contractor may remove his goods and with more than 25 workers must have at least 85% of Chilean materials from the site prior to approval of the works by the owner, nationals in their workforce, as determined by Chilean Labour but has no legal right to demand after that point. In . Subcontractors are allowed to have their own employees, works, this can be complemented by statutory law, with article 178 but the head contractor will have a legal obligation to oversee the of the RCOP (Reglamento para Contratos de Obras Públicas), subcontractors’ compliance with their labour obligations, which is which determines that all things incorporated into the works, by usually done through retention of payments. adherence or destination, become state property. Concerning taxes, the main ones that have a bearing on construction contracts are the payment of income tax of employees, which is

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2 Supervising Construction Contracts 3 Common Issues on Construction Contracts 2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third 3.1 Is the employer entitled to vary the works to be done party? Does any such third party (e.g. an engineer under the contract? Is there any limit on that right? 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, In private contracts, the parties can agree to entitle the employer please identify when the architect/engineer must act to modify the project, but the way this right is exercised is solely Chile impartially. determined by the terms and conditions agreed in the contract, meaning the employer cannot modify the contract by himself. In public works, the employer appoints a third party, known as an In public works, the employer is authorised to modify the works ITO, whose role is to supervise and inform on the works, although it by up to 35% of the original price, as determined by the applicable lacks the competence to suspend or stop the works. The ITO is not statutory legislation. If further changes are deemed necessary for impartial; it is a technical reviewer that represents the employer’s the project, the contract must be liquidated and a new contract must interests. be drawn up with the new adjustments. In private works the situation varies, since parties are free to agree to different terms and conditions in each specific contract. The most 3.2 Can work be omitted from the contract? If it is common case occurs when the contract is financed by third party omitted, can the employer do it himself or get a third investors, in which case an “independent engineer” is designated party to do it? to represent the investor’s interests and guarantee the correct administration of the investment. However, this independent While unusual, the employer may omit work from the contract engineer is not usually authorised to suspend or stop the works. based on standards of specialisation or budget. When this happens, Notwithstanding, some public services have the power to stop the the employer can do the omitted work himself or by hiring a third works if there is a normative breach. party, but the interference that those works may produce on the Additionally, supervision by an ITO is mandatory under planning contract will be his responsibility. If this omitted work is required law when the building is for public use; the ITO must be impartial to be done by the contractor after the contract has been awarded, and part of a public registry. then an amendment of the contract will be required. On the other hand, the contractor is generally not allowed to omit any 2.2 Are employers entitled to provide in the contract that work from the contract, and omission is regarded as non-fulfilment they will pay the contractor when they, the employer, of the contract, in which case the employer is usually authorised to have themselves been paid; i.e. can the employer finish the works himself or by hiring a third party, generally at the include in the contract what is known as a “pay when expense of the contractor. paid” clause?

Yes, employers are allowed to provide such clauses in private 3.3 Are there terms which will/can be implied into a construction contract? infrastructure contracts. In practice, when such terms are agreed upon, billing can still be done within the tax term of the service provided, and any impugnment must be done at that point, otherwise In public works contracts, the administrative bases that are published the right to object to the bill will expire. alongside the public tender provide the list of applicable regulations and their normative hierarchy. The norms contained therein are implied in the contract and must be observed by all parties. 2.3 Are the parties permitted to agree in advance a fixed In private contracts, some implied terms can be considered when no sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of express provision varies the implied duty or when a law of public particular breaches, e.g. liquidated damages for late order is applicable. General examples of these terms include the completion? If such arrangements are permitted, are duties to act in good faith and to exercise reasonable skill and care. there any restrictions on what can be agreed? E.g. Other implied duties can be observed depending on the context does the sum to be paid have to be a genuine pre- of the contract, mostly when an implied term is necessary to give estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of efficacy to a contract. financial loss suffered? 3.4 If the contractor is delayed by two events, one the In public works, liquidated damages are established by fines that fault of the contractor and one the fault or risk of are applicable against the contractor in the case of different forms his employer, is the contractor entitled to: (a) an of breaches, such as disobeying the employer’s instructions, late extension of time; or (b) the costs occasioned by that completion, among others. These fines are determined by statutory concurrent delay? legislation and each contract’s administrative bases. These fines are not subject to change once the contract has been awarded. While shared liability in cases of concurrent delays is not a matter covered by Chilean law, any delay which is related to an event of In private works the parties are free to determine liquidated risk or fault of the employer entitles the contractor to the respective damages, and the sum agreed upon can be unrelated to the amount extension of time. If the contractor amends both events, including of financial loss suffered by the other party. However, civil law the one which is his own fault, then he should not be subject to any limits the agreeable amount to twice the price of the contract. claim of late completion of the works. In the same sense, the costs occasioned by the event of risk or fault of the employer should be

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compensated and can be pursued, even if those same costs were to applicable taxes or import fees, as determined by Article 109 of incurred in part to solve the event brought about by the contractor. the RCOP. The risks in regard to other legal changes that can affect the 3.5 If the contractor has allowed in his programme a completion of the works or increase their cost significantly is a matter period of time (known as the float) to allow for his own in dispute, with recent recognising circumstances delays but the employer uses up that period by, for under which the employer assumes or shares such risk. example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed after this float is used up? 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? Chile In private contracts, parties may agree on rules that could affect the work programme, but generally if the employer provides a variation Unless otherwise agreed, the owners of the intellectual property of that takes additional time to implement, such time period should be the design and plans are the professionals or the company that made added to the duration of the contract. Usually this means that the the project. However, the right to commercialise such economic contractor is entitled to use all the time agreed upon in the contract rights is determined in the contract and it is commonly reserved for to perform the works and that delays caused by the employer are the employer, excluding the moral rights from the authors. typically compensated. In public works, most contractors implicitly incorporate float 3.10 Is the contractor ever entitled to suspend works? time into each task to allow for their own delays or those of their subcontractors. Variations to the contract made by the employer When there is a significant hazard of the safety of the employees or an normally come with an extension of time, especially when this is infringement of environmental laws has been verified, the contractor due to additional or extraordinary work. may be obligated to suspend the works provisionally. When this is the case, the contractor will have to inform the employer of the circumstances immediately. 3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims In public works, under no circumstances is the contractor allowed against each other? How long is that period and from to suspend the works of his own volition; only the employer is what date does time start to run? entitled to do so. Still, the contractor is bound to communicate any circumstance that would merit the suspension of the works, in which Parties in a construction contract have a five-year time limit to make case the employer may order the suspension of the works, applying judicial claims against each other, starting from the moment of the Article 148 of the RCOP. breach of contract or the non-fulfilment of the obligation that is being claimed. In any case, it is highly advisable that, prior to the claim, the issue is set forth to the other party through the formal 3.11 On what grounds can a contract be terminated? Are there any grounds which automatically or usually means of communication established in the contract, to provide a entitle the innocent party to terminate the contract? certain date for the discovery of the claim. Do those termination rights need to be set out In public works, briefer limits are established statutorily for specific expressly? claims that are required to be made in a certain time frame. The resolution that liquidates a contract with the Ministry of Public In private infrastructure contracts, there is freedom for the parties Works, for example, must be challenged in a 90-day period. In to stipulate the circumstances under which the contract may be contracts with SERVIU (the Housing and Urbanism Public Service), terminated. The general rule applicable is that one party is allowed this same type of challenge can be made up to 60 days after the to terminate the contract due to non-fulfilment of the other’s duties. respective resolution. Another example is in the case of partial Other common cases, such as force majeure or default, are generally payments; they have a particularly brief period of seven days to applicable, but the specific consequences of a contract’s termination challenge them, after which claims are left to be dealt with in the may vary. next partial payment. In the case of public infrastructure tendered by the Ministry of Public Works or the Service of Housing and Urbanism, the employer may 3.7 Who normally bears the risk of unforeseen ground only terminate the contract based on statutory provisions. The most conditions? common of these are delays, severe mistakes in the execution of the works, lack of financial guarantees or circumstances that affect the The party in charge of the design and engineering is normally the contractor, such as criminal involvement or insolvency. one that bears the risk of unforeseen ground conditions. In public works, when ground studies are provided by the employer, the 3.12 Is the concept of force majeure or frustration known contractor is still expected to know the overall conditions of the in your jurisdiction? What remedy does this give topography, but unforeseen and undetected conditions that affect the injured party? Is it usual/possible to argue the works will normally allow him to claim cost and time effects successfully that a contract which has become derived from those conditions. uneconomic is grounds for a claim for force majeure?

In public works, force majeure is recognised, but the employer is 3.8 Who usually bears the risk of a change in law required to determine when a given case is deemed extraordinary affecting the completion of the works? and could not be anticipated by the contractor. Since these provisions are at the employer’s sole discretion, it is crucial to take Generally the contractor assumes such risks. In public works, out insurance for construction risks to cover such cases of force however, there is a notable exception to this rule; statutory law majeure. explicitly provides that the employer will cover any changes made

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meant for potential bidders to ask about ambiguous or contradictory 3.13 Are parties which are not parties to the contract terms of the contract or the project. All the answers to the questions entitled to claim the benefit of any contract right made in this process are public and become a part of the contract. which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against If ambiguity persists, because contracts are interpreted and applied the original contracts in relation to defects in the by the employer and its comptroller, it is very likely that ambiguities building? will be interpreted in favour of the employer, which is why it is paramount that all ambiguities are addressed in the series of In general, third parties are not entitled to perform any claim based on questions and answers available during the tender. a contract that they are not a part of. However, in the construction of For contracts between private parties, the general legal rule applies, Chile housing and buildings, our legislation has established an exception which states that ambiguous clauses are interpreted against the party that determines that any owner or user of a house or building may that wrote them, but proving the ambiguity will be the burden of the claim responsibility of the developer for a time period of 10 years party that claims it. for failures or defects in the infrastructure of the building, five years in the case of failures or defects in construction elements of the facilities, and three years for failures or defects in smaller details. 3.17 Are there any terms in a construction contract which are unenforceable? All these time periods are counted from the time the works are received, and include defects produced by flawed materials or works executed by subcontractors. No, all terms of a construction contract are enforceable and applicable, as determined by Chilean law and its Constitution, The architects, engineers and constructors in charge of the design unless they are expressly illegal or subvert the public order, in which and the project are also personally responsible for their acts and case they are deemed invalid. omissions regarding their area of expertise; they may pursue claims personally, or the company they worked for at the time of the execution of the project or its works may do so. Because of 3.18 Where the construction contract involves an element this, it is commonplace that professionals working on Engineering of design and/or the contract is one for design only, and Construction projects hire personal insurance for professional are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does responsibility. the designer have to give an absolute guarantee in respect of his work? 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums In private works contracts, designer’s liability is usually determined due to P2 the sums P2 owes to P1? Are there any in the contract itself. If this is not the case, then the designer is limits on the rights of set-off? responsible, with no limitations. In public works, the design of the project and its execution Under normal circumstances, the right to set-off operates usually come under two different contracts awarded to different automatically when both the existence and sum of debts are clear, parties. The designer is in charge of providing the design, which easily determined and current. It is common for private contracts becomes the property of the employer. Notwithstanding, the to establish additional terms for operation of set-off or for them to designer is responsible for flaws in the design and its calculation, operate between different contracts. a responsibility that falls to the legal representative and chief of Set-off rights cannot be applied to credits that are not legally seizable, project if the company dissolves. This responsibility is applied in nor to obligations that are required to be paid in a different place. a broad sense, but its guarantees are only valid until the contract is In public works contracts, the right to set-off can only be exercised liquidated. by the employer and only in very particular scenarios. The DGOP (Director General de Obras Públicas) can instruct a set-off only when two contracts have been concluded but are not yet liquidated, 4 Dispute Resolution or a contract is being liquidated prematurely. Set-off can be instructed even when the employers are two different branches of 4.1 How are disputes generally resolved? the Ministry of Public Works, but only under these very specific circumstances. Most contracts determine a set of rules regarding dispute resolution. In public works, formal communication is established in the form 3.15 Do parties to construction contracts owe a duty of of books of correspondence: the “Book of Works”, in which the care to each other either in contract or under any employer provides its instructions or decisions; and the “Book of other legal doctrine? Communications”, in which the contractor informs about the state of the works or issues that arise during its execution. Contracts that are mutually beneficial for the parties impose a This is the most basic and common form of communication, and reciprocal duty of care under Chilean law. This usually implies disputes are usually first addressed through these means. Most the fulfilment of the contract in good faith and the protection of the instructions made through the Book of Works are mandatory, and patrimony of the other party whenever it is possible and reasonable failure to comply are met with fines determined by the RCOP. to do so. When the contractor of a public work has a claim that has not been addressed after being made in the Book of Communications, or he 3.16 Where the terms of a construction contract are was not satisfied by the response of the employer, he may present ambiguous, are there rules which will settle how that a motion for the employer to reconsider, or a motion addressed to ambiguity is interpreted? his superior in the public administration. If the subject is still in dispute after these motions have been resolved, then he may bring In public works tenders, there is a stage of the process especially

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his claim to the State Comptroller, who can review the matter, with the power to subvert the employer’s decision. If the Comptroller’s 4.4 Where the contract provides for international decision still does not satisfy the contractor, then he may bring his arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please claim within the ordinary justice system. advise of any obstacles to enforcement. On the other hand, in private contracts, dispute resolution can be regulated in the contract itself. Some of the subjects that are a matter Arbitration awards are recognised and applied by Chilean courts as of these stipulations can be the formal means of communication, determined by law. There are no notable obstacles in enforcement, mediations and time frames to bring forward or challenge certain other than perhaps the fact that the court that orders the enforcement acts made by the other party of the contract. will in most cases be slower to proceed than the arbitrator that preceded it. Chile 4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general 4.5 Where the contract provides for court proceedings procedures. in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? When disputes have to do with public infrastructure contracts, our system does not have a former adjudication process beside the International treaties determine how judgments provided by foreign ordinary justice system. However, the contractor has administrative courts will be upheld and enforced in Chile. If there is no applicable remedies set by law in order to review his case directly with the treaty, Chilean courts will provide that a ruling with the same owner. Notwithstanding, this alternative is usually insufficient recognition as a Chilean court’s judgment would be granted in that when the claim pretends a high amount, generating the need for a foreign country, based on the reciprocity principle. In all cases, law suit. in order for foreign rulings to be enforced in Chile, they may not On the other hand, there is an important difference in public contravene Chilean laws. concessions contracts, which contain a dispute review board that act in an early stage with no binding legal effect. But later, the 4.6 Where a contract provides for court proceedings in concessionaire can use his right of appeal against an arbitrator your jurisdiction, please outline the process adopted, commission or directly to the Court of Appeals, who take a binding any rights of appeal and a general assessment of role in the resolution. how long proceedings are likely to take to reduce: (a) Finally, private infrastructure disputes are in most cases solved by a decision by the court of first jurisdiction; and (b) a arbitration, as determined in their respective contracts. decision by the final court of appeal.

The process adopted is written and extended. In very broad terms, 4.3 Do your construction contracts commonly have the procedure involves a plaintiff and an answer followed by a period arbitration clauses? If so, please explain how in which both parties present their respective evidence. After that, a arbitration works in your jurisdiction. few motions may be filed and the judge gives a judgment. Because ordinary courts have no technical knowledge of construction and Most public works contracts do not have arbitration clauses and several motions may take a long time to resolve, a decision by the disputes are contested in ordinary courts. However, public works court of first jurisdiction may take between one and three years, and concessions that involve private investors are a notable exception, a final decision by the Supreme Court is usually expected to be made regulated by law, for which a system with a collegiate arbitral after four years at the earliest. tribunal has been established. Private infrastructure contracts commonly include arbitration clauses that establish administered arbitration, usually by the Acknowledgment Santiago Arbitration and Mediation Centre of the Santiago Chamber The authors would like to thank Felipe Hermosilla Torres for of Commerce. Generally speaking, this form of arbitration is not his invaluable contribution to this chapter. Mr. Hermosilla is an subject to appeals or remedies. associate at Lahsen & Cía. Abogados. (Tel: +56 2 2690 9200 / Email: [email protected].)

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Eduardo Lahsen Matus de la Pedro Mery Reyes Parra Lahsen & Cía. Abogados Lahsen & Cía. Abogados Av. Los Militares 5885, piso 4 Av. Los Militares 5885, piso 4 Las Condes, Santiago Las Condes, Santiago Chile Chile Tel: +56 2 2690 9200 Tel: +56 2 2690 9200 Fax: +56 2 2690 9202 Fax: +56 2 2690 9202 Email: [email protected] Email: [email protected] URL: www.lahsenycia.cl

Chile URL: www.lahsenycia.cl Mr. Lahsen has advised a wide range of companies on matters of Mr. Mery has more than 20 years of experience in Administrative and construction and engineering law, becoming personally involved with Construction Law, first as legal advisor at Chilean Road Authority of the success of the projects and entrepreneurships he has counselled the Ministry of Public Works, and later as Legal Chief in the Legal directly. Division of the same public office. With vast experience counselling over 350 construction contracts in Mr. Mery participated as advisor of the Ministry of Public Works in diverse subjects such as highways, public hospitals, bridges, dams, many matters related to the development of highway projects, and the airports, hydroelectric plants, administrative buildings and private drafting of new regulations for public works contracts. infrastructure, Mr. Lahsen has become a leading expert in public Since 2011, he has been an associate attorney at Lahsen & Cía., tenders, concessions and private works projects, including EPC, and focuses his practice on public works contracts and administrative EPCM, BOT, FIDIC and NEC3 contracts. law, giving legal advice to a wide range of construction companies in Mr. Lahsen’s career to date has covered dispute resolutions with the construction claims against public authorities. public administration, representing its clients in arbitrations and judicial Mr. Mery graduated from Universidad Central de Chile (1996) with cases and offering legal advice to real estate agencies, builders and postgraduate qualifications such as: Master’s in Business Law at public services. Pontificia Universidad Católica de Chile; Certificate in Remedy Mr. Lahsen is currently a professor at Universidad Adolfo Ibañez, of Protection at Universidad Diego Portales; and Certificate in teaching Public Work Contracts to law students and is a member of Management and Public Policy at Flacso-Cepal. He is currently the International Chamber of Commerce (ICC), the Dispute Resolution a member of the Bar Association and the International Chamber of Board Foundation (DRBF), and the Societies of Construction Law from Commerce (ICC). the United Kingdom, Chile and Peru.

Lahsen & Cía. is a highly specialised law firm with over nine years of experience in construction and engineering law, providing legal counsel to the most diverse field of construction companies, investors and professionals in Chile. The firm’s focus has allowed its lawyers to become experts in matters of public and private infrastructure, mining, labour and . The firm is renowned for its comprehensive service, advising its clients from the preparation of bidding procedures, to drafting and negotiating contracts with subcontractors and providers, managing labour policies, complying with environmental regulations and representing our clients’ interests with employers and local authorities. With a results-oriented mindset, Lahsen & Cía. has been a protagonist in the administration of over 350 contracts, with a total investment value of US$ 4 billion, including highways and roads, football stadiums, bridges, hospitals, malls, reservoirs and electric plants. Our lawyers work tirelessly to provide a legal service characterised by excellence and commitment, so that each of the projects we become a part of is carried out faultlessly. Mr. Lahsen leads the firm, coordinating strategy, legal counsel and representation for our clients in all matters related to construction and engineering, while Mr. Hermosilla coordinates the strategy in our court cases. Our team is currently composed of the following lawyers: Mr. Eduardo Lahsen; Mr. Pedro Mery; Ms. María Ignacia Ábalos; Mr. Felipe Hermosilla; Mr. Juan Ignacio Weber; Mr. Abbas Abi-raad; and Ms. Valeria Montero; being experts in their respective fields, which include litigation, construction law and all related areas of the construction industry.

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China

City Development Law Firm Cao Shan

effect. In written contracts, the contracts shall be established from 1 Making Construction Projects the time that parties sign or seal the contract agreement. A contract that is concluded pursuant to the law shall become valid upon 1.1 What are the standard types of construction contract establishment unless the laws or administrative regulations provide in your jurisdiction? Do you have contracts which or the parties agree otherwise. The validation essentials of a contract place both design and construction obligations upon include: capacity for civil conduct of the parties; genuine intention; contractors? If so, please describe the types of compliance with laws and public interest; and approval or registration contract. Please also describe any forms of design- processes required by laws or administrative regulations. Article only contract common in your jurisdiction. Do 270 of the Contract Law provides that a contract for a construction you have any arrangement known as management contracting, with one main managing contractor project shall be in writing. However, according to Article 36 of the and with the construction work done by a series Contract Law, where the parties fail to conclude a contract in writing of package contractors? (NB For ease of reference as provided by laws or administrative regulations, or as agreed by throughout the chapter, we refer to “construction the parties, the contract shall be considered established if one party contracts” as an abbreviation for construction and has already performed its major obligations and the other party has engineering contracts.) accepted the performance.

A contract for a construction project is a contract whereby the contractor undertakes the construction of a project, and the employer 1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in pays the price. Contracts for construction projects include contracts which an employer can give either a legally binding or for survey, design and construction. non-legally binding indication of willingness either to It is permitted by Construction Law that contractors consume the enter into a contract later or to commit itself to meet liabilities of design and construction. The employer may enter into a certain costs to be incurred by the contractor whether contract with one contractor for the survey design and construction of or not a full contract is ever concluded. a project, or enter into individual contracts with different contractors for survey, design and construction, respectively. Furthermore, in In China, the letter of intent exists, by which the employers express China, the employer may enter into a design contract with a designer their willingness to enter into a contract with the contractors. The for the designing work individually. employer could be legally binding by the letter of intent, but not always. After both parties sign the letter of intent, regardless of the Management contracting is permitted by Construction Law in China. formation of the complete contract, the employers usually do not However, in a management contract, the managing contractor assume the responsibility of contractors’ costs. concludes contractual relationships with the employer rather than other contractors. EPC contracts for construction projects are advocated in China. The prime contractor of a construction project 1.4 Are there any statutory or standard types of insurance may subcontract partial works of the project to subcontractors with which it would be commonplace or compulsory to corresponding qualifications. However, subcontracting not stipulated have in place when carrying out construction work? For example, is there employer’s liability insurance in an EPC contract shall be subject to the approval of the employer. for contractors in respect of death and personal In the case of a general construction contract, the main structure of injury, or is there a requirement for the contractor to the construction project must be completed by the prime contractor. have contractors’ all-risk insurance?

1.2 Are there either any legally essential qualities needed There are some statutory insurances during construction work, some to create a legally binding contract (e.g. in common of which are compulsory, while some are optional. It depends on law jurisdictions, offer, acceptance, consideration the agreement between the employer and the contractor regarding and intention to create legal relations), or any whether to buy such insurances, who will pay for them and how. specific requirements which need to be included in a Construction companies shall buy work-related injury insurance construction contract (e.g. provision for adjudication or for employees pursuant to the law. Construction companies any need for the contract to be evidenced in writing)? shall buy accident liability insurance for employees engaging in dangerous operations and pay the insurance premiums thereof. In To form a contract, there must be an offer and an acceptance. The EPC contracts, the prime contractors shall contribute work injury contract shall be concluded as soon as the acceptance comes into

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insurance premiums for employees, the duration of which covers hereinbefore. Besides, when the goods and supplies become from the day works commenced to the day of examination and inseparable parts of the construction project, the contractor will lose acceptance upon the completion of work; employers are not required the rights hereinbefore. to buy the insurance for death or injury of contractors’ employees. Except the statutory insurances, purchasing of other insurances, including all-risk insurance, is subject to 2 Supervising Construction Contracts the agreement between the employer and the contractor. It is not the contractor’s compulsory obligation to purchase the construction 2.1 Is it common for construction contracts to be engineering all-risk insurance. supervised on behalf of the employer by a third

China party? Does any such third party (e.g. an engineer or architect) have a duty to act impartially between 1.5 Are there any statutory requirements in relation contractor and employer? Is that duty absolute or is to construction contracts in terms of: (a) general it only one which exists in certain situations? If so, requirements; (b) labour (i.e. the legal status of those please identify when the architect/engineer must act working on site as employees or as self-employed impartially. sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety? It is common in China that a third party supervises construction Article 275 of the Contract Law provides that construction works on behalf of the employer. The employer can entrust project contracts shall include the scope of the project, time for completion, supervision units to conduct the supervision which is compulsory by commencement and completion dates for intermediary stages of law and administrative regulations. Except for project supervision the project, project quality, price, time for the delivery of technical units, employers can entrust other units, for example project materials, responsibility of the supply of materials and equipment, management companies, to supervise and manage construction works, payment, tests and acceptance on completion, scope of quality which is not compulsory by laws and administrative regulations. warranty, defects notification period, mutual cooperation, etc. Pursuant to the entrustment of the employer, project supervision The construction contract agreement between the employer and the companies shall execute supervision tasks in an objective and contractor shall comply with the mandatory requirements of laws and fair manner. Construction project supervision companies shall administrative regulations on labour, tax, health and safety issues. comply with laws, administrative regulations, relevant technical standards, design documents, and the construction project contract. Furthermore, supervision shall be implemented on behalf of the 1.6 Is the employer legally permitted to retain part of employer regarding construction quality, construction period and the purchase price for the works as a retention to be use of construction funds by the contractor, etc. released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability is complete? 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, Employers are permitted to retain part of the payments as retention have themselves been paid; i.e. can the employer money, which is to be released when the agreed defects liability include in the contract what is known as a “pay when paid” clause? period has expired or/and contractors have performed their repair work for the defects which they are liable. Employers may include the “pay when paid” clause in the contract with the contractor, which enables them to make payment after 1.7 Is it permissible/common for there to be performance getting paid. Making payment and securing construction funds bonds (provided by banks and others) to guarantee are major obligations of the employer according to relevant performance, and/or company guarantees provided to laws; therefore, it is not common to introduce a “pay when paid” guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds clause into construction contract. Usually, the “pay when paid” and guarantees? clause is agreed in the contracts between prime contractors and subcontractors, especially in the nominated subcontract. Performance guarantees are allowed and widely used in construction contracts provided by banks or parent companies. The formation 2.3 Are the parties permitted to agree in advance a fixed of performance guarantee is subject to the agreement between the sum (known as liquidated damages) which will be employer and the contractor, which shall not violate mandatory paid by the contractor to the employer in the event of provisions of laws and administrative regulations. 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. 1.8 Is it possible and/or usual for contractors to have does the sum to be paid have to be a genuine pre- retention of title rights in relation to goods and estimate of loss, or can the contractor be bound to supplies used in the works? Is it permissible for pay a sum which is wholly unrelated to the amount of contractors to claim that until they have been paid financial loss suffered? they retain title and the right to remove goods and materials supplied from the site? The parties can agree on a fixed sum of liquidated damages in advance, which is paid by the contractor to the employer when a It is determined by the agreement between the employer and the particular breaching of contract situation occurs. The amount is contractor whether contractors have retention of title rights of negotiated by the employer and the contractor, but it is supposed goods and supplies used in works and whether they have the right to be set in a proper range. When the sum is lower than the actual to remove those goods and supplies before the corresponding loss, the employer can request the court or arbitration institution to payments. Generally, the contractor is not entitled to those rights increase and vice versa.

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3 Common Issues on Construction 3.6 Is there a limit in time beyond which the parties to Contracts 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? 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? There is no restriction on the time for parties to claim their rights in current laws and administrative regulations. In such a circumstance, The employer has the right to vary the works to be performed, but the notification period of the claim and starting point thereof would the variation should comply with the planning of the country and be determined by the agreement between the parties. The period local government. Article 43 of the Law of the People’s Republic often starts from the day one party became aware, or should have China of China on Urban and Rural Planning provides that a developing become aware, of the event or circumstance. If the parties agreed on unit shall carry out construction in compliance with the conditions the issue, the agreement prevails. One party loses his rights to claim for planning; where it is really necessary to make changes to the after the agreed period has expired, and the statute of limitation conditions, it shall apply to the department in charge of urban and would apply with the absence of former agreement. According to rural planning under the people’s government of the city or county Article 188 of the General Rules of the Civil Law of the People’s concerned. If the changes to be made do not conform with the Republic of China, which will be valid from October 1, 2017, the detailed control plan, the said department shall not grant approval. limitation of action of an application to a People’s Court for the protection of civil rights is three years, which is calculated from 3.2 Can work be omitted from the contract? If it is the date on which the right holder knows or ought to be aware of omitted, can the employer do it himself or get a third the damage to the rights and the obligor, unless otherwise provided party to do it? by law.

The employer is entitled to omit some work under the contract. It 3.7 Who normally bears the risk of unforeseen ground depends on the agreement between the contractor and the employer conditions? whether the employer can carry out the omitted work himself or by others. If they have agreed on this issue, the agreement shall The risk of unforeseen ground conditions is usually borne by the be executed. Otherwise, the action of the employer constitutes a employer, but parties can make agreement on the allocation of such breach of contract. risk in the contract.

3.3 Are there terms which will/can be implied into a 3.8 Who usually bears the risk of a change in law construction contract? affecting the completion of the works?

Yes, there are implied terms in a construction contract. Even though The risk of changes in law is usually borne by the employer, but it is not specified in the contract, parties shall obey the mandatory parties can make agreement on this issue. provisions in laws and administrative regulations on safety, labour security, environment protection, tax, etc. 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? 3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of The party who invents intellectual property during the design and his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that operation of the construction work owns the intellectual property concurrent delay? rights. However, the employer and the contractor can make an agreement on the ownership of intellectual property in the contract. If the delay is caused by the fault of the contractor or the employer, the contractor is entitled to an extension of time and the costs arising 3.10 Is the contractor ever entitled to suspend works? from the delay. However, the contractor is not entitled to require any extension and costs arising from his own fault. Contractors are entitled to suspend works under specific circumstances, for example, if the employer fails to make payment as agreed, and 3.5 If the contractor has allowed in his programme a fails to make payment after the contractor’s notification. Parties can period of time (known as the float) to allow for his own conclude an agreement on this issue. 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 3.11 On what grounds can a contract be terminated? Are after this float is used up? there any grounds which automatically or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out It depends on the agreement between the employer and the expressly? contractor as well as the cause of the delay. Generally, if the delay is caused by the proposed variation from the employer, the Contract termination consists of two situations: termination based contractor is entitled to an extension of time. on agreement of both parties; and termination by the innocent party. Parties are entitled to ex parte termination with termination rights

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at law or termination rights based on the agreement. Parties may legally terminate the contract in the following circumstances: 3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right a. the objectives of the contract cannot be fulfilled due to force which is made for their benefit? E.g. is the second or majeure; subsequent owner of a building able to claim against b. prior to the expiry of the performance period, one of the the original contracts in relation to defects in the parties expressly demonstrates his intention not to continue building? performance of his obligations under the contract; c. one of the parties delays the performance of his major The beneficial third parties which are non-contractual parties are obligation, and fails to perform within a reasonable time after entitled to claim their contractual rights directly according to the

China notification; contract. However, the sub-purchaser of a building is not considered d. the objectives of the contract cannot be fulfilled due to the to be the beneficial third party of a construction contract. Ifthe delay of performance or other breach of contract; and sub-purchaser of a building obtains his rights from the employer, e. other circumstances stipulated in the law. he can claim rights against the employer in terms of defects of the The employer shall be entitled to terminate the contract if the building. His rights of claim are based on the contract between the contractor: sub-purchaser and the employer, instead of the contract between the employer and the contractor, i.e., the sub-purchaser cannot claim a. prior to the expiry of the performance period, expressly demonstrates his intention not to continue performance of his his rights against the contractor in relation to defects in the building obligations under the contract; based on the original construction contract. b. fails to complete work upon the agreed date of completion, and fails to complete within a reasonable time after the 3.14 Can one party (P1) to a construction contract which employer’s notification; owes money to the other (P2) set off against the sums c. rejects to remedy completed construction works that are not due to P2 the sums P2 owes to P1? Are there any qualified; or limits on the rights of set-off? d. illegally assigns the entire construction project to other subcontractors. One party (P1) to a construction contract which owes money to the other (P2) can set off against the sums due to P2 the sums P2 In the event of certain defaults of the employer and failing to remedy owes to P1. Where the parties owe each other matured obligations, within a reasonable time after notification, the contractor shall be and the subject matter of the said obligations are items of the same entitled to terminate the contract if the employer: kind and quality, either party may offset its obligation against the a. fails to pay the amount due according to the contract obligation of the other party, except that, in accordance with legal agreement; provisions or the nature of the contract, the offsetting of obligations b. provides construction materials, structural components and is not permitted. A party who seeks to offset obligations must notify equipment failing to meet the compulsory standards; or the other party. The notification shall take effect from the time it c. substantially fails to perform his obligations to cooperate reaches the other party. Neither conditions nor a time limit may be under the contract. attached to the offsetting of obligations. In any of the events or circumstances above, one party shall give notice to the other party to terminate the contract. The contract shall 3.15 Do parties to construction contracts owe a duty of be terminated from the time the notification reaches the other party. care to each other either in contract or under any other legal doctrine? 3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give Parties shall comply with the principles of honesty and trust, the injured party? Is it usual/possible to argue and shall perform obligations of notification, assistance and successfully that a contract which has become confidentiality, in accordance with the nature and purpose of the uneconomic is grounds for a claim for force majeure? contract, as well as business practices.

Yes, there is concept of force majeure and frustration in China. If a party is or will be prevented from performing its substantial 3.16 Where the terms of a construction contract are obligations under the contract by force majeure, the party shall be ambiguous, are there rules which will settle how that ambiguity is interpreted? excused, or partly excused, from performance of its obligations for as long as such force majeure prevents it from performing them. The innocent party may terminate the contract due to force majeure When there is any controversy arising from the understanding of or frustration by breach the contract. contract terms, the terms should be explained according to literal meaning of words and phrases, the purpose of the contract, trading Parties may petition a People’s Court to vary or dissolve the contracts usage and the principle of good faith. according to the principle of frustration of purpose. Frustration of purpose occurs when an unforeseen event undermines a party’s principal purpose for entering into a contract, and does not belong 3.17 Are there any terms in a construction contract which to any commercial risk occasioned by force majeure, rendering are unenforceable? the continual performance of the contract manifestly unfair to one party. The People’s Court shall confirm whether the contract shall Invalid construction contracts and invalid clauses in a construction be varied or dissolved in accordance with the principle of fair and contract are unenforceable. A contract shall be invalid if: (1) one justice, taking the actual circumstances into consideration, where a party concludes the contract by fraud or coercion, causing detriment party petitions a People’s Court to vary or dissolve the contract. The to the interests of the State; (2) the contract involves a malicious application of frustration of purpose is strictly regulated in China. conspiracy which is detrimental to the interests of the State, a collective or a third party; (3) illegal intentions are concealed

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beneath an appearance of ; (4) there is detriment to social and public interests; or (5) the mandatory provisions of laws and 4.3 Do your construction contracts commonly have administrative regulations are violated. arbitration clauses? If so, please explain how arbitration works in your jurisdiction. Invalid clauses include: (1) exemption clauses relating to personal injuries sustained by the other party; (2) exemption clauses relating In China, parties can choose either litigation or arbitration to resolve to property losses sustained by the other party either because of disputes. If the parties include arbitration clauses in the construction one party’s deliberate action or gross negligence; and (3) standard contract, either party can file for arbitration to the agreed arbitration clauses which exclude the liabilities of the party proposing the committee. The arbitration committee would form an arbitration standard clause, or to increase the liabilities of the other party, or tribunal to hear and rule on the dispute issues. The arbitration to eliminate the other party’s major rights. Besides, where one China process is governed by the Arbitration Law of the People’s Republic of the parties does not perform a non-monetary obligation, or of China and arbitration rules of each arbitration committee. does not perform a non-monetary obligation as agreed, the other party may demand performance of the obligation, except in the following circumstances: (1) it is impossible, either legally or in 4.4 Where the contract provides for international practice, to perform; (2) compelling performance is inappropriate arbitration, do your jurisdiction’s courts recognise given the subject matter of the obligation, or the expense associated and enforce international arbitration awards? Please advise of any obstacles to enforcement. with performance is too high; or (3) the obligee has not demanded performance within a reasonable period of time. When an arbitration award of an overseas arbitration organisation requires ratification and enforcement by a People’s Court of the 3.18 Where the construction contract involves an element People’s Republic of China, the parties concerned shall submit of design and/or the contract is one for design only, an application directly to an intermediate People’s Court at the are the designer’s obligations absolute or are there location of the enforcee’s residence or the location of the enforcee’s limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in properties. A People’s Court of the People’s Republic of China will respect of his work? not recognise and enforce international arbitration awards if: (1) the parties have not stipulated clauses on arbitration in their contract, Where the construction contract involves design and/or the contract nor subsequently concluded a written arbitration agreement; (2) the is a design contract, the designer shall be responsible for his work party against whom the application is filed was not notified to appoint and take absolute guarantee responsibility for his completed work. an arbitrator or to undertake arbitral proceedings, or the said party The designer shall work in compliance with the compulsory standard failed to state its opinions due to reasons for which it cannot be held of the State. The designers shall be responsible for the quality of responsible; (3) the composition of the arbitration tribunal or the designing. Registered architects, registered structural engineers and arbitral proceedings does not conform with arbitration regulations; other registered professionals shall sign the design documents and or (4) certain matters of the award exceed the scope of the arbitration have the responsibility of adhering to such documents. agreement or are outside the jurisdiction of the arbitration organ. If a People’s Court determines that the enforcement of the said award is against public interest, the arbitration award is not enforceable. 4 Dispute Resolution 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign 4.1 How are disputes generally resolved? court be upheld and enforced in your jurisdiction?

The methods of resolving construction disputes are settlement, If a legally effective judgment or ruling of a foreign court requires mediation, dispute review, arbitration and litigation. recognition and enforcement by a people’s court, the party concerned may apply directly to an intermediate People’s Court of the People’s 4.2 Do you have adjudication processes in your Republic of China with jurisdiction over the case for recognition jurisdiction? If so, please describe the general and enforcement, or the foreign court may, in accordance with the procedures. provisions of international treaties concluded or acceded to by the said country and the People’s Republic of China or according to the Litigation and arbitration are two main adjudication processes in principle of reciprocity, request that the People’s Court recognise China. The parties should file a civil lawsuit to the People’s Court and enforce the said judgment or ruling. After a People’s Court which has jurisdiction if they choose litigation to solve the dispute. has reviewed, in accordance with the provisions of international People’s Courts trying civil cases shall implement the system of treaties concluded or acceded to the People’s Republic of China or collegiate, abstention, open trial and trial of second instance being according to the principle of reciprocity, a legally effective judgment final pursuant to the provisions of the law. Grassroots People’s or ruling of a foreign court requiring recognition and enforcement Courts and their branches deliver judgments of first instance which by the People’s Republic of China, if the court considers that the should be considered final, when the cases are simple civil ones judgment or ruling does not violate the basic principles of the law with a small amount of subject matter. The parties should file of the People’s Republic of China and its sovereignty, security for arbitration to the agreed arbitration committee if they choose or public interest, the People’s Court shall rule to recognise its arbitration as a dispute resolution method in the contract. Unlike validity. If enforcement of the judgment or ruling is required, an litigation, the arbitration award is final and legally binding. enforcement order shall be issued and enforced pursuant to the relevant provisions of this Law. If the judgment or ruling is found to violate the basic principles of the law of the People’s Republic of China or its sovereignty, security or public interest, the people’s court shall refuse to allow its recognition or enforcement.

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The People’s Court trying a case in which summary procedure is 4.6 Where a contract provides for court proceedings in followed shall conclude the case within three months after placing your jurisdiction, please outline the process adopted, the case on the docket. any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) The People’s Court trying an appeal case against a judgment shall a decision by the court of first jurisdiction; and (b) a complete the trial within three months from the date of establishment decision by the final court of appeal. of case file for the trial of second instance. Where there is a need for extension of time under special circumstances, the approval of the If parties agree to resolve disputes by litigation, they should file president of the court is required. a civil lawsuit to the People’s Court with jurisdiction. A People’s The People’s Court trying an appeal case against a ruling shall

China Court shall establish a case file for a lawsuit which satisfies the make a ruling of final instance within 30 days from the date of prosecution criteria within seven days and notify the litigants; where establishment of case file for the trial of second instance. the prosecution criteria is not satisfied, the People’s Court may issue a ruling letter on non-acceptance of the lawsuit within seven days; Cao Shan where the Plaintiff disagrees with the ruling, the Plaintiff may file an City Development Law Firm appeal. Where a litigant disagrees with a judgment of first instance 31 F Hong Kong Plaza of a local People’s Court, the litigant shall have the right to file an No. 283 Huaihai Road(M) appeal to the higher-level People’s Court within 15 days from the Shanghai, 200021 China date of service of the judgment letter. Where a litigant disagrees with a ruling of first instance of a local People’s Court, the litigant Tel: +86 21 5219 3188 shall have the right to file an appeal with the higher-level People’s Email: [email protected] Court within 10 days from the date of service of the ruling letter. URL: www.jianwei.com The first instance of a local People’s Court cannot be appealed when Mrs. Cao Shan, Deputy Director of City Development Law Firm, the amount of the subject matter is below 30% of the annual average Secretary General of Construction and Engineering and Real Estate wages of employees in the preceding year of various provinces, Commission of National Association of lawyers, is a compound talent autonomous regions and centrally-administered municipalities. in both law and construction and engineering, who holds master’s degrees in law and construction and engineering, respectively. Mrs. Trial of a case for which a People’s Court applies general procedures Cao is a certified Cost Engineer, Constructor and Senior Project for trial shall be completed within six months from the date of Manager of IPMP Level B. During her 16-year career as a lawyer, establishment of the case file. Where there is a need for an extension Mrs. Cao has made remarkable achievements. She is the deputy of time under special circumstances, the approval of the president chief editor of the 2013 Edition Construction Project Contract (Model Version). She has been awarded three times by ENR/Construction of the court is required, an extension of time of six months may Times as one of the 60 most recommended construction and be granted; where there is a need for further extension of time, the engineering lawyers. As an expert of Think Tank of China’s Finance approval of the higher-level People’s Court is required. Ministry in PPP, she has participated in dozens of projects across China.

Founded in December 1992, City Development Law Firm is the first law firm specialising in construction and real estate in China. With outstanding achievements, we have become well-known in China and abroad. City Development Law Firm has won National Excellent Law Firm and Advanced Law Firm of Ministry of Justice, Shanghai Municipal Advanced Unit, and came second place in the Collective Award of Shanghai judicial administrative system. Chambers and Partners ranks City Development Law Firm as Chinese Well-known Law Firm, Chinese Best Architectural Law Firm and awards Zhu Shuying, the founder of City Development Law Firm, the Lifetime Achievement Award. City Development Law Firm has participated in the inquiries or amendments process of Construction Law, , Contract Law, Construction Project Quality Management Regulations, Shanghai Real Estate Mortgage Measures and so forth. We have branches in more than 10 important cities in China.

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England Tim Reid

Ashurst Michael J. Smith

■ “construction management”, where the employer appoints 1 Making Construction Projects the professional team (responsible for designing the works and monitoring the management of the works), a number of trade contractors (each responsible for packages of the works) 1.1 What are the standard types of construction contract and a construction manager (who manages and administers in your jurisdiction? Do you have contracts which the individual trade contracts on the employer’s behalf). place both design and construction obligations upon contractors? If so, please describe the types of Developers often use bespoke contracts when appointing contract. Please also describe any forms of design- consultants. However, certain projects may use one of a number only contract common in your jurisdiction. Do of industry model forms of consultant agreement published by you have any arrangement known as management various professional bodies (for example, the Royal Institution of contracting, with one main managing contractor Chartered Surveyors, the Royal Institute of British Architects, or and with the construction work done by a series of package contractors? (NB For ease of reference the Association of Consulting Engineers). Typically, the industry throughout the chapter, we refer to “construction model forms are considered to be consultant-friendly, whereas the contracts” as an abbreviation for construction and bespoke forms used by developers and favoured by funders and engineering contracts.) purchasers/tenants tend to be more employer-friendly. NEC The standard forms most widely used in England are published by The NEC3 Engineering and Construction Contract (“NEC3 ECC”) the (“JCT”), New Engineering Contract can be used for design and build projects or construct only (a new (“NEC”) and International Federation of Consulting Engineers edition, NEC4, is scheduled for release in June 2017). It adopts (“FIDIC”). Some place both design and construction obligations a different approach in its structure, terminology and contracting upon contractors. These forms are the focus of the discussion philosophy to other forms of contract. The NEC3 implements a below, but this list is not exhaustive. Other organisations also collaborative process (founded on the principle of “mutual trust and publish standard forms for use on construction projects in England, co-operation”), with a strong focus on contract administration and such as the Institution of Chemical Engineers (“IChemE”), which programme. specialises in contracts for the procurement of process plants. NEC also publish a number of other construction contracts JCT including a standard form for consultant services called the NEC3 The most common standard forms of building contract for Professional Services Contract, which adopts a similar collaborative construction projects in the UK real estate sector are those published contracting philosophy. by the Joint Contracts Tribunal (“JCT”). The JCT also publishes FIDIC standard forms of collateral warranty and sub-contracts that are commonly used for construction projects in England and Wales. The three most commonly used design and construct FIDIC forms (from the 1999 edition of the FIDIC “rainbow suite” of forms) The JCT publishes a wide range of construction contracts. The primarily differ in assigning responsibility for the design of the different contracts published by the JCT reflect the nature of the works and in their allocation of risk: projects under construction, the particular procurement route contemplated, and the way in which the price of the work is a) the Red Book – Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer, calculated and the contractor is paid. also known as the Construction Contract; The JCT suite of contracts includes standard forms tailored b) the Yellow Book – Conditions of Contract for Plant and specifically for: Design – Build for Electrical and Mechanical Plant, and for ■ “traditional” procurement, where responsibility for design Building and Engineering Works Designed by the Contractor, and construction are kept distinct, with an employer- also known as the Plant and Design-Build Contract; and appointed design team producing the design, in accordance c) the Silver Book – Conditions of Contract for Engineering, with which the separately appointed contractor constructs the Procurement and Construction/Turnkey Projects, also known works; as the EPC/Turnkey Contract. ■ “design and build” procurement, where the contractor FIDIC also publishes the White Book – Consultant Model Services designs (or assumes responsibility for the design team’s Agreement, which is a commonly used standard form for consultant design) and constructs the works to meet the employer’s requirements; and services (including design-only obligations).

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FIDIC is due to launch a second edition of its Yellow Book later in If used, the LOI usually forms the first part of a two-stage contracting 2017, with second editions of the Red Book and the Silver Book to framework. The LOI is seen as an interim measure outlining follow. essential terms and is expressed to terminate upon the execution of Management Contracting a formal contract. This is followed by the execution of a detailed formal contract, which is often based on a standard form. Management contracting arrangements are sometimes used in England for large-scale Engineering, Procurement and Construction In practice, two key factors will often influence an employer’s Management (“EPCM”) projects. These are usually bespoke and decision on whether to use a binding or non-binding LOI: heavily negotiated contracts as there is currently no standard form ■ the work required to be carried out under the LOI; and EPCM contract used in England. It is not uncommon, however, ■ how payment under the LOI and during the whole project is

England to see parties starting with a standard form consultancy agreement, envisaged. and making substantial amendments to reflect the unique role of the A strong argument against the use of the non-binding LOI is the Managing Contractor. uncertainty it creates for both parties. A non-binding LOI is likely to increase the contractor’s exposure in respect of matters that are crucial 1.2 Are there either any legally essential qualities needed to its performance of the work, and gives neither party certainty as to to create a legally binding contract (e.g. in common the amount to be paid for the work. The employer is still likely to be law jurisdictions, offer, acceptance, consideration bound to pay the contractor on the basis of a “quantum meruit” – a and intention to create legal relations), or any reasonable sum for work done and materials supplied. 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 1.4 Are there any statutory or standard types of insurance writing)? which it would be commonplace or compulsory to have in place when carrying out construction work? The Housing Grants, Construction and Regeneration Act 1996 For example, is there employer’s liability insurance for contractors in respect of death and personal (the “Construction Act”) applies to all “construction contracts” injury, or is there a requirement for the contractor to (contracts for the carrying out of, or for arranging for the carrying have contractors’ all-risk insurance? out of, “construction operations”) in England and Wales. The Construction Act was amended in October 2011 by Part 8 of the Typically, a domestic construction contract will require the Local Democracy, Economic Development and Construction Act following insurances: 2009 (the “LDEDC Act”) which provided that it is now no longer ■ insurance of the works (usually referred to as “Construction necessary for a construction contract to be in writing. This means All-Risks” insurance) – taken out by either the employer or that there are now no legally essential qualities required under the contractor covering loss or damage to the work executed English law to create a legally binding construction contract other and site materials up to practical completion in the joint than the usual English law principles of contract formation, which names of both parties to the contract; requires an intention to create legal relations and the key elements of ■ public liability insurance – covering claims in relation to offer, acceptance, consideration and certainty of terms. death or injury to third parties or damage to property other However, certain compulsory payment provisions (aimed at than the construction works; securing the flow of cash down the construction supply chain) are ■ employer’s liability insurance – required by statute required to be included in all “construction contracts” (as defined (Employer’s Liability (Compulsory Insurance) Act 1969) to under the Construction Act) and all contracting parties are given a be taken out by the contractor to cover the health and safety statutory right to refer disputes to adjudication. If the parties fail to of its employees; and include in their construction contracts the required provisions as to ■ professional indemnity insurance (“PII”) – to cover design payment and/or adjudication, the statutory Scheme for Construction liability and to be taken out by any party carrying out design Contracts SI 1998 No. 649 (the “Scheme”) applies, which will (including the contractor where it is undertaking some imply the relevant provisions into the construction contract. design under the contract). PII policies cover the insured against claims for breach of professional duty (professional Notwithstanding the above, any contractual provisions as to negligence). They are usually required to be in place from adjudication must be in writing to be effective. Otherwise, under commencement of the work/services until 12 years after the Construction Act, the adjudication provisions of the Scheme will practical completion. be implied into the construction contract.

1.5 Are there any statutory requirements in relation 1.3 In your jurisdiction please identify whether there is to construction contracts in terms of: (a) general a concept of what is known as a “letter of intent”, in requirements; (b) labour (i.e. the legal status of those which an employer can give either a legally binding or working on site as employees or as self-employed non-legally binding indication of willingness either to sub-contractors); (c) tax (payment of income tax of enter into a contract later or to commit itself to meet employees); or (d) health and safety? certain costs to be incurred by the contractor whether or not a full contract is ever concluded. (i) General requirements The main statutory requirements originate from the Yes, in England the Letter of Intent (“LOI”) is recognised by the Construction Act which gives parties to construction contracts courts as a contracting device that may amount to either a legally a number of statutory entitlements, dealt with elsewhere in binding contract or a non-binding arrangement, depending on this guide. whether the LOI contains the legally essential qualities for contract (ii) Labour (i.e. the legal status of those working on site as formation described in question 1.2. Express terms can be included employees or self-employed sub-contractors) to the effect that the parties do not wish to be bound by the LOI. In terms of labour, individuals are legally protected from direct and indirect age, sex, disability and race discrimination

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in the workplace under the Equality Act 2010. There are also generic obligations on employers to ensure that employees’ 1.7 Is it permissible/common for there to be performance personal details are protected. bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to (iii) Tax (i.e. payment of income tax of employees) guarantee the performance of subsidiary companies? With regard to tax, the Construction Industry Scheme Are there any restrictions on the nature of such bonds (“CIS”) is a tax deduction scheme which applies to payments and guarantees? made by a contractor to a sub-contractor. Contractors deduct money from a sub-contractor’s payments and pass it directly Performance bonds and company guarantees are common tools in to HM Revenue and Customs. The deductions count as England for securing the contractor’s performance and providing advance payments towards the sub-contractor’s tax and the employer with redress where the contractor fails to perform its

National Insurance. The term “contractor” under the CIS England includes construction companies and building firms but may obligations. also be government departments, local authorities and other Performance bonds businesses who procure construction work (i.e., employers The two types of performance bond most frequently encountered paying a main contractor). There are various obligations (including as to registration, verification and submitting are: online returns) on both payers and payees in the construction ■ conditional performance bonds: where the bondsman industry. Understanding the CIS and complying with its only becomes liable to the employer on of breach of requirements is essential for those involved in construction the underlying contract, or on proof of both breach and loss projects as the consequences of non-compliance can be resulting from the breach; and severe. ■ unconditional or on-demand performance bonds: where (iv) Health and safety the bondsman is liable to the employer when the demand is Health and safety is covered by the Construction (Design made in accordance with the bond, without the need for proof and Management) Regulations 2015 (“CDM”) which places of breach or loss resulting from the breach. formal obligations upon all clients, contractors and designers A reference to a performance bond is more commonly understood (known as duty-holders) in an effort to reduce deaths and to be a reference to an unconditional or on-demand bond, which injuries on construction sites. The CDM Regulations put is a primary obligation. The bondsman will not ordinarily be emphasis on safety throughout the lifetime of a building, from concerned with the status of the underlying contract or with the inception through to , with a focus on effective factual accuracy of any statement made to it by the employer, or implementation by placing obligations on duty-holders that whether any document presented to it in order to obtain payment focus on the removal of risk rather than the incorporation and management of risk thereafter. is, in fact, genuine, and must make payment upon satisfaction of the requirements prescribed in the bond. This is subject to the very limited exceptions of fraud in the request for payment, and where 1.6 Is the employer legally permitted to retain part of the underlying contract contains a clear prohibition on making the purchase price for the works as a retention to be demands in certain circumstances and a demand is made in such released either in whole or in part when: (a) the works circumstances. are substantially complete; and/or (b) any agreed defects liability is complete? Company guarantees Under a company guarantee, a parent or other group company of the Retaining part of the purchase price from payments due to the contractor guarantees the performance of the contractor under the contractor is a common practice. The retention will usually be construction contract. a deduction from periodic payments to the contractor (often by The company guarantee is usually in the nature of a “see to it” withholding a percentage of each payment to the contractor until guarantee, whereby the guarantor guarantees to the employer the the required amount, typically 3–5% of the contract price, has been punctual performance by the contractor of the primary obligation. retained). It is relatively standard for half of the retained amount to Breach by the contractor of the primary obligation automatically be released at practical completion and the remainder at the expiry puts the guarantor in breach and triggers a claim for damages. of the defects liability period or issue of the final certificate under There is no liability under a guarantee unless and until the contractor the contract. fails to perform the primary obligation; it is therefore a secondary Retention provisions may make the employer a trustee and the obligation. If the contractor’s primary obligation under the contractor a beneficiary of a trust for the retained amounts, asis construction contract is discharged or becomes void, the guarantee the case in the JCT standard forms. Contractors concerned with falls away. preserving their rights to these sums may apply to the courts for This highlights an important distinction in the nature of a company a mandatory injunction to set aside retained amounts in a separate guarantee and an on-demand performance bond: the employer under bank account, thereby protecting their entitlement to the retained such a bond must be paid on presentation of the demand even if amounts in the case of employer insolvency. there is a genuine dispute between the parties to the construction The Construction Act requires “construction contracts” (as defined contract as to whether the sum in question is due. Under a guarantee, under the Construction Act) to provide an adequate mechanism the guarantor is only liable to pay if there has been a breach of the for determining when payments become due and a final date for underlying contract and payment is actually due; the defences which payment. Hence, in terms of retained amounts, a construction are available to a traditional guarantor under the company guarantee contract must provide a mechanism for ascertaining the date for are not available to the guarantor under an on-demand performance repayment under that contract and must not make the release of bond. retentions under a sub-contract conditional upon the performance of obligations under a separate contract (such as the release of retentions under a head contract).

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an NEC contract in Costain Ltd v Bechtel Ltd (2005) EWHC 1018 1.8 Is it possible and/or usual for contractors to have (TCC)). The precise role and duties of the decision-maker will be retention of title rights in relation to goods and determined by the terms of the contract under which he is required supplies used in the works? Is it permissible for to act: Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd contractors to claim that until they have been paid they retain title and the right to remove goods and (2006) EWHC 89 (TCC). The consultant may be required to act materials supplied from the site? in relation to a number of matters where its professional opinion is required, including, for example, payment to the building contractor, In the absence of any express contractual terms to the contrary, the as well as certification of the works. The duty to act impartially general common law position between a contractor and employer does not inhibit the consultant’s duty to act with reasonable skill and is that property in materials on the site will pass to the employer care. Often professional appointments contain an express duty of England when they are incorporated or affixed to the works, whether or not impartiality, as do other documents relating to the project where the they have been paid for: until they are incorporated/affixed into issuing of a certificate triggers an event further up the contractual the works, property remains with the contractor, even if they have chain. been delivered to the site (Elwes v Maw (1802) 3 East 38). The Some of the commonly used standard form construction contracts contractor is not permitted to reclaim or remove the materials once include a mechanism for enabling an engineer, architect or project the materials have been affixed to the property, even where the manager to suspend work under the contract on behalf of the employer or a third party has subsequently severed them from the employer. For example, the FIDIC Red and Yellow Books enable property (Lyde v Russell (1830) 1 B & Ad 394). the engineer to instruct the contractor to suspend progress of part or Employers also often include transfer of title clauses in their all of the works (with a resulting entitlement for the contractor to contracts, stating that title in materials, and possibly also plant and claim for such suspension under the contract to the extent that the equipment, has, or is deemed to have, passed to them notwithstanding cause of the suspension is not the responsibility of the contractor). the common law position. Clauses providing for title in goods and Similarly, the NEC3 ECC enables the to instruct the materials to pass to the employer prior to their incorporation into contractor to stop or not to start any work under the contract. the works are more commonplace than retention of title rights in English courts recognise a duty on the engineer/architect to act favour of contractors, which permit contractors to claim that until fairly, independently and honestly in the administration of the they have been paid they retain title, and the right to remove goods contract. This extends to duties that require the engineer/architect and materials supplied from the site. to use its professional skill and judgement to form a view or make a In the JCT forms of contract, title to materials on site which are not decision where it holds the interests of the employer and contractor yet incorporated into the works passes to the employer on payment, in balance. whilst the NEC3 form provides that title passes when the goods The standard forms usually deal with this by making a distinction arrive on site (or, in the case of off-site materials, are marked for the between when the engineer/architect is acting as agent for, and in the works), so that the employer can assert whatever title the contractor interest of, the employer and when the engineer/architect is required has to the materials once brought within the site. to make a determination under the contract. However, the courts have held that clauses which state that property Under the FIDIC Red and Yellow Books, the engineer is deemed in unfixed materials will pass to the employer once their value has to act for the employer in exercising the duties assigned to it under been included in an interim certificate for which a contractor has the contract, except in circumstances where the contract expressly received payment, were not sufficient to transfer to the employer recognises the need for a determination by the engineer. In such property in a sub-contractor’s materials when the property in them circumstances, the engineer is to consult both parties in an endeavour had not passed from the sub-contractor to the contractor (Dawber to reach an agreement, failing which, the engineer must make a “fair Williamson v Humberside CC (1979) 14 BLR 70). determination” under the contract. The circumstances in which these “fair determination” provisions 2 Supervising Construction Contracts apply include where the engineer is issuing certificates, determining the employer’s entitlement to payment from the contractor, determining the contractor’s entitlement to extensions of time, 2.1 Is it common for construction contracts to be and making valuations and adjustments to the contract price supervised on behalf of the employer by a third (these are typically the determinations that trigger the impartiality party? Does any such third party (e.g. an engineer requirements under commonly used construction standard forms in or architect) have a duty to act impartially between England). 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 2.2 Are employers entitled to provide in the contract that impartially. they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer It is common for construction contracts to be administered by an include in the contract what is known as a “pay when paid” clause? architect or contract administrator under traditional procurement and for an employer’s agent to undertake a similar role for design and build contracts. Under the Construction Act, a provision making payment under a construction contract conditional on the payer receiving payment A duty is usually implied on the part of the professional consultant from a third person is ineffective, unless that third person, or any responsible for issuing certificates in accordance with a building other person, payment by whom is under the contract (directly or contract to act impartially between the employer and the building indirectly) a condition of payment by that third person, is insolvent contractor. For example, it has been implied on architects (see (as defined by the Construction Act). Where the relevant provision Sutcliffe v Thackrah (1974) AC 727) and in relation to other forms is ineffective, in default of the parties’ agreement of other terms of of contract and consultants (for example, on a project manager under payment, the payment provisions of the Scheme will apply.

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Contractual provisions that allow an employer to vary work (for 2.3 Are the parties permitted to agree in advance a fixed example, by omitting work) often do not allow the contractor to be sum (known as liquidated damages) which will be deprived of its opportunity to carry out the work and, usually where paid by the contractor to the employer in the event of the employer engages another contractor to carry out work that particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are would otherwise have been carried out by the original contractor, there any restrictions on what can be agreed? E.g. this will constitute a breach of contract. does the sum to be paid have to be a genuine pre- Typically, the contractor will be entitled to claim an extension estimate of loss, or can the contractor be bound to of time, and/or its loss and expense if a variation is instructed by pay a sum which is wholly unrelated to the amount of the employer (subject to the contractor being able to show that financial loss suffered? the employer has agreed to pay for the work in question and that the work is outside the scope of work agreed to be carried out for England Yes, liquidated damages clauses (“LD clauses”) are a commonly the contract sum). Contractors may try to restrict the extent of a used risk allocation tool in construction contracts in England. They variation (particularly omissions of a major part of the works – see are recognised as an effective method of avoiding the uncertainty the comments below in relation to omitting work). The contractor and expense of proving the nature and extent of damage suffered does not usually have a contractual entitlement to an extension of as a result of a breach by the contractor (often of a time-related time or additional payment if a variation is necessary due to the obligation, such as late completion). contractor’s default. The considerable advantages of LD clauses will be lost if the clause is not legally enforceable. Ultimately, such a provision can be either a legitimate LD clause, in which case it will be enforceable, or a 3.2 Can work be omitted from the contract? If it is omitted, can the employer do it himself or get a third penalty, in which case, as a matter of public policy, it will not. party to do it? The principles adopted by English courts in determining if an LD clause amounts to a penalty were recently restated in Cavendish It is usual in England for the variation provisions to give the Square Holding BV v Makdessi (2015) UKSC 67. Following employer a right to order part of the work to be omitted (with a this Supreme Court decision, the test for determining whether mechanism for a consequent adjustment to the contract price). a clause is a penalty will be whether it imposes on the contract- The position at common law is that, absent express words to the breaker consequences which are “out of all proportion to any contrary in the construction contract, the employer may: legitimate interest of the innocent party”. Therefore, the fact that a clause does not contain a genuine pre-estimate of loss does not ■ only omit work which it is intended should not be carried automatically mean it is a penalty. As long as a legitimate business out at all (see, for example, Carr v Berriman (JA) Pty Ltd (1953) 27 A.L.J. 273 (Aus), as applied in Amec Building Ltd interest is served and protected by the clause and the provision is v Cadmus Investment Co Ltd (1996) 51 Con L.R. 105); not “extravagant, exorbitant or unconscionable”, it will be upheld. ■ not, and the architect/engineer may not, omit part of the work from the contract and have it or similar work done by another 3 Common Issues on Construction contractor, or do the omitted work itself; and Contracts ■ not by virtue of the omission allow the removal of all of the work from the contractor’s scope: see Abbey Developments Ltd v PP Brickwork Ltd (2003) CILL 2033 as considered and 3.1 Is the employer entitled to vary the works to be done applied in Trustees of Stratfield Saye Estate v AHL Construction under the contract? Is there any limit on that right? (2004) EWHC 3286 (TCC). The employer may not change the fundamental nature of the work by an omission. At common law, subject to the inclusion of express provisions (see below), the employer is not generally entitled to vary or alter 3.3 Are there terms which will/can be implied into a previously described work and materials as of right without the construction contract? contractor’s agreement. The general rule is that, if a contractor has been requested to carry out work that is a variation to the contract, he Terms may be implied by statute, by certain types of conduct, or by will be entitled to recover payment for it if the employer has expressly operation of a principle of common law to certain types of contract. or impliedly requested the work knowing it to be a variation. Under the Construction Act, there are a number of terms which will be A consultant appointed by the employer has no implied authority implied into a construction contract where the contract does not comply to order additional work or promise to pay for it. In the absence of with certain requirements of the Construction Act. These include: express provisions, in order to recover payment for additional or varied ■ Section 108 – Right to refer disputes to adjudication. work, a contractor would need to show that it had a separate contract ■ Section 109 – Entitlement to stage payments. with the employer that it should carry out the additional or varied work ■ Section 110 – Dates for payment. which it had done on the consultant’s instructions and be paid for it. ■ Section 111 – Requirement to pay notified sum. As a result, express provisions as to variation of work are a common feature of construction contracts. Variations are often instructed by ■ Section 113 – Prohibition of conditional payment provisions. the employer’s contract administrator, with the extent of authority to order additional works depending on the terms of the contract 3.4 If the contractor is delayed by two events, one the administrator’s appointment. fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an If the additional or varied work is so peculiar, unexpected and extension of time; or (b) the costs occasioned by that different from what any person reckoned or calculated upon, it may concurrent delay? not fall within the contract at all and the contractor will be entitled to payment for the varied work on a quantum meruit basis: Thorn v (a) The English courts in recent years have followed the approach London Corp (1876) 1 App. Cas. 120. of Mr. Justice Dyson in Henry Boot Construction (UK) Ltd

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v Malmaison Hotel (Manchester) Ltd (1999) 70 ConLR 32, date of tender could not “reasonably have been foreseen by an QBD (TCC). The effect of that approach has been that, if experienced contractor possessing all the information he had/could the contract is silent as to the contractor’s entitlement to an have obtained by visual inspection of the site or by reasonable extension of time where there is concurrency between any enquiry”. This wording is used in the IChemE Red Book (lump employer-risk event and a contractor-risk event, both of sum contract) and is also an apt summary of the position adopted by which impact upon the programme for the Works (i.e. cause the FIDIC Red Book and Yellow Book and the JCT Major Project the delay), the contractor is entitled to an extension of time for the entire period. Construction Contract. (b) In terms of a contractor’s entitlement to costs caused by a The JCT standard forms (other than the Major Project Construction concurrent delay, it is unlikely that the same approach will Contract) are silent on the issue, thereby adopting the common apply to claims of loss and expense, unless the wording of law position of the contractor bearing the risk of encountering England the contract expressly permits it. There seems to be a much unforeseen ground conditions. The FIDIC Silver Book takes this higher test of causation applied to a contractor’s costs in a step further and expressly allocates all such risk to the contractor. comparison to extensions of time (and in this respect he may The NEC3 ECC is, in comparison, relatively favourable to the fail the “but for” test of causation). contractor, allowing recovery where the contractor encounters “physical conditions” within the site which are not weather 3.5 If the contractor has allowed in his programme a conditions, which “an experienced contractor would have judged period of time (known as the float) to allow for his own at the contract date to have such a small chance of occurring that it delays but the employer uses up that period by, for would have been unreasonable for him to have allowed for them”. example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed after this float is used up? 3.8 Who usually bears the risk of a change in law affecting the completion of the works? The question of “ownership” of float is a matter of debate under English law, particularly where delays occur which cause a If the contract is silent on the issue, the contractor bears the risk of programmed float to be absorbed in whole or in part without changes in law impacting the work under the contract. necessarily causing any delays to the works or to the following The standard form construction contracts will often address this activities. The issue has been considered at length by commentators issue expressly. The FIDIC Red, Yellow and Silver Books pass both and authors without any clear consensus emerging. the time and cost risk to the employer, allowing an extension of The judgment of Mr. Justice Lloyd. in Royal Brompton Hospital time and an adjustment to the contract price to take into account National Service Trust v Hammond & Ors (No.9) (2002) the impact of any change in law in the country in which the site is EWHC 2037 (TCC) does provide authority for the courts giving located. The base date used for determining this adjustment is 28 consideration, in respect of JCT contracts, to what would be fair and days prior to the submission of the tender for the work. The FIDIC reasonable in the circumstances and determining that the contractor change in law provisions do, however, enable the passing on of cost should not be deprived of the float where the employer’s delay savings to the employer to the extent that a change in law results in occurs prior to the contractor’s. However, the preferred view and a cost saving to the contractor. better argument under English law is that the float time necessarily The NEC3 optional change in law clause passes the time and cost belongs to the project and therefore that whichever party comes to risk of a change in law to the employer, to the extent such changes utilise the float first should have the benefit of it. This is particularly impact the contractor’s costs and ability to complete the works on the case where the programme is not a contract document. The time. Like the FIDIC provision, the NEC3 change in law clause is contractor’s obligation is to carry out and complete the work by the reciprocal, allowing the employer to benefit from a change in law completion date, rather than by any specific activity date. which reduces the contractor’s costs under the construction contract. The position in respect of risk allocation for changes in law under 3.6 Is there a limit in time beyond which the parties to the main JCT forms of contract, is that the contractor can claim a construction contract may no longer bring claims an extension of time to the extent that it notifies the employer of against each other? How long is that period and from the delay resulting from the change in law together with sufficient what date does time start to run? supporting information. The risk of delay is therefore passed to the employer, whilst the risk of additional cost arising from the change Limitation periods are imposed by the Limitation Act 1980. The in law remains with the contractor. limitation period for a normal contractual claim is six years from accrual of the cause of action (the date of breach of contract), but if the contract was created by deed, the limitation period is 12 years 3.9 Who usually owns the intellectual property in relation from the breach of contract. to the design and operation of the property?

The authors of the copyright material created in respect of the 3.7 Who normally bears the risk of unforeseen ground design and operation of a property are typically the employer’s conditions? design consultants, or where a contractor has carried out design, the contractor or a combination of these. Such consultants and/ The position under the common law is that if the contract is silent on or contractors will typically own the intellectual property rights in the issue, the contractor bears the risk of encountering unforeseen relation to the project. ground conditions in carrying out the work under the contract. Owners or authors of copyright material are rarely willing to Although much will depend on the risk profile of the construction assign ownership of the material on UK construction projects, so arrangement between the parties, the common compromise is employers generally seek to ensure that they are granted royalty- reflected in a number of the standard forms. This approach varies free, irrevocable licences to use and reproduce all copyright in the position at common law so that risk lies with the contractor any drawings and other documents produced by any consultants unless a physical condition is encountered on site, which at the

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or contractors, together with the right to transfer the licence and grant sub-licences in appropriate circumstances (i.e. in favour of 3.12 Is the concept of force majeure or frustration known purchasers, tenants, funders and any other third parties with an in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue interest in the project who may need to use the copyright material successfully that a contract which has become relating to the design and/or operation of the project). uneconomic is grounds for a claim for force majeure?

3.10 Is the contractor ever entitled to suspend works? Force majeure is not an English law concept but force majeure clauses are often included in a construction contract to allow a The Construction Act provides for a right to suspend performance party who cannot perform the construction contract to suspend its obligations and potentially terminate if the force majeure event for non-payment so that: England ■ the contractor may either suspend performance of all of its continues for a certain amount of time. Given that the remedy is work/obligations or just some; severe, such clauses are often the subject of heavy negotiation, and the fact that a contract has become uneconomic will not be ■ the defaulting payer is liable to pay the contractor a reasonable amount in respect of costs and expenses reasonably incurred a ground for a claim for force majeure. In Thames Valley Power by the contractor as a result of exercising his right to suspend; Limited v Total Gas & Power Ltd (2005) EWHC 2208, the court and drew a distinction between inability and inconvenience, and held ■ the contractor will be entitled to an extension of time for the that inconvenience was not enough for a force majeure clause to delay caused as a consequence of the suspension and not just succeed. for the period during which he suspends performance. The concept of frustration exists in English law as an exception to The contractor’s right to suspend work for non-payment is sometimes the general rule that if performance of a contract becomes more expressly included in UK construction contracts, although the right difficult or even impossible, the party that fails to perform is liable in will in most cases be implied into the construction contract by the damages (Paradine v Jane (1647) Aleyn 26). “Frustration” allows Construction Act. the contract to be automatically discharged when a frustrating event occurs.

3.11 On what grounds can a contract be terminated? Are A frustrating event is one which: there any grounds which automatically or usually ■ occurs after contract formation; entitle the innocent party to terminate the contract? ■ is so fundamental as to be regarded by the law both as striking Do those termination rights need to be set out at the root of the contract and as entirely beyond what was expressly? contemplated by the parties when they entered the contract; ■ is not due to the fault of either party; and A party may have express termination rights under a construction ■ renders further performance impossible, illegal or makes it contract, and/or it may have termination rights at law. It will radically different from that contemplated by the parties at generally be preferable to terminate using an express contractual the time of the contract. termination right, and rights to terminate at law are generally more restrictive than their contractual counterparts. 3.13 Are parties which are not parties to the contract A party will often have contractual rights of termination detailed in entitled to claim the benefit of any contract right the construction contract, which it can exercise on the occurrence which is made for their benefit? E.g. is the second or of certain events (e.g. bankruptcy or insolvency of the other party). subsequent owner of a building able to claim against The JCT Standard Building Contract 2016, for example, gives the the original contracts in relation to defects in the employer termination rights on the occurrence of certain events of building? default by the contractor (such as suspending the carrying out of the works without reasonable cause), or in the event of the insolvency Third parties taking an interest in a new development cannot now of the contractor. The contractor also has termination rights in the rely with any degree of certainty on having a remedy in tort in the event of certain defaults by the employer (such as failure to pay event that a defect is discovered. by the final date the amount properly due), or in the event of the In order to avoid developers having to give long-term warranties employer’s insolvency. Both parties have rights of termination in respect of latent defects in a building, it has been the practice for force majeure. Similarly, the FIDIC Red and Yellow Books of developers to impose on their contractors and consultants an contain express provisions dealing, for example, with termination obligation to provide interested third parties with contractual by the employer. They set out the circumstances that may lead to warranties in respect of the work that they have carried out, thus a termination, either as a result of a default by the contractor or for creating privity of contract between the various interested parties convenience (i.e. without default by the contractor), and describe and those responsible for design and construction. Such warranties the procedures that must be followed and the financial arrangements run in parallel to, or are stated to be, “collateral” to the main contract that will apply when this occurs. or appointment. The form which these contractual or collateral If it does not have express contractual termination rights, or the warranties can take varies considerably, some amounting to little express contractual termination rights do not apply, then a party may more than a one-page letter creating a duty of care in favour of end have grounds to terminate a contract at law for repudiatory breach users, and others being significantly more complex, dealing with of contract (which occurs where a party fails to perform a condition matters beyond simply the contractor’s or consultant’s duty of care of the contract or where a party refuses outright to perform all or to the beneficiary. substantially all of its obligations under a contract). However, developers, contractors, consultants, funders, purchasers and tenants are now sometimes dispensing with the use of of

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collateral warranty, as in their place, equivalent protection can be beneficiary of the warranty, as the warrantor could otherwise created through the use of the rights created by the Contracts (Rights raise equitable rights of set-off directly against the beneficiary. of Third Parties) Act 1999 (the “C(ROTP) Act”). Beneficiaries are typically unwilling to bear the risk of payment The C(ROTP) Act reformed the doctrine of privity of contract. disputes relating to set-off under the underlying contract between Historically, under English law, a contract could not confer rights P1 and P2. or impose obligations on anyone other than the signatories to the In addition to the equitable right of set-off described above, it should contract, irrespective of any contrary intention of the parties. The be noted that construction contracts are no different from any other C(ROTP) Act sets out various circumstances in which a third contract in that the common law rules of set-off will apply to them. party is entitled to enforce a contract directly against the relevant The common law right of set-off was defined by the House of Lords contracting party in his own name and without having to “join” the in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd England other contracting party in the action. 1974 AC 689 as being when, for example, P1 claims that there are A third party will have rights to enforce a contractual term either: defects in work carried out by P2 such that the work itself is worth less than the amount P2 has claimed for it. Common law set off ■ if the contract expressly provides for this to occur; or does not operate by deducting an amount from the proper value of ■ if the term in question confers a benefit on the third party, the works, but comprises a determination that the proper value of the unless it is clear, on a true construction of the contract, that work is worth less than P2 is claiming. If P1 can establish its claim this was not intended. in fact, the courts must apply P1’s common law right of set-off. Provisions of the C(ROTP) Act can be used to grant rights to In Gilbert-Ash, the House of Lords also held generally that parties to third parties without having to procure the execution of individual construction contracts are entitled to incorporate into a construction collateral warranties. The third party has to be identified in contract any rights of set-off they please: there is nothing to prevent the construction contract by name, as a member of a class, or as parties to construction contracts from extinguishing, curtailing answering a particular description, and as such the third party does or enlarging the ordinary rights of set-off, provided they do so not have to be in existence at the date of the construction contract. expressly or by clear implication. Under section 2 of the C(ROTP) Act, where a third party has a right under the C(ROTP) Act to enforce a term of the contract, under certain circumstances the parties to the contract are prohibited 3.15 Do parties to construction contracts owe a duty of from agreeing to rescind or vary the contract in a way that would care to each other either in contract or under any other legal doctrine? extinguish or alter the third party’s rights without obtaining the third party’s consent. Parties to construction contracts may owe a duty of care to each other In order to provide for third party rights, the underlying construction either in tort, by statute or as a term of the construction contract. For contract will need to incorporate provisions stating when and how example, a contractor will have a duty of care under statute (sections the relevant rights are to vest in the third party, and a memorandum 1 and 2 of the Occupiers Liability Act 1957 as affirmed in Nabarro setting out how the rights enforceable by the third party should be v Cope & Co (1938) 4 All E.R. 565) to make its construction site incorporated, either expressly or by reference. reasonably safe if it knows that the employer is going to walk about Conversely, construction contracts can expressly limit third party on site. rights, or exclude the use of third party rights altogether. a) Contract Construction contracts usually impose an obligation on 3.14 Can one party (P1) to a construction contract which the contractor, professional consultant or sub-contractor owes money to the other (P2) set off against the sums to exercise reasonable care and skill. However, a higher due to P2 the sums P2 owes to P1? Are there any standard of care is often negotiated between the parties to a limits on the rights of set-off? construction contract. In the absence of an express term in a construction contract If P1 owes a liquidated and undisputed debt to P2 and vice versa, the as to a duty of care, contractual terms can also be implied. law recognises and allows the set-off of these mutual debts. Section 13 of the Supply of Goods and Services Act 1982 implies into a contract for services a term requiring the Where that is not the case, but P1 owes money to P2 but, at the exercise of reasonable care and skill. In addition, contractual same time, has a sufficiently related cross-claim against P2, it is terms can also be implied by the courts to give effect to within the discretion of the courts to set-off against the sums due the presumed intention of the parties. The position of the to P2 the sums P2 owes to P1. This type of set-off is an equitable English courts in this respect was most recently stated in remedy; however, what constitutes a sufficiently related cross-claim the Supreme Court decision, Marks & Spencer plc v BNP is unclear. The Court of Appeal in Geldof Metaalconstructie v Paribas Securities Services Trust Co. (Jersey) Ltd (2015) 3 Simon Carves Ltd (2010) EWCA Civ 667 concluded that equitable WLR 1843. set-off will be applied when a cross-claim is so closely connected b) Tort with P1’s demands that it may be manifestly unjust to allow P2 to Where there is no contract between two parties, parties enforce payment of the sum it is owed by P1 without taking P1’s involved in a construction project may be able to bring an cross-claim into account. action in tort for negligence where the duty to take reasonable Following the case of Safeway Stores Limited v Interserve Project care has been breached. In order to succeed in an action for Services Limited (2005) EWHC 3085 (TCC), collateral warranties negligence, the claimant must be able to establish: and third party rights schedules commonly provide that any set-off ■ that the defendant owed a duty to the claimant; rights that the warrantor has pursuant to the underlying contract to ■ that the defendant breached the duty owed to the claimant; which the particular warranty and/or third party rights are collateral, and are excluded from its rights in defence of liability as against the ■ that the defendant’s breach of duty caused the claimant to suffer recoverable loss.

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Bespoke forms of consultancy agreement and building contract 3.16 Where the terms of a construction contract are will often contain contractual provisions that seek to raise the ambiguous, are there rules which will settle how that standard of care in design, for example, to that of an appropriately ambiguity is interpreted? qualified consultant holding himself out as having the competence, experience and resources necessary for projects of similar scope, Where a term of any contract is open to more than one interpretation, complexity, purpose and size. there are ambiguities in the language or there appears to be unclear It is also possible that the parties to a designer’s appointment drafting, the English courts sometimes employ certain “rules of are found to have actually intended the designer to be obliged to thumb” in an attempt to do justice between the parties. However, design a building (or part thereof) which is fit for its purpose. If these principles are just pointers and the court will only resort to so, an obligation as to fitness for purpose may be implied in fact applying them if the meaning cannot be found using the general England (as opposed to implied in law). This was the case in Greaves & Co rules of contractual interpretation. The most recent restatement (Contractors) Ltd v Baynham Meikle & Partners (1975) 1 W.L.R. of the approach taken by the English courts is to be found in the 1095, where the Court of Appeal found the contractor to be liable Supreme Court decision, Wood v Capita Insurance Services Limited to ensure that a defective warehouse would be fit for its intended (2017) UKSC 24. The Supreme Court confirmed that the court purpose. Notwithstanding the usual implied term of reasonable skill will look to both the language used and the commercial context in and care, on the particular facts of the case, the court found that there which it was drafted in order to ascertain the objective meaning of was a common intention of the parties that the the clause in question. The extent to which each is used will vary would design a warehouse which would be fit for the purpose for according to the circumstances. As a general rule, greater emphasis which it was required. The court implied into the agreement an is likely to be given to textual analysis in complex, detailed contracts “absolute warranty” that the design would be fit for its intended drafted by experienced lawyers. Commercial context will often be purpose. more relevant where the agreement is more informal, or lacking in detail. That said, there will always be exceptions: every case The higher standard of fitness for purpose is an absolute obligation; will be decided on its own facts. The fact that the outcome of such negligence does not have to be proved and the “state of the art” an approach may be a harsh result for one of the parties is not the defence is not available. Thus, even if the state of technical concern of the courts. As they have indicated in a number of recent knowledge across the construction industry is such that a particular cases, it is not the place of the courts to rescue a party that has made design fault would remain undetected by other competent designers, a bad bargain. the particular designer is still liable. It is important to distinguish between design, goods and materials 3.17 Are there any terms in a construction contract which and the completed works. The statutory implied terms under the are unenforceable? Supply of Goods and Services Act 1982 provide that materials must be: Examples of terms in construction contracts which are unenforceable a) reasonably fit for the purpose for which they will be used include: (provided it is the contractor who specifies them so that the employer is relying on his “skill and judgment”); and ■ A conditional payment provision under a construction contract which makes payment conditional on the payer b) of good quality (which makes the contractor liable for latent receiving payment from a third party. This will be ineffective defects in materials even where the employer has chosen the under section 113 of the Construction Act, unless that third materials/supplier and there has been no lack of care on the party, or any other person payment by whom is, under the part of the contractor) (Young & Marten v McManus Childs contract (directly or indirectly), a condition of payment by HL (1969) 1 AC 454). that third person, is insolvent. A line of cases from Greaves & Co (Contractors) Ltd v Baynham ■ Penalty clauses. Meikle & Partners (1975) 1. W.L.R. 1095 to Baylis Farms Limited ■ A provision which allocates liability for the costs of an v RB Dymott Builders Limited (2010) EWHC 3886 (QB) contain adjudication (section 108A(2) Construction Act). Agreement strong obiter comments in favour of a fitness for purpose obligation as to such costs can, however, be reached once an adjudication in relation to the design of an entire structure of other types of has commenced. development, provided that: a) there is an obligation on a contractor to design and build, or to supply and erect/install; 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, b) the particular purpose of the completed structure is made are the designer’s obligations absolute or are there known; limits on the extent of his liability? In particular, does c) the contractor holds himself out as being competent to the designer have to give an absolute guarantee in complete the works and assumes responsibility for them; respect of his work? d) the employer relies on the contractor’s skill and judgment; and For the design team, under the common law and statute (Supply e) there are no express terms of the construction contract and/ of Goods and Services Act 1982, section 13), the standard which or particular circumstances precluding the implied term of every designer must meet is one of “reasonable skill and care”. This fitness for purpose. is taken to mean “the ordinary skill of an ordinary competent man exercising that particular art”. Therefore, under the common law The rationale behind this line of cases appears to be primarily by and statute, the designer will be liable for defects in his design if: analogy with sale of goods and house-building laws (where English law provides that there is an implied term that the completed a) the designer’s conduct falls below the standard of the ordinary dwellings will be reasonably fit for the purpose for which they are competent professional; and/or required (Miller v Cannon Hill Estates Ltd (1931) 2 KB 113 and b) there is no substantial body of opinion within the profession the Defective Premises Act 1972, section 1(1)), and on the basis which would support the course taken by the designer. that a contractor responsible for design and construction should not

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be providing different levels of warranty for the different building elements of the project. 4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how Many legal commentators, therefore, start from the position that, arbitration works in your jurisdiction. in a design and build contract, there is an implied term that the completed works will be reasonably fit for the purpose for which Arbitration is a private dispute resolution method which, in the UK, they are required unless either: is governed by the Arbitration Act 1996. Any arbitrator’s award is a) there is a provision in the contract to negate that implication; binding on the parties and is enforceable in the courts. or Unlike adjudication and litigation, the parties must agree to b) it can be shown that the employer did not rely on the refer disputes between themselves to arbitration. The arbitration contractor’s skill and care. England agreement may be a separate agreement or, more commonly, a Thus, in circumstances where the employer has relied upon a design clause within a wider, more general agreement. and build contractor’s skill and judgement, it is likely that the courts Arbitration is more common in larger, more complex international would find the contractor to be subject to an implied warranty as to disputes. the fitness for purpose of the finished product/building. Parties can choose the particular rules for their own arbitration, In the UK, however, an express fitness for purpose warranty or they can choose for it to be governed by one of a number of as to design and/or the completed works can be difficult to organisations, such as the: obtain (primarily because it is commonly resisted by insurers), and warranties as to the fitness of any designs for their intended ■ International Chamber of Commerce (“ICC”). purposes are expressly carved out of the JCT forms of contract. ■ Chartered Institute of Arbitrators. Instead, employers tend to incorporate into construction contracts ■ London Court of International Arbitration (“LCIA”). the implied terms of satisfactory quality and fitness for purpose of ■ International Centre for Dispute Resolution. goods and materials to provide an absolute warranty in relation to Many of the standard form construction contracts, such as the JCT, fitness for purpose of the various components of a building. provide for litigation as the default dispute resolution mechanism for Where there are requirements, the achievement disputes. This, together with the increased popularity of litigation in of which is commercially important to the employer, an express the Technology and Construction Court (a specialist division of the warranty that the works will meet these requirements so as to be fit High Court, shortly to become part of the new Business and Property for a specified purpose is also sometimes sought by employers (see, Courts), has led to a general decline in the appeal of arbitration for for example, the recent case of MT Højgaard A/S v E.On Climate construction disputes. & Renewables UK Robin Rigg East Limited and another (2015) EWCA Civ 407). 4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise 4 Dispute Resolution and enforce international arbitration awards? Please advise of any obstacles to enforcement.

4.1 How are disputes generally resolved? The UK is a signatory to the New York Convention (the “Convention”) and has incorporated it into its legislation in The most common methods of settling construction disputes are sections 100–104 of the Arbitration Act 1996. The UK courts will adjudication, litigation and arbitration. recognise and enforce foreign awards made in the territories of the other signatory states. Foreign arbitral awards will be enforced in the same way as a judgment or order of the national courts. 4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general The courts will refuse to enforce an award in limited circumstances, procedures. such as those set out in Article V of the Convention. These include instances in which: Adjudication is a popular process for resolving disputes in the UK. ■ a party to the arbitration agreement was under some It was introduced in order to resolve disputes more quickly for the incapacity; benefit of contractors and sub-contractors through the Construction ■ the arbitration agreement was not valid under its substantive Act. law; Parties to a “construction contract” can, subject to a few exceptions, ■ a party against whom it is to be enforced was not given proper refer any dispute to adjudication at any time. notice or was unable to present its case; The adjudication process is significantly shorter than arbitration or ■ the tribunal lacked jurisdiction; litigation. Following receipt of the referral to adjudication from ■ there was a procedural irregularity; and/or the referring party, the responding party typically only has between ■ it would be contrary to public policy to recognise or enforce seven and 14 days to respond, and the adjudicator will typically the award. provide his decision within 28 days of receiving that referral (unless the parties agree otherwise). 4.5 Where the contract provides for court proceedings The decision of the adjudicator is binding until the dispute is finally in a foreign country, will the judgment of that foreign determined by arbitration, litigation or subsequent agreement. A court be upheld and enforced in your jurisdiction? successful party can apply to the court to enforce an adjudicator’s decision if the other party does not comply. The grounds for It is the origin of the foreign judgment which determines whether disputing the validity of an adjudicator’s decision are extremely that judgment will be enforceable in England and Wales. limited.

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For example: The guidelines as to when a claim should be issued in the TCC in ■ Judgments from EU Member States are governed by the recast London were set out in West Country Renovations Ltd v McDowell Brussels Regulation on jurisdiction and the recognition and and another (2013) 1 WLR 416, and include: enforcement of judgments in civil and commercial matters ■ The value of the claim is more than £250,000. (Regulation (EU) 1215/2012), and the EEO Regulation ■ It has an international element. creating a European Enforcement Order for uncontested claims (which does not apply to Denmark) (Regulation (EC) ■ It is complex. 805/2004). For proceedings in which judgment is given ■ It involves novel points of law. before 10 January 2015, the original Brussels Regulation ■ It involves adjudications, including enforcements, and (Regulation (EC) 44/2001) continues to apply. At the time arbitrations. of writing, the implications of Brexit on the enforcement of judgments are unclear. Because of its reciprocal nature, the Claims for less than £250,000 should generally be commenced in England Brussels regime cannot simply be retained by importing it County Courts or High Courts outside of London, where there is a wholesale into UK law. The UK Government has stated its designated TCC judge available unless the claim satisfies one of the commitment to replicating existing provisions as closely as other criteria above. Another exception to this general rule relates possible, but much will depend on the negotiations between to public procurement cases, which should normally be issued in the UK and the EU. the High Court in London because of the expertise of the judges in ■ Judgments from Iceland, Norway and Switzerland are the TCC there. governed by the Lugano Convention on jurisdiction and If proceedings are brought in the TCC, the procedure is similar to the recognition and enforcement of judgments in civil and the procedure in the other UK courts, viz. the claimant serves a claim commercial matters (L339/3) (the “Lugano Convention”). form supported by particulars of claim and the defendant serves a ■ Judgments from most Commonwealth countries are defence together with any counterclaim, either within 14 days of governed by either the Administration of Justice Act 1920, service of the particulars of claim, or within 28 days of service the Civil Jurisdiction and Judgments Act 1982, or the Foreign Judgments (Reciprocal Enforcement) Act 1933. should the defendant first serve an acknowledgment of service of the particulars of claim. There then follows a case management ■ For countries that do not have applicable treaties in place conference directed by the judge, disclosure by both parties of with the UK, or in the absence of any applicable UK statute, the foreign judgment may be enforced under the common documents both in support of, and to the detriment of, their claim, law. and a hearing. The judge then gives a judgment and both parties have the opportunity to request permission to appeal that judgment. The whole process can take many months or even years, depending 4.6 Where a contract provides for court proceedings in on the complexity of the case and whether the case goes to appeal. your jurisdiction, please outline the process adopted, It is likely to be a considerably longer process than adjudication, but any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) may be similar in length to arbitration. a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal. Acknowledgment Litigation in relation to construction is usually dealt with at first The authors would like to thank Matthew Bool and Ben Patton for instance by the Technology and Construction Court (“TCC”), in their invaluable contributions to this chapter. Matthew and Ben are which there are several full-time specialist judges in London, and partners in the Construction department of Ashurst’s London office full and part-time TCC judges sitting in various regional TCC (Email: [email protected]; [email protected]). centres across the country.

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Tim Reid Michael J. Smith Ashurst Ashurst Broadwalk House Broadwalk House 5 Appold Street 5 Appold Street London EC2A 2HA London EC2A 2HA United Kingdom United Kingdom

Tel: +44 207 859 1548 Tel: +44 207 859 1004 Fax: +44 208 638 1112 Fax: +44 208 638 1112 Email: [email protected] Email: [email protected] URL: www.ashurst.com URL: www.ashurst.com England Tim Reid is a partner in London and specialises in the resolution of Michael J. Smith is a partner in the construction group in London. He disputes in the energy and construction and civil engineering sectors specialises in the construction aspects of major infrastructure projects, both in the UK and internationally. His current and recent cases cover domestic and international EPC contracting and all other areas of non- a broad spectrum and include disputes arising from multi-million contentious construction and engineering law. His particular focus pound PFI projects in the UK and exploration for oil and gas reserves is the renewable energy sector, including energy from waste plants, off the coast of Africa. solar energy and on and offshore wind farm development. He has extensive experience in the drafting and negotiation of PFI/PPP project Tim has experience of all forms of dispute resolution. In addition documentation and bespoke EPC, DBFO and BOT documentation. to the successful conduct of High Court proceedings, Tim also has Michael also has expertise in all major UK and international standard considerable experience of the successful conduct of adjudications, form construction and engineering contracts (and associated interface arbitrations (national and international) and a large number of and security support instruments). mediations. As well as being a solicitor in England and Wales, Tim is admitted as a solicitor in Hong Kong. Michael is ranked in the Chambers UK Guide for Construction. Tim is recommended as a Leading Individual in The Legal 500 and ranked in the Chambers UK Guide for Construction.

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.

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Finland Aimo Halonen

Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law Ieva Kovarskyte

principles of Finnish contract law, a contract is concluded when an 1 Making Construction Projects offer to conclude a contract is accepted. Construction agreements usually, and public procurement agreements always, come into 1.1 What are the standard types of construction contract force upon signature. The widespread application of the YSE in your jurisdiction? Do you have contracts which 1998 General terms for building contracts (YSE 1998 conditions) place both design and construction obligations upon significantly diminishes the need for contractors to separately agree contractors? If so, please describe the types of on contractual terms. contract. Please also describe any forms of design- only contract common in your jurisdiction. Do you have any arrangement known as management 1.3 In your jurisdiction please identify whether there is contracting, with one main managing contractor a concept of what is known as a “letter of intent”, in and with the construction work done by a series which an employer can give either a legally binding or of package contractors? (NB For ease of reference non-legally binding indication of willingness either to throughout the chapter, we refer to “construction enter into a contract later or to commit itself to meet contracts” as an abbreviation for construction and certain costs to be incurred by the contractor whether engineering contracts.) or not a full contract is ever concluded.

The standard construction contracts commonly used in Finland are Pre-contractual agreements used in Finland can typically be divided turnkey construction contracts, overall construction contracts and into binding pre-agreements and non-binding letters of intent. divided construction contracts. Despite this general rule, the binding nature of such instruments is In a turnkey construction contract, a developer enters into an always determined on a case-by-case basis depending on the terms agreement with a contractor who takes full responsibility for both therein. Pre-agreements of any form are not very common between the design and construction work of a specific property. employers and employees. In an overall construction contract, a developer enters into an agreement with a single contractor. This contractor can, however, 1.4 Are there any statutory or standard types of insurance utilise one or several subcontractors to fulfil its contractual obligations. which it would be commonplace or compulsory to Design work is commonly excluded from such construction contracts. have in place when carrying out construction work? For example, is there employer’s liability insurance In a divided construction contract, a developer enters into for contractors in respect of death and personal agreements with one main contractor and several subcontractors, injury, or is there a requirement for the contractor to who may further subcontract their works. Design work is usually have contractors’ all-risk insurance? carried out by an external party. A contract can also be set up with a so-called “management contract” Employers carrying out construction work are responsible for in which the main contractor is replaced by a project management acquiring statutory insurances, namely earnings-related pension, health organisation. Such projects are commonly split into several separate insurance pension, unemployment insurance and accident insurance. contracts and projects. The YSE 1998 conditions require the main contractor to take out In the Finnish jurisdiction, design-only agreements may be performed insurance for both the construction works and the materials and either by one main designer, or by one or several sub-designers. supplies acquired for the works for their reacquisition value. Additional insurances are also commonly taken out, e.g.: loss-of- profits insurance; liability insurance; or legal expenses insurance. 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 1.5 Are there any statutory requirements in relation and intention to create legal relations), or any to construction contracts in terms of: (a) general specific requirements which need to be included in a requirements; (b) labour (i.e. the legal status of those construction contract (e.g. provision for adjudication working on site as employees or as self-employed or any need for the contract to be evidenced in sub-contractors); (c) tax (payment of income tax of writing)? employees); or (d) health and safety?

Under the Contracts Act (228/1929), which sets down the basic When ensuring the compatibility of construction contracts with the

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Finnish statutory requirements, key considerations would include appointed by the employer. According to the Land Use and Building the following: Act (132/1999), the employer is responsible for a construction ■ Complying with Finnish and applicable collective project. Such responsibility also includes an obligation to ensure agreements, as well as the Act on the Contractor’s Obligations that works are properly supervised. The content of supervision or and Liability when Works are Contracted Out (1233/2006). the qualification requirements of the supervisor are not defined by ■ Complying with the rules applicable to foreign employees. law. However, the construction industry organisations have signed a ■ Complying with Finnish laws concerning land use and building. treaty, where a common set of requirements is agreed for supervisors. There are no particular requirements of impartiality. The YSE ■ Complying with Finnish laws concerning reporting obligations to the Tax Administration. 1998 conditions include a provision whereby the supervisor must be changed if he is incompetent or unsuitable to the extent that the

Finland ■ Observing relevant safety requirements. implementation of building work is suffering. The reversed value added tax (VAT) rule, whereby the buyer is responsible for the payment of VAT instead of the seller and is applicable to certain construction-related services, is also noteworthy. 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 1.6 Is the employer legally permitted to retain part of include in the contract what is known as a “pay when the purchase price for the works as a retention to be paid” clause? released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed The use of a “pay when paid” clause is possible but not common, as defects liability is complete? contractors tend to apply the YSE 1998 conditions and milestones are usually aligned with payments. a) Milestone payments can be withheld until the corresponding works are completed. Contracts commonly stipulate that If such clauses were to be applied, contractors should take into invoices shall not be paid before the corresponding milestone consideration the provisions in the Act on Payment Terms in under the contract is completed and the invoice is otherwise Commercial Agreements (30/2013) as amended by Act 385/2015. considered fit for payment. Said act provides that payment time is presumed to be 30 days in b) The YSE 1998 conditions also provide that an employer is the case a debtor is either a contracting authority or an entrepreneur. entitled to withhold a sum corresponding to repair work for When a debtor is a contracting authority, the payment time of an a defect for which a contractor is liable until adequate repair invoice may exceptionally amount to a maximum of 60 days. If a has been effected. debtor is an entrepreneur, the payment time shall exceed 30 days only if the parties have expressly agreed thereon. 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 2.3 Are the parties permitted to agree in advance a fixed guarantee the performance of subsidiary companies? sum (known as liquidated damages) which will be Are there any restrictions on the nature of such bonds paid by the contractor to the employer in the event of and guarantees? 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. There are no particular restrictions on bonds and guarantees and a does the sum to be paid have to be a genuine pre- typical security structure is one where separate performance bonds estimate of loss, or can the contractor be bound to are provided for the period of construction work and the defects pay a sum which is wholly unrelated to the amount of liability period of the works. financial loss suffered?

Liquidated damages can be freely agreed upon. There are no 1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and limitations on the amounts of damages, but excessive damages may supplies used in the works? Is it permissible for be deemed unfair and hence unenforceable. Contracting parties contractors to claim that until they have been paid may also agree to follow the provisions for liquidated damages set they retain title and the right to remove goods and out in the YSE 1998 conditions. materials supplied from the site?

Title to goods and supplies typically passes to the employer upon 3 Common Issues on Construction payment for the respective items. However, if goods and supplies Contracts are integrated into the works, title to such items commonly passes to the employer upon integration. 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? 2 Supervising Construction Contracts Fundamentally, an employer is not able to vary the works to be performed under a contract as contracts may not be altered 2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party? unilaterally. However, an employer is entitled to carry out Does any such third party (e.g. an engineer or architect) modifications, which a contractor is obliged to perform, provided have a duty to act impartially between contractor and that such modifications do not substantially alter the content of a employer? Is that duty absolute or is it only one which contractor’s performance. If modifications go beyond what could exists in certain situations? If so, please identify when be reasonably assumed by a contractor, a contractor has the right to the architect/engineer must act impartially. refuse to carry out such modifications. More substantial alterations are considered amendments of the original contract. Construction contracts are commonly supervised by a supervisor

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conditions is borne by the employer. However, if the contractor 3.2 Can work be omitted from the contract? If it is has neglected to familiarise himself with the project site, the risk of omitted, can the employer do it himself or get a third unforeseen ground conditions may to some extent be attributed to party to do it? the contractor.

The employer is entitled to instruct some work under the contract to be omitted as long as such omissions do not significantly alter the 3.8 Who usually bears the risk of a change in law nature of the construction contract. The contractor is not entitled to affecting the completion of the works? unilaterally omit any work which has been contractually agreed on. The risk of change of law is usually borne by the employer. Finland 3.3 Are there terms which will/can be implied into a construction contract? 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? If the contracting parties have used a set of terms and conditions in their previous undertakings, such terms may be considered a According to the YSE 1998 conditions, both parties retain the commercial custom between the parties and thus be deemed implied. intellectual property rights to their own designs. In design-only contracts, the KSE 2013 conditions are typically applied. Under The status of the YSE 1998 conditions as implied terms is somewhat the KSE 2013 conditions, intellectual property rights belong to the ambiguous. In some cases, they have been likened to a general consultant. commercial custom and applied to construction contracts as implied terms. 3.10 Is the contractor ever entitled to suspend works?

3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of Unless otherwise agreed by parties, a contractor shall not suspend his employer, is the contractor entitled to: (a) an his works at a site. If the parties follow the YSE 1998 conditions, extension of time; or (b) the costs occasioned by that a contractor is, instead of suspending works, entitled to claim, from concurrent delay? the employer, liquidated damages as agreed and/or additional costs that have arisen due to a delay. Under the YSE 1998 conditions, a contractor is not entitled to an extension of time for delays attributable to the contractor nor 3.11 On what grounds can a contract be terminated? Are compensation of related costs; however, they are entitled to an there any grounds which automatically or usually extension of time for delays attributable to the employer and entitle the innocent party to terminate the contract? Do compensation of related costs, provided that the contractor has those termination rights need to be set out expressly? given adequate notification thereof to the employer. A contract can be terminated by a contractor if an employer neglects 3.5 If the contractor has allowed in his programme a his obligations under the contract or force majeure grounds are at period of time (known as the float) to allow for his own hand (for a long or indefinite period). delays but the employer uses up that period by, for A contract can be terminated by an employer if a contractor is in example, a variation, is the contractor subsequently breach of contract, a contractor is declared bankrupt or is otherwise entitled to an extension of time if he is then delayed after this float is used up? in a situation where he cannot be expected to fulfil his contractual obligations. In addition, a contract can be terminated due to force majeure (for a long or indefinite period) or in the case that a This depends on the precise wording of the programme and the float. contractor dies while a construction project is ongoing. As long as the deadlines set in the programme are met, extension of time is unlikely. 3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give 3.6 Is there a limit in time beyond which the parties to the injured party? Is it usual/possible to argue a construction contract may no longer bring claims successfully that a contract which has become against each other? How long is that period and from uneconomic is grounds for a claim for force majeure? what date does time start to run? Both a contractor and an employer are entitled to terminate a According to the Act on Limitation of Debts by Lapse of Time contract on force majeure grounds. Force majeure is at hand if it (728/2003), the general limitation period for debts by lapse of is necessary to interrupt the building work for a long and indefinite time is three years. However, for compensatory damages and period on account of exceptional circumstances referred to in the indemnification, a limitation period of 10 years from the breach State of Defence Act (1083/1991) or the Readiness Act (1552/2011) of contract or other grounds for compensation is applied. The or similar force majeure. limitation may be avoided by making an appropriate claim, based upon which the limitation is cut off. Force majeure grounds entitle the other party to compensation for The parties may also agree on shorter limitation periods for the work which corresponds to the part of construction that has commencing proceedings under a contract. already been performed. It is not possible for a contractual party to claim force majeure in a situation where a contract has become uneconomical. 3.7 Who normally bears the risk of unforeseen ground conditions?

Under the YSE 1998 conditions, the risk for unforeseen ground

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3.13 Are parties which are not parties to the contract 3.18 Where the construction contract involves an element entitled to claim the benefit of any contract right of design and/or the contract is one for design only, which is made for their benefit? E.g. is the second or are the designer’s obligations absolute or are there subsequent owner of a building able to claim against limits on the extent of his liability? In particular, does the original contracts in relation to defects in the the designer have to give an absolute guarantee in building? respect of his work?

According to the Code of Real Estate (540/1995), if the buyer has Typically, in design-only contracts, the designer’s liability for defects acquired real estate to serve as a residence or leisure residence for is limited to the total amount of compensation received under the himself or his family, the buyer, instead of the seller, has the right contract (KSE 2013 conditions). Otherwise, in regular construction Finland to make claims based on defects in quality against a merchant who contracts, there are no set limits for the parties’ liabilities. develops or sells real estate professionally and who has conveyed the real estate to the seller or a previous titleholder for the purpose referred to above; or a building element dealer, developer or other 4 Dispute Resolution merchant who is responsible for defects to the seller or a previous titleholder by virtue of an agreement or the Consumer Protection 4.1 How are disputes generally resolved? Act (38/1978). According to the Housing Transactions Act (843/1994), a housing Arbitration is commonly preferred over litigation in connection with corporation shall have the right to make an appeal regarding the international or larger construction contracts. According to the YSE contents of a contract on construction or repair, even if it is not 1998 conditions, unless otherwise contractually agreed, disputes party to said contract. Additionally, if any equipment belonging between parties are resolved in district courts. to an apartment is defective, the buyer of the apartment has, under the Consumer Protection Act (38/1978), the right to make claims 4.2 Do you have adjudication processes in your against an economic operator who has surrendered the equipment jurisdiction? If so, please describe the general for resale or housing production at an earlier level in the sales chain. procedures.

3.14 Can one party (P1) to a construction contract which There are no binding official adjudications processes in Finland. owes money to the other (P2) set off against the sums However, RIL Conciliation, which operates alongside RIL – the due to P2 the sums P2 owes to P1? Are there any Finnish Association of Civil Engineers, is an organisation focused limits on the rights of set-off? on solving disputes in construction projects. RIL Conciliation and the Consumer Disputes Board, a neutral and independent expert Set-off can be either a voluntary or an obligatory legal act. P1 can conciliation body for all consumer issues, provides recommendations unilaterally exercise its right for obligatory set-off if the claims and statements which the parties may choose to abide by or disregard. are (i) mutual, i.e. P1 and P2 have claims against each other, (ii) commensurable, and (iii) due and recoverable. 4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how 3.15 Do parties to construction contracts owe a duty of arbitration works in your jurisdiction. care to each other either in contract or under any other legal doctrine? Arbitration clauses are commonly used in construction contracts as arbitration processes are considered quicker and more confidential The mutual duty of care of contracting parties is confirmed in the compared to civil processes. Typically, the Arbitration Rules of the YSE 1998 and KSE 2013 conditions, as well as Finnish case-law. Finland Chamber of Commerce are applied to arbitration procedures. The parties may also agree to apply the arbitration process rules set out in the Arbitration Act (967/1992). 3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that ambiguity is interpreted? 4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise Parties usually refer to the YSE 1998 conditions, which provide that and enforce international arbitration awards? Please advise of any obstacles to enforcement. disagreements or ambiguous contract terms shall be settled through mutual negotiations between the parties. Finland has ratified the 1958 Convention on the Recognition According to the general principles of contract law, a clause shall be and Enforcement of Foreign Arbitral Awards (the New York interpreted to the detriment of its author. Convention), which establishes the grounds and sets the limits for a local court to reject a foreign or international arbitral award. 3.17 Are there any terms in a construction contract which are unenforceable? 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign No, other than on the grounds set out in the Contracts Act (228/1929) court be upheld and enforced in your jurisdiction? on which contracts in general may be unenforceable. According to the Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, a judgment given in an EU country is to be recognised without special proceedings, unless the recognition is contested.

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requirements for leave, be appealed to an Appeal Court. An Appeal 4.6 Where a contract provides for court proceedings in Court decision can be further appealed to the Supreme Court, but your jurisdiction, please outline the process adopted, only if the Supreme Court grants leave for such appeal. Leaves for any rights of appeal and a general assessment of an appeal to the Supreme Court are only granted in special cases. how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a There are no set time limits for court proceedings and their duration decision by the final court of appeal. depends on the nature and scope of each case. On average, legal processes could be said to take approximately two years per court The first instances for court proceedings in Finland are the District instance. Courts. The judgment of a District Court can, with certain Finland

Aimo Halonen Ieva Kovarskyte Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law Eteläesplanadi 12 Eteläesplanadi 12 FI-00130 Helsinki FI-00130 Helsinki Finland Finland

Tel: +358 6844 410 Tel: +358 6844 410 Email: [email protected] Email: [email protected] URL: www.makitalo.fi URL: www.makitalo.fi

Managing Partner Aimo Halonen focuses on construction and energy Associate lawyer Ieva Kovarskyte has worked on numerous large sector projects, with a particular emphasis on advising property scale construction and energy field projects. Ms. Kovarskyte has holders and project owners on complex contractual issues, legal advised clients and project owners through various stages of project project management and related matters in various real estate and development – from land lease and permitting matters, to contracting construction projects. Mr. Halonen is a leading lawyer in the field and corporate transactions. Ms. Kovarskyte has also worked within a with over 10 years of experience with the firm. He has advised, inter client organisation through a secondment arrangement and thus has alia, the Finnish State’s real estate company, ministries, some of the very hands-on experience of project execution related legal matters. 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.

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 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.

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Germany Anne Schoenbrunn

Stassen LLP Rechtsanwälte und Notare Florian Diestelmann

This includes the design-build contract, in which the contractor 1 Making Construction Projects renders the construction services (or they are performed by third parties) and provides all planning services for the construction 1.1 What are the standard types of construction contract project. The client’s benefit is that all planning and implementation in your jurisdiction? Do you have contracts which services are rendered by a single source and contract partner. The place both design and construction obligations upon conclusion of design/build contracts is increasing, particularly in contractors? If so, please describe the types of construction projects in the multi-million euro range. Finally, there contract. Please also describe any forms of design- is the form of the developer contract. The contractor undertakes to only contract common in your jurisdiction. Do plan, direct and convey a house or apartment to the purchaser. you have any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series 1.2 Are there either any legally essential qualities needed of package contractors? (NB For ease of reference to create a legally binding contract (e.g. in common throughout the chapter, we refer to “construction law jurisdictions, offer, acceptance, consideration contracts” as an abbreviation for construction and and intention to create legal relations), or any engineering contracts.) specific requirements which need to be included in a construction contract (e.g. provision for adjudication Construction contracts differentiate depending on the service being or any need for the contract to be evidenced in rendered. writing)? If a construction project involves planning and supervision services from an architect or engineer, the suitable contract would be a Two concurring declarations of intent must be present for a planning contract. If an architect or engineer provides all services valid contract: offer; and acceptance. The parties must agree during all stages of construction, the contract would be for complete upon the . This includes the service owed and architectural services. If the architect is not only planning and compensation. If the parties do not agree on the compensation, this supervising the erection of a building, but also rendering expert does not necessarily prevent the conclusion of a contract; by law, it planning such as technical building equipment, outdoor installations is assumed that the normal compensation is owed. or thermal building physics, it is a general planning contract, which There are no additional legal requirements for contracting, planning is common in major construction projects. When specialised or construction services. In particular, the contracting parties are services are provided, the planner frequently commissions sub- not required to reach an agreement about the settlement of disputes consultants. If the subject of the contract is construction services or agree upon a specific procedure for dispute settlement to the by a building contractor, it is a construction contract in the narrower contract. sense. In the various types of contracts, both the nature of service to be rendered and the manner of compensation are determined. 1.3 In your jurisdiction please identify whether there is The classification according to the type of service provision will a concept of what is known as a “letter of intent”, in determine whether the construction company renders all building which an employer can give either a legally binding or services, including by awarding part of the work to subcontractors non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet (i.e. acts as a general contractor), or does not render its own building certain costs to be incurred by the contractor whether services but rather awards all work to subcontractors (i.e. acts as or not a full contract is ever concluded. a developer). Construction contracts classified according to the manner of compensation are differentiated as follows: in a unit price The legal intent of the declaration, and thus the obligation of the contract, the compensation is calculated on the basis of services declaration, must always be determined through interpretation in the actually rendered (and not tendered) at the agreed unit prices. individual case. Consideration should also be given to the letter However, a lump-sum contract does not depend on the services of intent or a framework contract, in which the parties regulate actually rendered; instead, the parties agree to a fixed price for the fundamental aspects of the collaboration. However, concrete commissioned services at conclusion. There is also an hourly wage rules for the specific case are determined later. Phased contracts contract, which is paid by the hour. are normal in planning contracts between architects and engineers. Furthermore, there are hybrid forms of contract, in which the In this type of commission, the parties conclude several individual contractor must provide both planning and construction services. contracts for specific phases in the realisation of the construction

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project. Following commissioning of one or more phases, the client reserves the right to award further phases and the contractor is 1.6 Is the employer legally permitted to retain part of obligated to render the particular services when requested. 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 1.4 Are there any statutory or standard types of insurance defects liability is complete? which it would be commonplace or compulsory to have in place when carrying out construction work? The compensation is only due upon acceptance of the work, For example, is there employer’s liability insurance i.e. when the work is substantially complete. The contractor is for contractors in respect of death and personal obliged to carry out work in advance. As he carries the full risk, injury, or is there a requirement for the contractor to have contractors’ all-risk insurance? the contractor can demand progress payments corresponding to the works completed thus far. Corresponding contractual provisions are Germany frequently agreed. The client can deny the progress payments if the Architects and engineers are obliged to carry liability insurance for services are not rendered in accordance with the contract. Even damages due to faulty planning or construction supervision. after acceptance, the client has a right of retention with respect to It is common that the building contractor carries business liability the compensation if the performance is defective. The client may insurance to cover damages due to the building contractor’s defective retain compensation in the amount of twice the anticipated costs of services. The owner frequently obtains owner’s liability insurance, remedying the defects (so-called pressure surcharge). which covers personal and property damage due to hazards on Finally, a security retention is frequently agreed in practice, the building site. There is also building performance and all-risk whereby the client can retain a portion of the compensation for a insurance that is carried by builders and which protects building certain period as security for possible (warranty) claims against the contractors and owners from damages that are unpredictable; for contractor. example, to force majeure. Finally, there is multi-risk insurance, particularly in major construction projects. This includes all participants in the project 1.7 Is it permissible/common for there to be performance and contains both liability and building performance insurance. bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to The owner allocates the costs of the insurance proportionally to the guarantee the performance of subsidiary companies? individual contractors. The benefit of multi-risk insurance is that it Are there any restrictions on the nature of such bonds is not necessary to determine which of the many participants in the and guarantees? construction project caused the damage if it comes to that, because it settles all damages. Bonds are very frequently provided in construction projects. Contract performance guarantee and warranty bonds are the most 1.5 Are there any statutory requirements in relation common. The contract performance guarantee bond ensures that the to construction contracts in terms of: (a) general contractors complete and provide services in a timely manner while requirements; (b) labour (i.e. the legal status of those the warranty bond covers all of the client’s claims arising during working on site as employees or as self-employed the warranty period. There are no special bonds for subcontractors. sub-contractors); (c) tax (payment of income tax of The bonds are posted by banks and must be contractually agreed. employees); or (d) health and safety? There is differentiated case law about the permissible amount of the bond and its application. There are no legal requirements or preconditions that must be Furthermore, there is also the building worker’s security interest fulfilled besides the declarations of intent (see question 1.2). In (lien), which allows the contractor to secure his compensation terms of labour law requirements, an architect’s, engineer’s or claim by entering a security interest in the land register. In addition, building contractor’s staff can either be employees or self-employed. the contractor can demand that the client post a building workers Currently, an employer is obligated to pay at least a minimum wage security, which is frequently a bond, to secure his demands for of EUR 8.84 per hour for each of their staff. Additionally, he is compensation. obligated to comply with any existing wage agreements which apply to specific industries with regard to pay and working conditions. The builder is legally obligated to appoint a health and safety 1.8 Is it possible and/or usual for contractors to have coordinator for the construction site if employees of more than one retention of title rights in relation to goods and supplies used in the works? Is it permissible for company (trades) are working on the construction site. The health contractors to claim that until they have been paid and safety coordinator checks compliance with legal provisions for they retain title and the right to remove goods and health and occupational safety on the construction site. Regarding materials supplied from the site? taxes, there is a statutory value-added tax of 19% that applies in the case of exchange of goods and services. In certain arrangements, it In construction contracts, provisions concerning retention of title are is frequently agreed that the client will forward the statutory value- rather unusual. added tax directly to the authorities and the contractor will receive If the parties have agreed upon the application of the German the net compensation. Standard Building Contract Terms (VOB/B), the client has the right, It is also frequently agreed that the contractor will present a certificate following termination of the construction contract, to take advantage of exemption. This certificate relieves the recipient of construction of the equipment, scaffolding, other installations, delivered materials services from the obligation to retain building withholding tax. In and building components present on the site for the continuation of these cases, it is usual that the client retains 15% of the gross amount the work in exchange for reasonable compensation. of the contractor’s compensation claims and pays this amount to the tax authorities with the effect of discharging the debt to the contractor.

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owner cannot unilaterally modify the work owed by the contractor. 2 Supervising Construction Contracts For a change in the contract, concurring declarations of intent by both contractual partners are basic requirements. 2.1 Is it common for construction contracts to be However, the parties also have the option of agreeing to the inclusion supervised on behalf of the employer by a third of the German Standard Building Contract Terms (VOB/B). This party? Does any such third party (e.g. an engineer involves pre-formulated clauses within the meaning of general or architect) have a duty to act impartially between terms and conditions that have been developed by the German contractor and employer? Is that duty absolute or is it only one which exists in certain situations? If so, Award and Contract Committee of the Federal Ministry of Building. please identify when the architect/engineer must act The VOB/B regulates the right of the client to make changes in the impartially. building’s design. Furthermore, upon direction, the contractor has Germany to render services that were not agreed, but are necessary for the It is common that the owner will contract an architect who will plan execution of the agreed service. Anything else only applies if the and supervise the construction project and all building services. contractor’s operation is not set up for such services. In any case, The architect acts exclusively in the interests of the owner. The the direction is followed by a separate claim for altered or additional architect is the “owner’s advocate” (“Sachwalter”) and owes him services. complete commitment for consultation, examination, information, Agreement on the VOB/B represents standard practice. observation and comprehensive representation of his interests. In major construction projects especially, the owner appoints a project 3.2 Can work be omitted from the contract? If it is manager who takes over the professional construction management omitted, can the employer do it himself or get a third and coordinates the entire construction project with regard to party to do it? schedules, costs and all participants. The project manager also represents the interests of the owner. Both the BGB and the VOB/B give the client the right of terminating the contract without stating reasons. A partial termination of the 2.2 Are employers entitled to provide in the contract that contract is – under additional circumstances – also possible. In they will pay the contractor when they, the employer, the case of termination, the client can either execute the eliminated have themselves been paid; i.e. can the employer services himself or allow another company to render the services. include in the contract what is known as a “pay when In a VOB/B contract, the client is also entitled to unilaterally alter paid” clause? the scope of owed services through appropriate directives. This includes the directive that certain additional different services shall Occasionally, a “pay when paid” clause is found in subcontractor be carried out. contracts. Such an agreement is not objectionable in an individual contract. However, such a provision in the employer’s preformulated contracts is a breach of the law of general terms and conditions and 3.3 Are there terms which will/can be implied into a is therefore invalid. construction contract?

Unless the parties agree otherwise, the law always applies. Because 2.3 Are the parties permitted to agree in advance a fixed legal provisions apply anyway, their express adoption is not sum (known as liquidated damages) which will be necessary, if the contractual parties have not reached a separate paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late agreement. completion? If such arrangements are permitted, are The provisions of the VOB/B are normally included in construction there any restrictions on what can be agreed? E.g. contracts. 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 3.4 If the contractor is delayed by two events, one the financial loss suffered? fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an Agreements of contractual penalty, especially in the event of failing extension of time; or (b) the costs occasioned by that concurrent delay? the completion date, are widespread in practice. Mostly, the parties agree on a certain percentage of the contract total as a contractual penalty. According to case law, clauses concerning contractual According to the VOB/B, the contractor has a claim for a schedule penalties in owners’ pre-formulated construction contracts are, e.g., extension if the hindrance originates in the client’s area of risk, invalid if an upper limit is absent or excessive or invokes the entire was caused by a strike of the client’s employees or due to other contractual penalty for only minor delays by the contractor. circumstances that the contractor could not avoid. Weather conditions during the construction period that must normally be taken into account do not qualify as hindrance. Whether the contractor is 3 Common Issues on Construction (also) to blame for the delay is irrelevant to the contractor’s claim Contracts for a schedule extension; the claim exists independently. However, the contractor only has a claim for compensation for the costs incurred if he is not responsible for the delay. Consequently, 3.1 Is the employer entitled to vary the works to be done this claim by the contractor no longer applies if both parties caused under the contract? Is there any limit on that right? the delay, because even if we assume the absence of the disruption from the client’s area, the disruption from the contractor’s area Fundamentally, the provisions of the German Civil Code (BGB) would remain, therefore a claim for compensation for costs incurred apply upon a construction contract. According to the BGB, the no longer applies.

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3.5 If the contractor has allowed in his programme a 3.9 Who usually owns the intellectual property in relation period of time (known as the float) to allow for his own to the design and operation of the property? delays but the employer uses up that period by, for example, a variation, is the contractor subsequently In the design of a building, the architect owns the copyright as the entitled to an extension of time if he is then delayed creator of the work. The copyright is not transferable. However, after this float is used up? assignment to the owner of a right to use the architect’s copyright is customary. This can be expressed or implied. According to case There is great controversy about how to deal with the sometimes law, an architect implicitly assigns copyright powers over his plans very different constellations in which the contractor builds slack to the owner upon conclusion of the architectural contract, insofar as into the construction schedule for the execution of his work and

they are required for erection of the building (the so-called principle Germany a disruption arises from the client’s side. Fundamentally, the of assignment limited to purpose). contractor is obligated to enable the progression of the construction project. Based on a current court decision, if the contractor planned However, the architect is only entitled to claims due to infringement a float, it cannot serve as a basis for compensation as long as the of his copyright if it involves a work subject to copyright protection. contractor needs it to catch up with his own performance delays. The hurdles developed by case law are very high and rarely However, the German Federal Court of Justice has still not answered overcome. The design must: reflect a personal intellectual creation; this question definitively. display an original creative individuality; and rise above the mass of everyday construction with a certain level of design.

3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims 3.10 Is the contractor ever entitled to suspend works? against each other? How long is that period and from what date does time start to run? Like every debtor, the contractor has a right of retention or a right to refuse performance with respect to the services he owes. He may After the end of the limitation period, a claim is no longer refuse the services until the client renders the services he owes. In enforceable. The length of the limitation period is measured particular, the contractor is entitled to suspend works if the client according to the subject of legal action and whether the parties fails to post a bond to secure the contractor’s compensation claims, have agreed to the inclusion of the VOB/B. According to the despite a request and the setting of a deadline (building worker’s BGB, the limitation period for the contractor’s claim for payment security, see question 1.7). Under further conditions, the contractor is three years. It commences at the end of the year in which the can also discontinue the services in the event of delay of payment. compensation demand becomes due. With the inclusion of the The cessation of work by the contractor is risky insofar as the client VOB/B, the limitation period also amounts to three years and starts has the right to extraordinary termination of the contract if the at the end of the year that the contractor presented the final bill. contractor is not entitled to refuse performance or retention. For clients’ claims due to deficient services, the limitation period always begins with the acceptance of the building work. According to the BGB, the limitation period amounts to five years, whereas the 3.11 On what grounds can a contract be terminated? Are there any grounds which automatically or usually VOB/B provides for a limitation period of one, two or four years, entitle the innocent party to terminate the contract? depending on the service. Do those termination rights need to be set out expressly? 3.7 Who normally bears the risk of unforeseen ground conditions? A contract can be terminated in two ways: there is a unilateral termination by one contractual partner or a contract cancellation Unless otherwise agreed, the client bears the risk of unforeseeable mutually agreed by both contractual partners. An automatic complications arising from the subsoil (subsoil risk), since he must termination of the contract under certain conditions does not exist. provide the site. A distinction is made in the termination between an ordinary termination and an extraordinary termination. An ordinary termination is not subject to any conditions and may be declared 3.8 Who usually bears the risk of a change in law affecting the completion of the works? at any time. Only the client is entitled to an ordinary termination. In addition, there is the extraordinary termination, which can be declared by both parties. Existence of good cause is always a Fundamentally, both parties carry the risk of a change of law during prerequisite. execution of a contract. However, the effect of a change in the law is limited to the extent that the parties will often have already finally A good cause for termination by the client may exist if the contractor settled any significant issues. does not eliminate reported defects during construction, despite a request to eliminate defects and the threat of withdrawal of the As far as the owed scope of services is concerned, the successful commission. Among other reasons, the contractor may be entitled performance of the work, i.e. compliance with the applicable legal to termination if the client does not meet his obligations to cooperate situation, must be present at the time of acceptance. By way of and the contractor is therefore unable to render his service, or if the example: the architect owes a permanently approvable design. If client delays payment. the public law regulations for the permissibility of construction projects change, the architect is required to arrange his design so that The termination must be expressly declared. According to case the construction project permanently corresponds to the statutory law, the termination cause is not to be named. The objective requirements. To that extent, he bears the risk. existence of good cause for the termination at the time of the termination declaration is decisive. So, in practice, it is usual that

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the termination grounds are set out in the termination letter. This framework of a construction contract, each contractual partner can applies particularly to termination by the client and he should offset his claims against the other contractual partner’s claims. always state which termination right he is making use of, due to The offset must be expressly declared and results in both claims the different compensation consequences in an ordinary and an being extinguished, insofar as they cover each other. The excess extraordinary termination. If VOB/B was included in the contract, part remains in effect. There are statutory bans regarding when the termination must be in writing. The termination can also be an offset is not permissible. Furthermore, there are contractual declared verbally in a BGB contract. provisions whereby an offset by the contractor is not permissible in certain cases. According to case law, a clause in the contract 3.12 Is the concept of force majeure or frustration known between business people, whereby the contractor may only declare in your jurisdiction? What remedy does this give the offset with uncontested claims or claims that are legally Germany the injured party? Is it usual/possible to argue determined, cannot be challenged. Clauses of this kind are common successfully that a contract which has become in construction contracts. uneconomic is grounds for a claim for force majeure?

The legal institution of force majeure does exist. It involves an 3.15 Do parties to construction contracts owe a duty of care to each other either in contract or under any unavoidable event. other legal doctrine? If the contractor is hindered in execution of the building due to force majeure, the contractor has a claim against the client for extension In every contract under German law, there are duties to protect, of the schedule in accordance with VOB/B. This ensures that the whereby the rights, legal assets and interests of the other contractual contractor is not responsible for exceeding the original completion partner must be preserved. date and does not make himself liable for damages. The contractor In addition, the contractual partners in a VOB/B contract are obligated only has a claim for damages due to hindrance in the execution of the to cooperate. Obligations and duties related to involvement and building if the client is responsible for the impeding circumstances. mutual information arise from the cooperation relationship. The It follows that the contractor certainly has a claim for extension of cooperation duties should ensure that in cases in which the intended the schedule in the event of force majeure, but no claim for damages. contract implementation or the contract’s content must be adapted to Furthermore, the principle of pacta sunt servanda (contracts must changed circumstances, differences of opinion or conflicts that arise be fulfilled) applies in German law. The commitment to a concluded will be resolved amicably. contract also applies if it should have become uneconomical for one of the two contractual partners. The legal institution of frustration of contract forms one exception to this principle; it enables a 3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that dissolution of the contract if the foundations of the contract have ambiguity is interpreted? changed seriously. However, the prerequisites for a frustration of contract are very high and are seldom present in practice. In the event of ambiguities in a contract, these must be interpreted in accordance with the general methodology. The concurring, 3.13 Are parties which are not parties to the contract entitled hypothetical or complementary intention of the parties to enter into to claim the benefit of any contract right which is made a contract, which is determined by means of various interpretation for their benefit? E.g. is the second or subsequent methods, is decisive. There is the grammatical interpretation, owner of a building able to claim against the original the historical interpretation, the systematic interpretation and the contracts in relation to defects in the building? teleological interpretation. Fundamentally, contractual claims can only be asserted within the There are no special interpretation rules for a construction contract. respective contractual relationships. Exceptions to this principle A construction contract frequently consists of several contract are the assignment of a claim by a contractual partner to a third components. There is usually a provision concerning which party or the conclusion of the contract in favour of a third party, in contract components take precedence in the event of contradictions which their own claim to performance is granted to the third party. and which order of priority applies. If the validity of VOB/B was However, a contract in favour of a third party is very unusual in agreed, it contains an express provision whereby, in the event of construction law practice. contradictions the description of services, the special contract conditions, any supplementary (technical) contract conditions (for It follows that, for example, in the event of defects in a building, building services), and finally the VOB/B itself apply successively. only the owner, who as a rule is also the owner of the site, is entitled According to case law, all of the contract’s appendices must be taken to assert defect warranty claims against the building company. If into consideration in the interpretation of individual clauses. the owner sells the site and building to a third party, this party is fundamentally unable, as purchaser, to assert any defect warranty claims against the building company, because no contractual 3.17 Are there any terms in a construction contract which relationship exists with the construction firms. However, the buyer are unenforceable? has the opportunity to assert warranty claims due to defects in the object of purchase against the seller who can, in turn, seek recourse There are clauses in construction contracts that violate the Law from the construction firms due to defective performance. of General Terms of Business and are therefore invalid. It is thus important that the description of the main obligations in a construction contract, the service to be rendered and the 3.14 Can one party (P1) to a construction contract which compensation are deprived of the content review in accordance with owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any the Law of General Terms of Business. limits on the rights of set-off? The effectiveness of contract clauses is very often the subject of judicial decisions. The following clauses are mentioned as If similar claims of two parties oppose each other within the examples: a contractual clause whereby the general planner must

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only pay the sub-planner following payment by the owner is invalid. project and determines all facts and circumstances that he requires A clause whereby an offset against the fee claim is only permissible for his decision. The adjudicator must arrive at a (provisional) with an uncontested or legally determined claim is invalid, if the binding decision within two weeks. If neither of the parties objects, contract was made available by the contractor (architect). On the the adjudication decision becomes binding. Otherwise, each party other hand, a clause in the VOB/B, whereby a defect complaint has the opportunity to call upon a state court. immediately before expiration of the limitation period leads to an extension of the limitation period by a further two years, is valid. 4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how 3.18 Where the construction contract involves an element arbitration works in your jurisdiction. of design and/or the contract is one for design only, are the designer’s obligations absolute or are there So far, the agreement on clauses concerning implementation Germany limits on the extent of his liability? In particular, does of arbitration or mediation proceedings has not made progress, the designer have to give an absolute guarantee in especially in smaller and medium-sized construction projects. If the respect of his work? owner is a public authority, disputes are generally dealt with in the framework of judicial proceedings. However, the VOB/B regulates The architect/engineer is only liable for a breach of duties that he a voluntary, extrajudicial procedure for dispute resolution that can has contractually agreed to. The extent of liability depends on be implemented in the event of differences of opinion between the scope of services owed. There is no unlimited liability. In a authorities and the contractor. breach of the contractually accepted duties, the architect/engineer is Opportunities for extrajudicial dispute resolution are used with especially liable for faulty damages. The contractual agreement to ever-greater frequency and, in addition to mediation (see question a guarantee by the architect/engineer seldom takes place in practice. 4.1) and adjudication proceedings (see question 4.2), this includes the arbitration proceeding and conciliation. 4 Dispute Resolution The arbitration proceeding is regulated in the code of civil procedure. An arbitration agreement between the parties that precludes a lawsuit in the state courts is a prerequisite for implementation of 4.1 How are disputes generally resolved? an arbitration proceeding. The arbitration proceeding represents a formalised procedure with one or more arbitration judges, oral In the event of a difference of opinion, an attempt at an out-of- hearings and pleadings in the form of a complaint and a response to court conflict resolution takes place, in which both parties present the complaint. The arbitration award takes the place of the judgment their view of the issues. In practice, it is normal for lawyers to also by a state court. It is binding upon the parties. attempt to first resolve the issue out-of-court. This takes place by Conciliation is also a formalised procedure that is conducted by a correspondence and/or direct negotiations. conciliator. Conciliation can also result in a conciliator award, but it Should the partners also be unable to achieve an amicable settlement requires acceptance by both parties for its validity. here, there are several possibilities for a resolution, including: amicable conflict resolution; or the undertaking of legal action. The 4.4 Where the contract provides for international following procedures exist for an amicable resolution: arbitration, do your jurisdiction’s courts recognise ■ mediation; and enforce international arbitration awards? Please advise of any obstacles to enforcement. ■ arbitration; and ■ arbitration tribunal. Foreign arbitration awards require recognition to be valid in There is no formalised procedure for mediation. The mediator Germany. Enforcement of the arbitration award requires namely does not make any decisions and does not formulate any proposals the so-called enforcement order. Germany is a Contracting State for or recommendations for a possible conflict resolution. He has no the New York Convention on the Recognition and Enforcement of influence on the outcome. The parties are responsible for all of this. Foreign Arbitration Awards. In there is also the possibility of mediation conducted by a The implementation of international arbitration proceedings or judge who does not decide the legal dispute. the enforcement of international arbitration awards tends to be the If an amicable conflict resolution is not attempted, one of the parties exception in Germany. introduces a proceeding that will be decided by the judges.

4.5 Where the contract provides for court proceedings 4.2 Do you have adjudication processes in your in a foreign country, will the judgment of that foreign jurisdiction? If so, please describe the general court be upheld and enforced in your jurisdiction? procedures. The principle of automatic recognition of a foreign court decision The adjudication procedure was introduced in Germany specifically applies in German law. However, enforcement arising from a for construction law disputes. It serves to avoid long-standing, foreign judgment only takes place if its admissibility is pronounced extensive lawsuits and should enable a rapid resolution of the through an enforcement judgment in Germany. There is no uniform conflict, especially during the ongoing construction. In contrast to procedure for the recognition and enforcement of foreign judgments mediation, the adjudicator is a professional expert in construction in Germany. The type of enforcement procedure depends on the law. content of the decision. The adjudication procedure is initiated at the request of one party. If the decision that is to be enforced in Germany was issued in The applicant must set out the basis of the asserted claim in the another Member State of the European Union, there is a simplified application. The respondent then has an opportunity to answer. procedure for recognition and enforcement. The legal basis is The adjudicator obtains immediate knowledge of the construction a European Union directive concerning the legal jurisdiction and enforcement of decisions in civil and commercial matters.

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the court decision must be based, because the legal assessment 4.6 Where a contract provides for court proceedings in depends on them. Taking of evidence then becomes necessary. your jurisdiction, please outline the process adopted, Since technical issues are frequently involved in construction law, any rights of appeal and a general assessment of an expert report is normally obtained. how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a Following a judgment from the regional court, the losing party has decision by the final court of appeal. the option to appeal against it. The higher regional court negotiates the appeal. The process of an appeal procedure corresponds to the In order to initiate litigation, it is necessary to bring an action. In process of a procedure before the regional court. When the higher the statement of a claim, the plaintiff explains what he seeks from regional court has also handed down a judgment, the final option the defendant, the basis upon which he asserts his claim and the exists of requesting a review by the Federal Court of Justice as Germany facts upon which his request is based. Due to the high amounts the highest German court in civil matters. Due to the very high in dispute in construction law (payment requests), the action is prerequisites for acceptance of a review, only very few legal disputes frequently elevated to the regional court. Following the statement reach the Federal Court of Justice. of claim, the defendant has the opportunity to answer and present When it is necessary to take evidence, which is common, the in a written pleading why, in his view, the asserted claim does not proceedings generally last between two and three years. The appeal exist (statement of defence). Following the exchange of several and review procedures each last approximately one to two years; written pleadings by the parties, the court arranges a date for the therefore, a final ruling in a construction law dispute can frequently oral hearing. The parties frequently dispute the facts upon which only be expected after a legal dispute of three to five years.

Anne Schoenbrunn Florian Diestelmann Stassen LLP Rechtsanwaelte und Notare Stassen LLP Rechtsanwaelte und Notare Kurfuerstendamm 188 Kurfuerstendamm 188 10707 Berlin 10707 Berlin Germany Germany

Tel: +49 30 887 16 62 45 Tel: +49 30 887 16 62 51 Email: [email protected] Fax: +49 30 887 16 62 55 URL: www.stassenllp.com Email: [email protected] URL: www.stassenllp.com

1978: Born in Bonn-Beuel. 1967: Born in Bremen. 1998–2006: Studied law in Trier, Munich and Berlin; Legal Trainee in 1989–1998: Studied law and near history in Goettingen and Hamburg, Cologne. legal trainee in Berlin. 2007: Admitted to the Bar. 1998: Admitted to the Bar. 2007–May 2012: Practised at Hecker Werner Himmelreich. 1998–2007: Practised at Hecker Werner Himmelreich. Since 2010: Certified specialist for construction and architectural law. 2008–2012: Partner at Hecker Werner Himmelreich. Since June 2012: Has practised at Stassen LLP. Since 2006: Certified specialist for construction and architectural law. Since 2015: Adjunct lecturer at Beuth-Hochschule. Since 2012: Partner at Stassen LLP. Anne is specialised in private construction law with a special emphasis Florian advises employers and contractors during all stages of the on construction contract law. Anne is an expert in contract drafting and construction phase of a project. Clients benefit from his extensive legal counselling during all stages of the construction phase, as well knowledge and experience in the fields of construction law, construction as for litigation. Anne has broad experience with regard to providing contract law (contract drafting) and litigation. Florian has several years legal counsel on several large scale construction projects, inter alia, of experience in providing legal assistance in conjunction with large for public authorities. Since 2015, Anne has also been teaching at a scale infrastructure projects, the construction of commercial buildings technical college (Beuth-Hochschule). (with regard to private clients, as well as to public authorities) and major research institutes. Florian’s knowledge and expertise includes the areas of equipment construction and building services.

We advise in the fields of construction and architectural law and real estate. Our clients benefit from many years of experience andawide knowledge about all areas related to real estate. Our lawyers are highly specialised in providing legal assistance in conjunction with construction and architectural law.

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Greece Elisabeth Eleftheriades

Kyriakides Georgopoulos Law Firm Kimon Tsakiris

(i.e. agreement) including the determination of the consideration. If 1 Making Construction Projects the performance of the works is agreed but there is no consideration (of any type), then the provisions of donation (GCC 496) or mandate 1.1 What are the standard types of construction contract (GCC 713) shall apply. The offer shall describe in as much detail as in your jurisdiction? Do you have contracts which possible the essentials of the contract that is about to be concluded, place both design and construction obligations upon and it must be clear that the person making it intends to be bound contractors? If so, please describe the types of by the contract in case of acceptance of the offer by the other party. contract. Please also describe any forms of design- only contract common in your jurisdiction. Do As an exception to the above rule, in the case of provision of you have any arrangement known as management construction services by profession (i.e. contractor) or by virtue contracting, with one main managing contractor of permission issued by a public authority or by making oneself and with the construction work done by a series publicly available for the provision of such services, the contract of package contractors? (NB For ease of reference is considered concluded as long as the contractor does not reject throughout the chapter, we refer to “construction the offer made to him by the employer (GCC 650 and 682 para. 2). contracts” as an abbreviation for construction and engineering contracts.) Although it is not necessary for construction contracts to be evidenced in writing, it might be prudent to do so. More specifically, No standard types of construction and design contract exist in the apart from certain cases in which the law provides for the contract to Greek legal system. be concluded in writing and for it to be submitted to the competent authorities, i.e. tax authorities, construction contracts do not have to According to articles 681 to 702 of the Greek Civil Code (“GCC”), be of a specific type (e.g. notarial deed). the provisions of which regulate Contracts for Work, a works contract is a contract where the contractor undertakes to execute a specific work assigned by the employer, whereas the latter undertakes to pay 1.3 In your jurisdiction please identify whether there is the agreed remuneration. These provisions are general and may a concept of what is known as a “letter of intent”, in cover all types of contracts, i.e. construction, design, management, which an employer can give either a legally binding or non-legally binding indication of willingness either to etc. To a large extent, the GCC provisions are non-mandatory and, enter into a contract later or to commit itself to meet therefore, give the parties not only room for negotiation but also certain costs to be incurred by the contractor whether the ability to freely decide on the terms of their contract, yet within or not a full contract is ever concluded. the set, mandatory, limits. Thus, the parties may freely enter into any contract in which the contractor takes full responsibility for The concept of “letter of intent”, although not regulated per se by the performance of the design, construction and management of a the Greek legal system, is widely known to the Greek business specific property. environment. However, a document of such nature, containing Management contracting is a practice that is employed/utilised by simply the intention of the employer to enter into a future agreement employers in Greece. This concept is preferred when the employer with the contractor is in principle not legally binding on the parties. wishes to deal only with one contractor, who in turn uses several Similar, yet not identical, is the provision of the GCC (article 166) subcontractors to fulfil his contractual obligations towards the for preliminary contracts. With the preliminary contracts, the employer. parties undertake to conclude the (principal) contract in the future under the main terms and conditions established in the preliminary 1.2 Are there either any legally essential qualities needed contract. This preliminary contract should be as detailed as possible to create a legally binding contract (e.g. in common and determine all essential terms and conditions of the principal law jurisdictions, offer, acceptance, consideration contract; for instance, the time limit within which the final contract and intention to create legal relations), or any shall be concluded, remuneration, etc. Contrary to the concept of specific requirements which need to be included in a letters of intent, these preliminary contracts are legally binding for construction contract (e.g. provision for adjudication both parties and each party shall be entitled to indemnification in or any need for the contract to be evidenced in writing)? the case that the other party violates his duties as per the agreement.

Execution of any contract in the Greek legal system is, generally, conditioned on providing an offer, and on the acceptance of such offer

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As far as labour issues are concerned, in a typical construction 1.4 Are there any statutory or standard types of insurance agreement, the works are performed by building workers who have which it would be commonplace or compulsory to an employment relationship with the contractor. As a result, the have in place when carrying out construction work? contractor shall follow the major labour obligations provided in For example, is there employer’s liability insurance for contractors in respect of death and personal the labour laws, which indicatively are: the safety and health of the injury, or is there a requirement for the contractor to employees; working time and time off from work; and compensation. have contractors’ all-risk insurance? Building workers have a right, directly emanating from the GCC, to claim salary directly against the employer, up to the amount that the The only compulsory insurance in construction works is that of the latter owes to the contractor. However, as regards the insurance of employees/workers who should be insured in the competent Social the workers with the Social Security Authorities, it is the employer Greece Security Authority according to their participation in the works who is responsible. (building workers, supervisors, etc.). This insurance, however, does Depending on the status of the people working at a construction not cover any civil liability of the employer or the contractor for site, different provisions apply to the taxation that should be paid in any death or personal injury or any other loss occurring during the relation to their income, fees or wages (as the case may be). performance of construction works or as a result of a fault in them. Lastly, health and safety matters are governed by legal provisions Following the general principle of the GCC that the contractor bears incorporating EU legislation. the risk of accidental loss or damage of the works until they have been accepted by the employer, it is dependent on the business decision 1.6 Is the employer legally permitted to retain part of of the contractor whether he will take any precautionary measures. the purchase price for the works as a retention to be On the other hand, the employer bears the risk of accidental loss or released either in whole or in part when: (a) the works damage of the materials he has provided to the contractor. are substantially complete; and/or (b) any agreed It is common practice, mostly depending on the size of the project defects liability is complete? and exposure of the parties to project risks, for both parties to insure against their corresponding risks. Further, wherever the financing of According to article 694 of the GCC, the remuneration of the the project is by means of a loan (i.e. from a bank or other institution), contractor shall be paid upon delivery of the project, unless the parties are obliged to do so. Thus, the contractor (or the employer acceptance of parts of the works has been agreed, in which case as the case may be) often concludes an insurance contract against payment shall follow every partial delivery (and acceptance). all risks, i.e. for (i) civil liability for personal injury and damage to However, as these provisions are soft law, the parties may agree third parties as a result of an accident relating to building and erection differently. In practice, it is common for the parties to agree on works, as well as (ii) any potential loss or damage of building site a payment schedule according to the particulars of each project. equipment, objects located on the building site construction, machines Parties may also agree on the provision of different forms of and equipment, as well as the materials for the construction. guarantee in relation to the good performance of the works and the As the obligation to proceed with providing insurance is mostly liability period. That may be in the form of retention upon payments a contractual obligation, the party that has undertaken to insure or issuance of a bank guarantee in that respect, etc. against (all) potential risks must supply the other party with proof that the insurance contract has been concluded and that it is in force 1.7 Is it permissible/common for there to be performance according to the terms and conditions specified in a construction bonds (provided by banks and others) to guarantee contract (such as the amount of coverage, risks, exclusions, etc.). performance, and/or company guarantees provided to By way of proof, the former party might be obliged to provide a guarantee the performance of subsidiary companies? copy of the insurance contract together with proof of its payment. Are there any restrictions on the nature of such bonds and guarantees?

1.5 Are there any statutory requirements in relation In private construction contracts, especially when the size and the to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those value of the project is big, it is common for the performance of works working on site as employees or as self-employed and the liability for removal of defects to be guaranteed by corporate sub-contractors); (c) tax (payment of income tax of or other guarantees and performance bonds. These securities can employees); or (d) health and safety? be provided either by legal or fiscal entities or banks and it is most common for them to be unconditional, payable at first demand and Several Greek Laws (such as the GCC, Labour Laws, Urban irrevocable. There are no restrictions as regards the type and content of Planning Law, Sustainable Urban Development Law, New General such securities. Exceptionally, for company guarantees to be provided Building Construction Code, etc.) provide for both specific and for the guarantee of the performance of subsidiary companies, the prior general requirements with regard to a variety of issues that might approval of the shareholders of the parent company is required. affect a construction contract. These requirements shall be met prior to the commencement and shall remain in force during the execution 1.8 Is it possible and/or usual for contractors to have period of a construction contract. retention of title rights in relation to goods and The general requirements for the execution of construction works supplies used in the works? Is it permissible for which cover the issuance of two types of contract are as follows: contractors to claim that until they have been paid they retain title and the right to remove goods and a) Permits related to the execution of works, which mainly materials supplied from the site? include administrative procedures for the commencement of construction procedures. The permits differ according to the scope of works which have to be executed, the area of works, In the case of works involving the construction of movable items, etc. article 695 of the GCC provides that the contractor bears a legal b) Licences related to the capacity of the contractor or pledge on the items he constructed and which belong to the subcontractors to lawfully execute construction works. employer, until the latter pays the agreed fee.

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No such right exists in relation to the construction of immovable for non-completion, late completion or defective performance of the works/buildings. The materials used in the performance of works construction. on immovable property, once used, are considered to have been According to the GCC, restrictions apply in relation to the limitations incorporated into the works and therefore to have been transferred of the amount of this contractual liability. As this amount is, in to the property of the employer. The parties, however, have the right most cases, a pre-estimated sum, should it be disproportionate to the to agree otherwise in the construction contract. damage suffered, it shall be reduced to what shall be considered to be ‘fair’. On the contrary, if damage suffered is more extensive than 2 Supervising Construction Contracts the amount of the agreed contractual penalty, the suffering party is entitled to request the difference up to the total amount of damages.

Further, in case of imposition of a penalty that has been agreed for Greece 2.1 Is it common for construction contracts to be the non-performance of the project and the employer exercised that supervised on behalf of the employer by a third right, then he shall not be entitled to seek the completion of the party? Does any such third party (e.g. an engineer work. However, if the penalty had been agreed for late completion, or architect) have a duty to act impartially between contractor and employer? Is that duty absolute or is then the employer shall be entitled not only to the fixed sum but to it only one which exists in certain situations? If so, the execution of the work as well. please identify when the architect/engineer must act impartially. 3 Common Issues on Construction Depending on the size of the project, it is not uncommon for Contracts construction contracts to be supervised by third parties appointed by the employer. This is certainly the case in big construction contracts 3.1 Is the employer entitled to vary the works to be done where supervision is assigned to consultants with the technical under the contract? Is there any limit on that right? knowledge and experience to carry out such duties. Their role is to protect the rights of their employer, i.e. the owner of the project, and Upon signing the construction contract, the parties should have agreed is constrained by the provisions of their contract of appointment and on the works to be executed (usually by already having acquired the the existing legal framework. necessary building permits), possibly the construction programme, Only in certain circumstances, and more specifically in the case of the process for varying the works, etc. An agreement on the above public constructions, does the law provide for statutory supervision of is very important for the smooth development of the construction and the works, which in such circumstances shall be carried out impartially. in order for both parties to be aware of their rights and obligations. As, in the course of the works, the employer might decide (or might 2.2 Are employers entitled to provide in the contract that be forced) to vary the works to be performed under the contract in they will pay the contractor when they, the employer, terms of quantity, quality and/or type, it falls to the particulars of have themselves been paid; i.e. can the employer each construction contract and the general principles of the GCC include in the contract what is known as a “pay when to determine whether any change in the works, depending on its paid” clause? materiality, shall be acceptable. In the case that the variation is such that it leads to the alteration of the initial scope of the works, then By way of derogation from article 694 of the GCC, a provision in a that variation shall be considered material and that change shall construction contract according to which payment of the contractor not be allowed under the existing contract. In such a case, a new shall take place upon payment of the employer is allowed under contract or an amendment should be signed. the Greek jurisdiction. However, when examining the validity and enforceability of these types of back-to-back or “pay when paid” clauses, Greek courts may seek to investigate their accordance with 3.2 Can work be omitted from the contract? If it is the general principles of the law. More specifically, such clauses, omitted, can the employer do it himself or get a third party to do it? especially when they have not been negotiated between the parties but have been imposed by one party to the other, and in this case by the employer to the contractor, tend to be negated in favour of the The GCC does not contain hard law provisions under which the weaker party to the agreement, i.e. the contractor. parties are not allowed to omit the performance of works from the construction contract. Such an agreement does not affect the workers (of the contractor) who have the right to seek payment of their wages directly from Under a typical construction contract, it is expected that all works the employer should the contractor withhold any of their payments. mentioned therein will be conducted by the contractor. In case the contractor does not perform all the agreed works, the employer has compensation rights against him for non-performance. However, 2.3 Are the parties permitted to agree in advance a fixed if the employer decides to perform the omitted works himself, sum (known as liquidated damages) which will be or through a third party acting on its behalf, he could seek the paid by the contractor to the employer in the event of restitution of the cost incurred from the contractor after deducting particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are all that the employer has benefitted from the non-performance by there any restrictions on what can be agreed? E.g. the contractor. 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 3.3 Are there terms which will/can be implied into a financial loss suffered? construction contract?

The nature of liquidated damages could be that of contractual The majority of the provisions of the GCC chapter regulating penalty clauses and could be included in the contract as a penalty work contracts are soft law. This means that, when concluding a

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construction contract, the parties can either abide to or refrain from these provisions. Yet, if the parties have not agreed otherwise on a 3.7 Who normally bears the risk of unforeseen ground specific issue, and the application of the provisions of the GCC have conditions? not been expressly excluded, the provisions of the GCC shall apply. Unless otherwise provided in the construction contract, if the owner has supplied the material, then he shall also bear the risk of its 3.4 If the contractor is delayed by two events, one the fortuitous destruction, even if in possession of the contractor (article fault of the contractor and one the fault or risk of 698 para. 2 of the GCC). Since the plot for the construction of the his employer, is the contractor entitled to: (a) an project is provided by the employer, the employer shall bear the risk extension of time; or (b) the costs occasioned by that concurrent delay? of unforeseen ground conditions. Greece In support of the above, article 685 para. 2 of the GCC provides By virtue of the provisions of article 686 of the GCC, if the that if, during the performance of the works, unforeseen ground contractor – at his fault – decelerated the construction or delayed conditions are revealed that might affect due performance, then the the commencement of the works so that it became obvious that he contractor should advise the employer without delay, otherwise the would exceed the time agreed, then not only is the contractor unable employer shall be held liable for all consequences. to ask for an extension of time but the employer has the right to In light of the above, the risk initially lies with the employer; withdraw from the construction contract and seek compensation. however, if the contractor fails to duly inform the employer about Further, if during the performance of the works the materials the appearance of any unforeseen ground conditions, then the latter supplied or the site designated by the employer show defects, or if shall be held liable for the damages occurred. for some other reason a situation has arisen that jeopardises timely Please note that, despite the above, unforeseen ground conditions or proper performance, the contractor shall be bound to advise the might qualify as a change of circumstances under which the parties employer accordingly without delay; failing to do so will mean the agreed to the contract, as long as such event was unpredictable, extreme contractor shall be held liable for the prejudicial consequences. and has caused the execution of the contract to be burdensome. On the other hand, where any act or omission of the employer has caused delay in the performance of the works by the contractor, 3.8 Who usually bears the risk of a change in law then, even if not so provided in the contract, an extension of time affecting the completion of the works? and/or the costs occasioned by the concurrent delay shall be granted to the contractor by virtue of the general principle of good faith. The general principle is that each party shall bear the risk of a change in law affecting their scope of obligations under the construction contract. 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own However, according to article 388 of the GCC, an unpredictable and delays but the employer uses up that period by, for sudden change of law could be considered as an unforeseen change example, a variation, is the contractor subsequently of circumstances, thus leading to the alteration of the obligations entitled to an extension of time if he is then delayed owed by the parties. This alteration shall be decided in concreto after this float is used up? by the court (unless the parties come to a decision on their own), which would allocate the risks of a change in law equally to the Subject to the provisions of the construction contract, and in parties. To that end, the court could extend the time of completion particular to those of execution of variations, the contractor may of the contract, increase or decrease the fees owed by the employer be entitled to an extension of time for the performance of works or even, on special occasions, terminate the contract. beyond the initial scope of works. The general approach, however, is that for any additional works/ 3.9 Who usually owns the intellectual property in relation variations asked to be performed, a time period should be provided to the design and operation of the property? respectively. Thus, the contractor should be entitled to an extension of time. Intellectual property rights relating to the design and operation of the property are regulated by the Intellectual Property Law 2121/1993. 3.6 Is there a limit in time beyond which the parties to By virtue of this law, such rights may be categorised either as moral a construction contract may no longer bring claims rights or as material rights. The former are associated with the against each other? How long is that period and from personal aspect of the rights; the latter with the property segment of what date does time start to run? the rights, i.e. their financial exploitation. The moral part of intellectual property rights is not transferable and All claims under Greek law are subject to a limitation period. More is retained by their creator, who in the case of design and works will specifically: most likely be the architect. On the other hand, the material part a) Claims by the employer arising from defects in the works can of such rights is transferable and their ownership status does not be brought before the court within a 10-year period as from depend on who was their creator but on who was the assignor for the acceptance of the works in respect of immovable works/ their creation. Therefore, if the designer/architect carried out the buildings. For all other (movable) works, the time limit is six months. designs upon an order from the employer, then the latter shall hold the right for their exploitation. b) All other claims by the employer regarding compensation or other rights due to the non-completion of the construction shall become unenforceable after a 20-year period (which is 3.10 Is the contractor ever entitled to suspend works? the general limitation period provided in the GCC). c) A claim by the contractor against the employer regarding As there is no specific provision in relation to the right for suspension payment of his fees is limited to a five-year period, of works, such a right could arise under the general principles of the commencing on the delivery of the works. GCC. Force majeure could be the cause of such a suspension.

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Further, the parties may contractually agree a number of the case of partial inability to perform (article 386 of the GCC) due circumstances upon the occurrence of which the contractor may to events not attributable to either of the parties, the counterparty be entitled to suspend works. Such issues may be non-payment or may terminate the agreement if the partial performance does not delayed payment, non-provision of materials, etc. meet its needs; if not, the agreement remains in force and the counterparty may request a pro rata reduction of its obligations.

3.11 On what grounds can a contract be terminated? Are With regard to the concept of an unpredictable change in there any grounds which automatically or usually circumstances, please refer to question 3.8 above. When the entitle the innocent party to terminate the contract? completion of the contract has become uneconomic due to Do those termination rights need to be set out unforeseeable circumstances, both parties could make use of the expressly?

concept described in article 388 of the GCC in order to terminate Greece the contract or to readjust their obligations. According to article 700 of the GCC, the employer may terminate a construction contract at any time and without any serious reason, provided that termination takes place before completion of the 3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right works. In this case, the employer shall remunerate the contractor. which is made for their benefit? E.g. is the second or Apart from the above, the general grounds for the termination of subsequent owner of a building able to claim against every contract also apply. Therefore, the contract can be terminated the original contracts in relation to defects in the upon agreement between the parties, upon the acquisition of the building? construction site by the contractor, or upon completion of the works being rendered impossible due to force majeure. Greek law contains provisions under which a third party can claim Moreover, subject to the application of provisions of the GCC the benefits of contract rights as long as they are made for their (and the non-existence of opposite provisions in the construction benefit. These rights can either be agreed in the initial construction contract), the employer is entitled to withdraw the contract in the contract or in a side contract between a contracting party and following circumstances: the beneficiary. Thus, in order for a third party to benefit from any contract right made for his benefit, that third party should be a) Late commencement or deceleration of the progress of the specifically mentioned in the contract. construction works by the contractor or performance of its obligations contrary to the provisions of the contract, which Especially with regard to claims of the subsequent owner of the result in the impossibility of the due completion of the works building, the latter is not entitled to any rights or remedies against (article 686 (a) of the GCC). the contractor for any material defects upon approval of the work by b) The existence of material defects that render the executed the employer, unless these defects could not have been found at the works useless, or if the works lack the agreed qualities and/or time of receipt of the work upon its regular examination, or provided characteristics (article 689 (1) of the GCC). that the contractor deliberately hid these defects. However, the c) Substantial overspending of the budget (article 697 (1) of the buyer retains his rights against the seller (i.e. the employer), who GCC). upon acceptance of works from the contractor is liable towards Apart from the above, other grounds for termination of a contract the buyer under a sales contract for: a) absence of characteristics could be provisions that reflect the capacity and viability of the required for the normal use of the building and agreed upon; and b) parties (i.e. bankruptcy, insolvency, etc.). These, as well as other material defects of the building. reasons, although not included in the law, are usually included in the construction contract. 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 3.12 Is the concept of force majeure or frustration known limits on the rights of set-off? in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue successfully that a contract which has become The setting-off of claims between the debtor and the creditor is uneconomic is grounds for a claim for force majeure? explicitly provided in articles 440 et seq. of the GCC. By virtue of these provisions, a party (P1) to a construction contract The concept of force majeure is known under Greek law, although it owing money to the other party (P2) can offset the money he owes is not clearly described in the GCC. According to the jurisprudence, to P2 against the sums due to him by P2, under the following force majeure itself is usually defined as an outside interference conditions: whose effect could not have been foreseen, avoided or eliminated. a) The offset claims need to be mutual, meaning that the debtor With regard to private contracts and especially contracts concerning of one claim shall be the creditor of the other. construction works, force majeure applies through specific legal b) The offset claims need to be of the same nature. This is the concepts such as “unintentional inability to perform” (article 380 case when both claims are of a monetary nature, or for other of the GCC) or “unforeseeable change of circumstances” (article replaceable goods of the same nature and kind. 388 of the GCC), which are regulated by the GCC and constitute c) Both claims have to be due. grounds for termination of or amendments to a contract. d) One of the parties shall declare to the other party his intention According to the concept of the “inability to perform”, where the for set-off. fulfilment of obligations by one of the parties to a bilateral agreement When the other party receives notice and as long as all necessary has become impossible due to events not attributable to either of conditions have been fulfilled, then the set-off shall be considered the parties, the counterparty’s obligations are also cancelled out; if complete. such a counterparty has fulfilled part of its obligations by that time, it may claim reimbursement according to the rules governing the Apart from the above described set-off, the parties to a construction reimbursement of benefits acquired groundlessly. Accordingly, in contract may agree on a contractual set-off, which could be based on different terms and conditions from those described above.

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design to the assignment of the employer, the employer’s needs 3.15 Do parties to construction contracts owe a duty of of which the designer is aware and which shall be included in care to each other either in contract or under any the respective contract, and the compliance of the design with the other legal doctrine? applicable regulations.

Duty of care is an important legal obligation that both parties shall bear in a construction contract. It is a basic principle of Greek 4 Dispute Resolution contract law and is generally subsumed by article 288 of the GCC; it introduces the obligation of each party to a contract to fulfil its obligations in accordance with good faith and fair commercial 4.1 How are disputes generally resolved? Greece usages. Moreover, under the provisions of the GCC concerning construction contracts, the contractor is obliged to duly perform It is up to the agreement of the parties to decide whether any dispute the obligations arising from the contract and respect the material arising from the performance of the construction contract shall be provided by the employer. Finally, the level of duty of care owed resolved by litigation, arbitration or mitigation. If there is no such may be foreseen and described in detail in the construction contract agreement or no agreement at all, disputes shall be resolved by agreed by the parties. litigation. Most commonly, disputes are resolved by the competent courts and this is why jurisprudence in this matter is very rich in Greece. The 3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that recently introduced role of the mediator might change this norm; ambiguity is interpreted? however, since it has not been tested in time, its success cannot be guaranteed. On the other hand, arbitration, especially in highly The general provisions of the GCC contain rules applicable to valued construction contracts, is becoming very popular in resolving the interpretation of ambiguous terms. By virtue of article 200 commercial disputes. of the GCC, all contracts shall be interpreted in accordance with good faith and commercial usages, meaning that in interpreting a 4.2 Do you have adjudication processes in your contract, all facts shall be taken into account in order to find the jurisdiction? If so, please describe the general best solution equilibrating the interests of both parties. Moreover, procedures. the interpretation of the terms included in a contract shall be in accordance with the true, or assumed, will of the parties without There are three main types of adjudication processes in the Greek being committed by the exact wording of the contract. Finally, legal system: litigation; arbitration; and mitigation. when there is ambiguity in the terms of the contract and there is a a) Litigation remains the most popular one with regard to all gap in the agreement which has a direct impact on the performance types of disputes, including those arising from construction of the contract, then this gap shall be replaced with other provisions contracts. Litigation procedures are described in the Greek of the GCC, provided that they could apply in the context of what Code of Civil Procedure (“GCCP”). A typical litigation is led has been agreed and that they do not contradict with other clauses of by a judge or a chamber (according to the nature and the value the construction contract. of the dispute) and leads to a binding decision for both parties. b) Arbitration is the most important alternative to litigation and has increased its popularity due to the delays in awarding 3.17 Are there any terms in a construction contract which justice through the rigid judicial system. The arbitration are unenforceable? procedure is described in the GCCP (articles 867 et seq.), but the parties are free to decide on other arbitration procedures As already mentioned, the majority of the provisions of the GCC according to international standards (e.g. the Arbitration regarding contracts for works are jus depositivum rules and, Court of the International Chamber of Commerce). In any therefore, contracting parties are free to agree on the terms of the case, the decisions of arbitration have the same construction contract. However, when drafting these terms, parties effect as those of civil courts. must be careful not to violate the mandatory rules included either in c) Although not yet widespread in Greece, mediation is another the GCC or in other laws, because such terms would then be deemed alternative dispute mechanism. In the case of mediation, unenforceable. the dispute is led by a legal expert who holds a neutral position and assists the parties to come to an agreement. The Terms opposite to mandatory provisions and, thus, not enforceable mediator’s position shall be provided in the contract. By are only those contrary to article 702 of the GCC, according to way of derogation from the other procedures (litigation and which the building workers of the contractor have a claim for their arbitration), the decision of the mediator is not binding but wages against the employer up to the amount that the latter owes rather is of an advisory nature. to the contractor, and those contrary to article 693 of the GCC regarding the limitation period for claims of the employer against 4.3 Do your construction contracts commonly have the contractor for defects in the work. arbitration clauses? If so, please explain how arbitration works in your jurisdiction. 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, Arbitration clauses are becoming increasingly known in construction are the designer’s obligations absolute or are there contracts and tend to be the norm in expensive construction projects, limits on the extent of his liability? In particular, does since arbitration provides parties with a quick and authoritative way the designer have to give an absolute guarantee in to resolve their dispute. respect of his work? According to the type of arbitration decided by the parties, different In the absence of any contractual provisions imposing additional provisions shall apply. With regard to the arbitration scheme described duties, a designer’s liability is limited to the correspondence of the in the GCCP, its main features are summarised as follows:

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a) Every private dispute – apart from labour issues – can be subject to arbitration, upon a written agreement between the 4.6 Where a contract provides for court proceedings in parties. your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of b) Arbitrators can either be judges of Greek courts or other legal how long proceedings are likely to take to reduce: (a) experts and are appointed by the parties, who shall also bear a decision by the court of first jurisdiction; and (b) a the cost of their services. decision by the final court of appeal. c) Decisions of arbitral tribunals have the same effect as court decisions, are enforceable and cannot be challenged before Where a contract provides for court proceedings, these are normally higher courts (the GCCP only provides for the annulment of activated in case of breach. Usually, then, the parties terminate their the decision before the Court of Appeal for specific reasons).

contract for cause and the party (believed) to have suffered damages Greece With regard to arbitration procedures provided by international files a lawsuit/claim requesting compensation for damages and/or conventions or institutions, the respective rules apply. monetary satisfaction for moral damages. Following the filing and serving of the claim (30 days from filing), 4.4 Where the contract provides for international the defendant has 100 days to file its pleadings and evidential arbitration, do your jurisdiction’s courts recognise material with the secretariat. Following the filing of their pleadings, and enforce international arbitration awards? Please the parties have a further 15-day deadline to prepare and file their advise of any obstacles to enforcement. addendum after which the case is considered ‘closed’ and ready to be heard. The ‘trial’ is just a typical formality as no advocacy takes Unless otherwise provided in international conventions to which place nor are witnesses examined. A judgment is usually issued the Greek State is a party, a foreign arbitral decision is recognised within four to eight months from the hearing. by Greek courts and is enforceable under Greek law should the following conditions be met: Upon issuance of the judgment, the defeated party may file an appeal within a 30-day deadline as of the service of the judgment. If neither a) The arbitration clause provided in the contract has been of the parties serves the judgment to its adversary, the deadline for validly agreed according to the law governing the dispute at hand. filing an appeal is two years from the date of publication. Failing to file an appeal within these deadlines renders the judgment final and b) The subject of the arbitral decision can be the subject of an irrevocable. The appellate court usually issues its judgment within arbitration agreement under Greek law. four to eight months following the hearing of the case. Hearing in c) The arbitral decision is not challenged and no appeal the appellate court is also typical. regarding its validity is pending. The defeated party has also the right to file a cassation appeal against d) The defeated party was not deprived of the right to defend itself. the judgment of the appellate court before the Supreme Court. The deadline for filing a cassation appeal is 30 days from service of the e) The arbitral decision does not contradict a final Greek court decision on the same matter between the same parties. judgment under review to the adversary. As with appeals, if the judgment under review is not served by either of the parties, the f) The decision does not contradict public order or moral deadline to file a cassation appeal is two years from the publication principles. of the judgment. Following issuance of a final and irrevocable judgment, the winning 4.5 Where the contract provides for court proceedings party may execute the judgment against the defeated party. in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? Note: Deadlines are extended if the defendant is a foreign resident or of an unknown residence. The GCCP, dealing with the issue of enforcement of foreign court decisions, provides for the same conditions, in order for the decision Acknowledgment to be enforceable, as those set out in question 4.4 above with regard to arbitral decisions. Further, the following two conditions must The authors would like to thank Charalambos (Harry) Karampelis additionally be met: and Konstantinos Varelas for their invaluable contributions to this a) The foreign court decision shall be considered final according chapter. to the laws of the jurisdiction where it was issued. b) The foreign court shall have authority to decide on the dispute at hand. Should the abovementioned conditions be met, the competent Greek court shall declare the foreign decision enforceable.

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Elisabeth Eleftheriades Kimon Tsakiris Kyriakides Georgopoulos Law Firm Kyriakides Georgopoulos Law Firm 28, Dimitriou Soutsou Str. 28, Dimitriou Soutsou Str. 115 21, Athens 115 21, Athens Greece Greece

Tel: +30 210 817 1500 Tel: +30 210 817 1500 Fax: +30 210 685 6657 8 Fax: +30 210 685 6657 8 Email: [email protected] Email: [email protected] URL: www.kglawfirm.gr URL: www.kglawfirm.gr Greece Elisabeth heads the Project Finance team of the firm. Her main areas Kimon was admitted to the Athens Bar Association in 2005. He joined of practice are public-private partnerships and energy projects, both the firm in 2014 and is a member of KG’s Energy and Infrastructure on the financing and the project side (construction, operation and due department. His main area of expertise focuses on project finance for diligence), mostly acting for senior lenders. infrastructure projects and major construction projects in Greece and abroad. He acts mainly for international investors and international She was instrumental in setting up the firm’s tax department, which and local financing institutions by providing specialised legal services she headed from January 2011 to June 2013. in the financing of infrastructure projects and the performance of due Elisabeth is also active in infrastructure privatisations, as well as diligence on major projects. Kimon has experience in drafting and energy and infrastructure mergers and acquisitions, regularly acting negotiating agreements (engineering, procurement and construction for international investors (working on greenfield and brownfield contracts, operation and maintenance agreements, etc.) for major investments, with both business investors and funds). infrastructure-related projects, as well as in drafting tender documents for the awarding authorities. In addition, Kimon advises on matters of Her expertise includes real estate acquisition and incentives legislation. environmental, commercial and public procurement law. Before joining the firm, Kimon acted as legal counsel for an international consortium engaged in the construction of a major infrastructure project in Greece.

Kyriakides Georgopoulos Law Firm is Greece’s largest multidisciplinary law firm and covers the needs of its clients in all fields of legal practice. Our multidisciplinary teams of lawyers have experience in the following practice areas: capital markets; corporate and commercial; banking; tax; project finance; dispute resolution; insurance; energy; labour and employment; mergers and acquisitions; intellectual property; data protection; competition; e-commerce; restructuring and insolvency; natural resources and utilities; and real estate development, providing a client-focused service with a constructive approach to legal practice. KG Law Firm has offices inAthens and Thessaloniki. KG Law Firm is also a member of the South East Europe Legal Group (SEE LEGAL), a regional group of 10 leading independent law firms covering 12 jurisdictions of South East Europe, established in 2003 (visit www.seelegal.org).

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Hong Kong

Deacons Kwok Kit Cheung

1 Making Construction Projects 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 1.1 What are the standard types of construction contract and intention to create legal relations), or any in your jurisdiction? Do you have contracts which specific requirements which need to be included in a place both design and construction obligations upon construction contract (e.g. provision for adjudication contractors? If so, please describe the types of or any need for the contract to be evidenced in contract. Please also describe any forms of design- writing)? only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor Hong Kong is a common law jurisdiction. Offer, acceptance, and with the construction work done by a series consideration and intention to create legal relations are all essential of package contractors? (NB For ease of reference for establishing a legally binding contract. throughout the chapter, we refer to “construction There are no special requirements for construction contracts. contracts” as an abbreviation for construction and They do not even need to be evidenced in writing. In fact, it is engineering contracts.) not uncommon for a formal construction contract not to have been signed even after completion of the project. For private projects, the contracts mainly used are the Standard Form of Building Contract published by the Hong Kong Institute of Architects, the Hong Kong Institute of Construction Managers and 1.3 In your jurisdiction please identify whether there is the Hong Kong Institute of Surveyors. There are “with quantities” a concept of what is known as a “letter of intent”, in and “without quantities” editions. The former is for use when bills which an employer can give either a legally binding or non-legally binding indication of willingness either to of quantities are used. The latter is for use when bills of quantities enter into a contract later or to commit itself to meet are not used. certain costs to be incurred by the contractor whether For public projects, Government Forms are used. The forms for or not a full contract is ever concluded. building and civil engineering works are slightly different. In recent years, the Government has been promoting the use of NEC3 Yes. It is standard practice to have a letter of intent before signing contracts which are now generally used in all public projects except the formal contract. It can be either legally binding, non-legally those issued by the Housing Authority. Although NEC4 will be binding or partially legally binding (e.g. a commitment to pay actual published in June, whether the Government will use it remains to costs incurred in the event that the employer decides not to engage be seen. the contractor to complete the project) depending on the precise In addition, there are contracts which place both design and wording of the letter of intent. The court will look into the substance construction obligations upon contractors, especially for specialised of the letter of intent, rather than its label. projects such as the construction of hospitals. One example of a design and build contract is the Government 1.4 Are there any statutory or standard types of insurance Standard Form of Contract for design and build projects. If an NEC3 which it would be commonplace or compulsory to is used, there is no separate edition for design and build projects and have in place when carrying out construction work? the same standard form will be used; the design obligations will be For example, is there employer’s liability insurance for contractors in respect of death and personal set out in the Works Information of the contract document. injury, or is there a requirement for the contractor to If it is a design-only contract, we will usually call it a consultancy have contractors’ all-risk insurance? agreement with the designer, who is usually either the architect or engineer. Employers in Hong Kong usually engage consultants to It is compulsory for all employers in Hong Kong to take out undertake the design of construction projects. Design-only contracts employees’ compensation insurance for their employees. Contractors are therefore common in Hong Kong. and sub-contractors are therefore required by law to take out such We do have management contracting arrangements in Hong Kong, insurance for their workers. Other than that, there is no statutory although this is not common. In recent years, such arrangements are requirement for taking out insurance, although contractors invariably common in nearby Macau for casino projects. take out contractors’ all-risk insurance for their projects. For owners of the project, there is no requirement, and indeed it is not common,

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for them to take out insurance for contractors, unless it is fitting out or renovation works that are to be carried out in the owner’s existing 2 Supervising Construction Contracts building, for which the owner already has an insurance policy that covers the contractor’s liability. 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 1.5 Are there any statutory requirements in relation or architect) have a duty to act impartially between to construction contracts in terms of: (a) general contractor and employer? Is that duty absolute or is requirements; (b) labour (i.e. the legal status of those it only one which exists in certain situations? If so, working on site as employees or as self-employed please identify when the architect/engineer must act sub-contractors); (c) tax (payment of income tax of impartially. employees); or (d) health and safety? Hong Kong Yes, almost invariably, construction contracts are supervised on There are no statutory requirements in relation to construction behalf of the employer by a third party, except for Government contracts generally, although it is common for employers to provide projects, where an in-house architect or engineer may be designated in the contract for their own specific requirements in relation to by the employer. In the latter case, the contract should make labour, tax and health and safety for the project. Health and safety this known to the contractor and set out under what situations of labour are generally protected by the Construction Sites (Safety) the architect or engineer is required to act in accordance with the Regulations issued under the Factories and Industrial Undertakings employer’s instructions, rather than impartially. Ordinance (Chapter 59 of the Laws of Hong Kong). No. As mentioned above, it depends on the terms of the construction contract, although the third party is generally required 1.6 Is the employer legally permitted to retain part of to act independently and honestly which may overlap with acting the purchase price for the works as a retention to be impartially but they are not synonymous. In other situations, such released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed as issuing instructions on behalf of the employer, there is no duty for defects liability is complete? them to act impartially. In the following situations, the third party usually must act Yes. It is legally permitted and indeed it is standard practice to have impartially: a retention, which will usually be released in the following manner: ■ certifying interim payment; half upon practical or substantial completion of the project and half ■ assessing extension of time for completion of the project; upon expiry of the defects liability period or issue of certificate ■ issuing certificate of non-completion; of making good defects, whichever is later. For Government ■ certifying date of practical completion; projects, the retention will usually be released after the issue of the maintenance certificate. ■ issuing certificate of making good defects; ■ assessing value of variations;

1.7 Is it permissible/common for there to be performance ■ assessing loss and/or expense; and bonds (provided by banks and others) to guarantee ■ issuing certificate of direct payment to a nominated sub- performance, and/or company guarantees provided to contractor. guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees? 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 It is common to require the contractor to procure a performance include in the contract what is known as a “pay when bond of usually 5% or 10% of the contract sum. A parent company paid” clause? guarantee is sometimes required, but this is not common. There are no restrictions on the nature of such bonds or guarantees. In Yes, although usually such clause is found in the sub-contract, rather our experience, “default bonds” are more common than “demand than the main contract, i.e. the main contractor will pay the sub- bonds” nowadays. The reason is that banks and insurance companies contractor when they have themselves been paid by the employer. charge high premiums for providing demand bonds. It has been proposed by the Hong Kong Government to make “pay when paid” clauses invalid, following the models of other 1.8 Is it possible and/or usual for contractors to have jurisdictions such as the UK and Australia. It is expected that the retention of title rights in relation to goods and legislation will be passed within the next two years. 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 2.3 Are the parties permitted to agree in advance a fixed materials supplied from the site? sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of It is not common for contractors to have retention of title rights. In particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are Hong Kong, contractors have little say in modifying standard terms there any restrictions on what can be agreed? E.g. imposed upon them by employers. The usual term in Hong Kong is does the sum to be paid have to be a genuine pre- that once materials arrive on site, they become the property of the estimate of loss, or can the contractor be bound to employer, whether paid for or not. However, suppliers do usually pay a sum which is wholly unrelated to the amount of have retention of title rights in their contracts. financial loss suffered?

Yes, this is done in practically all construction contracts in Hong Kong.

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A liquidated damages clause will only be enforceable if it is not a Another important implied term from the contractor’s perspective is penalty, i.e. if it is a genuine pre-estimate of loss. We are aware an implied promise to pay for work done. This implied term usually that in England, the Supreme Court has recently reformulated the applies when the formalities required for issuing instructions have test to be applied when a contractual clause is challenged as being not been complied with, but the works have nevertheless been a penalty clause. However, to date, Hong Kong Courts still follows carried out by the contractor. the test set out in the English House of Lords judgment in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company 3.4 If the contractor is delayed by two events, one the Ltd [1914] UKHL 1, i.e. the genuine pre-estimate of loss test is still fault of the contractor and one the fault or risk of applicable. his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that concurrent delay? 3 Common Issues on Construction Hong Kong Contracts The answer to this question depends on the precise wording of the contract. Analysis of such situation, as can be seen from case law, can be complicated. Having said that, assuming that standard forms 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? are used, it is generally believed that the contractor in such situation is entitled to an extension of time, but not the costs occasioned by the concurrent delay. Yes. The employer is entitled to vary the works to be done under the contract. There are limits on that right, depending on the terms of the contract. 3.5 If the contractor has allowed in his programme a For private projects, the Hong Kong standard form of a building period of time (known as the float) to allow for his own delays but the employer uses up that period by, for contract (2005 edition) defines “variation” as a change instructed by example, a variation, is the contractor subsequently the architect to the design, quality or quantity of the works and then entitled to an extension of time if he is then delayed sets out specific changes which are within that definition. after this float is used up? For Government projects, its standard form provides that the architect shall order any variation to any part of the works that may, The author is not aware of any case law in this regard in Hong Kong. in his opinion, be necessary for the completion of the works and If this question came before a Hong Kong Court or arbitration shall have the power to order any variation that for any other reason tribunal, it is likely that they would follow the English authority, shall, in his opinion, be desirable for or to achieve the satisfactory Ascon Contracting Ltd v Alfred McAlpine Construction Isle of completion and functioning of the works. Man Ltd (1999) 66 Con LR 119, where the English Court rejected Generally, as a matter of common law, the variation ordered cannot the argument that the float is owned by the contractor. Therefore, change the scope of the original works too drastically. For example, the better view is that “float” is for the benefit of all parties in a it might not be a valid variation if the architect orders two buildings construction project. to be built, when the original contract was for only one building. Some contracts may also provide that a variation order is not valid 3.6 Is there a limit in time beyond which the parties to unless it is issued in writing. However, this requirement may a construction contract may no longer bring claims sometimes be waived by the parties’ conduct during the course of against each other? How long is that period and from what date does time start to run? the project. Some contracts may also put a limit on the value of variation works which the architect may order, although this is not common. Yes. For simple contracts signed under hand, it is six years from the date of accrual of the cause of action. For contracts executed under seal, the period is 12 years. 3.2 Can work be omitted from the contract? If it is For a contractor’s claim, the date of accrual usually starts to run a omitted, can the employer do it himself or get a third party to do it? reasonable time after the expiry of the Period of Final Measurement (which is usually prescribed in the contract as one year after practical completion of the project) or the issue of the final certificate by the Yes to both questions. However, as a matter of common law and architect, whichever is earlier. subject to express terms in the construction contract, the omission must be ordered in good faith and not with a view to deprive the For an employer’s claim for defective works, the date is usually contractor of the profit to which it would otherwise have been taken as a reasonable time after the expiry of the defects liability entitled had the works been carried out. period (which is usually one year after practical completion). For latent defects, the employer may have a longer limitation period if its claim is in tort. It is either three years from the date that 3.3 Are there terms which will/can be implied into a the employer had the knowledge required to bring an action for construction contract? damages, or six years from the date damage was suffered by the employer. The aforesaid limitation periods are in any event subject Yes. The most important implied term in construction contracts is to the long stop date of 15 years from the negligent act or omission. that the employer impliedly agrees to do all that is necessary on his part to bring about completion of the contract. It is therefore If deliberate fraud, concealment or mistake is involved, the above- a breach of such implied term if the employer has done anything mentioned periods of limitation shall not begin to run until the which impedes the carrying out of the works, e.g. by not giving employer has discovered it. possession of the site to the contractor, unless there is express provision in the contract to deal with such situations.

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3.7 Who normally bears the risk of unforeseen ground 3.13 Are parties which are not parties to the contract conditions? entitled to claim the benefit of any contract right which is made for their benefit? E.g. is the second or The contractor normally bears the risk. subsequent owner of a building able to claim against the original contracts in relation to defects in the building? 3.8 Who usually bears the risk of a change in law affecting the completion of the works? Yes. In 2016, the Contracts (Rights of Third Parties) Ordinance came into effect, which enables a person (third party) who is not The contractor normally bears the risk. a party to a contract to enforce a term of that contract (including

Hong Kong a term excluding or limiting liability) if: (a) the contract expressly provides that the third party may do so; or (b) the term purports 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? to confer a benefit on that third party. The Ordinance applies not only where a third party is named in the contract, but also where they are expressly identified as a member of a class or as answering The employer usually owns the intellectual property. a particular description. In a construction contract, this could be achieved, for example, by naming the second or subsequent owner 3.10 Is the contractor ever entitled to suspend works? of a building as the intended beneficiaries in the construction contract. Yes, by relying on an express provision of the contract, e.g. in It is, however, possible for the parties to the contract to contract out private project sub-contracts, if the main contractor fails to pay the of the Ordinance by including a clause in the contract to the effect certified sum to the sub-contractor and continues such failure for that application of the Ordinance is expressly excluded and that it seven days after the sub-contractor has given written notice of the does not confer any rights enforceable by third parties. same to the main contractor, the sub-contractor can suspend further execution of the sub-contract works. Apart from contractual rights to suspend works, it is generally 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums accepted that the contractor has no right to suspend works for non- due to P2 the sums P2 owes to P1? Are there any payment at common law. limits on the rights of set-off?

3.11 On what grounds can a contract be terminated? Are Yes, unless there is express provision in the contract that payment there any grounds which automatically or usually is not subject to any set-off, which is very unusual in Hong Kong. entitle the innocent party to terminate the contract? In fact, the right of set-off is regarded as an important common law Do those termination rights need to be set out right which can only be excluded by clear language in the contract. expressly? There is a distinction between legal and equitable set-off in Hong Kong. If the mutual debts are both liquidated, i.e. ascertainable An innocent party can terminate the contract if the other party without involving any assessment by the court, the debts can be has committed a repudiatory breach. Termination on such ground set off against each other, even if they are unconnected, e.g. if they need not be set out expressly in the contract. What constitutes a arose from different projects not arising out of the same series of repudiatory breach has been explained in different ways in different transactions. This is legal set-off. An unliquidated claim cannot court judgments. Fundamentally, it refers to the conduct of a party be set off against a liquidated claim, unless the claims are closely which evinces an intention to no longer be bound by the terms of connected with each other; for example, where they arise out of the the contract. In the context of construction contracts, such conduct same construction project or same series of transactions. The latter includes the contractor abandoning the works or those situations is equitable set-off. where the cumulative effect of breaches is sufficiently serious to justify the innocent party terminating the contract, e.g. persistent delay in making interim payments to the contractor. 3.15 Do parties to construction contracts owe a duty of In other cases, whether the breach is serious enough to justify care to each other either in contract or under any other legal doctrine? the innocent party terminating the contract may be controversial. For the sake of clarity, modern construction contracts therefore invariably set out expressly the circumstances in which the innocent A contractor usually only owes a duty of care to the employer under party will be entitled to terminate the contract. the terms of the construction contract. In some circumstances, a duty of care may exist in tort. However, the general position is that the law does not favour concurrent liability in both contract and tort 3.12 Is the concept of force majeure or frustration known in construction contracts. in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue successfully that a contract which has become 3.16 Where the terms of a construction contract are uneconomic is grounds for a claim for force majeure? ambiguous, are there rules which will settle how that ambiguity is interpreted? Yes. We do have the concept of force majeure and frustration, which will excuse the parties from further performance of contract. Yes. The starting point in construing a contract is that words are I am not aware of any case where a party has successfully argued given their ordinary and natural meaning, unless that would result that a contract has become uneconomic, as the ground for claiming in absurdity or inconsistency with the rest of the contract. Where force majeure, although it seems that in a rare case, a catastrophic the language in the contract is ambiguous, the court will ascertain change in prices may justify frustration of a contract at common law. what a reasonable person (i.e. a person who has all the background

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knowledge which would reasonably have been available to the of arbitration on the other party. The procedures for conducting parties in the situation in which they were at the time the contract was arbitration should be similar to those in other jurisdictions. Parties made) would have understood the parties to have meant. In doing will usually instruct lawyers to represent them in arbitration and the so, the court must consider all relevant surrounding circumstances. procedures tend to be relatively formal and not much different from If there are two possible constructions, the court is entitled to prefer court procedures (although often simplified with less interlocutory the one which is consistent with business common sense. The contra hearings). proferentem rule will also be applied by the courts where there is doubt about the meaning of terms in a contract, namely the words 4.4 Where the contract provides for international will be construed against the person who put them forward (i.e. the arbitration, do your jurisdiction’s courts recognise person who required the terms to be included in the contract). and enforce international arbitration awards? Please advise of any obstacles to enforcement. Hong Kong 3.17 Are there any terms in a construction contract which are unenforceable? Yes. Hong Kong is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, by China’s accession to the Convention. Hong Kong Courts are It seldom happens. Parties sometimes argue that a liquidated very supportive of arbitration and adopt an “enforcement biased” damages clause is unenforceable as a penalty. Please see my approach in dealing with applications to enforce foreign awards. answer to question 2.3 above for the criteria for setting aside a Enforcement may only be refused if a party can establish one of the liquidated damages clause. However, it is quite difficult to set aside grounds set out in the New York Convention. Even in such case, the a liquidated damages clause. The current judicial attitude is that Court retains a residual discretion to enforce the award. parties to a commercial contract should be free to agree whatever terms they wish. 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign 3.18 Where the construction contract involves an element court be upheld and enforced in your jurisdiction? 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 Certain foreign judgments can be enforced in Hong Kong by the designer have to give an absolute guarantee in registration pursuant to the Foreign Judgments (Reciprocal respect of his work? Enforcement) Ordinance. The Ordinance contains a list of those countries whose judgments can be enforced in Hong Kong under Usually, the designer is only obliged to exercise reasonable skill and the Ordinance. The current list includes Australia, Belgium, care, and commensurate with the size and nature of the project he France, Germany, India, Israel, Italy, Malaysia, the Netherlands, has undertaken in the contract. We seldom come across designers New Zealand, Singapore, Brunei, Bermuda, Austria and Sri Lanka. giving an absolute guarantee in respect of this work. Since inclusion in the list is based on reciprocity (i.e. based on Hong Kong judgments being enforceable in those countries), following the handover of Hong Kong to China in 1997, Hong Kong’s 4 Dispute Resolution Department of Justice wrote to the countries listed in the Ordinance for confirmation that post-1997 they would continue to enforce Hong Kong judgments. Brunei and Bermuda replied that they would 4.1 How are disputes generally resolved? not; the Netherlands replied that Hong Kong judgments would be recognised, but not enforced or executed; and no replies appear They are mostly resolved by arbitration. However, a small to have been received from Austria or Sri Lanka. Accordingly, proportion of main contracts and sub-contracts (in particular of low although those five countries are still listed in the Ordinance, there is tier) may not contain an arbitration clause. In such cases, disputes some doubt about whether they can still be enforced in Hong Kong will be resolved by way of court proceedings. by registration under the Ordinance. Some construction contracts provide for a multi-tiered dispute At common law, foreign judgments of countries not listed in the resolution mechanism. For example, in the Hong Kong Standard Foreign Judgments (Reciprocal Enforcement) Ordinance may still Form of Building Contract and Government forms, the parties have be enforced in Hong Kong, provided that the following requirements to go through mediation first before commencing arbitration. are satisfied: (1) the judgment is for a debt or a definite sum of money; 4.2 Do you have adjudication processes in your (2) the proceedings in which the judgment was obtained were not jurisdiction? If so, please describe the general opposed to natural justice; procedures. (3) the foreign judgment was not obtained by fraud; (4) the foreign judgment was rendered by a court with competent No, but in the consultation paper for implementing security of payment jurisdiction; legislation in Hong Kong in 2015, statutory adjudication has been (5) the foreign judgment is final and conclusive; proposed for resolving payment disputes in construction contracts. (6) the enforcement and recognition of the foreign judgment is not contrary to public policy; and 4.3 Do your construction contracts commonly have (7) the foreign proceedings were not brought in contravention arbitration clauses? If so, please explain how of an agreement under which the dispute in question was arbitration works in your jurisdiction. to be settled otherwise than by proceedings in the courts of that country or (if there was such contravention) the person Yes. As mentioned above, the arbitration clause will usually require against whom the judgment was given either agreed to the the parties to first attempt to resolve their disputes by mediation and if bringing of the foreign proceedings or otherwise submitted to that fails, either party may commence arbitration by serving a notice the jurisdiction of the foreign court.

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4.6 Where a contract provides for court proceedings in Kwok Kit Cheung your jurisdiction, please outline the process adopted, Deacons any rights of appeal and a general assessment of 5th Floor, Alexandra House how long proceedings are likely to take to reduce: (a) 18 Chater Road a decision by the court of first jurisdiction; and (b) a Hong Kong decision by the final court of appeal. Tel: +852 2825 9427 Email: [email protected] Legal proceedings are commenced in Hong Kong by issuing a URL: www.deacons.com.hk writ of summons, either in the District Court (for claims of over HK$50,000, but no more than HK$1 million) or the High Court, Kwok Kit has over 30 years of experience in dealing with a variety of

Hong Kong Court of First Instance (for claims of over HK$1 million). Then there follows the filing of pleadings (i.e. statement of claim; private and government building projects in Hong Kong, some of which defence and counterclaim; and reply and defence to counterclaim). was gained when practising as a quantity surveyor. He also acts for developers, contractors and subcontractors in construction projects, in This is followed by discovery of documents and exchange of litigation, arbitration and mediation, and undertakes general advisory witness statements and, in some cases, expert reports. Once any work in relation to construction contracts in Hong Kong, Macau and interlocutory applications have been resolved and the parties have Mainland China. He conducts CIETAC arbitrations in Shenzhen, complied with all court directions made in respect of the matter, a Shanghai and Beijing and acts as an arbitrator and mediator in construction and commercial disputes. He also handles cross-border trial date will be fixed by the Court. disputes involving Hong Kong, Mainland China and other countries. Parties may appeal a judgment to the Court of Appeal within prescribed time limits. If the losing party is dissatisfied with the outcome of the appeal, he may apply for leave to further appeal to the Court of Final Appeal. If leave is granted, the case will go to the Court of Final Appeal. The time from commencing proceedings to obtaining a judgment in the Court of First Instance varies a lot depending on how vigorous the case is run by the parties. The minimum time for a straightforward and smooth running case is one year, but the norm is three years. It may take another one year from the Court of First Instance to the Court of Appeal and a further year to the Court of Final Appeal, assuming there is no procedural delay in the process.

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 49 partners, around 200 lawyers and lawyer equivalents, and approximately 690 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. Recent accolades include: ■■ “Construction & Infrastructure Firm of the Year” (2016) and “Hong Kong Firm of the Year” (2014–2016) awarded by China Business Law Journal; ■■ “Hong Kong Firm of the Year” at the Chambers Asia Pacific Awards for Legal Excellence (2015–2016); ■■ “Hong Kong Firm of the Year 2016” awarded by IFLR; and ■■ “Citizenship Firm of the Year” awarded by The Asian Lawyer 2015.

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India Sumeet Kachwaha

Kachwaha & Partners Dharmendra Rautray

1 Making Construction Projects 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 1.1 What are the standard types of construction contract and intention to create legal relations), or any in your jurisdiction? Do you have contracts which specific requirements which need to be included in a place both design and construction obligations upon construction contract (e.g. provision for adjudication contractors? If so, please describe the types of or any need for the contract to be evidenced in contract. Please also describe any forms of design- writing)? only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor The Indian law of contracts is codified (Indian Contract Act, 1872 and with the construction work done by a series – the “Act”). It is largely based on English Common Law. For any of package contractors? (NB For ease of reference binding contract to come into existence, there should be an agreement throughout the chapter, we refer to “construction between two or more parties who are competent to contract, and the contracts” as an abbreviation for construction and parties must have entered into the agreement with their free consent, engineering contracts.) for a lawful consideration and a lawful object. These requirements are mandated by the Act (Section 10 thereof). As all other contracts, The construction industry in India does not subscribe to any construction contracts must also satisfy the aforesaid requirements standard form of construction contract, however, some of the to be legally enforceable. Further, rudimentary requirements of a commonly used forms include the suite of contracts published by valid offer, followed by an acceptance of an offer, with the intention FIDIC (International Federation of Consulting Engineers), ICE of entering into a legally enforceable agreement not void in law, (Institution of Civil Engineers) and the model published by the are other essentials of a valid contract under the Act. As the Act IIA (Indian Institute of Architects). Governmental construction provides, contracts need not be evidenced in writing, which similarly authorities, such as the National Highways Authority of India applies to all construction contracts. (“NHAI”), employ their own as per their departmental requirements, particularly for Public and Private Partnership projects. One standard FIDIC form extensively used 1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in in the Indian construction industry is the Plant and Design/Build which an employer can give either a legally binding or Contract. Design-only contracts prevalent in India are majorly non-legally binding indication of willingness either to inspired by the FIDIC Conditions of Contract for Plant and Design/ enter into a contract later or to commit itself to meet Build (the FIDIC Yellow Book). certain costs to be incurred by the contractor whether Besides the NHAI, several government departments such as the or not a full contract is ever concluded. Public Works Department, Delhi Metro Rail Corporation, Indian Oil Corporation, National Building Construction Corporation, The legal position in India as regards a “Letter of Intent” (“LOI”) Central Public Works Department, etc. have their own standard is well settled and can be understood while referring to the contract form contracts. law principle to the effect that an agreement to enter into an agreement does not create any legal relation between the addressor Management contracts are executed in the form of Engineering, and its addressee, nor is it legally enforceable before a court of law. Procurement and Construction Management Contracts. As the name suggests, such contracts are executed between employers and A letter of intent merely indicates a party’s intention to enter into a contractors, wherein contractors are hired to holistically manage the contract with the other party in future. Normally, it is an agreement completion of a construction project while overseeing developments to ‘enter into an agreement’ which is neither enforceable nor does it regarding engineering, procurement and construction of a project. confer any rights upon the parties. However, some aspects of a LOI may contain binding obligations, if so specifically provided therein.

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Such aspects may include clauses concerning confidentiality and State Migrant Workmen (Regulation of Employment and exclusivity of dealings, amongst others. In certain circumstances Conditions of Service) Act, 1979, requires all contractors who it may be construed as a letter of acceptance of the offer resulting employ five or more inter-state migrant workmen to register in a concluded contract between the parties. It largely depends themselves. It is aimed to protect and/or provide a migrant worker’s right to equal wages, displacement allowance, home on the intention of the parties to be drawn from the terms of the journey allowance, medical facilities, etc. The Workmen’s Letter of Intent, the nature of the transaction and other relevant Compensation Act, 1923 require that compensation be paid circumstances. If parties have acted on a Letter of Intent (as if there to workers if injured in the course of employment. Under is a binding obligation), it is likely to be held as a binding contract the Minimum Wages Act, 1948, the employer is required between them. In India, a binding contract can result from conduct to pay the minimum wage rates as may be fixed by the

India alone. relevant government. Further, the Payment of Wages Act, 1936 ensures that the employees receive wages on time and without any unauthorised deductions. 1.4 Are there any statutory or standard types of insurance (c) Tax: A person responsible for paying any sum to a contractor which it would be commonplace or compulsory to for carrying out any work (including supply of labour for have in place when carrying out construction work? carrying out any work) is required to, at the time of payment, For example, is there employer’s liability insurance deduct tax commonly known as Tax Deducted at Source for contractors in respect of death and personal (“TDS”) under Section 194C of the Income Tax Act. The injury, or is there a requirement for the contractor to Works Contract Tax is applicable to contracts for labour, have contractors’ all-risk insurance? work or service. Other taxes include VAT and Service Tax. The Building and Other Construction Workers Welfare Cess The standard type of insurance policy opted by the employer, Act, 1996 which applies to 10 or more building workers or contractor or a sub-contractor separately or jointly is the Contractor’s other construction work, has been enacted for the welfare of All Risk Policy (“CAR Policy”). All major construction contract construction workers including regulating the workers safety, health, and other service conditions. A cess of 1% is collected projects expressly provide for putting in place a CAR policy during from the employer on the cost of construction incurred. the construction stage. Federal legislation requires any business including construction projects employing more than 10 people to (d) Health and Safety: Social security such as the Employee’s Compensation Act, 2009, Employees’ State procure registration under the Employees’ State Insurance Act, 1948 Insurance Act, 1948, Maternity Benefit Act, 1961, Payment (“ESI Act”). of Gratuity Act, 1972, and the Employees’ Provident Fund The ESI Act mandates every employer to provide for its worker’s Act, 1952 mandatorily apply to all employers and contractors insurance. The said Act covers both workers employed directly hiring labourers or workmen in the construction industry. under an employer and through a contractor. The insurance procured by an employer/contractor under the mandate of the ESI Act covers 1.6 Is the employer legally permitted to retain part of for contingencies such as maternity leave, sickness, temporary or the purchase price for the works as a retention to be permanent physical disablement, or death owing to the hazards of released either in whole or in part when: (a) the works employment which may lead to loss of wages and earning capacity are substantially complete; and/or (b) any agreed of an employee. defects liability is complete?

Yes. In construction contracts, provision for retaining part of the 1.5 Are there any statutory requirements in relation purchase price for the given situations is fairly common. Parties to construction contracts in terms of: (a) general may also agree to deposit the purchase price in an escrow account requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed to ensure a level-playing field for both the employer and the sub-contractors); (c) tax (payment of income tax of contractor. The contract may provide that the employer, prior to employees); or (d) health and safety? completion of the works, releases the retention money provided the contractor furnishes an unconditional bank guarantee equivalent to The following are some of the statutory requirements which must the retention money. be complied with: (a) General requirements: As stated above, all construction 1.7 Is it permissible/common for there to be performance contracts must satisfy the requirements of the Indian Contract bonds (provided by banks and others) to guarantee Act, 1872 to be legally enforceable. There are no statutory performance, and/or company guarantees provided to requirements specifically in relation to construction contracts. guarantee the performance of subsidiary companies? (b) Labour: All employers and contractors are required to comply Are there any restrictions on the nature of such bonds and guarantees? with the relevant labour legislations in force in India or in the state/city concerned. The onus of complying with such labour laws falls upon an employer or a contractor depending Yes, performance bonds/performance guarantees are commonly on the legislation. Labourers get their legal recognition from provided for in construction contracts in India to provide security the definition of the word “workman” under the Industrial against failure of a contractor to perform its contractual obligations. Disputes Act, 1947 (a Federal legislation) which entitles Similarly, an employer may require company guarantees from them to various statutory benefits and fair treatment at the parent companies against the duties and obligations of a subsidiary hands of their employer/contractor. Further, the Contract company involved in a construction contract. Labour (Regulation and Abolition) Act, 1970 must be The nature of restrictions that may apply to a performance guarantee complied with by any principal employer/contractor who hires 20 or more contract labourers for an “establishment”. will depend upon the wording of the terms of guarantee. A The said Act requires the principal employer to register performance guarantee, in nature, is a contract between an employer its establishment in accordance with the Act, whereas all and a guarantor, independent of the contract between an employer such contractors must obtain a licence from the authorised and a contractor. Therefore, unless otherwise provided, a guarantor licensing authority specified in the Act. In order to regulate shall be obliged to unconditionally honour a guarantee as and when the condition of service of inter-state labourers, the Inter- called upon by the employer.

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Normally, construction contracts require the contractor to furnish employer as liquidated damages is permissible. Such damages are an unconditional performance bank guarantee to ensure timely and governed by Section 74 of the Indian Contract Act, 1872 (“Act”) satisfactory performance by the contractor. The employer normally which provides that if a sum is named in the contract as the amount requires the contractor to keep the performance bank guarantee valid to be paid in case of such breach of contract, the party complaining until the defect liability period is over or the completion certificate of breach is entitled to receive the said amount, “whether or not is issued. The beneficiary of the bank guarantee, i.e. the employer, actual loss is proved to have been caused”. Section 74 has been must make a demand for payment under the bank guarantee, should judicially interpreted and the following principles have been laid a need so arise, before the expiry of validity period stipulated in the down: bank guarantee. A demand made by the employer for payment after ■ Only reasonable compensation can be awarded as liquidated the validity period will not be honoured by the bank. damages. India ■ Notwithstanding a liquidated damages clause, the factum of 1.8 Is it possible and/or usual for contractors to have damage or loss caused must be proved (the burden for which retention of title rights in relation to goods and is on the Claimant). supplies used in the works? Is it permissible for ■ The court must find the liquidated damages to be a genuine contractors to claim that until they have been paid pre-estimate of the damages. they retain title and the right to remove goods and materials supplied from the site? ■ The expression “whether or not loss is proved” in Section 74 has been interpreted to mean that if there is a possibility to prove actual damage or loss, such proof is required. Where, Yes it is possible. Right to lien over goods arises from the contractor’s however, it is difficult or impossible to prove the actual right to be duly paid for the goods supplied to an employer. The damage or loss, the liquidated damages amount named in the existence of right of lien over goods, and the scope of such right, is contract, if it is found to be a genuine pre-estimate of the determined by a contractual clause to that effect. Lien over goods damage or loss, can be awarded. whose ownership passes over to an employer on delivery to, or ■ The proof of loss or damage may be circumstantial and the affixation on, a construction site may exist if contractually so provided court does not look for arithmetical exactitude. for. However, most construction contracts do not provide for the contractor’s title rights to the goods and supplies made for the works. ■ The amount named in a contract serves as a ceiling or a cap on the sum which can be awarded and not the amount which will mechanically be awarded. 2 Supervising Construction Contracts If parties have agreed to a genuine pre-estimated sum of money as liquidated damages then they are deemed to have excluded their right to claim an unascertained sum of money as damages. 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) 3 Common Issues on Construction have a duty to act impartially between contractor and employer? Is that duty absolute or is it only one which Contracts exists in certain situations? If so, please identify when the architect/engineer must act impartially. 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? Yes, construction contracts are commonly supervised by third parties in India who may be appointed by an employer in the role of either an architect or an engineer. The scope of their functions and Variations in the works to be performed under a construction contract duties are contractually defined. may be made by an employer or an engineer employed for such works. If such variations are made, a contractor is entitled to seek Whilst the engineer or architect usually have a contractual duty to additional payments for the same so far as such variations have been act impartially between the contractor and employer, in practice it is duly authorised by the employer/engineer-in-charge. However, usually in government contracts especially that the engineer often tows the line of the employer. such variations must not be of such a nature so as to substantially alter the character of the contract in question and must be within the ability of the contractor to execute. 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 3.2 Can work be omitted from the contract? If it is include in the contract what is known as a “pay when omitted, can the employer do it himself or get a third paid” clause? party to do it?

Yes. Such clauses are valid under the Indian Contract Act. Yes, works may be omitted from a construction contract by an employer or an engineer if there is an express term in the contract permitting omission. However, such omissions must not be made 2.3 Are the parties permitted to agree in advance a fixed sum (known as liquidated damages) which will be to deliberately deprive a contractor from its entitled share of works. paid by the contractor to the employer in the event of The employer cannot omit the work on non bona fide grounds (and particular breaches, e.g. liquidated damages for late have it carried out by someone else without the contractor’s consent). 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- 3.3 Are there terms which will/can be implied into a estimate of loss, or can the contractor be bound to construction contract? pay a sum which is wholly unrelated to the amount of financial loss suffered? Yes. Indian law recognises use of both express and implied terms in a construction contract. While express terms are easily identifiable, Yes. Stipulating a certain amount to be paid by a contractor to its

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implied terms must be read into a contract while examining the intention of the contracting parties. However, such terms must 3.8 Who usually bears the risk of a change in law not offend the intended commercial purpose of the contract as affecting the completion of the works? understood between the parties. While there are no agreed set of terms which can be implied in a construction contract, certain Most construction contracts provide for relevant stipulations for a obligations are understood as impliedly binding both the employer change in law contingency. Generally, an employer bears the risk and the contractor. For example, a contractor is expected to perform arising out of a change in law, and any delays resulting out of it its tasks while exercising a standard of care, and must provide such can be condoned by granting an extension of time to the contractor. materials which are fit to be used for the stipulated works. Section 64A of the Sale of Goods Act, 1930 provides that in the

India event of increase or decrease in tax or imposition of new tax in respect of goods after the making of any contract for the sale or 3.4 If the contractor is delayed by two events, one the purchase of goods, in the absence of any stipulation as to payment of fault of the contractor and one the fault or risk of such tax, any increase would entitle the seller to add the equivalent his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that amount of the contract price and the buyer would be liable to pay concurrent delay? the increased sum to the seller. However, in case of a decrease in tax, the buyer would be entitled to deduct the equivalent amount The Indian position on concurrent delay is not certain. In situations of decreased sum from the contract price and the seller would be where there are concurrent delays on the part of an employer liable to pay that sum to the buyer. The provision is applicable to and a contractor, an employer may rely upon them to substitute any duty of customs or excise on goods and to any tax on the sale an extension of time for payment of any monetary damages to a or purchase of goods. contractor, whereas a contractor may rely upon them to defend against imposition of liquidated damages upon itself by an 3.9 Who usually owns the intellectual property in relation employer. Therefore, in cases of concurrent delays, a contractor to the design and operation of the property? would be entitled to an extension of time and not to compensation for any loss it may have suffered due to the delays (see: De Beers Generally, a contract for service contains clauses so as to empower UK Ltd v. Atos Origin IT Services UK Ltd [2010] EWHC 3276 an employer to claim ownership over all intellectual property as (TCC)). A contractor would be entitled to an extension of time for may be created by an employee in the course of his employment. the period of delay caused by the relevant event notwithstanding the Indian law also provides for employment as an exception to author’s concurrent effect of the other event (see: Walter Lilly & Co Ltd v. ownership over his intellectual property. Therefore, in the case of Mackay, [2012] EWHC 1773 (TCC)). Indian courts usually refer to construction contracts, ownership of intellectual property in the and rely upon English cases. form of design of concerned works should vest with the employer.

3.5 If the contractor has allowed in his programme a 3.10 Is the contractor ever entitled to suspend works? 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 A contractor may suspend performance of its obligations under entitled to an extension of time if he is then delayed a construction contract on grounds provided for in the contract after this float is used up? in accordance with its statutory right to do so under the Indian Contract Act, 1872. Some occasions when a contractor may The float in a programme would be dealt with on a ‘first come first suspend performance include non-performance of the obligations served’ approach. However, the existence of float may mean that or considerable delay by an employer, non-payment of dues for the contractor cannot claim extension of time but it does not stop the works performed, non-fulfilment of conditions upon which the contractor from claiming loss or expense due to variation. performance is contingent, force majeure, etc.

3.6 Is there a limit in time beyond which the parties to 3.11 On what grounds can a contract be terminated? Are a construction contract may no longer bring claims there any grounds which automatically or usually against each other? How long is that period and from entitle the innocent party to terminate the contract? what date does time start to run? Do those termination rights need to be set out expressly? The Limitation Act, 1963 (“Act”) governs a time period for filing a court action and also a claim before the arbitral tribunal. As per the The Indian Contract Act, 1872 (“Act”) allows a party to rescind/ said Act, the limitation period for the purpose of initiating a suit in terminate a contract in the event of breach by the other party, relation to a breach of contract is three years from the date on which including refusal to perform or disabling himself from performing the breach occurs or the cause of action arises. (Section 39 of the Act). Over and beyond the statutory grounds of breach recognised in the Act, parties may choose to provide contractual stipulations recognising events which would amount to 3.7 Who normally bears the risk of unforeseen ground breach of the contract to entitle the injured party to terminate the conditions? contract. A statutory or common law ground of breach need not be expressly provided in a contract, however, other instances of breach It is for the parties to agree in the contract as to who shall bear should be specified in the contract. the risk of unforeseen ground conditions. Construction contracts in general put all the risk on the contractor.

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person to exercise a standard of care while performing any act which 3.12 Is the concept of force majeure or frustration known could foreseeably cause harm to others. This duty extends to all in your jurisdiction? What remedy does this give such persons who, on a reasonable contemplation, can be expected the injured party? Is it usual/possible to argue to be affected by the acts of a person. Therefore, the doctrine of successfully that a contract which has become uneconomic is grounds for a claim for force majeure? “duty of care” applies to all construction works performed by a contractor, and a liability for negligence may arise for any harm caused to persons who could foreseeably be affected by his acts. The concept of a force majeure event is well recognised in the Indian legal system. The doctrine of frustration of contract is imbibed in Section 56 of the Indian Contract Act, 1872 (“Act”). In 3.16 Where the terms of a construction contract are accordance thereof, a contract stands frustrated if the performance ambiguous, are there rules which will settle how that India of an agreed set of obligations becomes impossible or unlawful, ambiguity is interpreted? either before or after the conclusion of a contract. Section 56 of the Act thus recognises force majeure (or act of God) events as a Any ambiguity must be attempted to be resolved by resorting to ground for frustration of contracts. Frustration of a contract under well recognised rules of contractual interpretation, such as the rule Section 56 of the Act results in such a contract becoming void in of literal interpretation, harmonious construction, giving effect to law, and thus cannot be enforced. Therefore, a frustrated contract the intention of the parties, and resorting to an interpretation which stands discharged and relieves the parties from performance of all upholds business efficacy of the contract. (These principles are to be underlying obligations. However, an exception to Section 56 states applied in that order.) If the ambiguity sustains on the application of that if frustration was within the reasonable contemplation of the the said rules, resort may be made to the rule of contra proferentem. promisor, or if the contract is frustrated due to acts attributable to the promisor, the promisee shall be entitled to compensation for any loss it suffers due to non-performance of promisor’s obligations 3.17 Are there any terms in a construction contract which under the contract. are unenforceable? However, Section 56 does not apply to instances of mere inconvenience, economic unfeasibility, or if performance of the The following terms or clauses shall be unenforceable in a contract has become more burdensome, but without impossibility. construction contract: (a) clauses empowering an employer to unilaterally terminate a contract without any remedy to a contractor; 3.13 Are parties which are not parties to the contract (b) unilateral and substantial alteration of the character of a entitled to claim the benefit of any contract right contract by adding/omitting obligations of a contractor; which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against (c) clause for payment of an unreasonable sum in the form of the original contracts in relation to defects in the liquidated damages; building? (d) clause absolutely restricting a party from enforcing his rights under or in respect of any contract; Third parties cannot bring claims or enforce terms of a contract (e) clause which limits the time within which a party may enforce against a party to a contract. This principle emanates from his rights; and the doctrine of “privity of contract” which confers rights and (f) any other clause which falls foul of the provisions of the obligations arising out of a contract only upon parties to a contract. Indian Contract Act, 1872. Therefore, in the landscape of construction law, a contractor cannot be subjected to claims from third parties to a construction contract. However, third parties are entitled to a remedy under tort law for 3.18 Where the construction contract involves an element injury suffered due to negligent acts of a contract. Therefore, a of design and/or the contract is one for design only, are the designer’s obligations absolute or are there contractor may be subjected to claims under tort law for negligence. limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in 3.14 Can one party (P1) to a construction contract which respect of his work? owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any As regards a designer’s contractual liability, the same shall be limits on the rights of set-off? limited to the obligations owed by the designer towards other parties to the construction contract, such as the employer. Due to Yes, parties in a construction contract can set off their claims and the application of the doctrine of privity of contract, the contractual dues against each other. This can be done either by way of mutual liability of the designer would not extend to third parties. negotiations and agreement, or through a proceeding before a court As for a designer’s liability in tort law, please see the response to of law or in an arbitration proceeding. An instance for the latter question 3.15 above. Harm to third parties must have directly arisen would arise where parties disagree upon the amount due to either out of the impugned negligence towards the design in question, and party. In such cases, a cross-claim is filed by the party who wishes must have been reasonably foreseen as being caused to persons who to set off its claims against the amount it owes to the other party. may avail of the facility designed. Such cross claims must be for a recognised sum and must be based on a legitimate claim against the other party. Any guarantee given by a designer under a construction contract would have relevance only against potential contractual claims for a defect in design, however, such a guarantee would not keep his 3.15 Do parties to construction contracts owe a duty of liability under tort law at bay. care to each other either in contract or under any other legal doctrine?

The doctrine of “duty of care” originates from tort law and requires a

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44(b) and 53(c) of the Act. Under the New York Convention, 4 Dispute Resolution Indian Courts may recognise and enforce foreign arbitral awards if the country is a signatory to the New York Convention and if the 4.1 How are disputes generally resolved? award is made in the territory of another contracting state which is a reciprocating territory. Section 57 of the Act, enumerates the pre- There are multifarious ways of resolving disputes which are requisites to enforce a foreign award under the Geneva Convention. recognised in India. These include resolving disputes by way of court India is a signatory to the New York Convention, with reservations litigation, arbitration, mediation, conciliation, dispute resolution that there should be a valid agreement to arbitrate, and that such boards and judicial settlement. Arbitration is most commonly used agreement must be evidenced in writing. Another reservation made India mechanism to resolve construction contract disputes. by India is to the effect that the New York Convention would be applicable only to disputes and differences arising out of a legal “commercial” relationship between the parties, whether contractual 4.2 Do you have adjudication processes in your or not. The Act mandates an award to be rendered in a country jurisdiction? If so, please describe the general procedures. which is a signatory to the New York Convention, and which has been duly notified in the Official Gazette of India as being a signatory to the New York Convention. This can cause hardships as In the absence of a statutory enactment to refer a payment dispute to whilst all important arbitration seats are recognised and notified, the adjudication, adjudication process is subject to a parties’ agreement. Official Gazette has not notified all countries which are signatories Generally, a clause containing the adjudication process would be to the Convention. part of the dispute resolution clause wherein parties would resolve disputes in the first instance through an adjudicator named in the Section 48 of the Act provides for conditions which must be satisfied contract. The contract would stipulate a time period within which for enforcement of a foreign arbitral award in India under the New the contractor may refer a decision of the engineer to the adjudicator. York Convention (these are all as per the New York Convention). It would also stipulate the time limit within which the adjudicator The public policy ground is narrowly construed in India for must give his decision. If either party is aggrieved by the decision enforcement of foreign awards. of the adjudicator, it may refer the dispute to arbitration within a stipulated time period failing which the adjudicator’s decision will 4.5 Where the contract provides for court proceedings be final and binding. in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? 4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how The procedure for enforcement of foreign judgments in India differs arbitration works in your jurisdiction. on the basis of reciprocating and non-reciprocating territories. In case of “reciprocating territories”, judgments may be enforced One of the widely accepted means of dispute resolution in directly as a decree and an execution decree may be obtained to this construction disputes is arbitration. The Arbitration and effect from an Indian Court. On the other hand, judgments from Conciliation Act, 1996 (“Arbitration Act”) is the governing law “non-reciprocating” territories are not executed directly by a court of arbitration in India. The Arbitration Act is essentially based of law. A fresh law suit needs to be filed on the basis of the foreign on the UNCITRAL Model Law, 1985 and UNCITRAL Model judgment within three years of the judgment for its enforcement. Arbitration Rules, 1976. Broadly, the Act has two parts. Part I This suit can only be defended on the grounds specified under the is an elaborate code providing for all arbitrations seated in India Code of Civil Procedure, 1908 (“CPC”), i.e. due process ground. (domestic or international arbitrations). Part II provides basically Subject to the exceptions under Sections 11 and 13 of the CPC, these for enforcement of foreign awards (see question 4.4). India is an foreign judgments operate as res judicata in India. arbitration friendly jurisdiction with a pro-arbitration Act and a good track record of enforcement for foreign awards. There is, 4.6 Where a contract provides for court proceedings in however, a problem of judicial delays. An important feature of the your jurisdiction, please outline the process adopted, Act is the requirement to conclude India-seated arbitrations within any rights of appeal and a general assessment of 12 months of the tribunal entering into the reference i.e. on the date how long proceedings are likely to take to reduce: (a) the sole arbitrator or all the arbitrators receive notice in writing of a decision by the court of first jurisdiction; and (b) a their appointment. Parties by consent may extend the stipulated decision by the final court of appeal. period by six months. Thereafter, time can only be extended by court and upon terms. Proceedings before a court are initiated upon the receipt of a plaint by one of the parties. The court then serves summons to the opposite party to file their written statement. Issues are thereafter framed by 4.4 Where the contract provides for international the court and the case posted for trial. Evidence-in-chief is in the arbitration, do your jurisdiction’s courts recognise form of sworn affidavits and cross examination is conducted in front and enforce international arbitration awards? Please advise of any obstacles to enforcement. of court appointed commissioners. This is followed by the filing of documents and evidences by the claimant and the respondent respectively. On conclusion of arguments on merits, the court The Arbitration and Conciliation Act, 1996 (“Arbitration Act”) reserves the matter to pronounce its judgment on a later date. recognises and provides for enforcement of foreign arbitral awards in India vide Part II thereof. The said Act gives effect to the A claimant may request the court for a summary judgment in case Convention on the Recognition and Enforcement of Foreign Arbitral of a certain debt and on lack of defence being available to the Awards, 1958 (“New York Convention”) and the Convention on the respondent wherein a judgment is sought without trial. Execution of Foreign Arbitral Awards, 1927 (“Geneva Convention”) Parties may prefer an appeal to a High Court within a period of 90 with a specific reservation of principle of reciprocity under Sections days from the date of the impugned judgment of a lower court, or

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within a period of 30 days to any other court in India (Division II of by a High Court to grant a certificate of appeal to prefer a SLP the Schedule, Limitation Act, 1963). If parties are not satisfied with before the Supreme Court, an appeal to the Supreme Court may be the judgment of a High Court, a Special Leave Petition (“SLP”) may preferred within 60 days of the impugned order of the High Court be filed to the Supreme Court of India against any such judgment (Order XXI, Supreme Court Rules, 2013). within a period of 90 days from the date of the impugned judgment A decision from the court of first instance can be expected within a (Order XXI, Rule 1, Supreme Court Rules, 2013). In case of refusal period of 3–4 years and within 1–2 years from the final court of appeal.

Sumeet Kachwaha Dharmendra Rautray India Kachwaha & Partners Kachwaha & Partners 1/6, Shanti Niketan 1/6, Shanti Niketan New Delhi – 110 021 New Delhi – 110 021 India India

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

Sumeet Kachwaha is a founding partner of the New Delhi-based Dharmendra Rautray completed his LL.M. in 1996 from the London firm Kachwaha & Partners with over 38 years’ standing as a lawyer. School of Economics and was thereafter called to the England and His work focuses on dispute resolution, contracts, infrastructure, Wales Bar in 2001. He is a member of Lincoln’s Inn. construction and procurement. Mr. Rautray’s main areas of practice are construction arbitrations, Sumeet has been involved in over 35 construction-related arbitrations, litigation, contracts, business transactions and international trade. including one as sole arbitrator. He has been involved in several power Mr. Rautray is currently handling several road and oil and gas dispute projects and has advised extensively on privatisation of railways, arbitrations including for a Canadian–Indian joint venture company roads, airports and other infrastructure projects. He is a frequent in infrastructure projects relating to highway construction. He is speaker on construction-related issues in international forums. representing clients in disputes relating to setting up of a Diesel Sumeet is a founding fellow of the International Academy of Hydro-Heater Project (DHDT) in an oil refinery owned by a Public Construction Lawyers. He also features in the procurement and Sector Unit. Mr. Rautray advised and represented an Indian entity in government contracts section of Who’s Who Legal. He recently the construction of railway bridges in the Dedicated Freight Corridor completed a two-year term as co-chair in a subcommittee of the being constructed in the State of Gujarat. He also advised a Russian international construction project (ICP) committee of the IBA. He entity in relation to construction of a Hydro Power Project in the North is currently serving as vice president of the Asia-Pacific Regional East India in relation to submissions to be made before the Dispute Arbitration Group (APRAG) and as a member of the advisory board of Adjudication Board. the Kuala Lumpur Regional Centre for Arbitration. Mr. Rautray has authored a full-length book on arbitration published by Wolters Kluwer (2008) and several articles published in leading international law journals.

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 many years of experience. 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.

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Indonesia Heru Mardijarto

Makarim & Taira S. Alexandra Gerungan

In addition, the Construction Law requires a tender or selection, 1 Making Construction Projects or electronic procurement to create a legally binding contract for construction financed from the state budget or for the construction 1.1 What are the standard types of construction contract of a public facility. in your jurisdiction? Do you have contracts which place both design and construction obligations upon 1.3 In your jurisdiction please identify whether there is contractors? If so, please describe the types of a concept of what is known as a “letter of intent”, in contract. Please also describe any forms of design- which an employer can give either a legally binding or only contract common in your jurisdiction. Do non-legally binding indication of willingness either to you have any arrangement known as management enter into a contract later or to commit itself to meet contracting, with one main managing contractor certain costs to be incurred by the contractor whether and with the construction work done by a series or not a full contract is ever concluded. of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and It is common to have a letter of intent or memorandum of engineering contracts.) understanding.

Under Indonesian law, there are no standard types of construction 1.4 Are there any statutory or standard types of insurance contract. Under Law No. 2 of 2017 on Construction Services (the which it would be commonplace or compulsory to “Construction Law”), a construction work contract can take any have in place when carrying out construction work? form according to need, but must be implemented in accordance For example, is there employer’s liability insurance with the prevailing laws and regulations. In practice, international for contractors in respect of death and personal standard forms of contract, such as International Federation of injury, or is there a requirement for the contractor to Consulting Engineers (“FIDIC”) contracts, are commonly used have contractors’ all-risk insurance? with foreign contractors. Under the Construction Law, a construction contract must include The Construction Law sets a minimum for the provisions of a a provision on insurance cover to be obtained by the employer/ construction contract. For example, the contract must provide the contractor. Under the Indonesian law on social security, the identities of both parties, a description and the value of the work, contractor must enroll its workers in the Manpower Social Security a force majeure clause, etc. Please see question 1.5 below for the Program for Construction Workers. In addition to the Manpower minimum provisions that need to be included in a construction Social Security Program, the parties are free to determine the types contract. of insurance required for a project. In practice, the employer usually Regarding package contractors, in Indonesia it is common to requires “Construction All Risk/Erection All Risk” insurance and establish a consortium of several contractors with different areas of “Third Party Liability” insurance with both the contractor and the expertise, with the main contractor leading the other members of the employer as the Insured Parties. consortium in performing the work.

1.5 Are there any statutory requirements in relation 1.2 Are there either any legally essential qualities needed to construction contracts in terms of: (a) general to create a legally binding contract (e.g. in common requirements; (b) labour (i.e. the legal status of those law jurisdictions, offer, acceptance, consideration working on site as employees or as self-employed and intention to create legal relations), or any sub-contractors); (c) tax (payment of income tax of specific requirements which need to be included in a employees); or (d) health and safety? construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)? (a) General Requirements: Under the Construction Law, the standard clauses to be included in In general, under Article 1320 of the Indonesian Civil Code (“ICC”), a construction contract are the following: an agreement is valid if it satisfies the following four requirements: (i) the consent of the individuals who are bound thereby; (ii) their ■ the identities of the parties; capacity to undertake an obligation; (iii) a specific subject matter; ■ the details of the work to be performed, a clear description and (iv) a permitted cause. and scope of work, the value of the work, unit prices, etc.;

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■ coverage period including a maintenance period for which it is agreed to by the parties. However, in practice, to secure proper the contractor is responsible; performance by the contractor, the contractor prefers to provide ■ the rights and obligations of both parties; the employer bonds (e.g. advance payment security, performance ■ construction workers (including the obligation to employ security, defect notification period security). certified construction workers); ■ the method of payment; 1.7 Is it permissible/common for there to be performance ■ event of default provisions; bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to ■ dispute settlement; guarantee the performance of subsidiary companies? ■ termination of contract provisions; Are there any restrictions on the nature of such bonds and guarantees? ■ force majeure; Indonesia ■ building failure; ■ workers’ protection (working safety and health); Yes, it is common in Indonesia for the contractor to provide several guarantees/bonds. Note that for a construction project financed out ■ protection against third parties (including the obligations of of the state budget, it is mandatory for the contractor to provide the parties in the event of a loss, accident or death); Contractor Bonds. ■ environmental aspects (includes the obligation of the parties to comply with the environmental requirements); and The Contractor Bonds must be payable unconditionally in the amount of the guaranteed value and within a certain period of receipt ■ collateral or guarantees. of the request from the employer regarding the contractor’s default. (b) Labour: Bank Indonesia Circular Letter No. 23/7/UKU Tahun 1991 dated Article 47 (1) e of the Construction Law requires contractors and 18 March 1991 requires a bank guarantee to contain the following: the employers to only hire construction workers holding a Work a. title: “Bank Guarantee”; Competence Certificate Sertifikat ( Kompetensi Kerja) in certain positions. According to the elucidation of this Article, these positions b. the name and address of the bank issuing the bank guarantee; are: (i) operators; (ii) technicians or analysts; and (iii) experts (ahli). c. the issuance date of the Bank Guarantee; (c) Tax: d. the underlying transaction secured; Tax issues do not have to be covered in the construction contract. e. the amount of money guaranteed; Employees in a construction project must pay income tax like all f. the beginning and end dates of the Bank Guarantee; employees. Usually, the contractor who hires the workers pays their g. the end date for submitting a claim; and income tax. h. a statement that the bank will pay the beneficiary with Note that, whilst we have a working knowledge of Indonesian the condition that the bank will first confiscate and sell taxation laws, this is not an area where we, in common with nearly the principal’s assets (Article 1831 of ICC) or the bank all Indonesian law firms, claim specialist expertise. In Indonesia, will release its right to first claim the principal’s assets taxation advisory services traditionally fall within the scope of the to be confiscated and sold (Article 1832 of ICC) and thus immediately pay the beneficiary. As guarantees/bonds for work of the accounting firms. construction are payable unconditionally, the bank usually (d) Health and Safety: waive its rights under Article 1831 of ICC. The Construction Law imposes requirements related to construction security, safety and continuity. The employer and contractor 1.8 Is it possible and/or usual for contractors to have must comply with the construction security, safety and continuity retention of title rights in relation to goods and standards. These standards cover the following areas: supplies used in the works? Is it permissible for i. materials; contractors to claim that until they have been paid ii. equipment; they retain title and the right to remove goods and materials supplied from the site? iii. security and safety; iv. procedures; We understand that this relates to the security placed by the v. quality of work; contractors to make sure the employer meets its payment obligations. vi. maintenance; It is common in private projects for the contractor to require its vii. worker-protection programmes; and investment to be secured by a lien over collateral. The lien may be a fiduciary security (for moveable objects, e.g. materials supplied, viii. protection of the environment. etc.). If the construction contract allows the contractor to place a The above standards are provided in the relevant regulations. lien on the goods and supplies used in the works, the construction The standards, especially for materials and equipment, may depend contract will usually require the contractor to provide the employer on the type of construction work to be undertaken. For instance, a lien waiver upon the fulfillment of the payment obligation by the for the construction of a building (gedung), the Indonesian National employer. Standards (Standar Nasional Indonesia/SNI) usually apply. In addition, for goods or supplies that are not fixed to the land, under Article 1459 of the ICC, ownership of the goods will not be 1.6 Is the employer legally permitted to retain part of transferred if there is no handover from the seller (or in this case the purchase price for the works as a retention to be the contractor) to the buyer (or in this case the employer). The released either in whole or in part when: (a) the works contractor may hold back the handover of the goods until the are substantially complete; and/or (b) any agreed contractor has been paid. defects liability is complete?

There is no restriction on the employer retaining part of the payment under the construction contract as a form of security provided that

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on the construction contract. In general, any change or alteration 2 Supervising Construction Contracts must be agreed to by the employer, as it will also usually lead to a price adjustment. 2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third 3.2 Can work be omitted from the contract? If it is party? Does any such third party (e.g. an engineer omitted, can the employer do it himself or get a third or architect) have a duty to act impartially between party to do it? 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 The Construction Law imposes no restriction on the work that can impartially. be omitted from the contract. However, in Indonesia, a standard

Indonesia construction contract (FIDIC) only allows an omission if the Yes, it is common for construction contracts to be supervised on employer does not need the work, not because the employer will behalf of the employer by a third party. This duty is not regulated have a third party replace the contractor to perform work. under Indonesian law, but ideally, the third party supervisor must act impartially. 3.3 Are there terms which will/can be implied into a In the event of a building failure, for example, an independent construction contract? expert evaluator (penilai ahli) will be appointed by the Minister of Public Works and Housing (“MOPW”) to impartially evaluate the Unless otherwise stated in the construction contract (except for building failure. provisions of Indonesian law that cannot be waived (e.g. the duty to act in good faith)), the rights and obligations under the law (statutory requirements) are deemed implied in a construction contract. 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 3.4 If the contractor is delayed by two events, one the include in the contract what is known as a “pay when fault of the contractor and one the fault or risk of paid” clause? his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that The Construction Law is silent on this scheme, but Indonesian concurrent delay? law recognises the freedom of contract principle. Although it is uncommon, the “pay when paid” scheme may be applied in a project As a general rule, under Article 24 of Government Regulation No. as long as it is agreed to by the parties under the construction contract. 29 of 2000 (subject to the up-coming implementing regulations for In project finance, the availability of the funds needed by the the Construction Law), the party responsible for the delay must employer to pay the contractor (financial close) is included as provide compensation for the costs incurred because of a concurrent a condition precedent to the commencement date under the delay. The Construction Law is silent on who is responsible in the construction contract. event of concurring causes; it is to be determined on a case-by-case basis taking into account the relevant provisions of the construction contract. Unlike in the common law system, Indonesian law does 2.3 Are the parties permitted to agree in advance a fixed not provide provision on the laws of causation. sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of It is important to note that Indonesian courts have wide latitude particular breaches, e.g. liquidated damages for late to interpret law and to make rulings, and do not have to follow completion? If such arrangements are permitted, are precedent. Each case is therefore decided based on the presiding there any restrictions on what can be agreed? E.g. court’s interpretation of the law and determination of the facts. does the sum to be paid have to be a genuine pre- Case law has little legal effect and only a few cases are published. estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of Enforcement proceedings are also subject to the general discretion financial loss suffered? of the courts with regard to the award of costs.

The parties may agree in advance on a fixed sum (liquidated 3.5 If the contractor has allowed in his programme a damages) to be paid by the contractor to the employer in the event period of time (known as the float) to allow for his own of a particular breach (e.g. late completion of the works). Under delays but the employer uses up that period by, for Article 1309 of ICC, Indonesian courts have the authority to reduce example, a variation, is the contractor subsequently the amount of liquidated damages if the contract has been partially entitled to an extension of time if he is then delayed after this float is used up? fulfilled. Moreover, Indonesian courts have, on occasion, reduced the amount of the damages based on considerations of decency and The Construction Law is silent on this issue; it is to be agreed good faith. to by the parties under the construction contract. In general, the entitlement to an extension of time for any reason usually depends 3 Common Issues on Construction on the agreement between the parties. Contracts 3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims 3.1 Is the employer entitled to vary the works to be done against each other? How long is that period and from under the contract? Is there any limit on that right? what date does time start to run?

The Construction Law does not give the contractor the right to vary Under Article 1967 of the ICC, all legal claims expire after 30 (thirty) the works without the consent of the employer. It therefore depends

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years. However, for a building failure, under the Construction the contract. Typically, the employer is entitled to terminate for a Law, the contractor’s period of liability is determined according default or the bankruptcy of the contractor. The contractor can do so to the anticipated lifetime of the planned construction, specified in the event of the bankruptcy of the employer or its failure to make in the construction contract. If the specified term is more than 10 a payment within a specified time period. (ten) years, the contractor is liable for building failures occuring during the interval between the handover and 10 (ten) years after 3.12 Is the concept of force majeure or frustration known the handover. The employer will be liable for any building failure in your jurisdiction? What remedy does this give which occurs after the specified term. 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? 3.7 Who normally bears the risk of unforeseen ground conditions? Indonesia Yes, the concept of force majeure is known and commonly used The law is silent on this issue so it depends on the arrangment for the in Indonesia. For construction contracts, the Construction Law construction works agreed to by the parties under the construction provides 2 (two) types of force majeure: contract. If the employer is responsbile for a feasibilty study of a. force majeure of an absolute nature: a situation in which the ground conditions (conducted before construction commences), parties cannot exercise their rights and obligations under the construction contract; and/or and if that information is relied on by the contractor without the contractor having any obligation to verify the accuracy of that b. force majeure of a relative nature: a situation in which the information, the employer is liable for unforseen ground conditions. parties can still exercise their rights and obligations under the construction contract. It is also possible to have the contractor bear the risk of any unforseen ground conditions under the construction contract. The parties are free to determine under the construction contract which events will trigger a force majeure condition. However, it is not unusual for the employer and the contractor to share the risks, so that in the event of unforeseen ground conditions, the parties will agree on the how to deal with the issue. 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 3.8 Who usually bears the risk of a change in law subsequent owner of a building able to claim against affecting the completion of the works? the original contracts in relation to defects in the building? The Construction Law is silent on this issue; therefore it is agreed to by the parties under the construction contract. In practice, this risk In the event of a building failure, third parties (even the general is usually borne by the employer. public) affected by the building failure may claim compensation for losses/damage caused by the building failure. 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums The Construction Law is silent on this issue; therefore it is agreed to due to P2 the sums P2 owes to P1? Are there any by the parties under the construction contract. Generally speaking, limits on the rights of set-off? those who create the intellectual property material in respect of the design and operation of a property typically own the intellectual The set-off arrangement (perjumpaan utang) is known in Indonesian property rights related to the project. These are usually the law. Under Article 1425 of the ICC, if one party is simultaneously employer’s design consultants or, if the contractor has created the a creditor and a debtor to another party, the debt can be settled by design, the contractor. “set-off”. If the contractor owns the intellectual property, the contractor will provide an irrevocable right to use the intellectual property to the 3.15 Do parties to construction contracts owe a duty of employer. care to each other either in contract or under any other legal doctrine?

3.10 Is the contractor ever entitled to suspend works? The duty of care principle is more commonly known in common law jurisdictions, not in civil law jurisdictions such as Indonesia. In The Construction Law is silent on this issue; so it is agreed to by Indonesia, a tort claim may be submitted when one party unlawfully the parties under the construction contract. In most cases, the violates another party’s rights thereby causing the other party (the construction contract provides the contractor the right to suspend aggrieved party) to suffer damages which the aggrieved party works. may claim. A tort/illegal act lawsuit does not require any prior contractual arrangement as it is covered by the law. To qualify as an 3.11 On what grounds can a contract be terminated? Are illegal act, the following 4 (four) criteria must be met: there any grounds which automatically or usually 1. There must have been an illegal act (onrechmatig). entitle the innocent party to terminate the contract? 2. The illegal act must have caused the relevant third party to Do those termination rights need to be set out suffer a loss. expressly? 3. There must have been a “mistake” or “negligence”. The Construction Law is silent on this matter; therefore it is agreed 4. There must be a direct relationship between the act and the to by the parties under the construction contract. The construction loss. contract will usually include clear provisions on termination of

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stated that the court must refuse to be involved in a dispute where the 3.16 Where the terms of a construction contract are parties have stipulated arbitration. In addition to arbitration, Law ambiguous, are there rules which will settle how that No. 30 of 1999 on Arbitration and Alternative Dispute Resolution ambiguity is interpreted? (“Arbitration Law”) also provides alternative dispute resolution to settle disputes or divergent views throughout the court as agreed Under Article 1343 of the ICC, if the wording of an agreement is upon by parties, namely by means of consultation, negotiation, open to several interpretations/ambiguous, then the intent of the mediation, conciliation or evaluation experts. parties involved must be ascertained rather than determined by the literal sense of the wording. 4.2 Do you have adjudication processes in your Under the Construction Law, in the event of a dispute, the Indonesian jurisdiction? If so, please describe the general

Indonesia language version of the construction contract must apply. procedures.

3.17 Are there any terms in a construction contract which While adjudication is common to settle construction disputes, are unenforceable? Indonesian Arbitration Law does not specify it as a dispute settlement alternative. Law No. 2 of 2017 on Construction Services (the new In general, terms that conflict with the law terms are unenforceable. Indonesian Construction Law) provides for a Dispute Board (Dewan One example is the provision on the prevailing language of the Sengketa), which is a team formed under the parties’ agreement to construction contract. Under the Construction Law, the Indonesian prevent and mediate a dispute arising from the implementation of the version of the construction contract must prevail. Therefore a construction contract. This will be specified further in a government provision of a construction contract that states that the English regulation, but to date, the government regulation has not yet been version of the agreement prevails may not be recognised. issued. We are aware that a Dispute Adjudication Board (DAB) is available under FIDIC books.

3.18 Where the construction contract involves an element of design and/or the contract is one for design only, 4.3 Do your construction contracts commonly have are the designer’s obligations absolute or are there arbitration clauses? If so, please explain how limits on the extent of his liability? In particular, does arbitration works in your jurisdiction. the designer have to give an absolute guarantee in respect of his work? Yes, our construction contracts commonly have arbitration clauses. As explained above, under the contracts, the parties may have an In so far as it relates to liability for a defect which leads to a building arbitration agreement before or during a dispute. failure, if it is purely caused by the design (assuming that the design The parties to the arbitration are given wide discretion to determine will not change during construction), the designer may be held liable. their own procedural provisions and processes, provided they do not An independent expert evaluator (penilai ahli) will be appointed by conflict with the Arbitration Law. Some of the principles provided the MOPW to evaluate the building failure and determine who is in the Law are as follows. liable for the building failure. Secrecy: the arbitration is conducted behind closed doors. The designer’s period of liability is determined according to the anticipated lifetime of the planned construction, as specified in the Language: Indonesian, unless the parties and the arbitrator agree construction contract. If the specified term is more than 10 (ten) otherwise. years, the designer is liable for building failures occuring during the Representation: proxies may represent the parties provided they are interval between the handover and 10 (ten) years after the handover. properly authorised. Third parties can participate in the arbitration if they have interests in the case and with the agreement of all parties and the arbitrator. 4 Dispute Resolution Provisional Decision: this is possible if a party applies for it, for example, an order to sell perishable goods. The exact scope and 4.1 How are disputes generally resolved? extent of such interim judgments are unclear. Forum: arbitration can be ad hoc or institutional, either domestic or Under Indonesian law, the disputes generally are commonly international. resolved in or out of court (i.e. arbitration and alternative dispute Venue: to be determined by the parties or the arbitrator, however, resolutions). certain functions (for example, site inspection or witness Depending on the complexity of the case, court litigation can take examination) can be held elsewhere. between six months to approximately one year to obtain a district Witnesses: witnesses, including expert witnesses, may be summoned court ruling (first instance) in Indonesia, and the losing party can either at the request of the parties or the order of the arbitrator. appeal to the relevant high court. High court proceedings can take another six months, and the losing party can appeal to the Supreme Secretary: a secretary should prepare an account of the arbitration Court, which can take from one to three years to render a final and its proceedings. decision. Indonesian judges are not bound by earlier judgments as So far as the arbitral process itself is concerned, the basic procedures Indonesian law does not recognise binding precedent principles. As include the claimant’s petition, the respondent’s response/counter such, each case before the Indonesian courts is determined on the claim, hearings, evidence review, and award. The review of the basis of its particulars facts and merits. dispute must conclude within 180 days of the arbitrator/ tribunal The parties may agree to proceed to arbitration either before or being instituted. This period may be extended; often, the parties during a dispute. An arbitration agreement will preclude the parties may wish to waive the provisions of this article in their arbitration from submitting the dispute to the court. Indeed, it is specifically clauses or agreement.

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4.4 Where the contract provides for international 4.5 Where the contract provides for court proceedings arbitration, do your jurisdiction’s courts recognise in a foreign country, will the judgment of that foreign and enforce international arbitration awards? Please court be upheld and enforced in your jurisdiction? advise of any obstacles to enforcement. Under Article 436 of the RV (Reglement of de Rechtsvordering – Yes, enforcement of international arbitral awards can be applied an Indonesian civil procedural regulation from the colonial era), a after the award has been registered at the Central Jakarta District foreign court judgment cannot be enforced in Indonesia directly. To Court by the arbitrator(s) or their proxy. When registering the enforce one, a new lawsuit must be filed in an Indonesian court. award, the following documents must be furnished: The foreign court ruling may be introduced as evidence in the new (1) the original award, or its authenticated copy according to proceedings, although in principle the Indonesian court will not be Indonesia the provisions on the authentication of foreign documents, bound by the findings of the foreign court. The basic procedure will together with an official Indonesian translation; follow the civil procedural law as explained in question 4.6 below. (2) the original agreement which is the basis for the award, or its authenticated copy according to the provisions on the authentication of foreign documents, together with an 4.6 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, Indonesian official translation; and any rights of appeal and a general assessment of (3) a certificate from the diplomatic representative of the how long proceedings are likely to take to reduce: (a) Republic of Indonesia in the country in which the award a decision by the court of first jurisdiction; and (b) a was rendered stating that country and Indonesia are bound decision by the final court of appeal. by a bilateral or multilateral treaty on the recognition and implementation of international arbitral awards. Civil disputes in Indonesia are filed in general courts, comprising Upon receipt of the above requirements, the Central Jakarta District district courts serving as courts of first instance and high courts Court will issue a deed of registration of the award. Once the award as courts of appeal. The Supreme Court supervises the district has been registered in the Central Jakarta District Court, if the courts and high courts, and is the court of final appeal. Therefore, respondent does not implement the award voluntarily, the steps to Indonesia generally adopts a three-stage court system (exceptions enforce the award are as follows: include appeals against commercial court judgments on bankruptcy (a) file a petition for a writ of execution exequatur( ) – the Central and intellectual property, and Industrial Relations Courts, which lie Jakarta District Court will then issue the Exequatur Order directly with the Supreme Court). (Penetapan Exequatur); A. The Court of First Instance (b) file a petition to summon the respondent to appear in court Generally, the process includes: (i) the plaintiff registers a lawsuit to be officially warned aanmaning( ) to implement the award with the district court’s clerk’s office; (ii) the court then serves the and the Exequatur Order; and defendant an order to appear in court on the first hearing; and (iii) (c) file a petition to seize the respondent’s assets and sell them on the first hearing, the judge refers the parties to the mandatory through public auction if the respondent denies or refuses mediation. If mediation fails, the mediator returns the matter to the to comply with the court’s demand as explained above for whatever reasons. judge. The above procedures are subject to Indonesian Civil Procedure Subsequently, the defendant can submit a response to the plaintiff’s Law. claim. The plaintiff is given an opportunity to submit a rejoinder responding to the defendant’s response; and the defendant is given The award can be recognised and may only be enforced within an an opportunity to respond to it in a counterplea. The judge will Indonesian jurisdiction if they satisfy the following requirements: then allow the disputing parties to present evidence, including, if so (a) The award must have been rendered by an arbitrator/tribunal desired, witnesses or experts. Finally, each party can submit their in a country which, together with Indonesia, is a party to closing arguments; thereafter, the court renders its final ruling and a bilateral or multilateral treaty on the recognition and reads it out in the final hearing. enforcement of international arbitral awards. (b) International awards are limited to awards which, under A 2014 Supreme Court Circular Letter requires in courts of the provisions of Indonesian law, fall within the scope of first instance to conclude within 5 (five) months of the lawsuit being . registered. However, in practice, a civil court proceeding (in the (c) The awards do not violate public policy. first instance) often takes longer than 5 (five) months. (d) An order of Exequatur from the Chairman of the Central B. Appeal to the High Court Jakarta District Court has been obtained. The unsuccessful party has an absolute right to appeal against a Enforcement of international arbitral awards may be challenged in district court judgment to the high court. The appellant must submit the following ways: an appeal to the clerk of the district court with jurisdiction over the case by submitting an application within 14 days of receiving the (a) Appeal to the Supreme Court. The appeal can be filed only against a decision of the Chairman of the Central district court’s ruling. It is not mandatory but the appellant can Jakarta District Court that refuses to recognise and enforce submit a memorandum of appeal, which sets out the reasons for the the award. The Supreme Court will rule within 90 days of appeal. The court will take six months to one year to hand down a receipt of the appeal case. A decision of the Chairman of the ruling. The enforcement of the original district court judgment is Central Jakarta District Court confirming and enforcing the generally stayed until a final and binding ruling is handed down. award cannot be appealed. C. Appeal to the Supreme Court (b) Annulment. Under Article V(1)(e) of the New York The unsuccessful party may appeal against the high court judgment Convention, annulment of the award may only be requested to the Supreme Court. Appeals on certain cases (such as commercial in the place where the arbitration was held. court rulings on bankruptcy and intellectual property) lie directly with the Supreme Court. In general, the appellant must state its

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intention to appeal within 14 days of receiving the high court D. in the Supreme Court ruling. The appellant must submit a memorandum of appeal setting Under Indonesian law, a judicial review of a final and binding court out the grounds for the appeal within 14 days of the application’s judgment (including of the Supreme Court) is only available in submission. The respondent can file a counter appeal memorandum limited circumstances, including if the judgment was based on false within 14 days of receipt of the appeal memorandum. The Supreme information or a deception by the opposing party, which was only Court in general decides on matters of law only. Enforcement of discovered after the case had been ruled on and after the judgment high court ruling is generally stayed until a final and binding ruling was handed down, or if substantial written evidence was discovered has been handed down by the Supreme Court. This process can take that could not be found during the proceedings. The judicial review from one to five years to render a final decision. does not cancel or prevent enforcement of a final and binding judgment while the judicial review is being considered. Indonesia

Heru Mardijarto Alexandra Gerungan Makarim & Taira S. Makarim & Taira S. Summitmas I, 16th–17th Floors Summitmas I, 16th–17th Floors Jl. Jendral Sudirman Kav. 61–62 Jl. Jendral Sudirman Kav. 61–62 Jakarta 12190 Jakarta 12190 Indonesia Indonesia

Tel: +62 21 252 1272 / 5200001 Tel: +62 21 252 1272 / 5200001 Fax: +62 21 2522751 / 2522750 / 2521830 Fax: +62 21 252 2751 / 2522750 / 2521830 Email: [email protected] Email: [email protected] URL: www.makarim.com URL: www.makarim.com

Heru Mardijarto is a Partner in the Firm’s Corporate and Commercial Alexandra Gerungan is a Partner dealing with litigation/dispute department. His expertise includes general corporate matters, energy resolution at Makarim & Taira S. She has successfully handled and natural resources, construction, and IT and telecommunications. litigation and dispute resolution cases across highly diverse sectors. He has advised many major international clients, as well as Her experience ranges from civil lawsuits to arbitration; alternative Indonesian state-owned companies in relation to power plants, as dispute resolution; anti-corruption investigation; employment issues; well as construction projects. He also has extensive experience in land/property cases; insurance, banking and future exchange claims/ handling the procurement/tender process in both Government and disputes; investigations (for example, related to allegations private institutions. Specifically for construction projects, he has been of forestry and environmental ); and internal/independent involved in some big construction projects for electric power plants, investigations. She also advises on related matters such as due a blast furnace, and the construction of the Grissik – the Singapore diligence and general investigations, liquidation, bankruptcy/ borderline gas pipeline. Recently, he has been actively involved in suspension of payment, and land/property issues. handling Data Protection legal issues and provided advice on them to both local and overseas clients. Drawing on her experience, she is moreover able to advise clients on transaction structures, agreements and general business practices Heru is a member of The Indonesian Advocates Association (PERADI), with a view to preventing the emergence of future disputes or issues. and The Indonesian Legal Consultant Association (IPHI). Alexandra is a frequent contributor to and a co-author of various reports, articles and publications on litigation, arbitration, alternate dispute resolution, environment matters, , 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.

Established in 1980 by two Harvard graduates, Nono Anwar Makarim and Frank Taira Supit, Makarim & Taira S. 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. Our long-standing reputation with policymakers, regulators, state-owned companies and leading industry groups provides us with important insights into the latest Government policies and industry positions. The firm has received recognition in a number of leading international legal guides and surveys by advising many clients on innovative deals. We are committed to providing excellent service in a timely and commercially-oriented manner. From the initial foreign investment decision to the establishment and operation of a successful Indonesian business, from dispute resolution to M&A, the firm has long become the favoured, trusted Indonesian counsel in providing practical solutions and advice on every aspect of doing business in Indonesia.

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Ireland Rhona Henry

Matheson Nicola Dunleavy

building works and civil engineering works) site investigation 1 Making Construction Projects contract, framework agreement, minor works contract, a short form contract plus a contract for early collaboration) for use in public 1.1 What are the standard types of construction contract sector construction procurement. in your jurisdiction? Do you have contracts which The most commonly used design only contracts in this jurisdiction place both design and construction obligations upon are those contracts which are produced by the regulatory bodies contractors? If so, please describe the types of for disciplines like mechanical and electrical consultancy, civil contract. Please also describe any forms of design- only contract common in your jurisdiction. Do engineering and architecture together with bespoke forms. When you have any arrangement known as management used, certainly in the context of larger projects, these contracts are contracting, with one main managing contractor often heavily amended. In addition, the GCCC has produced a and with the construction work done by a series design only contract for use in the case of public sector projects. of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and 1.2 Are there either any legally essential qualities needed engineering contracts.) to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any There are a number of standard-form construction contracts used in specific requirements which need to be included in a this jurisdiction. The most commonly used forms are as follows: construction contract (e.g. provision for adjudication 1. Conditions of Building Contract issued by the Royal Institute or any need for the contract to be evidenced in of the Architects of Ireland (“RIAI”) (together with a sub- writing)? contract form); and 2. Engineers Ireland conditions of contract for works of civil The legal essential requirements of a contract in this jurisdiction engineering construction (together with a form of sub- are: agreement; consideration; certainty; intention to create legal contract). relations; and capacity. Generally, there is no requirement for a These conditions of contract are, particularly with respect to construction contract to be in writing. Recent legislation in this larger projects, usually heavily amended through a schedule of jurisdiction, the Construction Contracts Act, 2013 (which came into amendments to reflect risk profile currently acceptable in the force on 25 July 2016), includes a right on the part of parties to market. In a design and build scenario, a further set of amendments a construction contract to refer payment disputes to adjudication, can be incorporated into these conditions to facilitate a design and provides for certain new payment provisions and includes a statutory build procurement route. right on the part of a contractor/sub-contractor to suspend works In the case of more complicated projects, for example, in the under a construction contract for non-payment. pharmaceutical, information technology and energy market, there are a number of other types of contracts which are commonly used. 1.3 In your jurisdiction please identify whether there is For example: a concept of what is known as a “letter of intent”, in (a) the Fédération Internationale des Ingénieurs-Conseils which an employer can give either a legally binding or (“FIDIC”) suite of contracts, which includes a build-only non-legally binding indication of willingness either to form of contract, a design and build mechanical and electrical enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether contract and a turnkey or engineering, procurement and or not a full contract is ever concluded. construction (“EPC”) contract; (b) management contracts (which, in this jurisdiction, are In general, a letter of intent (“LOI”) may be issued to indicate an typically based on the RIAI form); employer’s intention to create a contract or similar arrangement with (c) Institution of Engineering and Technology MF/1; a contractor in due course. The phrase LOI is not a legal term of art (d) New Engineering Contract (“NEC”) Forms; and in Ireland, however, and as such the effect of each LOI will depend (e) Joint Contracts Tribunal (“JCT”) Forms. on the individual LOI’s terms and on the context in which the LOI In the case of public sector works, the Government Construction is issued. In the context of a construction project, an LOI may be Contracts Committee (“GCCC”) have produced a suite of standard issued when the parties to a construction contract are negotiating documents (including a build only, design and build, (for both contract particulars so that, for example, the employer can induce

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the contractor to begin preliminary contract work (e.g., begin site 2. Data Protection Acts 1988 to 2003: these acts outline clearance and site preparation, the ordering of equipment) before the obligations regarding the type of data an employer parties execute a final contract. may hold on employees, the background checks that an employer can carry out on potential employees, seeking Garda vetting of potential employees and how long an 1.4 Are there any statutory or standard types of insurance organisation can retain employee data. which it would be commonplace or compulsory to 3. The Minimum Wage Act 2000: provides for a national have in place when carrying out construction work? minimum wage per hour for an adult employee which For example, is there employer’s liability insurance is €9.25 per hour. In the construction sector, employers for contractors in respect of death and personal usually pay at a higher rate as a matter of sector level injury, or is there a requirement for the contractor to Ireland have contractors’ all-risk insurance? practice. 4. The Industrial Relations Acts 1942 to 2015: this legislation provides the overall industrial relations framework for Irish statute law does not require specific insurances in relation resolving industrial disputes in Ireland. It is based on a to construction projects, save for motor vehicle insurance where predominantly voluntarist system, the central feature appropriate. However, construction projects will typically involve of which is that an employer cannot be required to some/all of the following insurances: recognise a trade union or to negotiate directly with it. (a) insurance of the project works (typically referred to as “All The recommendations from the Workplace Relations Risks” insurance), taken out by either the contractor or the Commission or the Labour Court are in most cases non- employer to cover loss or damage to the works and/or project binding, however, in certain circumstances the Labour materials; Court can issue binding orders in relation to terms and (b) employer’s liability insurance, taken out by the contractor to conditions. cover injury to or the death of its employees during the course 5. The Organisation of Working Time Act 1997: regulates of a construction project; working time, annual leave and public holiday leave. (c) public liability insurance, taken out by the contractor to It provides for a maximum working week of 48 hours cover third party claims in relation to personal injury, death averaged over a four-month period (or in certain cases or injury to third parties and property damage (other than longer averaging periods), daily and weekly rest periods, damage to the works); and and minimum annual leave entitlements. (d) professional indemnity (“PI”) insurance, taken out by any 6. The Protected Disclosures Act 2014: this is the Irish party with design responsibility to cover design liability. general whistleblower code and allows employees to raise concerns regarding potential health and safety issues at the workplace and failure of the employer to comply with 1.5 Are there any statutory requirements in relation legal obligations, amongst other issues. to construction contracts in terms of: (a) general 7. The Protection of Employees (Part-Time Work) Act requirements; (b) labour (i.e. the legal status of those 2001: in addition to providing protection to part-time working on site as employees or as self-employed employees against less favourable treatment, this legislation sub-contractors); (c) tax (payment of income tax of implements the EU posted workers directive, imposing employees); or (d) health and safety? certain minimum mandatory standards under local law to any employees working in the jurisdiction, irrespective of (a) General Requirements nationality, where they were originally hired or the place The Construction Contracts Act 2013 (the “CCA”) applies to of residence. In short, this prevents against foreign service all construction contracts (as defined under the CCA) entered providers using foreign labour on more cost effective terms into after 25 July 2016. The CCA applies to oral and written and conditions to undercut local service providers. agreements. The CCA: 8. The Protection of Employees (Transfer of Undertakings) 1. introduces requirements in relation to payment under a Regulations 2003: the rules (“known as TUPE”) provide construction contract; that where a business or part of a business transfers from 2. renders “ineffective” “pay when paid” clauses in one employer to another, any employees attached to that construction contracts; and business will be entitled to transfer with it on the same terms and conditions, and with their service recognised in 3. provides for an adjudication regime in relation to payment full. Changes or dismissals related to the transfer are not disputes under construction contracts. permitted, though redundancies are. The Building Control (Amendment) Regulations 2014 9. EU legislation such as the Equal Pay Directive, the Equal also introduced a new regime in this jurisdiction aimed at Treatment Directive and the General Framework Directive achieving minimum standards in building practice in relation must also be considered when drafting construction to design and construction methods. contracts. (b) Labour (c) Tax The following principal legislation relating to labour must As with all employed/self-employed persons working in be taken into account when drafting construction contracts Ireland, workers on a construction project are invariably subject in Ireland, however, there is a large body of broader to the payment of income tax, universal social charge (“USC”) employment law that will also apply depending on the issue and pay-related social insurance (“PRSI”) either through self- and circumstances: assessment as self-employed persons or through Irish Revenue’s 1. The Employment Equality Acts 1998 to 2015: these acts pay-as-you-earn or PAYE system. In the case of employees, deal with employment discrimination on the grounds the employer needs to correctly operate the PAYE system and of gender, civil status, family status, sexual orientation, be mindful of its obligations and its filing requirements in this religion, age, disability, race and membership of the regard. In the case of individuals engaged as independent traveller community. They also regulate issues such as contractors, the contracting entity needs to be entirely satisfied harassment, sexual harassment, discriminatory dismissal, that they are genuine independent contractors from an Irish tax, access to employment, equal pay and working conditions. social security and employment law perspective.

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Furthermore, Relevant Contracts Tax (“RCT”) must be retained upon issue of the certificate of substantial completion. The operated by a party who falls under the definition of a principal balance of the retention monies is invoiced upon the issue of the contractor. In order to operate RCT, the principal contractor defects certificate/final certificate. In standard-form construction must register on the Revenue website and list all the sub- contracts, such as the RIAI and GCCC, the retention money is held contractors involved in the project and notify Revenue in in trust by the employer for the contractor. advance of any payments to be made to the sub-contractors. This system allows the Revenue to require sums of money to be withheld for tax purposes from the sub-contractor 1.7 Is it permissible/common for there to be performance each time the principal contractor makes a payment and the bonds (provided by banks and others) to guarantee withheld amount is required to be paid to the Revenue by performance, and/or company guarantees provided to the principal contractor. Revenue imposes heavy penalties guarantee the performance of subsidiary companies? for those who do not register and fail to operate RCT. The Are there any restrictions on the nature of such bonds Ireland purpose of the system is to ensure that sub-contractors satisfy and guarantees? their tax obligations on time as the withheld amounts may be offset by the Revenue on behalf of the sub-contractor against Performance bonds and parent company guarantees are permissible any tax liabilities they may have. It should also be noted that and commonly seen in construction projects in this jurisdiction. where RCT applies, it can alter the application of VAT to the They are not mutually exclusive and regularly both kinds of contract relevant contract as well. security are sought by employers. Performance bonds usually (d) Health and Safety involve an employer, a contractor and an independent third party The following key pieces of health and safety legislation such as a bank or a financial institution, which guarantees to cover affect the construction industry in this jurisdiction: certain losses sustained by the employer due to the non-performance ■ Safety, Health and Welfare at Work Act 2005. by the contractor. The amount of the bond is usually between 10% ■ Safety, Health and Welfare at Work (Construction) and 12.5% of the contract sum. In contrast, a parent company Regulations 2013. guarantee will come directly from the parent company, where the ■ Safety, Health and Welfare at Work (Asbestos) Regulations contractor is a subsidiary of the parent company, and will cover 2006 to 2010 and the Safety, Health and Welfare at Work the entirety of the works. Company guarantees are often capped (Carcinogens) (Amendment) Regulations 2015. at the contract sum. On-demand bonds are very difficult to obtain ■ Safety, Health and Welfare at Work (General Application) in Ireland. Regulations 2007 to 2012. The above regulations set out obligations and duties to ensure 1.8 Is it possible and/or usual for contractors to have a minimum standard of health and safety in the workplace, retention of title rights in relation to goods and and specify certain equipment and procedures to minimise supplies used in the works? Is it permissible for risk. Failure to discharge the statutory duties within the contractors to claim that until they have been paid legislation can have huge implications ranging from a €3 they retain title and the right to remove goods and million fine and/or up to two years’ imprisonment. materials supplied from the site? The following are some examples of an employer’s obligations in relation to a construction project under Irish Retention of title (“ROT”) clauses are permissible in construction- health and safety legislation: related contractual agreements in Ireland. 1. An employer must satisfy itself that the contractor to In general, a ROT clause will be effective in reserving title to goods be appointed to the project has demonstrated that it is already supplied to an employer so long as the goods exist in the competent to complete the project works. same state in which they were supplied and so long as the goods 2. An employer must appoint, in writing, a competent have not either been mixed with other similar goods, transmuted Project Supervisor Design Process (“PSDP”) and into a manufactured product or affixed to real property (i.e., land a competent Project Supervisor Construction Stage or buildings). (“PSCS”) to discharge an employer’s obligations related to the respective design and construction of the works. The RIAI form of contract provides that title to goods will pass on 3. An employer must maintain a safety file in relation to each payment. construction project it undertakes, containing relevant As each ROT clause will be considered and interpreted on its own health and safety information. terms, it is important to note the specific circumstances around each 4. If the duration of a construction project is expected to contractual arrangement are important in each individual case. exceed specified limits (e.g., last longer than thirty (30) working days), an employer must give written notice to the Health & Safety Authority of the particulars of the 2 Supervising Construction Contracts respective PSDP and PSCS appointments.

2.1 Is it common for construction contracts to be 1.6 Is the employer legally permitted to retain part of supervised on behalf of the employer by a third the purchase price for the works as a retention to be party? Does any such third party (e.g. an engineer released either in whole or in part when: (a) the works or architect) have a duty to act impartially between are substantially complete; and/or (b) any agreed contractor and employer? Is that duty absolute or is defects liability is complete? it only one which exists in certain situations? If so, please identify when the architect/engineer must act Standard-form construction contracts in this jurisdiction provide impartially. for an agreed percentage of the contract sum to be retained by the employer for the purposes of remedying defects. The typical Construction contracts in Ireland are commonly supervised and retention amounts are between 3% and 10%. Usually, the contractor administered by either an architect/engineer, or another contract will invoice the employer for half of the amount of the contract sum administrator (appointed separately by an employer). Examples of

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circumstances of where such a contract administrator has a duty to through the architect. Most construction contracts in this jurisdiction act impartially are as follows: contain detailed variation provisions. The architect is responsible (a) In the event of dispute: if the contractor is disputing an for valuing the variations and recording them without undue delay. architect/engineer’s decision for, e.g., putting extra expenses The contractor is then entitled to prompt payment for variations on the contractor, then the architect/engineer must decide on properly authorised and carried out. If a proposed variation is the merits of the contractor’s claim, and in so doing must act outside the scope of what was anticipated by the contractor and the fairly and impartially between the parties. employer, it may fall outside the scope of the power of the employer (b) Payment and issue of certificates: the architect/engineer must to order a variation. act impartially when deciding how much the contractor is entitled to receive by way of payment. The employer must Ireland not interfere with the architect/engineer’s role of issuing 3.2 Can work be omitted from the contract? If it is certificates. omitted, can the employer do it himself or get a third party to do it? (c) Extensions of time for completion: the contractor will normally look for an extension when he is delayed due to a cause which he believes entitles him to an extension of time The employer is not entitled to omit work and have it performed under the contract. In deciding whether the cause of the delay by another contractor, unless there is an express power in the was such as to entitle the contractor to an extension of time, contract. If work is omitted, the contractor would usually have to the architect/engineer must act impartially. be compensated on a quantum meruit or ‘as much as he deserves’ basis. The contractor would have to provide evidence of the expenses incurred as a result of the omission and may also be 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, awarded compensation for the loss of anticipated profit and for have themselves been paid; i.e. can the employer under-productive use of overheads as a result of reduced workload. include in the contract what is known as a “pay when paid” clause? 3.3 Are there terms which will/can be implied into a construction contract? The Construction Contracts Act 2013 (“CCA”), section 3, renders “ineffective” so-called “pay when paid” clauses except in the limited In addition to the express terms of a construction contract, there may circumstances provided for under the CCA such as, for example, be other terms, known as “implied terms”, which form part of the where a party to a construction contract is in either a bankruptcy or contract also. Implied terms may come from one or more sources, an insolvency process (as appropriate). including: custom; Judges’ decisions; and statute law. There are numerous statutes which affect terms in construction contracts, in 2.3 Are the parties permitted to agree in advance a fixed particular, the Sale of Goods and Supply of Services Acts 1893– sum (known as liquidated damages) which will be 1980, Construction Contracts Act 2013, consumer legislation paid by the contractor to the employer in the event of and employment legislation. Some terms which can be implied particular breaches, e.g. liquidated damages for late into construction contracts include an implied fitness for purpose completion? If such arrangements are permitted, are warranty, duty to exercise reasonable skill and care, a warranty there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre- that materials supplied will be of good and proper quality and an estimate of loss, or can the contractor be bound to obligation to carry out work in a good and workmanlike manner. pay a sum which is wholly unrelated to the amount of financial loss suffered? 3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of Liquidated damages are commonly seen in construction contracts. his employer, is the contractor entitled to: (a) an The employer and the contractor are permitted to agree a contractual extension of time; or (b) the costs occasioned by that rate of damages which will cover particular breaches, e.g., damages concurrent delay? for late completion. Liquidated damages can be expressed in a single sum but it is more common to specify a daily or weekly rate. The Concurrency describes an effect caused by at least two events contractual rate of those damages must be a genuine pre-estimate occurring at the same time, of which one is at the contractor’s of the employer’s loss at the time of entering into the contract. It is risk and one is at the employer’s risk. In the construction contract invalid and unenforceable if what it stipulates is a penalty. Whether context, concurrency is often used by the employer as a defence a provision is a penalty will be a matter for the courts to interpret to a claim for compensation. A claim for compensation based on according to the circumstances existing at the time the contract was concurrent delay in Ireland will most likely be determined, at least made. If a court finds that a clause in a contract is a penalty clause, at first, by reference to the express extension of time clause in the it will not enforce it. construction contract (if any). The dominant approach to the issue of concurrent delay in England 3 Common Issues on Construction and Wales is that the contractor is entitled to a full extension of time caused by the two or more events, regardless of the contractor’s own Contracts fault. This approach was set out in Henry Boot Construction (UK) Limited v Malmaison Hotel (Manchester) Limited [1999] 70 Con 3.1 Is the employer entitled to vary the works to be done LR 32 (“Malmaison”) where it was common ground between the under the contract? Is there any limit on that right? parties that: “...if there are two concurrent causes of delay, one of which Unless there is an express provision in the contract, variations are is a relevant event, and the other is not, then the contractor is not allowed in construction contracts under common law. Clause 13 entitled to an extension of time for the period of delay caused in the RIAI contract gives the employer the right to order variations by the relevant event notwithstanding the concurrent effect of the other event.”

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The approach in Malmaison was approved of more recently in the the parties are bringing a claim in tort, they have six years from the case of Adyard Abu Dhabi v SD Marine Services [2011] EWHC date on which the incident occurred. Recent case law in Ireland has 848 (Comm) (“Adyard”). There, the alternative approach that, in discussed the issue of when the cause of action accrues. In the case such circumstances, the contractor is entitled only to a reasonably of Brandley v Hubert Deane [2016] IECA 54, President Ryan cited apportioned extension of time (as set out in the Scottish case of with approval the Supreme Court decision in Hegarty v O’Loughran City Inn Limited v Shepherd Construction Limited [2010] BLR [1990] 1 IR 148, where Finlay CJ stated “[a] cause of action in 473 (“City Inn”)) was discussed. In Adyard, however, Mr. Justice tort has not accrued until at least such time as the two necessary Akenhead confirmed that the Malmaison approach was the correct component parts of the tort have occurred, namely, the wrong and approach to take in English law jurisdictions. The Irish courts are the damage”. This decision confirms that in a construction context certainly likely to have regard to this decision. there is a difference between defective work and actual damage. Ireland

3.5 If the contractor has allowed in his programme a period 3.7 Who normally bears the risk of unforeseen ground of time (known as the float) to allow for his own delays conditions? 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 Normally, the unforeseen ground conditions risk lies with the used up? contractor; however, it is important when negotiating a construction contract to ensure that risks are placed with the party who is best In a construction context, the term float is generally used to refer able to manage them. to the unallocated time between the finish of the last planned The RIAI form of contract does not include a clause on unforeseen activity under a construction contract and the date for completion. ground conditions. It is not unusual for the parties to provide a At common law, neither the contractor, nor the employer ‘own’ clause in a schedule of amendments to the RIAI, which would allow the float in the absence of express agreement to the contrary. In the contractor an extension of time if particular unforeseeable events practice, the question ‘Who “owns” the float?’ tends to be decided occur, such as the presence of archaeological remains or discovery by examining whether or not the contractor has allowed more time of utilities. However, if the contract is silent, the risk will pass in its programme for the series of contract activities that is longer entirely onto the contractor. than these series of activities will, in fact, take to complete. If the Like the RIAI, the JCT does not generally provide for unforeseen contractor has done so and if the employer wishes to take advantage ground conditions. of this unallocated time (i.e., to propose a change/variation that absorbs the float), the question ‘Who “owns” the float?’ becomes In the GCCC form of Civil Engineering Contract used for Public an examination of whether the employer is entitled to make use of Works, there is an option for an employer to take some risk regarding the float at no cost. Conversely, the float can also be looked at as a the unforeseen ground conditions. consequence – i.e., in so far as a delay to the contract programme Under FIDIC’s red and yellow books, the employer bears the causes disruption to the contractor, and consequential loss and/ risk of physical conditions which could not have been reasonably or expense result in the ‘float’ being absorbed, can the contractor foreseeable by an experienced contractor at the date of tender claim an entitlement to an extension of time and/or compensation (clause 4.12). for the consequential loss/expense it actually suffers as a result of this delay/disruption? 3.8 Who usually bears the risk of a change in law The argument in favour of the employer ‘owning’ the float is, affecting the completion of the works? at a high level, that the employer has paid for the contractor’s programme as the employer has agreed to pay the contractor’s The contractor is responsible for completing the works in accordance cost of programming the works and the contractor’s costs during the duration of the contract period and, therefore, the employer with the local law and regulations and carries the risk in the contract has contracted to buy the float and so can use it as it wishes. arising from a change in law, including in relation to the contract Conversely, the argument in favour of the contractor ‘owning’ price. If the contractor does not want to carry the risk, he must the float is premised on the fact that the Contractor’s costs and ensure that provisions are expressly incorporated into the contract profit for a project are influenced by the efficiency with which its to deal with this event. resources are applied and the duration over which they are planned to be executed. 3.9 Who usually owns the intellectual property in relation Irish law on who ‘owns’ the float is not clear where a construction to the design and operation of the property? contract does not expressly provide for ‘ownership’ of the float. Frequently, construction contracts in this jurisdiction do not Under a construction contract, the parties have two alternatives. The specifically deal with ownership of the float. copyright and ownership to the design can either remain with the contractor, who grants a licence to the employer to use the design 3.6 Is there a limit in time beyond which the parties to documents for the works, or the copyright material can be assigned a construction contract may no longer bring claims to the employer upon execution of the contract. The copyright against each other? How long is that period and from design should not be transferred lightly and rarely is. what date does time start to run?

3.10 Is the contractor ever entitled to suspend works? Generally, the time limits for bringing a claim under a construction contract are governed by the Statute of Limitations Act 1957 (the Most standard forms of construction contracts in this jurisdiction “Act”) (save to the extent that a construction contract specifically allow the contractor to suspend works if payment is not made. provides otherwise). If the contract is signed by hand, the parties In addition, the Construction Contracts Act 2013 (the “CCA”) have six years to bring the claim from the date of accrual of the introduced a statutory right on the part of a contractor/sub- action, and if the contract is a deed, the parties have 12 years. If contractor to suspend works under a construction contract for non-

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payment. Significantly, if works are suspended in compliance with the CCA and this suspension affects a contractor’s/sub-contractor’s 3.14 Can one party (P1) to a construction contract which ability to comply with the works programme, the CCA provides owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any the suspension’s duration is to be disregarded when calculating the limits on the rights of set-off? contractual time limit to the works programme.

Set-off as a remedy has a legislative basis within section 6 (12) of 3.11 On what grounds can a contract be terminated? Are the Construction Contracts Act 2013 stating that a decision by an there any grounds which automatically or usually adjudicator regarding payment disputes shall be binding, unless entitle the innocent party to terminate the contract? otherwise agreed by the parties and can be relied by any of them Do those termination rights need to be set out Ireland by way of defence, set-off or otherwise in any legal proceedings. expressly? The general position under building contracts is that set-off against certified sums will be allowed provided there are no special There are a number of non-contractual rights to terminate a provisions in the contract which prevent or restrict this practice. In construction contract. The parties can terminate a contract if the case of Moohan and Another v S & R Motors Limited [2007] there are circumstances beyond the parties control making the IEHC 435, Clarke J. concluded that set-off was available. performance of the contract impossible (frustration). A contract can also be terminated if a serious or repudiatory breach occurs. However, most of the standard-form construction contracts do 3.15 Do parties to construction contracts owe a duty of not depend on common law for termination purposes and contain care to each other either in contract or under any termination rights for parties. The parties usually set a list of events, other legal doctrine? such as breach, force majeure, insolvency or non-payment, under which the contract may be terminated. Termination for convenience The parties will normally owe a duty of care in both tort and contract. wording can be inserted into a contract which allows one party to So, for example, builders of a house will have a duty in tort to take end the contract without having to establish that some event has ‘reasonable care’ to avoid reasonably foreseeable latent defects. occurred, but such clauses are difficult to negotiate. While a concurrent duty in contract will be owed by the builder arising out of their contractual obligation to act with skill and care. 3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give 3.16 Where the terms of a construction contract are the injured party? Is it usual/possible to argue ambiguous, are there rules which will settle how that successfully that a contract which has become ambiguity is interpreted? uneconomic is grounds for a claim for force majeure? The leading interpretation case in the United Kingdom is Investors Force majeure clauses exist to exclude liability where exceptional, Compensation Scheme v West Bromwich Building Society [1998] unforeseen events beyond a party’s control prevent the performance 1 WLR 896. The Irish Supreme Court reaffirmed the Investors of its contractual obligations. Force majeure events within a Compensation principles in the recent case of McMullan Brothers construction contract generally include acts of God, earthquake, Limited v Mc Donagh [2015] IESC 19. fire, flood or other natural physical disasters, acts of war and riot. Lord Hoffmann in the Investors Compensation lists his five As there is no doctrine of force majeure in Irish law, it is at the principles in how to deal with ambiguity within the contract: contractual parties’ discretion whether they wish to rely upon force majeure and can do so by including a provision in their contract. (1) “Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the Force majeure may result in an automatic termination of the background knowledge which would reasonably have been contract or by a party giving notice of the termination. However, available to the parties in the situation in which they were at the relevant event must have an adverse impact upon performance the time of the contract.” of the contracting party and cannot be used as an excuse to end the Within his second principle, he expands on his previous principle: contract. (2) “Subject to the requirement that it should have been reasonably available to the parties and to the exception to be 3.13 Are parties which are not parties to the contract mentioned next, it includes absolutely anything which would entitled to claim the benefit of any contract right have affected the way in which the language of the document which is made for their benefit? E.g. is the second or would have been understood by a reasonable man.” subsequent owner of a building able to claim against He stresses in his third principle that when attempting to understand the original contracts in relation to defects in the the context to the agreement, this process should not evolve into building? an impermissible investigation of the subjective intentions of the parties in entering into the agreement: Parties are unable to avail of a benefit of any contractual right if they are not party to the contract. This is due to the doctrine of privity in (3) “The law excludes from the admissible background the previous negotiations of the parties and their declarations of this jurisdiction which prevents a contract from being enforceable subjective intent.” in favour of or indeed against someone who is not a party to that contract. In order for a third party to receive a benefit, the claimed Lord Hoffmann in his next principle acknowledges that within a benefit must be independent or collateral to the main contract. This complicated background, understanding the intention can have is typically done through collateral warranties with third parties minimum value in understanding the meaning of the document: (e.g., tenants, purchasers, funders). (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 matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant

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background would reasonably have been understood to mean. The background may not merely enable the reasonable man 4.2 Do you have adjudication processes in your to choose between the possible meanings of words which are jurisdiction? If so, please describe the general ambiguous but even (as occasionally happens in ordinary procedures. life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.” The Construction Contracts Act 2013 provides that a party to a Lord Hoffman concludes with his fifth principle on how ambiguity construction contract has the right to refer a payment dispute arising within a construction contract should be interpreted: under the contract for adjudication. To exercise this right, the party (5) “The ‘rule’ that words should be given their ‘natural and must serve a notice of intention to refer the payment dispute for ordinary meaning’.” adjudication. The parties may then agree to appoint an adjudicator within five days. If the parties are unable to reach agreement within Ireland that time, an application may be made for the appointment of an 3.17 Are there any terms in a construction contract which adjudicator from the panel established by the Minister of State for are unenforceable? Employment and Small Business. Once the adjudicator is appointed, the party who initiated the Terms of a construction contract which can be deemed unenforceable adjudication must refer the payment dispute to the adjudicator are: within seven days beginning with the day on which the appointment a) liquidated damage provisions (where the damages specified is made. The adjudicator must reach a decision within 28 days from are not a genuine pre-estimate of loss but instead viewed as a penalty); the date of the referral (or such longer period as may be agreed by the parties). With the consent of the referring party, the adjudicator b) a clause which creates an indemnity against criminal liability; may extend this 28 day period by a maximum of 14 days. c) a Construction Contracts Act 2013 renders ineffective “pay when paid” provisions; and The decision of the adjudicator binds the parties until the dispute is finally settled by the parties or a different decision is reached on d) a clause seeking to circumvent the application of the the reference of the payment dispute to arbitration or in proceedings Construction Contracts Act 2013 will render the clause unenforceable according to section 12(2) of the Act. initiated in a court in relation to the adjudicator’s decision.

3.18 Where the construction contract involves an element 4.3 Do your construction contracts commonly have of design and/or the contract is one for design only, arbitration clauses? If so, please explain how are the designer’s obligations absolute or are there arbitration works in your jurisdiction. limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in Arbitration clauses are often included in construction contracts. The respect of his work? Arbitration Act 2010 applies to all arbitrations commenced after 9 June 2010 and the UNCITRAL Model Law has the force of law in A designer has obligations which are implied into the contract. The Ireland (subject to the Arbitration Act). The Irish courts are very Sale of Goods and Supply of Services Act 1980 imply a number of supportive of arbitration. terms which have an impact on the extent of a designer’s liability. While court challenges to an award are possible, the grounds for These include that the designer has the necessary skill to render the challenges are very limited. service and that the services will be supplied with due skill, care and The parties can agree on the identity of the arbitrator or on a number diligence. It must be noted that these implied terms can be negated of arbitrators to form a tribunal. Construction contracts generally through the use of express terms within the contract. A designer will provide for a default appointing mechanism, which typically not usually have to give an absolute guarantee of their work. involves an application by either party to the president of a named In design and build contracts, a contractor can assume responsibility professional body (for example, Engineers Ireland) requesting that that works are fit for purpose unless otherwise explicitly stated in he or she appoint an arbitrator. the contract. Yet a consultant is held to a less onerous standard of Article 19 of the Model Law confirms that the parties are entitled ‘reasonable skill and care’, meaning that the contractor assumes to set their own procedures. If no rules are chosen, and the parties greater liability than those to whom they have subcontracted. cannot subsequently agree upon how the procedure is to be conducted, then the tribunal can set the procedures. 4 Dispute Resolution 4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise 4.1 How are disputes generally resolved? and enforce international arbitration awards? Please advise of any obstacles to enforcement. Mediation, conciliation, arbitration and litigation are the most common methods of construction dispute resolution in this Ireland is a signatory to the New York Convention on the Recognition jurisdiction. Contractual adjudication and expert determination and Enforcement of Foreign Arbitral Awards, which has the force of are also used. The Construction Contracts Act 2013 provides law in Ireland (subject to the Arbitration Act 2010). for statutory adjudication of payment disputes arising under The Irish courts have shown a supportive approach to the enforcement construction contracts entered into after 25 July 2016. of arbitral awards. Enforcement is not generally problematic, unless there is reason to deny enforcement (the grounds for which are set out at Article 36 of the Model Law). In a leading case, the High Court held that the Irish courts would not exercise jurisdiction over an application for the enforcement of an arbitral award where the party against whom enforcement was

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sought had no assets in Ireland and no real likelihood of having assets Decisions of the lower courts can generally be appealed to higher in Ireland (Yukos Capital S.A.R.L. v Oao Tomskneft Vnk Otkytoye courts, or questions regarding a point of law can be referred to Aktsionernoye Obshchestvo “Tomskneft” Vostochnaya Neftyanaya higher courts. Kompania [2014] IEHC 115, in which one of the authors acted for Decisions of the High Court may generally be appealed to the Court the successful respondent). of Appeal. The Court of Appeal was established in 2014. A decision of the Court of Appeal may only be appealed to the Supreme Court if: 4.5 Where the contract provides for court proceedings ■ the decision involves a matter of general public importance; in a foreign country, will the judgment of that foreign or court be upheld and enforced in your jurisdiction? ■ in the interests of justice, it is necessary that there be an

Ireland appeal to the Supreme Court. In relation to court judgments given in EU Member States, A ‘leapfrog’ appeal may be made directly from the High Court to Regulation (EU) No 1215/2012 (the “Recast Brussels Regulation”) the Supreme Court if the case involves a matter of general public applies. The Recast Brussels Regulation applies to proceedings and importance or: judgments in proceedings commenced on/after 10 January 2015. ■ there is some other reason requiring that the interests of The 2001 Brussels Regulation (Regulation (EC) 44/2001) continues justice is met by an appeal to the Supreme Court; and to apply to judgments in proceedings commenced before 10 January ■ there must be exceptional circumstances warranting a direct 2015. appeal to the Supreme Court. The Recast Brussels Regulation provides that a judgment given Once proceedings are issued, the parties will exchange documents in a Member State shall be recognised in the other Member States setting out their respective claims and/or defences. The parties may without any special procedures being required and is enforceable also be required to disclose relevant documents to each other. This in other Member States without any declaration of enforceability process is known as discovery. The parties may also exchange being required. witness statements and expert reports in advance of the hearing. Enforcement of judgments from Iceland, Norway and Switzerland is Oral evidence will usually be given by relevant factual witnesses governed by the Lugano Convention. and expert witnesses at the hearing of the case. Regulation (EC) No 805 / 2004 of the European Parliament and The length of time it may take to obtain a decision of the court of of the Council of 21 April 2004, which provides for European first jurisdiction will depend on the appropriate court jurisdiction, as Enforcement Orders for uncontested claims, applies to uncontested well as a number of other factors. It may take many months or even claims in civil and commercial matters. years to obtain a decision of the court of first jurisdiction. Where foreign states are not Member States of the EU or contracting However, if the case is suitable for admission to the commercial parties to the Lugano Convention, the recognition and enforcement division of the High Court (the “Commercial Court”), this timeline of judgments from such jurisdictions is governed by the common may be reduced. The Commercial Court has extensive case law rules of private international law. To enforce a judgment from management powers and can deal with significant commercial a foreign court at common law in Ireland, proceedings must be disputes more quickly than the ordinary courts. To be admitted commenced before the Irish courts by either commencing an action to the Commercial Court, the proceedings must be “commercial on the foreign judgment or commencing fresh proceedings on the proceedings” (for example, a dispute relating to a business document, original cause of action. business contract or business dispute) and, in general, must have a value of over €1 million. Whether a case will be admitted to the 4.6 Where a contract provides for court proceedings in Commercial Court is a matter for the discretion of the Commercial your jurisdiction, please outline the process adopted, Court judge. any rights of appeal and a general assessment of The length of time it may take to obtain a decision of the final how long proceedings are likely to take to reduce: (a) court of appeal will depend on the complexity of the matter, the a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal. jurisdiction of the appeal court, as well as other factors. Currently, the Court of Appeal has a backlog of appeals, with appeals in that court taking over a year to be heard. A court action is commenced by issuing proceedings (usually by way of a summons) in the appropriate court. The appropriate court jurisdiction for the proceedings will depend on the value of the claim. In civil actions in contract, the District Court has jurisdiction to award damages not exceeding €15,000. The Circuit Court has jurisdiction to award damages not exceeding €75,000. The High Court has original jurisdiction to hear virtually all matters and will generally hear matters that exceed the monetary jurisdiction of the Circuit Court.

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Rhona Henry Nicola Dunleavy Matheson Matheson 70 Sir John Rogerson’s Quay 70 Sir John Rogerson’s Quay Dublin 2 Dublin 2 Ireland Ireland

Tel: +353 1 232 2000 Tel: +353 1 232 2000 Fax: +353 1 232 3333 Fax: +353 1 232 3333 Email: [email protected] Email: [email protected] URL: www.matheson.com URL: www.matheson.com Ireland Rhona Henry is a partner and head of Matheson’s Construction and Nicola Dunleavy is a partner in Matheson’s Commercial Litigation and Engineering Group. Dispute Resolution Department and leads Matheson’s arbitration team. Her expertise includes advocacy in alternative dispute resolution, Rhona Henry is distinguished by her industry knowledge and extensive encompassing expert determination, conciliation, adjudication and market experience which includes advising on the build-out of capital mediation. projects; construction/project finance; public-private partnership construction and construction regulation. Nicola has a broad commercial litigation and arbitration practice. Much of her work crosses borders, representing international companies Her experience in the area of construction/project contracts doing business in and from Ireland. encompasses the entire life cycle of strategic commercial arrangements including: Her experience in construction disputes includes representing clients in prosecuting or defending claims for variation, extension of time, ■■ Major international construction projects including pharmaceutical liquidated damages and other losses. plants, infrastructure projects, utilities, data centres, power and process plants, corporate headquarters and commercial offices. Nicola represents clients in commercial disputes including mergers and acquisitions, regulatory disputes, EU and competition litigation, ■■ Bespoke project agreements/construction contracts (including the and constitutional litigation. Her clients are active in the technology RIAI, FIDIC, MF /1 (Revision 4 and 5), NEC and JCT contracts). and telecommunications, pharmaceutical, chemicals, food and drink, ■■ EPC contracts. waste, water, energy, mining, and transport sectors. Her practice includes advising in regulatory investigations and defending criminal ■■ Professional/design team terms of engagement. prosecutions. Nicola has significant experience in major development ■■ Project/construction contract security including bonds, warranties and property disputes, including environmental and safety disputes. and guarantees. Nicola is an Associate of the Irish Taxation Institute and an Associate ■■ Procurement strategy route (design and build, management of the Chartered Institute of Arbitrators. contracting, construction management, EPC). ■■ Project/construction health and safety issues/project supervisor appointments. ■■ Collateral warranties/direct agreements. ■■ Facilities management/services agreements. ■■ Interface agreements.

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.

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Japan

Nagashima Ohno & Tsunematsu Naoki Iguchi

1 Making Construction Projects 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 1.1 What are the standard types of construction contract and intention to create legal relations), or any in your jurisdiction? Do you have contracts which specific requirements which need to be included in a place both design and construction obligations upon construction contract (e.g. provision for adjudication contractors? If so, please describe the types of or any need for the contract to be evidenced in contract. Please also describe any forms of design- writing)? only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor In principle, a contract is validly formed by an offer and a and with the construction work done by a series corresponding acceptance. In addition, the CBA requests that a of package contractors? (NB For ease of reference construction contract be made “in writing”, stipulating at least 14 throughout the chapter, we refer to “construction items provided in the CBA (Art 19) to make contract terms clear and contracts” as an abbreviation for construction and unequivocal (see question 1.5). A simple violation of the CBA does engineering contracts.) not make a contract invalid because the CBA is only an administrative regulation. One exception is an arbitration agreement, which shall For private construction works, a group of four professional be made in writing; an oral arbitration agreement is invalid (Art 13, associations of architects and contractors jointly published the Para 2 of the Arbitration Act (Act No. 138 of 2003, as amended)). “General Conditions for Construction Contract (amended in 2016)” (the “GCCC”). For public construction works, the central government published the “Public Work Standard Contract” 1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in (amended in 2015) (the “PWSC”). For industrial plant construction which an employer can give either a legally binding or works, the “ENAA General Conditions for Domestic Plant non-legally binding indication of willingness either to Construction Work” (amended in 2011) (the “ENAA-Domestic”), an enter into a contract later or to commit itself to meet EPC turnkey contract, is published by the Engineering Advancement certain costs to be incurred by the contractor whether Association (“ENAA”). or not a full contract is ever concluded. For private contracts of design and build works, the Japan Federation of Construction Contractors (“JFCC”) published the “General A letter of intent is often used in certain types of transactions, such Conditions for Design/Build Contract” (the “GCDB”) in 2016. In as mergers and acquisitions, joint ventures and business alliances. addition, the recently published “General Conditions for Design/ A letter of intent can be a binding document if it is so drafted. In Build for Small Building Works (2015)” also adopted design-build construction contracts, letters of intent are not used frequently. scheme. For design works and supervision services of construction works, the above-mentioned group of four associations also 1.4 Are there any statutory or standard types of insurance published “General Conditions for Design Work and Supervision” which it would be commonplace or compulsory to (amended in 2015) (the “GCDS”). have in place when carrying out construction work? Furthermore, “General Conditions for Renovating Works (2014)” For example, is there employer’s liability insurance for contractors in respect of death and personal and “General Conditions for Renovation Works of Condos (2016)” injury, or is there a requirement for the contractor to are published for consumer contracts. have contractors’ all-risk insurance? A contract scheme of “Management Contracting” is not used in Japan due to regulatory consideration under the Construction No, there is no standard type of insurance required by statute, except Business Act (Act No. 199 of 1949, as amended) (the “CBA”). mandatory workers’ accident compensation liability insurance. In practice, the GCCC/GCDB/ENNA-Domestic requests a contractor to purchase and maintain insurance to cover an executed portion of work, materials, building equipment and other items. Contractors usually purchase all-risk insurance.

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1.5 Are there any statutory requirements in relation 2 Supervising Construction Contracts 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 2.1 Is it common for construction contracts to be sub-contractors); (c) tax (payment of income tax of supervised on behalf of the employer by a third employees); or (d) health and safety? 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 As general requirements, the CBA (Art 19) provides 14 items to be it only one which exists in certain situations? If so, stipulated in the contract, including (i) scope of work, (ii) contract please identify when the architect/engineer must act price, (iii) commencement and completion date, (iv) advance impartially. Japan payment, (v) variation, (vi) force majeure, (vii) price adjustment, (viii) damages to third parties, (ix) use of materials and equipment, The employer may designate a third party to be a supervisor for the (x) inspection and handover, (xi) terms of payment, (xii) defect works. Such supervisors usually act on behalf of the employer and liability, (xiii) delay and damages, and (xiv) dispute resolution. they are not required to be impartial. This scheme is not common Labour, tax and health and safety are not legally required items in a in Japan. construction contract.

2.2 Are employers entitled to provide in the contract that 1.6 Is the employer legally permitted to retain part of they will pay the contractor when they, the employer, the purchase price for the works as a retention to be have themselves been paid; i.e. can the employer released either in whole or in part when: (a) the works include in the contract what is known as a “pay when are substantially complete; and/or (b) any agreed paid” clause? defects liability is complete? Theoretically, it is possible for the parties to agree that the employer For main construction contracts between the employer and the main shall pay a price to the contractor when the employer is paid by contractor, there is no regulation applicable to retention. For sub- an investor, fundraiser, and the like, although it is quite unusual. contracts, the employer has to pay the full amount to the contractor Important exceptions are sub-contracts: for example, general main within a certain period of time under the CBA (Art 24-3 and 24-5), contractors (tokutei-kensetsu-gyosha) have to make a payment once the work is substantially completed and is handed over to the within 50 days from the handover date (Art 24-3 and 24-4, CBA). employer.

2.3 Are the parties permitted to agree in advance a fixed 1.7 Is it permissible/common for there to be performance sum (known as liquidated damages) which will be bonds (provided by banks and others) to guarantee paid by the contractor to the employer in the event of performance, and/or company guarantees provided to particular breaches, e.g. liquidated damages for late guarantee the performance of subsidiary companies? completion? If such arrangements are permitted, are Are there any restrictions on the nature of such bonds there any restrictions on what can be agreed? E.g. and guarantees? does the sum to be paid have to be a genuine pre- estimate of loss, or can the contractor be bound to In the PWSC, the contractor is required to submit a kind of pay a sum which is wholly unrelated to the amount of financial loss suffered? performance guarantee and it may choose to obtain and submit a performance bond issued by a bank or insurance company (Art 4, PWSC). On the other hand, in private contracts, it is not common to Liquidated damages are valid and enforceable. Courts cannot request that the contractor submit a performance bond, although it is change an amount agreed by the parties (Art 420, Para 1 Civil Code possible for the employer to request a guarantee of the contractor’s (Act No. 89 of 1896)), but a contractor can claim a reduction of parent company. In the ENAA-Domestic for plant construction the amount if an employer is comparatively negligent (Sup Ct, works, there is a provision by which the contractor shall guarantee Judgment of 21 April 1994, 172 Minshu 379). Furthermore, it is the function of work by agreeing to a certain amount of liquidated commonly understood that a contractor shall be discharged if a damages. delay is not attributable to the contractor.

1.8 Is it possible and/or usual for contractors to have 3 Common Issues on Construction retention of title rights in relation to goods and Contracts 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 3.1 Is the employer entitled to vary the works to be done materials supplied from the site? under the contract? Is there any limit on that right?

Theoretically, it is possible for the parties to agree that the contractor The laws are silent on variation and limits to variation. In practice, shall retain titles to goods and supplies used in the works, unless most of the contract forms entitle the employer to a right to vary the they are indivisibly attached to an uncompleted part of the work. works (Art 28, GCCC; Art 40, GCDC; Art 28, ENAA-Domestic). In practice, titles to goods and materials which are already used in, The PWSC provides that the employer is entitled to change “design and become parts of, an uncompleted work, shall be taken by the documents” which may lead to a variation of works (Art 19, PWSC). employer and the contractors shall be entitled to be paid their value The GCCC and GCDS allow the variation “when necessary”, while if the contract is terminated (Art 33, GCCC). the ENAA permits it as long as it is “reasonable”.

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Unless parties use such major contract forms, the contractor may 3.2 Can work be omitted from the contract? If it is have to bear the risk of unforeseen ground conditions. In a fixed- omitted, can the employer do it himself or get a third sum contract, the court found that the contractor may not claim party to do it? any additional costs, unless the court finds the situation to be extraordinarily unfair (Tokyo High Ct, Judgment of 29 March 1984, The laws and regulations, as well as most contract forms, are silent 1115 Hanrei Jiho 99). The court considered some factors in order to on omission. Omission may be allowed on the same basis as determine whether or not they were unfair, such as whether: (i) the variation since, for example, the GCCC provides that the amount conditions were unforeseeable to the parties; and (ii) the conditions of price reduction shall be calculated by unit prices provided in the were not attributable to the contractor, but it finally found that the details of the contract price (Art 29, Para 2, GCCC). This shows that Japan conditions in question were foreseeable. the contract forms allow the employer to omit a part of the work.

3.8 Who usually bears the risk of a change in law 3.3 Are there terms which will/can be implied into a affecting the completion of the works? construction contract? The GCCC provides that either party may, by expressly stating It depends on the factual matrix of the contract’s formation. Since the reason therefor, make a claim for a necessary adjustment to there is no specific requirement for the formation of a construction the contract price if the contract price has become apparently contract, implied terms or obligations may be found by the court or inappropriate and improper due to an unforeseeable enactment, arbitrator, based on the background facts. revision or abrogation of any law (Art 29, Para 1, GCCC). The GCDB and ENAA-Domestic have similar provisions. It is pertinent 3.4 If the contractor is delayed by two events, one the to note that they do not provide an effective mechanism to fix the fault of the contractor and one the fault or risk of amount to be added or reduced, since the administrative architect is his employer, is the contractor entitled to: (a) an not empowered to render a decision in this respect. extension of time; or (b) the costs occasioned by that concurrent delay? As a matter of principle for administrative laws, new or revised laws shall apply to the works which have been commenced before the enactment of such laws. In practice, parties will consult each Under the GCCC/GCDC/ENAA-Domestic, the contractor is other in case there is any substantial effect on the works. The entitled to an extension of time. However, there is no specific Building Standard Act (Act No. 201 of 1950, as amended) (the provision or court precedent which handles the concurrent delay. “BSA”) is unique in providing that any revision or amendment to Unless otherwise stipulated in the contract, the court or arbitrator the provision of the BSA shall not apply retrospectively to a work may consider the concurrent fault or risk event of the employer being constructed at the time of revision or amendment. when it determines the point from when the delay is attributable to the contractor. 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? 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 Design documents, including but not limited to drawings, are eligible example, a variation, is the contractor subsequently as a subject matter of copyright. Copyrights to them shall be vested entitled to an extension of time if he is then delayed in the architect who created them. Furthermore, once the building after this float is used up? is completed in accordance with the drawings, the copyright to the building shall be vested in the architect, as long as the building No, there are no such specific terms. meets the requirements of architectural works. A contract for design and build work, such as the GCDB, allows an architect or a contract who actually made a design to keep the copyright. The ENAA- 3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims Domestic is silent on this matter as it is usually used for industrial against each other? How long is that period and from plant construction work where copyright rarely becomes an issue. what date does time start to run? 3.10 Is the contractor ever entitled to suspend works? Theoretically, it is possible for the parties to agree to a time limitation on possible claims. It may be deemed as the waiving The GCCC provides four situations where the contractor may of a right by the claimant, to the extent that the agreed limitation suspend the work. They are: (1) the employer’s delay in making is shorter than the period prescribed in the statute of limitations. advance or partial payment; (2) the employer’s unreasonable rejection of consultation in the case of unforeseeable ground 3.7 Who normally bears the risk of unforeseen ground conditions, discrepancies between the drawings and site, etc. (the conditions? employer is obliged to accept consultation as per Art 16); (3) impossibility of continuation of the work due to site conditions or The GCCC provides that if the contractor discovers any obstruction force majeure; and (4) an extraordinary delay of work due to a cause to the construction work at the site, the contractor shall immediately attributable to the employer. Other major forms also have similar notify the administrative architect of this in writing (Art 16, Para 1 provisions. and 2, GCCC). It is also provided in Para 4 of its Article that if it Unless parties use such major forms or unless the employer is is necessary to vary the scope of work, as well as the extension of explicitly obliged to make a payment prior to the completion of time for completion, the additional amount shall be agreed by the the works, the contractor is not entitled to suspend the work. The employer, the administrative architect and the contractor, through employer’s credibility to make further payments would be an issue if consultation. the contract only had a provision of termination, not of suspension.

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The Tokyo District Court allowed the contractor to suspend the vested in such third parties, as long as such claims threaten the basic work when the employer’s alter ego company was found bankrupt safety of the building. (Tokyo Dist Ct, Judgment of 19 March 1976, 840 Hanrei Jiho 88). However, it is worth noting that the court does not always allow 3.14 Can one party (P1) to a construction contract which the contractor to suspend or terminate the works just because the owes money to the other (P2) set off against the sums employer’s affiliated company goes bankrupt. due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off? 3.11 On what grounds can a contract be terminated? Are there any grounds which automatically or usually Either party can set off against the sum due to the other party;

entitle the innocent party to terminate the contract? however, set-offs against any claim arising from tortious acts are Japan Do those termination rights need to be set out prohibited (Art 509, Civil Code). expressly?

3.15 Do parties to construction contracts owe a duty of Most major contract forms provide cause of termination for the care to each other either in contract or under any employer and contractor. The core concepts of these causes are other legal doctrine? breach of contract and lack of credibility for payment or further works. In addition, the contractor may terminate the contract in Parties owe a supplementary duty (fuzui-gimu) to each other based case of force majeure (Para (1)(c), Art 32, GCCC). The employer on the “principle of good faith” (shingi-soku), such as the obligation may also terminate the contract without any cause before the to provide each other with the necessary information. For instance, completion of the work (Art 641, Civil Code). The employer’s where the contractor provides the employer with wrong information, partial termination has been an issue among academics, and the it may be found that the employer is entitled to cancel the contract prevailing view refutes it. In practice, the employer’s partial based on a breach of the supplementary duty of the contractor termination is usually treated as omission or variation, which (Nagoya Dist Ct, Judgment of 15 September 2006, 1243 Hanrei causes price adjustments. Times 145). Unless parties use such major forms, or unless the employer explicitly agrees to certain terms of termination, parties can still terminate the contract as long as it establishes the other party’s 3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that breach of contract. ambiguity is interpreted?

3.12 Is the concept of force majeure or frustration known Japanese courts endeavour to interpret and find a reasonable intention in your jurisdiction? What remedy does this give of the parties in each particular type of transaction. Sometimes such the injured party? Is it usual/possible to argue a reasonable intention found by the courts may depart from the successfully that a contract which has become literal meaning of the words used in the contract. Trade usage may uneconomic is grounds for a claim for force majeure? be strong evidence for such interpretation.

As a traditional civil law jurisdiction, Japan has the concept of force majeure, but does not have that of frustration. Furthermore, 3.17 Are there any terms in a construction contract which most contract forms have provisions for force majeure as a cause of are unenforceable? extension of time and termination. Theoretically, the core effect of force majeure is to prevent the As long as terms are not against public policy, terms agreed by the contractor from being liable for delays to the work. Except where parties shall be respected. the work is no longer possible due to force majeure, the contractor has to resume and complete the work once the influence of force 3.18 Where the construction contract involves an element majeure ceases to be in play. Whether or not the contractor is entitled of design and/or the contract is one for design only, to claim additional costs for resuming and recovering the work, is a are the designer’s obligations absolute or are there matter of argument. In principle, the contractor has to resume and limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in recover the work at its own cost. Contrarily, most major contract respect of his work? forms provide that parties have to consult each other first, and if the parties agree to find that the contractor’s losses songai( ) on the There is no limitation on the extent of the designer’s obligation. uncompleted works, materials and equipment were substantial, and Where there is any defect in a building which threatens the basic good care of these was not taken, the employer shall indemnify the safety of the building, and the defect is attributed to the design, the contractor for such losses (Art 21, GCCC). As such, solutions given designer shall be liable for the damage caused by the defect incurred by the major forms are still ambiguous and limited. not only by the employer but also by a third party, in accordance with tort theory (Sup Ct, Judgment of 6 July 2007, 1984 Hanrei 3.13 Are parties which are not parties to the contract entitled Jiho 34). 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 4 Dispute Resolution contracts in relation to defects in the building?

As long as the employer and the contractor agree to grant to the third 4.1 How are disputes generally resolved? party a beneficiary right, it is possible for such third party to take the benefit, including a claim relating to defects. Unless otherwise, it Generally, litigation is the most popular among other dispute may be difficult to rely on contractual claims, but tort claims may be resolution procedures, such as arbitration and mediation. In

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addition, in the construction industry, the CBA stipulates the on International Trade Law (“UNCITRAL”) and Japan has “Construction Dispute Commission” (kensetsu-koji-funso- acceded to the United Nations Convention on Recognition and shinsa-kai) (the “CDC”) as providing the government-sponsored Enforcement of Foreign Arbitral Awards 1958 (the “New York alternative dispute resolution procedure (Art 25, CBA). The CDC Convention”), Japanese courts usually recognise and enforce is established in every prefecture, and there is a nationwide CDC. international arbitration awards made in Member States of the The jurisdiction of each CDC is determined by the registered venue New York Convention. Further, there is no unique obstacle against of the claimant, or the venue of the construction site in question. enforcement. Central and prefectural governments appoint a panel of mediator- arbitrators. The CDC provides mediation and arbitration services. 4.5 Where the contract provides for court proceedings Japan Furthermore, summary courts and some district courts provide in a foreign country, will the judgment of that foreign mediation services, whereas private mediation services are rarely court be upheld and enforced in your jurisdiction? used in any of the industry sectors. Arbitration is also rarely used. Even in the construction industry, litigation is used more often than This question depends on the country in which the judgment is arbitration. made. Article 118 of the Code of Civil Procedure (Act No. 109 of 1996, as last amended by Act No. 30 of 2012) provides the 4.2 Do you have adjudication processes in your following requirements for the judgment of the foreign court to jurisdiction? If so, please describe the general be upheld and enforced in Japan: (1) the jurisdiction of the foreign procedures. court is recognised under laws or conventions; (2) the defeated defendant has received the service of a summons or order necessary There are no statutes stipulating “adjudication”. Court-supported for the commencement of the suit or has appeared; (3) the judgment mediators are sometimes allowed to render determination-like and the court procedures are not contrary to public policy in Japan; adjudication procedures, and a mediator’s determination becomes and (4) a mutual guarantee exists between the country and Japan. final and binding unless parties expressly disagree with the proposal Accordingly, the judgment of the foreign court would not be (Arts 17 and 18, Civil Mediation Act, Act No. 222 of 1951, as enforceable unless a mutual guarantee exists between Japan and the amended). foreign country in which the judgment was made.

4.3 Do your construction contracts commonly have 4.6 Where a contract provides for court proceedings in arbitration clauses? If so, please explain how your jurisdiction, please outline the process adopted, arbitration works in your jurisdiction. any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) The use of arbitration for domestic disputes is quite low in Japan. a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal. It is the same in the construction industry. However, compared with other business sectors, it seems that construction arbitrations, mainly handled by the CBC, amount to around 90 cases − three to A civil procedure is commenced by a plaintiff filing a complaint with four times the number of regular commercial arbitrations handled a court. A defendant receives the complaint and a writ of summons by the Japan Commercial Arbitration Association (“JCAA”). from a court. In response to this, the defendant files an answer with a court. After that, in general, each party submits its argument and Usually, parties do not agree to arbitration at the time of conclusion evidence several times, and court hearings, including examination of the construction agreement. If any dispute arises, either party of witnesses, are held several times. In general, it takes one to two (or parties) refers the dispute to CDC mediation, and some parts of years to receive a decision by the first instance court. the dispute are settled by mediation. If parties find that it is more efficient to refer the remaining issues to the same CDC members, Japan’s court system is basically a three-trial system in which parties then they go to arbitration. Otherwise, they go to court for litigation. to disputes have the right of appeal (koso) and final appeal jokoku( ). It generally takes two to three years from filing a complaint to receiving a decision ruled by the final court of appeal (i.e. the 4.4 Where the contract provides for international Supreme Court). arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement.

Since the Arbitration Act (Act No. 138 of 2003, as amended) was enacted based on the Model Law of the United Nations Commission

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Naoki Iguchi Nagashima Ohno & Tsunematsu JP Tower, 2-7-2 Marunouchi Chiyoda-ku Tokyo 100-7036 Japan

Tel: +81 3 6889 7655 Email: [email protected] URL: www.noandt.com Japan

Naoki Iguchi is a partner of the international construction/infrastructure projects and arbitration team of Nagashima Ohno & Tsunematsu. He advises construction and infrastructure companies in construction, transportation, gas pipeline and other infrastructure projects in various jurisdictions. He has also represented clients in international arbitration globally. He served as country representative of Japan, Dispute Resolution Board Foundation (DRBF) (until 2015), director of the International Academy of Construction Lawyers (IACL) (until 2015), co-chair of the international construction project committee of the Inter-Pacific Bar Association (IPBA) and regular lecturer of the Oversea Construction Association of Japan (OCAJI) (until 2015). He studied at the University of Tokyo (LL.B.; LL.M.), Stanford (LL.M.) and worked at law firms in Japan, China, Taiwan and the United States. He is a member of the Japan ICC Arbitration Committee and a member of ICC Workforce on Cost. He is fluent in Japanese, English and Mandarin and he also understands Spanish.

Nagashima Ohno & Tsunematsu, having offices in Tokyo, New York, Singapore, Bangkok and Ho Chi Minh City, is widely known as a leading law firm and one of the foremost providers of international and commercial legal services in Japan. The firm’s construction team has advised on many construction and infrastructure projects in various jurisdictions including the UK, Turkey, China, Taiwan, Vietnam, Indonesia, India, Pakistan, Sri Lanka, Iraq and African countries, as well as Japan. The firm has advised owners, construction companies, engineering and design companies in various types of construction projects including office buildings, super high-rise condominiums, entertainment parks, museums, crude-oil pipelines, highways, bridges, thermal/nuclear power plants, chemical and paper-mill plants and various other kinds of industrial plants. The firm regularly represents clients in international and domestic arbitration/mediation procedures. Many members of the construction team are active in construction committees in the International Bar Association, Inter-Pacific Bar Association, Dispute Resolution Board Foundation and International Academy of Construction Lawyers; some are national members of the ICC Arbitration Committee.

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Malaysia Janice Tay

Skrine Richard Khoo

1 Making Construction Projects 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 1.1 What are the standard types of construction contract non-legally binding indication of willingness either to in your jurisdiction? Do you have contracts which enter into a contract later or to commit itself to meet place both design and construction obligations upon certain costs to be incurred by the contractor whether contractors? If so, please describe the types of or not a full contract is ever concluded. contract. Please also describe any forms of design- only contract common in your jurisdiction. Do you have any arrangement known as management It is common in Malaysia for an employer to issue a “letter of intent” contracting, with one main managing contractor (LOI) to a selected contractor as an expression of intent to award and with the construction work done by a series the contract to the said contractor. Generally, an LOI is not legally of package contractors? (NB For ease of reference binding as parties are at that point in time at a negotiation stage throughout the chapter, we refer to “construction (Ayer Itam Tin Dredging Malaysia Berhad v YC Chin Enterprise contracts” as an abbreviation for construction and Sdn Bhd [1994] 2 MLJ 754). Nevertheless, the question of whether engineering contracts.) a LOI is legally binding is ultimately determined by the terms of the document, the circumstances in which it came to be written and The standard forms of construction contracts are issued by the performance. following bodies and institutes: (i) Ministry of Works (JKR); 1.4 Are there any statutory or standard types of insurance (ii) Malaysian Institute of Architects (PAM); which it would be commonplace or compulsory to (iii) Institution of Engineers Malaysia (IEM); and have in place when carrying out construction work? (iv) Construction Industry Development Board of Malaysia For example, is there employer’s liability insurance (CIDB). for contractors in respect of death and personal injury, or is there a requirement for the contractor to An example of a contract which places both design and construction have contractors’ all-risk insurance? obligations on the contractor is the JKR Standard Form of Design and Build Contract (Rev.1/2010). There is no form of design-only It is compulsory for the contractor to insure the workmen he contract that is commonly used. employs for the construction work (s 26, Workmen’s Compensation Management contracting is a fairly common arrangement for large Act 1952). infrastructure projects in Malaysia. In Malaysia, the most common types of insurances required under a construction contract are Contractor’s All Risk (CAR), Erection All 1.2 Are there either any legally essential qualities needed Risk and Public Liability Insurance. to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any 1.5 Are there any statutory requirements in relation specific requirements which need to be included in a to construction contracts in terms of: (a) general construction contract (e.g. provision for adjudication requirements; (b) labour (i.e. the legal status of those or any need for the contract to be evidenced in working on site as employees or as self-employed writing)? sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety? In Malaysia, contracts are governed by the Contracts Act 1950 and (i) General Requirements by common law. A legally binding contract is formed where there is an offer, acceptance, valuable and lawful consideration, the intention Contractors are required to be registered with the Construction Industry Development Board of Malaysia (s 25, Lembaga to create legal relations, certainty, and the contracting parties have Pembangunan Industri Pembinaan Malaysia Act 1994). the capacity and have consented to the contract. (ii) Labour There are no specific requirements as to what a construction contract An employer is required to register his local workmen under should include. the Employee’s Social Security Scheme (Employees’ Social

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Security Act 1969). As stated in the answer to question 1.4, In addition, where an injunction is sought to restrain the demand an employer must also insure his workmen (s 26, Workmen’s made on the bond, the bank will be restrained from making Compensation Act 1952). payment if fraud on the bond is proved whereas the beneficiary (iii) Tax will be restrained from receipt of the monies if there is fraud and A contractor who is a “registered person” under the unconconsionability pursuant to the underlying contract. Goods and Services Tax Act 2014 is required to charge Company Guarantees Goods and Services Tax for his services (Guide to the Construction Industry (Goods and Services Tax), Royal Under a company guarantee, a parent or other group company of Malaysian Customs). In addition, for payment to a non- the contractor guarantee the performance of the contractor under a resident individual/company, the payer is required to deduct construction contract. Accordingly, the guarantor is only liable to withholding tax from such payment and pay the said tax to pay if there has been a breach of the underlying contract. Malaysia the Inland Revenue (Income Tax Act 1967). (iv) Health and safety 1.8 Is it possible and/or usual for contractors to have An employer has to ensure the safety, health and welfare retention of title rights in relation to goods and at work of his employees, e.g. providing training and supplies used in the works? Is it permissible for supervision (s 15, Occupational Safety and Health Act 1994). contractors to claim that until they have been paid For building operations (contract price exceeding RM20 they retain title and the right to remove goods and million) and engineering construction work (contract price materials supplied from the site? exceeding RM20 million), the employment of a safety and health officer is required (s 29, Occupational Safety and It is common for contractors to have retention of title rights in relation Health Act 1994). to the materials and goods to be used in the works. Construction contracts generally provide that the title to such materials and goods 1.6 Is the employer legally permitted to retain part of shall only pass to the employer upon the employer’s payment for the purchase price for the works as a retention to be such goods and supplies (see Clause 20 of JKR Form 203A, Clause released either in whole or in part when: (a) the works 14.2 of PAM Contract 2006, Clause 33.2 of CIDB Standard Form of are substantially complete; and/or (b) any agreed Contract for Building Works 2000). defects liability is complete?

It is common for the employer to retain 5%–10% of the contract sum 2 Supervising Construction Contracts to secure the due performance of the contractor (see Clause 30.5 of the PAM Contract 2006, Clause 58.6 IEM.CE 2011 Form and 2.1 Is it common for construction contracts to be Clause 42.3 of the CIDB Form). supervised on behalf of the employer by a third It is also common for one moiety of the said sum to be released party? Does any such third party (e.g. an engineer upon the issuance of the Certificate of Practical Completion and the or architect) have a duty to act impartially between balance after the issuance of the Certificate of Making Good Defects contractor and employer? Is that duty absolute or is (see Clause 30.6(c) and (d) of the PAM Contract 2006). it only one which exists in certain situations? If so, please identify when the architect/engineer must act The Malaysian Court of Appeal in Qimonda Malaysia Sdn Bhd impartially. (in liquidation) v Sediabena Sdn Bhd & Anor [2011] 2 AMCR 784; [2012] 3 MLJ 422 (upheld by the Federal Court) decided It is common for construction contracts to be supervised on behalf that retention monies are by their very nature and purpose trust of the employer by a third party. This is typically the architect or monies held by the employer for a specific purpose as trustee for the superintending officer. contractor. There is no requirement for the retention monies to be The role of the contract administrator depends on the terms of kept in a separate bank account and this is applicable even where the the contract under which he is required to act. In undertaking his employer has gone into liquidation. certification role (for example, of the certificate for an extension of time, certificate of non-completion, certificate of making good defects, 1.7 Is it permissible/common for there to be performance certificate of completion, etc.), it is usually expressed or implied that bonds (provided by banks and others) to guarantee the contract administrator must act independently and professionally. performance, and/or company guarantees provided to He is required to act impartially, reasonably and expeditiously. guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees? 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, Performance bonds and company guarantees are common to secure have themselves been paid; i.e. can the employer and guarantee a contractor’s performance and to provide the employer include in the contract what is known as a “pay when paid” clause? with redress where the contractor fails to perform its obligations. Performance Bonds Pursuant to the Construction Industry Payment and Adjudication Act The types of performance bonds which are most frequently 2012 (CIPAA), an Act which applies to every written construction encountered are: contract save for certain limited exceptions, a conditional payment ■ conditional performance bond, where the condition for the clause is rendered void pursuant to Section 35. Section 35 provides demand on the bond must be fulfilled; and as follows: ■ unconditional or on-demand performance bond, where the “35. Prohibition of Conditional Payment employer must be paid under presentation of the bond even if ■ Any conditional payment provision in a construction contract there is a genuine dispute between parties to the construction in relation to payment under the construction contract is contract as to whether the sum in question is due. void.

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■ For the purposes of this section, it is a conditional payment (ii) Implied under common law: provision when: ■ The employer shall fully cooperate with the contractor. ■ The obligation of one party to make payment is conditional ■ The contractor shall ensure the works are fit for purpose, upon that party having received payment from a third where the employer relies on the contractor’s skill and party; or judgment. ■ The obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party.” 3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of The Malaysian Courts have given Section 35 a wide meaning and his employer, is the contractor entitled to: (a) an this is pending a decision by the Federal Court. extension of time; or (b) the costs occasioned by that Malaysia concurrent delay? 2.3 Are the parties permitted to agree in advance a fixed sum (known as liquidated damages) which will be The position in Malaysia on this matter is not settled. Authorities paid by the contractor to the employer in the event of from Commonwealth courts are instructive and have persuasive particular breaches, e.g. liquidated damages for late value. 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- 3.5 If the contractor has allowed in his programme a estimate of loss, or can the contractor be bound to period of time (known as the float) to allow for his own pay a sum which is wholly unrelated to the amount of delays but the employer uses up that period by, for financial loss suffered? example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed Yes, such clauses are common. after this float is used up? The law in Malaysia governing claims for LAD for delay presently The position in Malaysia on this matter is not settled. Authorities places the burden on the employer to prove its losses on a balance from Commonwealth courts are instructive and have persuasive of probabilities in order to succeed in its claim for liquidated and ascertained damages. value. The Federal Court case of Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817 held that a party seeking to claim 3.6 Is there a limit in time beyond which the parties to liquidated damages must prove its actual losses, but remains bound a construction contract may no longer bring claims by the cap on liability in the sense that it is unable to recover more against each other? How long is that period and from what date does time start to run? that the stipulated sum, even if it can proves loss in excess of that stipulated sum. Limitation periods are typically imposed by the Limitation Act 1953 which is applicable in West Malaysia, the Limitation Ordinance 3 Common Issues on Construction 1952 (Sabah), the Limitation Ordinance 1959 (Sarawak) and the Contracts Public Authorities Protection Act 1948. The limitation period for a contractual or a tortious claim is six years from the accrual of the cause of action. 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? The Limitation Act 1953 does not apply to any action or arbitration to which the Government of Malaysia is a party (s 3, Limitation Act An employer is entitled to vary the works to be done under the 1953). Instead, s 32 of the Public Authorities Protection Act 1948 contract under the express terms of the contract or under common provides that the limitation period for such action or arbitration is 36 law, whereby the contractor will be entitled to payment on a months from the accrual of the cause of action. quantum meruit basis. Such works must be a change to the works specified in the original 3.7 Who normally bears the risk of unforeseen ground contract and comply with the express procedural requirements as conditions? well as the . The common law position is that the contractor bears the risk of unforeseen ground conditions. It depends on the provisions of the 3.2 Can work be omitted from the contract? If it is omitted, can the employer do it himself or get a third construction contract. In the JKR and IEM standard forms, the party to do it? contractor bears the risk.

Generally, work can only be omitted from the contract under the 3.8 Who usually bears the risk of a change in law express terms of the contract. affecting the completion of the works?

3.3 Are there terms which will/can be implied into a The contract will usually provide which party shall bear the risk construction contract? of a change in law in relation to the works. Typically, such a risk is borne by the employer in that a change in law would be grounds Yes. Some examples of implied terms are as follows: for a contractor to make a variation claim for any increase in the (i) Implied by statute: contract price. ■ A contractor/sub-contractor may refer a payment dispute for adjudication (Construction Industry Payment and Adjudication Act 2012).

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It is not a requirement to set out the termination rights expressly in 3.9 Who usually owns the intellectual property in relation the contract. However, in practice, termination of a contract based to the design and operation of the property? on the contractual provisions is the most common mechanism of termination. The Malaysian position is that copyright first vests in the creator of a piece of work. However, where work is commissioned under a contract of service or made in the course of employment, copyright 3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give is deemed to be transferred to the person who commissioned the the injured party? Is it usual/possible to argue work or the author’s employer (s 26, Copyright Act 1987). As such, successfully that a contract which has become copyright would vest in the employer. uneconomic is grounds for a claim for force majeure?

It is to be noted that, unless agreed otherwise, architects will own the Malaysia copyright in all documents, drawings and works executed from such Construction contracts in Malaysia usually have a force majeure documents and drawings (Subrule 29(20), Architects Rules 1996). clause. A delay or breach by a party due to a force majeure event The ownership of intellectual property in relation to the works would entitle the said party to an extension of time or the excusal will usually be agreed upon by the parties and provided for in the of the breach. However, force majeure is not applicable where the construction contract. delay was within the claimant’s contemplation and control (Golden Bay Realty Pte Ltd v Orchard Twelve Investments Pte Ltd [1989] MLJ 70). 3.10 Is the contractor ever entitled to suspend works? In general, force majeure provisions in contracts expressly exclude economic downturn, insufficient funding or commercial There is no right of suspension under common law. In the absence impossibility. of a contractual entitlement, the contractor’s act of suspension may amount to a breach of contract. However, CIPAA provides for a right to suspend performance or 3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right reduce the rate of progress of performance of any construction work which is made for their benefit? E.g. is the second or or construction consultancy services under a construction contract subsequent owner of a building able to claim against if the adjudicated amount pursuant to an successful adjudication the original contracts in relation to defects in the decision has not been paid wholly or partly. building? The party who exercises his right under CIPAA: ■ is not in breach of contract; In general, a contract cannot be enforced by or against a person who is a stranger to it, however, parties may be able to pursue ■ is entitled to a fair and reasonable extension of time to complete his obligations under the contract; other remedies available to them in tort. Collateral contracts and warranties are also used as an exception to the doctrine of privity ■ is entitled to recover any loss and expenses incurred as a of contract. result of the suspension or reduction in the rate of progress of performance from the other party; and ■ shall resume performance or the rate of progress of 3.14 Can one party (P1) to a construction contract which performance of the construction work or construction owes money to the other (P2) set off against the sums consultancy services under a construction contract in due to P2 the sums P2 owes to P1? Are there any accordance with the contract within 10 working days after limits on the rights of set-off? having been paid the adjudicated amount or an amount as may be determined by arbitration or court. In general, a party is entitled to set off where expressly provided for in the contract. These items typically include deductions of 3.11 On what grounds can a contract be terminated? Are retention sum, liquidated and ascertained damages over payments there any grounds which automatically or usually and payments made to third parties. Such deductions are usually entitle the innocent party to terminate the contract? made simply or upon certification by the contract administrator Do those termination rights need to be set out unless the contract requires the contractor’s prior agreement or the expressly? decision of an independent third party.

The grounds of termination of a contract vary from contract to 3.15 Do parties to construction contracts owe a duty of contract. Some common grounds of termination are as follows: care to each other either in contract or under any (a) Default of obligations. other legal doctrine? (b) Financial defaults (e.g. bankruptcy). (c) Force majeure. Parties to a construction contract may owe a duty of care to each other in contract and tort. Aside from contractual termination, parties may also terminate a contract under common law on the grounds of a repudiatory breach Unless expressly provided for in the contract, the parties are under or the breach of a condition. the following implied duties: The JKR standard forms, which are used in the public sector, also The Employer provide for termination on grounds of national interest, termination (i) the employer must cooperate with the contractor; of convenience, and termination on grounds of corruption or (ii) the employer must not prevent the contractor from carrying unlawful activities. out his works; Financial defaults and termination on grounds of corruption or (iii) the works will be supervised by a qualified person; unlawful activities would entitle the innocent party to immediately (iv) the employer will give the contractor possession and site terminate the contract. access; and

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(v) the employer must prepare and hand over the necessary skill and care to be expected from a competent designer. In practice, documents to enable the contractor to carry out the works. the liability of the designer is usually capped at the contract price or The Contractor fee payable to them. (i) The contractor is to undertake all work which is indispensably There is no requirement for the designer to provide an absolute necessary for the completion of the work; guarantee for his work. (ii) work is to be executed in a proper and workmanlike manner using reasonable skill and care; and 4 Dispute Resolution (iii) materials or goods supplied must be fit for purpose.

Malaysia 3.16 Where the terms of a construction contract are 4.1 How are disputes generally resolved? ambiguous, are there rules which will settle how that ambiguity is interpreted? Disputes are generally resolved by way of court litigation, arbitration, adjudication and mediation. Where the terms of a construction contract are ambiguous, the courts may adopt certain rules as to how such ambiguity is interpreted. For 4.2 Do you have adjudication processes in your example: jurisdiction? If so, please describe the general (i) General Guidelines procedures. First, a court interpreting a private contract is not confined to the four corners of the document. It is entitled to look at the Malaysia enacted statutory adjudication with the Construction factual matrix forming the background to the transaction. Industry Payment and Adjudication Act 2012 (CIPAA). Second, the factual matrix which forms the background to CIPAA applies to every construction contract made in writing the transaction includes all material that was reasonably relating to construction work carried out wholly or partly within the available to the parties. territory of Malaysia including a construction contract entered into Third, the interpreting court must disregard any part of the by the Government. Disputes which may be referred to adjudication background that is declaratory of subjective intent only. under CIPAA relate to payment for work done and services rendered Lastly, the court should adopt an objective approach when under the express terms of a construction contract. interpreting a private contract. The process is usually a documents-only procedure and lasts around (ii) Parol Evidence 100 days. The decision is temporarily but immediately binding Extrinsic evidence will only be admitted and considered pending the final resolution of the subject disputes by arbitration, if it falls under the exceptions permitted under s 92 of the litigation or agreement between the parties. In the interim, the Evidence Act 1950. losing party is required to comply with the adjudicator’s decision (iii) Contra Proferentum and pay the adjudicated amount unless the decision has been stayed Any ambiguity is resolved against the party who seeks to rely or set aside by the High Court. on the particular term in issue. (iv) Ejusdem Generis 4.3 Do your construction contracts commonly have Where words of a particular class are followed by general arbitration clauses? If so, please explain how words, the general words only covers matters of the same arbitration works in your jurisdiction. class. (v) Noscitur a sociis Arbitrations are governed by the Arbitration Act 2005 (“AA 2005”) The meaning of a word may be ascertained according to its which is based on the UNCITRAL Model Law and amended by the context. Arbitration (Amendment) Act 2011 (“Amendment Act”). Section 8 of the AA 2005 expressly states that “No court shall 3.17 Are there any terms in a construction contract which intervene in matters governed by this Act, except where so provided are unenforceable? in this Act”. Pursuant to section 10 of the AA 2005, it is mandatory for the Malaysian courts to stay any court proceedings which are the A conditional payment provision in a construction contract is subject of an arbitration agreement in favour of arbitration. A stay void by virtue of s 35 of the Construction Industry Payment and will be refused where a party has taken a step in the proceedings or Adjudication Act 2012. the arbitration agreement is null and void, inoperative or incapable of being performed. Any terms which restrain the exercise of lawful trade will be void (s 28, Contracts Act 1950). Further, provisions restricting a party from Unless the parties to an international arbitration agree, Part III of enforcing his rights under the contract, or limiting the time for the the AA 2005 shall not apply to that arbitration. Conversely, unless enforcement of his rights, will be void (s 29, Contracts Act 1950). the parties to a domestic arbitration otherwise agree, Part III shall apply to the domestic arbitration. The parties may agree to apply or exclude the application of Part III of the AA in whole or in part. 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, Part III of the AA 2005 deals with: are the designer’s obligations absolute or are there ■ Consolidation of proceedings and concurrent hearings. limits on the extent of his liability? In particular, does ■ Determination of preliminary points of law by the High Court the designer have to give an absolute guarantee in in the course of the arbitration with the consent of the arbitral respect of his work? tribunal or every other party to the arbitration. ■ Reference to the High Court of any arising A designer will only be liable for any defects in or losses resulting out of the arbitral award. from his design if it is proven that he failed to exercise the reasonable

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■ Appeals against the decision of the High Court on the viii) the subject-matter of the dispute is not capable of settlement question of law arising out of the arbitral award. by arbitration under the laws of Malaysia; or ■ Costs and expenses of the arbitration. ix) the award is in conflict with the public policy of Malaysia. ■ Extension of time for the commencement of arbitral proceedings. 4.5 Where the contract provides for court proceedings ■ Extension of time for the making of an arbitral award. in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction?

4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise Foreign judgments may be enforced by registration under the and enforce international arbitration awards? Please Reciprocal Enforcement of Judgments Act 1958 (“REJA”) or by Malaysia advise of any obstacles to enforcement. way of a common law action. Pursuant to REJA, a foreign judgment must meet the following Malaysia is a signatory to the 1958 New York Convention on the requirements before it can be upheld and enforced: Recognition and Enforcement of Foreign Arbitral Awards (“the New i) the foreign judgment must be delivered by a court listed York Convention”). An arbitration award obtained in a “foreign under the First Schedule of REJA 1958; state” (i.e. a State which is a party to the New York Convention) is ii) it must be a final and conclusive decision between parties; enforceable in Malaysia. iii) it must be a judgment for a sum of money payable (does not Enforcement of international arbitration awards may be refused for include sums such as taxes, fines or other penalties); and failing to meet the conditions set out in Section 38 or based on the iv) the applicable for registration must be made within six years grounds as set out in Section 39. after the date of judgment, or if there was an appeal, after the Section 38 of the Malaysian Arbitration Act 2005 provides that on date of the last judgment in the appeal. application in writing to the High Court with the award and written arbitration agreement, an arbitration award from a foreign state shall 4.6 Where a contract provides for court proceedings in be recognised and be enforced by entry as a judgment in terms of the your jurisdiction, please outline the process adopted, award or by action. any rights of appeal and a general assessment of Section 39 of the Arbitration Act 2005 provides that recognition or how long proceedings are likely to take to reduce: (a) enforcement of an arbitration award may be refused where: a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal. i) a party to the arbitration agreement was under any incapacity; ii) the arbitration agreement is not valid under the law to which An action usually commences by way of a Writ (where generally the parties have subjected it, or, failing any indication thereon, there are contested facts and which proceeds to trial) or Originating under the laws of the State where the award was made; Summons (where matters can be summarily disposed of). iii) the applicant was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was The Malaysian courts are comprised of a hierarchical system of otherwise unable to present that party’s case; courts with the Superior Courts and Subordinate Courts and the doctrine of stare decisis applies. The Superior Courts contain the iv) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration; Federal Court, the Court of Appeal, the High Court of Sabah and Sarawak whereas the Subordinate Courts contain of the Sessions v) the award contains decisions on matters beyond the scope Court, the Court, Penghulu’s Courts, Native Courts of the submission to arbitration. That being said, where the decision on matters submitted to arbitration can be separate and other miscellaneous courts and tribunals. There are specialised from those not so submitted, only that part of the award construction courts in Malaysia. which contains decisions on matters submitted to arbitration The time to resolve disputes may generally take one to two years may be recognised and enforced; from a decision by the court of first instance until a decision by the vi) the composition of the arbitral tribunal or the arbitral final court of appeal. procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Act from which the party cannot derogate, Acknowledgment or, failing such agreement, was not in accordance with the Arbitration Act 2005; The authors would like to thank Rachel Chiah for her invaluable contribution to this chapter. vii) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made;

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Janice Tay Richard Khoo Skrine Skrine Unit 50-8-1, 8th Floor, Wisma UOA Unit 50-8-1, 8th Floor, Wisma UOA Damansara Damansara 50 Jalan Dungun, Damansara Heights 50 Jalan Dungun, Damansara Heights 50490 Kuala Lumpur 50490 Kuala Lumpur Malaysia Malaysia

Tel: +603 2081 3999 Tel: +603 2081 3999 Email: [email protected] Email: [email protected] URL: www.skrine.com URL: www.skrine.com

Malaysia Janice Tay is a graduate from the University of Cambridge and was Richard Khoo graduated from Leeds Metropolitan University, England called to the English Bar (Lincoln’s Inn). Upon returning to Malaysia, and was called to the Malaysian Bar in 1995. He is a partner in Skrine. she commenced her pupillage in the Construction and Engineering He is actively involved in advising, structuring, negotiating, drafting Department at Skrine and was admitted as an Advocate and Solicitor and documenting complex and interdependent agreements for various of the High Court of Malaya. construction, infrastructure and engineering projects from tender She is currently a Partner in Skrine, an Arbitrator (FCIArb) and submission to financial close. This includes tender documents, power Adjudicator in the panel of the Kuala Lumpur Regional Centre for purchase agreements, engineering, procurement and construction Arbitration and a Mediator. agreements, operation and maintenance agreements, fuel supply agreements, equipment supply agreements, dredging agreements Janice is also the Deputy President of the Society of Construction and joint venture and shareholders agreements. He also advises on Law, Secretary of the Chartered Institute of Arbitrators (Malaysia), project implementation and claims. Committee Member of the Chartered Institute of Arbitrators (Malaysia) Young Practice Group), Drafting Committee Member of Malaysia’s In addition to his involvement in construction, infrastructure and First Supplement to the Delay & Disruption Protocol published by the engineering projects, he has led and concluded mergers and Society of Construction Law (Malaysia) and Committee Member of the acquisitions transactions for Japanese companies structured on an Migrants, Refugees & Immigration Affairs Committee of the Malaysian asset purchase and acquisition exercise. He has also conducted Bar. litigation and advised on contentious contractual, commercial and construction disputes, including instructing senior counsel.

Skrine is one of the largest full-service law firms in Malaysia with in-depth experience in a range of legal matters acquired through its more than 54 years of practice. Skrine is the exclusive Malaysian member of Lex Mundi, a network of leading independent law firms in over 160 jurisdictions around the world and the Pacific Rim Advisory Council, a network of 30 top-tier independent member law firms. The Firm has been named as the Malaysia Law Firm of the Year 2017 by Asian Legal Business; Malaysia Law Firm of the Year in 2015 by Chambers Asia Pacific; Malaysian Firm of the Year 2013–2016 by Who’s Who Legal; ranked as Leading Firm by Chambers Asia Pacific and Global from 2011– 2017; ranked as Top Tier Firm by The Legal 500 Asia Pacific since 2014; ranked in the Top 100 International Arbitration Practice since 2012 by Global Arbitration Review (GAR) 100 and has been named as Malaysian Firm of the Year for 2014–2016 by Managing Intellectual Property (Managing IP).

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Mexico Roberto Hernández García

COMAD, S.C. Adrián Roberto Villagómez Alemán

■ For the lump-sum contract in the private sector, the contract 1 Making Construction Projects must be in written form, with a description of the work and the amount or design of the work when applicable. The contract can include clauses that parties consider appropriate for the 1.1 What are the standard types of construction contract characteristics of the work, without affecting the essence of in your jurisdiction? Do you have contracts which the contract. place both design and construction obligations upon contractors? If so, please describe the types of ■ For contracts in the public sector, a public procurement contract. Please also describe any forms of design- process must be followed in order to formalise a public only contract common in your jurisdiction. Do works contract. This type of contract must include all the you have any arrangement known as management requirements established in article 46 of the Law of Public contracting, with one main managing contractor Works and Related services (LPWRS), such as the name of and with the construction work done by a series the government authority, the applied public procurement of package contractors? (NB For ease of reference procedure, the information of the bidder, the characteristics throughout the chapter, we refer to “construction of the work to be done, and the amount and forms of payment contracts” as an abbreviation for construction and (which are also established in the law). The bidder must engineering contracts.) know the model contract at the time of the bid.

Mexico has not developed its own general standard types of 1.3 In your jurisdiction please identify whether there is construction contracts (model contracts), although some specific a concept of what is known as a “letter of intent”, in projects have used international forms such as FIDIC (Fédération which an employer can give either a legally binding or Internationale des Ingénieurs-Conseils), AIA (American Institute of non-legally binding indication of willingness either to Architects – USA) and ConsensusDocs (USA). enter into a contract later or to commit itself to meet On the contrary, in Mexico companies develop their own certain costs to be incurred by the contractor whether or not a full contract is ever concluded. construction and engineering contracts, according to the applicable law of the place where the works are to be performed and according to the nature of the contract (public or private). The equivalent to a letter of intent in Mexico is the so-called “Preliminary/Promise Contract” provided for in the Civil Code Regular types of construction contracts include Lump-Sum, Unit which contemplates that parties or the party are obliged to enter into Prices, Mixed (Lump-Sum and Unit Prices), and in recent times, a future contract. due to the participation of foreign companies in the market, more Construction Management contracts (at-risk or pure) have seen the In addition to the essential qualities of any contract, for this contract light of day. According to Mexican legislation, parties can agree to be legally binding it must be in written form, and establish a time on any matter that they decide as long as they do not violate public limit for the parties to enter into the future contract. order/public interest rules. This preliminary contract can only have as its object the future entering into a contract made in the terms and conditions agreed by the parties. 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 1.4 Are there any statutory or standard types of insurance and intention to create legal relations), or any which it would be commonplace or compulsory to specific requirements which need to be included in a have in place when carrying out construction work? construction contract (e.g. provision for adjudication For example, is there employer’s liability insurance or any need for the contract to be evidenced in for contractors in respect of death and personal writing)? injury, or is there a requirement for the contractor to have contractors’ all-risk insurance? To create a legally binding contract in Mexico, it is important to comply with all the requirements established in the general law Yes, there is statutory insurance for the contractor with respect to applicable to contracts, such as: consent or willingness; licit object; its employees under the Law of Social Security (for death, personal capacity to contract; and the form that each contract requires injury or sickness of employees). In addition, depending on the according to the law. Nevertheless, there could be specific rules object of the contract, the parties can establish in clauses of the such as the following: contract, the insurances that they deem necessary in terms of the

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object of the contract. The most common insurances used in practice As for private contracts, the parties are entitled to freely agree the are: professional liability (design); civil liability; general liability terms of retentions and translate such agreement into a contract (all-risk); automobile; equipment or machinery; environmental; clause; however, in the case that the parties do not agree on the construction; or work insurance. employer’s right of retention, the Civil Code contemplates the As of public work contracts, they usually oblige the contractor to payment of liquidated damages from the contractor to the employer provide insurance on certain matters, in order to cover contingencies instead of a retention (article 2104 Civil Code). during the execution of the contract. Depending on the procurement entity, there will be additional requirements according to internal 1.7 Is it permissible/common for there to be performance laws and regulations (Comisión Federal de Electricidad (CFE), bonds (provided by banks and others) to guarantee Petróleos Mexicanos (Pemex), etc.). performance, and/or company guarantees provided to Mexico guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds 1.5 Are there any statutory requirements in relation and guarantees? to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those In Mexico, performance bonds are the most common mechanism working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of for guaranteeing contractual obligations. employees); or (d) health and safety? Regarding public works contracts, the LPWRS establishes in its article 48 the requirement for performance bonds, which Regarding public contracts: must be provided in order to sign the contract. The amount and (a) General requirements: for this type of contract, the LPWRS specific conditions are established by the authority, but usually the establishes a list of requirements that the contract must percentage is not higher than 10 per cent of the total contract value. include and comply with in order to be awarded. With respect to private contracts, the existence of performance (b) Labour: Labour Law establishes that all companies shall bonds is subject to the conditions agreed by the parties. comply with its terms, including sub-contractors, outsourcing companies, etc. 1.8 Is it possible and/or usual for contractors to have (c) Tax: according to the tax laws, both parties shall comply with retention of title rights in relation to goods and their own obligations. supplies used in the works? Is it permissible for (d) Health and safety: this requirement is only for the contractor contractors to claim that until they have been paid in terms of article 67 LPWRS. they retain title and the right to remove goods and materials supplied from the site? Regarding private contracts: the parties can agree on the general terms and conditions for the contract, as long as such agreements do It is not common practice to include these provisions in construction not violate the public interest rules and statutory requirements such contracts. Nevertheless, article 2644 of the Civil Code mentions as the following: that when the contractors have not been paid, they can retain the (a) General requirements: for example, the lump-sum contract is work that has been constructed, but it does not mention the right required to be in written form, with a description of the work and the amount or design of the work where applicable. to retain the title or to remove goods. The only case in which this would be possible is if the parties expressly agree and establish it as (b) Labour: it is important to distinguish whether the status of a contract clause. those working on site is as employees of the employer or employees of the self-employed contractor. For the first assumption, the employer must comply with the obligations 2 Supervising Construction Contracts provided for in the Federal Labour Law. In the case of self- employed contractors, the labour relationship will be between the contractor and the employees, so the contractor must be 2.1 Is it common for construction contracts to be the one who complies with the obligations of the Federal supervised on behalf of the employer by a third party? Labour Law (articles 10, 13, 15 FLL). Does any such third party (e.g. an engineer or architect) (c) Tax: taxes will be paid under the Tax Code. Each of the have a duty to act impartially between contractor and parties shall comply with its own obligations. employer? Is that duty absolute or is it only one which (d) Health and safety: in terms of article 15-C of the Federal exists in certain situations? If so, please identify when Labour Law, the employer is obliged to review that the the architect/engineer must act impartially. contractor complies with the applicable measures for safety, health and environmental protection. It is common for construction contracts to be supervised by a third party on behalf of the owner. Third parties are supposed to act impartially, but in practice they act on behalf of the owner. Usually 1.6 Is the employer legally permitted to retain part of the engineer or architect may provide elements for the employer to the purchase price for the works as a retention to be released either in whole or in part when: (a) the works decide on the suspension of the works, but unless there is express are substantially complete; and/or (b) any agreed authority of the third party (unusual), the suspension shall come defects liability is complete? directly from the employer.

For public contracts, the LPWRS establishes in its article 46BIS the 2.2 Are employers entitled to provide in the contract that possibility for the employer to make a retention in two phases: (a) they will pay the contractor when they, the employer, during the performance of the works (as a performance guarantee); have themselves been paid; i.e. can the employer and/or (b) that of defects liability. The conditions of these retentions include in the contract what is known as a “pay when are one of the essential requirements of public contracts, as provided paid” clause? in section X of article 46 of the same law. “Pay when paid” clauses are possible in private contracts. In

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accordance with article 1839 of the Civil Code, the parties have contractual freedom, which allows them to include whatever clauses 3.3 Are there terms which will/can be implied into a they deem convenient, and considering “pay when paid” is not an construction contract? essential requirement for the validity of the contract, it is entirely valid. In the case of public works contracts, the LPWRS provisions are automatically applicable and even if the contractual clauses are silent or ambiguous with respect to a matter established in the 2.3 Are the parties permitted to agree in advance a fixed LPWRS, the latter will apply. sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of Concerning private contracts, parties may choose a specific piece of particular breaches, e.g. liquidated damages for late legislation to apply to the contract. Therefore, the Civil Code of the Mexico completion? If such arrangements are permitted, are respective state, and/or the Commercial Code, shall apply. 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 3.4 If the contractor is delayed by two events, one the pay a sum which is wholly unrelated to the amount of fault of the contractor and one the fault or risk of financial loss suffered? his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that concurrent delay? Liquidated damages are the most commonly used sanction for breaches of contract under Mexican law. The parties can agree in advance a certain sum to be paid in the event of particular breaches, Regarding public contracts, article 46 BIS of the LPWRS mentions or in the cases agreed by them. However, this kind of provision that if the delay is caused by the contractor, the contractual penalties will apply, as long as they do not exceed the total price of the has some restrictions. In private contracts, the amount of liquidated contract. In that case, there will not be an extension of time unless damages cannot exceed the value of the breached obligation, and in the parties agree to one. public contracts, liquidated damages cannot exceed the amount of the performance bond. If the delay is caused by the employer, the contractor is entitled to receive: (i) the costs occasioned by that concurrent delay; and (ii) an extension of the final deadline in the same proportion of the delay, 3 Common Issues on Construction in accordance with article 52 of the LPWRS. Contracts In the case that there are two events that cause the delay, the affected party can allege concurrent delay. Nevertheless, this has to be proved, notwithstanding that the law is silent on this. 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? For private contracts, the Civil Code does not establish a hypothesis regarding the extension of time caused either by the contractor or the employer; however, in the case of the costs occasioned, article For public contracts, article 59 of the LPWRS allows the authority 1840 mentions that the parties can agree on a clause for liquidated to modify the scope of the work, yet there are some limits on this damages in case one of them does not comply with its obligations right: variation in the scope is the responsibility of the authority, which, in this case, may result in a delay. and the determination must be supported and establish the impact on the price and payment terms; such modification cannot vary the contract term or price in more than 25 per cent, nor modify the 3.5 If the contractor has allowed in his programme a original project substantially. period of time (known as the float) to allow for his own delays but the employer uses up that period by, for If the changes exceed the mentioned percentage but do not vary the example, a variation, is the contractor subsequently object of the contract, the parties can execute a Change Order, which entitled to an extension of time if he is then delayed will be considered part of the contract. Public lump-sum contracts after this float is used up? cannot be modified when the total price or term are affected. Regarding private contracts, articles 2623 and 2627 of the Civil There is no specific provision or case law regarding this matter, but Code provide that in a lump-sum contract, the employer is entitled in principle the contractor would not be entitled to an extension of to vary the scope of the work. In this type of contract, it is essential time, since that float is a way to “cover” the risks, and providing an that the parties agree on the terms and conditions of the Change extension would mean a double benefit for the contractor. Order, due to all the changes that may be involved (in terms of It is important to remember that the parties can agree such provisions payment and time). in the contract. When executing a Change Order, it is important to verify that the new terms do not conflict with contractual provisions, but also 3.6 Is there a limit in time beyond which the parties to comply with applicable laws and regulations (i.e. Construction a construction contract may no longer bring claims Regulations). against each other? How long is that period and from what date does time start to run?

3.2 Can work be omitted from the contract? If it is omitted, can the employer do it himself or get a third The generic period of the statute of limitations under Mexican law party to do it? is 10 years. Nevertheless, this period can be modified or changed in an agreement by the parties. In terms of article 2027 of the Civil Code, if the contractor incurs in Additionally, article 66 of the LPWRS establishes that the employer omission to perform certain work, the employer can do it himself or can only make a claim within 12 months following the day of hire a third party to do it at the contractor’s expense. This provision completion and acceptance of the works; the claims may be made applies to both private and public contracts, since article 13 of the for latent defects and for any other responsibility that the contractor LPWRS establishes that the Civil Code is supplementary. may have incurred in terms of the contract.

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has the right to choose between requiring the compliance with the 3.7 Who normally bears the risk of unforeseen ground obligations of the contract, and terminating the contract (article conditions? 1949 of the Civil Code). However, it is important that the causes for termination are expressly For private contracts, article 2618 of the Civil Code establishes that set out in the contract so that the parties are clear as to under which every risk that may occur before the completion of the work will be circumstances the contract can be terminated. at the contractor’s expense, unless otherwise agreed by the parties. In the case that the contract is ambiguous, the Civil Code may be applied, since it is supplementary to the LPWRS and the latter is 3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give silent (article 13 LPWRS).

Mexico the injured party? Is it usual/possible to argue Notwithstanding the aforementioned, unless otherwise stated in the successfully that a contract which has become construction contract, the Owner shall bear the risk of unforeseen uneconomic is grounds for a claim for force majeure? ground conditions, and not the contractor. Force majeure is recognised in our jurisdiction as an event that is not foreseeable where the party is unable to prevent it from happening. 3.8 Who usually bears the risk of a change in law affecting the completion of the works? Given the nature of such events, it is not possible to ask for liquidated damages (article 1847 Civil Code), unless one of the In public contracts, the party who bears the risk of a change in law parties had the opportunity to prevent the force majeure and did not is the contractor, due to his obligation to comply with the applicable act correspondingly. law, in accordance with article 67 LPWRS. Under the terms of article 62 LPWRS, it is possible in public contracts Regarding private contracts, in the case of lump-sum agreements, to argue that the force majeure event caused the impossibility to all the risks that may arise during construction will be borne by the continue with the works, bringing about the early termination of the contractor (article 2617 Civil Code); by interpretation of this article, contract. it may be understood that the risk of a change in law is also included. Case law states that for an event to be considered force majeure, it However, it is important to negotiate risk allocation when drafting is not enough reason that the compliance with contract terms turns a contract. more complicated or burdensome, but that it is impossible to be accomplished. 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? 3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right The employer owns the intellectual property in public contracts which is made for their benefit? E.g. is the second or in accordance with section XIII of article 46 LPWRS; all the subsequent owner of a building able to claim against the original contracts in relation to defects in the intellectual property rights derived from the contracted services will building? be the property of the employer except when there is an impediment.

In the case of private contracts, the Civil Code does not establish According to article 1869 of the Civil Code, the third party is anything about this; it must be agreed by the parties, but the owner entitled to claim the benefit only in cases where the parties to the shall usually keep these rights. contract agree to establish that the benefit will be for this third party. In public contracts, the law does not contemplate this scenario and 3.10 Is the contractor ever entitled to suspend works? therefore, it is not possible.

This hypothesis is rarely seen, but the contractor may suspend the 3.14 Can one party (P1) to a construction contract which works in cases where the employer does not pay the contractor or owes money to the other (P2) set off against the sums there is extended force majeure. Also, the Civil Code recognises due to P2 the sums P2 owes to P1? Are there any the concept of force majeure, which is commonly provided for in limits on the rights of set-off? contracts. In terms of the Civil Code, in these cases it is possible for the parties 3.11 On what grounds can a contract be terminated? Are to set off the debts up to the amount of the lowest one (articles 2185 there any grounds which automatically or usually and 2186 Civil Code). The limitations to this right are expressly entitle the innocent party to terminate the contract? mentioned in article 2192 of the Civil Code, some of which may be Do those termination rights need to be set out applicable if one party waives this right, and/or if the debts to set off expressly? are fiscal debts.

Under the terms of article 60 LPWRS, a public contract can be 3.15 Do parties to construction contracts owe a duty of terminated on the grounds of general interest, and when it is care to each other either in contract or under any demonstrated that continuing with the work would not benefit the other legal doctrine? State. The only scenario that the LPWRS contemplates for the contractor to terminate the contract is when force majeure has Parties owe a duty of care to each other considering that they are occurred, making it impossible to continue with the works (article professionals, performing valid work under the law. Lack of duty of 62). care will impact on the performance of the contract and could cause In terms of the Civil Code, which applies to private contracts and a possible breach by the person that does not comply correctly. to public contracts in a supplementary manner, the innocent party

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3.16 Where the terms of a construction contract are 4.2 Do you have adjudication processes in your ambiguous, are there rules which will settle how that jurisdiction? If so, please describe the general ambiguity is interpreted? procedures.

Yes, the Federal Civil Code and the Codes of the 32 federative There is no “adjudication” as understood in the United Kingdom, entities, as well as the Commercial Code, provide rules for the Australia or Malaysia. However, parties may agree to submit their interpretation of a contract as follows: (i) the ambiguous term disputes to a Dispute Adjudication Board (DAB) as adjudication must be interpreted in accordance with the other conditions of the processes have a binding effect. This is rather uncommon in contract, but also applying the sense that is consistent with the Mexico, due to the lack of regulation. object and purpose of the contract; (ii) the customary practice of the Mexico country of the party must be taken into consideration; and (iii) if it 4.3 Do your construction contracts commonly have is impossible to resolve the doubt through these rules, then it will arbitration clauses? If so, please explain how be resolved in favour of the greater reciprocity of interests (articles arbitration works in your jurisdiction. 1851–1857 Civil Code). Many construction contracts have arbitration clauses – mainly 3.17 Are there any terms in a construction contract which those of CFE and Pemex. Arbitration in Mexico abides by the are unenforceable? rules of ICC, LCIA and the Commercial Code which follows the UNCITRAL (United Nations Commission on International Trade In general, terms and conditions that are illegal and/or against a Law) Model Law. public order or public interest provisions are not enforceable. “Illegal acts” are understood as all those acts that go against laws or 4.4 Where the contract provides for international customary practices (articles 1830 and 1795 Civil Code). arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement. 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, Yes, the courts recognise and enforce international arbitration. are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does Mexico is a signatory of the New York and Panama Conventions. the designer have to give an absolute guarantee in respect of his work? 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign The designer’s obligations are not absolute in the sense of those court be upheld and enforced in your jurisdiction? situations in which a construction contractor may incur a fault for construction reasons and not due to design factors. There are provisions in the procedure laws for enforcement of a judgment in a foreign court. The procedure and requirements have to be met in order to enforce a foreign judgment. 4 Dispute Resolution

4.6 Where a contract provides for court proceedings in 4.1 How are disputes generally resolved? your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of According to the public contracts law, disputes are generally how long proceedings are likely to take to reduce: (a) resolved through claims, conciliation, arbitration and trial (articles a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal. 83–104 LPWRS), nevertheless, the most used means to solve a dispute in Mexico regarding public contracts is still going to court. In cases related to construction, this is a commercial matter. Usually Disputes in private contracts may be solved through the mechanisms such matters are solved by civil or commercial courts. There is a agreed by the parties and established in the contract. In this case, the main procedure, an appeal and two federal instances. The entirety law establishes no limitation. In order to choose a particular method of the instances may take between two to four years. of dispute resolution, it is important to know the type of project and the most convenient resolution method. Acknowledgment The authors would like to thank Cynthia Irene Osio Sánchez for her invaluable contribution to this chapter. Cynthia is an associate at COMAD, S.C. (Tel: +52 55 5661 3733 / Email: cosio@comad. com.mx).

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Roberto Hernández García Adrián Roberto Villagómez COMAD, S.C. Alemán FEBO 29 COMAD, S.C. Mexico City 03940 FEBO 29 Mexico Mexico City 03940 Mexico Tel: +52 55 5661 3733 Fax: +52 55 5663 0814 Tel: +52 55 5661 3733 Email: [email protected] Fax: +52 55 5663 0814 URL: www.comad.com.mx Email: [email protected] URL: www.comad.com.mx Mexico Roberto is an international attorney specialised in construction law, Adrián is a lawyer specialised in construction law, public procurement, public procurement law and compliance. He has a Master’s degree and dispute resolution procedures (Dispute Boards in Mexican Administrative Law from the Universidad Panamericana, and International Arbitration); especially in the construction field. Mexico City. He has also attended specific courses at prestigious Adrián completed the LL.M. Program ( Degree) at the universities such as the University of California (Davis and Berkeley), University of California, Berkeley, School of Law. He also received the The University of Florida, Harvard University and Cambridge Certificate of Specialization in International Law from this University. University, UK. He has served as a leader in international construction Adrián has published articles for the Berkeley Journal of International groups, for example, as Co-Chair of the International Construction Law (International Arbitration), “Obras” Magazine (Dispute Boards), projects Committee of the International Bar Association (IBA), and “CNEC” Magazine (Reform of the Energy Sector in Mexico), among Chair of the Infrastructure Disputes Committee of the International others. Adrián has been a member of the Forum on the Construction Chamber of Commerce (ICC) in Mexico. He is the Consulting Editor Industry of the American Bar Association, in which he has participated and Co-Author of the books: “Construction and Infrastructure Disputes: as a speaker on topics related to Energy Reform in Mexico. Adrián A global handbook”; and “International Public Procurement: A guide to has been active in Dispute Boards for infrastructure projects. best practice”, both published in the UK.

COMAD, S.C. is a prestigious boutique law firm, founded 51 years ago (1965), that 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).

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Norway Jacob F. Bull

Advokatfirmaet Thommessen AS Henrik Møinichen

including the follow-up of design work during the construction 1 Making Construction Projects period and warranty period. Further, we refer to the standard NS 8402:2010 General conditions 1.1 What are the standard types of construction contract of contract for consultancy commissions with remuneration based on in your jurisdiction? Do you have contracts which actual hours spent. This standard is intended to regulate contractual place both design and construction obligations upon relations between commissioning parties and architects, consultant contractors? If so, please describe the types of engineers and other professionals in the context of commissions contract. Please also describe any forms of design- only contract common in your jurisdiction. Do connected to the construction and civil engineering sector, and is, you have any arrangement known as management e.g., used for follow-up work during the construction period. contracting, with one main managing contractor In addition, we refer to the standard NS 8403:2005 General and with the construction work done by a series conditions of contract for construction supervision commissions. of package contractors? (NB For ease of reference This standard is intended to regulate contractual relations between throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and commissioning parties and construction supervisors relating to engineering contracts.) construction supervision in the context of construction and civil engineering works. In Norway, we have the following two main construction contracts: Lastly, we refer to the standard NS 8404:2013 General conditions (i) NS 8405:2008 Norwegian building and civil engineering for independent control commissions. contract; and A standard contract for EPCM (engineering, procurement, (ii) NS 8407:2011 General conditions of contract for design and and construction management services) contracts has not been build contracts. developed in Norway and EPCM contracts are not widely used The above standard contracts have been prepared and unanimously within the construction sector. recommended by a committee appointed by Standards Norway, Within the offshore sector, Norwegian Fabrication Contract based on a proposal put forward by representatives both from the (fabrication/construction obligations upon the contractor) and employer side and the contractor side, and may thus be regarded as Norwegian Total Contract (design and construction obligations upon “agreed documents”. the contractor), both revised and updated in 2015, are commonly NS 8405 has been prepared for use in a contractual relationship in used. Some employers also use these standards as the basis for which one party (the contractor) undertakes to carry out building construction, and design and construction, contracts for onshore or civil engineering work (including installations, new buildings, construction projects. maintenance, repairs and alternations) for another party (the employer), and in which most of the drawings, descriptions and 1.2 Are there either any legally essential qualities needed calculations are to be provided by the employer. Thus, this standard to create a legally binding contract (e.g. in common contract places the design obligations upon the employer and the law jurisdictions, offer, acceptance, consideration construction obligations upon the contractor. and intention to create legal relations), or any specific requirements which need to be included in a NS 8407 has been prepared for use in a contract where one part construction contract (e.g. provision for adjudication (the design and build contractor) takes on all or a substantial or any need for the contract to be evidenced in proportion of the design work in addition to the execution of writing)? building or civil engineering work (including installations, new buildings, maintenance, repairs and alternations) for another party As a starting point and in accordance with the Norwegian Contract (the employer). Thus, this standard contract places both the design Act, a legally binding contract is generally entered into once an and construction obligations upon the contractor. offer has been given and such offer is accepted within the time limit As to the forms of design-only contracts, the following standard for acceptance. In contrast to English contract law, two parties can is commonly used: NS 8401:2010 General conditions of contract enter into a binding agreement regardless of whether or not the for design commissions. This standard is intended to regulate consideration is agreed upon. contractual relations between commissioning parties and architects, Pursuant to Norwegian case law, an agreement may be legally consultant engineers and other professionals in the context of binding even if the parties have not entered into a written contract. design commissions in the construction and civil engineering sector, For instance, an agreement can be legally binding based on one

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party’s act of quasi ex contractu (a certain type of behaviour), or if it can be determined that the parties have agreed on the main terms 1.5 Are there any statutory requirements in relation of the agreement. Furthermore, the contracting parties’ justified to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those expectations may imply that a legally binding contract has been working on site as employees or as self-employed entered into. sub-contractors); (c) tax (payment of income tax of Consequently, there are no formal requirements with respect to the employees); or (d) health and safety? validity and enforceability of a contract, i.e. that written contracts, oral contracts and electronic contracts (scans) are binding upon the parties Norwegian authorities have a constant (and increasing) focus on and will be enforceable. In order to enforce an agreement, it would securing equal working conditions and good HSE routines on only be necessary to demonstrate on the balance of probabilities that construction sites in Norway. Many of the big scale buyers in Norway Norway the parties have entered into the agreement in question. are public procurers, which have a particular focus on compliance. Both HSE and CSR issues are often to a certain extent regulated in construction contracts. Contractors who are interested in Norwegian 1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in construction projects must be prepared to provide documentation which an employer can give either a legally binding or for both their proper knowledge about the relevant legislation, and non-legally binding indication of willingness either to their ability/willingness to implement systems that will ensure that enter into a contract later or to commit itself to meet projects are performed in compliance with such legislation. certain costs to be incurred by the contractor whether There are statutory requirements (and collective wage agreements) or not a full contract is ever concluded. with respect to, inter alia, the following: Pursuant to Norwegian case law, there is a presumption that a Letter (i) Working conditions: Includes requirements related to salary, holidays and holiday pay, working hours, insurance and of Intent does not commit the parties to enter into the intended pension, accommodation and other working conditions. agreement. By entering into a Letter of Intent, the parties are committed to the process of entering into a legally binding contract, (ii) Health, safety and environment matters: Mainly consisting of requirements relating to safety on construction sites, and not to the contract per se. By signing a Letter of Intent, the parties the obligation to ensure a safe physical and mental working demonstrate that they are serious and committed to act loyally in environment. negotiations towards a final agreement, but it does not involve a (iii) Administrative requirements: Requirements related to legal duty to enter into a binding contract. control routines, transparency, systems for provision of However, there is a “point of no return”, and the circumstances ID-cards and lists of persons working on the construction may imply that the parties cannot back out of the agreement. It site, documentation on salary payments, work schedules, is important to keep in mind that it is the contents of the Letter contracts, etc. of Intent that serve as a guideline for the interpretation. It has no The contractor must ensure that the salary and working conditions consequence that the parties have called the agreement a “Letter of applicable for the contractor or any subcontractor personnel are in Intent”, as long as the nature of it fulfils the general conditions for a accordance with the Act of 4 June 1993 no 58 relating to general legally binding contract. application of wage agreements, etc. and regulations appurtenant to the Act. As a minimum, the conditions shall correspond to the wage 1.4 Are there any statutory or standard types of insurance agreements applicable to the work. which it would be commonplace or compulsory to As to HSE, the employer mainly has a controlling function, whereas have in place when carrying out construction work? the contractor is responsible for ensuring that compliance with HSE For example, is there employer’s liability insurance requirements is an integral part of the work plan. The contractor for contractors in respect of death and personal must present a plan for its HSE work, regular safety inspections injury, or is there a requirement for the contractor to have contractors’ all-risk insurance? shall be carried out, and routines and systems for handling lapses and incidents must be established. According to NS 8407, the contractor shall keep insured materials, With respect to tax, the contractor must submit form RF-1199 to design documents and that part of the work which has been performed the Central Office Foreign Tax Affairs (“COFTA”) concerning at any time until delivery/take-over of the contract object. The information about the contract, contractor and his personnel. employer shall be co-insured. Further, the contractor shall procure Whether an employee must pay tax on earnings from work which has and maintain liability insurance, which shall cover liability for any been performed in Norway depends on several conditions, e.g. period damage and economic loss the contractor may cause to the person of time spent in Norway and whether the business may be deemed or possessions of the employer or any third party in connection with conducted or carried out in Norway. In any event, tax agreements the performance of its obligations under the contract. between Norway and another state may limit the right to demand payment of income tax related to work performed in Norway. The parties are, however, free to agree on a different insurance regime. With regard to large building or civil engineering work contracts, we 1.6 Is the employer legally permitted to retain part of often see that the employer provides and maintains a “Construction the purchase price for the works as a retention to be released either in whole or in part when: (a) the works All Risk” (“CAR”) or “Builder’s All Risk” (“BAR”) insurance. On are substantially complete; and/or (b) any agreed such occasions, the contractor will usually be co-insured. defects liability is complete? For the sake of completeness, it should be mentioned that an employer must, according to mandatory labour legislation, provide According to NS 8407, a deduction of 7.5% of the progress payment and maintain workmen’s injury insurance. In addition, employers basis shall be made by way of retention. The retention shall be will always require that the contractor provides and maintains invoiced and payable in connection with the final account. In liability insurance and, in case of design work, often professional addition, the employer may withhold payment if the employer has liability insurance has to be provided and maintained by the engineer. legitimate claims against the contractor.

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1.7 Is it permissible/common for there to be performance 2.2 Are employers entitled to provide in the contract that bonds (provided by banks and others) to guarantee they will pay the contractor when they, the employer, performance, and/or company guarantees provided to have themselves been paid; i.e. can the employer guarantee the performance of subsidiary companies? include in the contract what is known as a “pay when Are there any restrictions on the nature of such bonds paid” clause? and guarantees? Yes, the parties may agree to include a “pay when paid” clause in It is common that the contractor must provide the employer the contract. However, it cannot be excluded that a “pay when paid” with a performance bond to guarantee the correct performance clause may on some occasions be deemed “highly unreasonable” of contractors’ obligations under the contract, and also a parent and consequently set aside or modified by a Norwegian court. company guarantee in the event the contractor is the subsidiary of Norway another company. There are no general restrictions on the nature of such bonds and guarantees provided that the contract is entered into 2.3 Are the parties permitted to agree in advance a fixed between professional parties. sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of In accordance with NS 8407, the contractor shall provide the particular breaches, e.g. liquidated damages for late employer with security for the performance of his contractual completion? If such arrangements are permitted, are obligations during the execution period and the guarantee period. there any restrictions on what can be agreed? E.g. The security during the execution period, including liability for does the sum to be paid have to be a genuine pre- delayed completion, shall amount to 10% of the contract price. estimate of loss, or can the contractor be bound to Upon take-over/delivery of the work, the security shall be reduced pay a sum which is wholly unrelated to the amount of financial loss suffered? to 3% of the contract price in respect of any guarantee claims for a period of three years. The security shall be provided in the form of an ordinary bank guarantee (not an on-demand guarantee) from a The parties are free to agree on liquidated damages in the event bank, insurance company or other financial institution. However, in of particular breaches, including in case of delay, and there are construction and supply contracts we often see that an on-demand no mandatory requirements or general restrictions with respect to guarantee is still required. liquidated damages between professional parties. Consequently, the contractor can be bound to pay a sum which is wholly unrelated to the amount of financial loss suffered. 1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and However, a “highly unreasonable” liquidated damages clause may supplies used in the works? Is it permissible for be set aside or modified by a Norwegian court. contractors to claim that until they have been paid they retain title and the right to remove goods and materials supplied from the site? 3 Common Issues on Construction Contracts In accordance with NS 8407, the contract work shall become the property of the employer progressively as the work is performed. Materials delivered to the project site and which are to be 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? incorporated into the contract object become the property of the employer upon payment. Materials delivered by the employer shall remain the property of the employer. In accordance with NS 8407 (and NS 8405), the employer is entitled to vary the works to be done under the contract. A variation to the The parties may agree that the contractor retain title and the right to work must be sufficiently connected to the contract in question and remove goods and materials from the site. However, the contractor shall not be of a materially different nature to the originally agreed is in principle not entitled to invoke retention rights towards the work. Unless otherwise agreed, the employer shall not be entitled employer’s creditors with respect to materials, etc. which have been to order the contractor to make changes representing an addition to incorporated into the main object. the contract price of more than 15%.

2 Supervising Construction Contracts 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? 2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party? According to NS 8407, parts of the work can also be omitted from Does any such third party (e.g. an engineer or architect) have a duty to act impartially between contractor and the contract. If it is omitted, it is somewhat uncertain whether employer? Is that duty absolute or is it only one which the employer may get a third party to perform the work. In our exists in certain situations? If so, please identify when opinion, the employer would in most instances not be entitled to the architect/engineer must act impartially. issue a negative variation order (omit work from the contract) if the intention is that the employer wishes to transfer parts of the scope of Some construction contracts are supervised on behalf of the work to another contractor. employer by a third party. Such an engineer or architect would not have a particular duty to act impartially between the contractor and 3.3 Are there terms which will/can be implied into a the employer. However, the third party would possibly have some construction contract? fiduciary duties towards the contractor and may not act in “bad faith” or in a “blameworthy” manner towards the contractor. The standard Subject to certain exceptions, the Norwegian background law (both NS 8403:2005 General conditions of contract for construction general contract law and construction law) would only apply as a supervision commissions is often used for supervision contracts.

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“gap-filler” to the extent legal questions have not been regulated in The contractor shall issue a final account proposal and the final the contract. Further, in contrast to, for example, English contract invoice within two months after take-over. If the contractor fails law, the judge or arbitrator would not necessarily be bound “by to do so, the employer is entitled to set a final deadline, which shall the four corners” of the contract, but use the background law in its not be shorter than 14 days. If the contractor fails to submit the final interpretation of the contract. account, then he loses (with certain exceptions) the right to make any claims in connection with the contract against the employer.

3.4 If the contractor is delayed by two events, one the It should also be noted that any claims may become time-barred fault of the contractor and one the fault or risk of in accordance with the Norwegian Limitation Act regardless of the his employer, is the contractor entitled to: (a) an agreed mechanisms in the contract. Claims will in general be time- extension of time; or (b) the costs occasioned by that barred three years after the date on which the creditor first had the Norway concurrent delay? right to demand performance. Further, according to NS 8407, the employer must present guarantee In the case of concurrent delay, the contractor would be entitled to claims without undue delay and within five years after take-over at an extension of time equal to the parts of the delay that may be the latest (guarantee period). attributed to fault of the employer, provided that the fault of the employer impacts the “critical path”. If the contractor is delayed as a result of two events/faults occurring in parallel, and one is the fault 3.7 Who normally bears the risk of unforeseen ground or risk of the contractor and one is the fault or risk of the employer, conditions? the contractor would as a main rule not be entitled to an extension of time. According to NS 8407, the employer bears the risk for unforeseen As to the costs incurred by the contractor, the employer would only ground conditions if they deviate from what the contractor had be liable for increased costs which may be attributed to a fault or reason to expect when preparing its tender. However, the contractor risk of the employer. If there are two faults occurring in parallel, is obliged to take into account all available information in connection and the costs would have occurred regardless of the employer’s with the preparation of its tender as further detailed in the standard fault, the contractor would as a main rule not be entitled to the costs contract. occasioned by that concurrent delay. 3.8 Who usually bears the risk of a change in law affecting the completion of the works? 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 According to NS 8407, the employer bears the risk of a change in example, a variation, is the contractor subsequently law affecting the performance of the works. The contractor must entitled to an extension of time if he is then delayed notify the employer thereof without undue delay. However, this after this float is used up? only applies if the contractor could not have been expected to take into account such changes to laws and regulations at the time the Whether the employer or the contractor “owns the float” is an tender was submitted and could not have been expected to avoid the ongoing discussion in Norwegian legal theory, and there is no consequences. decisive or clear court practice with an answer to this legal problem.

The main view in legal theory related to onshore contracts is that the 3.9 Who usually owns the intellectual property in relation contractor owns the float, i.e. the contractor is entitled to an extension to the design and operation of the property? of time if he is subsequently delayed after the employer has used up the float. However, it is difficult to establish general principles Unless otherwise agreed, the employer shall only be entitled to regarding this legal problem and the courts tend to solve it on a case- use the design work for the completion of the project, subsequent by-case basis without addressing the “ownership” to the float. operation, maintenance, alterations or extensions. All other rights to the design work shall continue to be held by the party that has 3.6 Is there a limit in time beyond which the parties to prepared the design work. 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? 3.10 Is the contractor ever entitled to suspend works?

NS 8407 includes certain time limits that the parties must respect. According to NS 8407, the contractor is entitled to suspend If the party fails to submit a claim within such time limits, then the performance of the work if the employer is in substantial breach party loses its claim against the other party. of its payment obligation or if it is evident that such breach will occur. The contractor must notify the employer of such suspension With regard to variation orders and variation order requests, the in writing 24 hours in advance. standard sets out several strict time limits. The main rule is that the contractor is obliged to submit a variation order request to the employer “without undue delay” after he becomes aware, or ought 3.11 On what grounds can a contract be terminated? Are to have become aware, of the circumstances which form the basis there any grounds which automatically or usually for the variation order request. entitle the innocent party to terminate the contract? Do those termination rights need to be set out Further, if the contractor receives a rejection in response to a variation expressly? order request, including a demand for an extension of time and/or adjustment of the contract price, then the contractor must take the According to NS 8407, a party is entitled to terminate the contract if necessary steps to initiate ordinary court or arbitration proceedings the other party has substantially breached its contractual obligations, no later than eight months after take-over of the contract work. which corresponds with general principles of Norwegian contract

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law. In addition, a party is entitled to terminate the contract if it Further, a contracting party may, unless agreed otherwise, assign its is evident that a substantial breach will occur. However, the party contractual rights (but not obligations) to a third party without the in breach shall be given a reasonable deadline for remedying the other party’s consent. matter before termination can be implemented. A second or subsequent owner of a building is, in most cases, Further, a party is entitled to terminate the contract if the other regardless of whether a claim or right has been transferred to such party goes bankrupt or becomes insolvent. However, the employer subsequent owner, entitled to make claims for defects against the shall not be entitled to terminate the contract if it is proven that the contractor in accordance with the original contract. However, the work will be completed in accordance with the contract. Nor shall contractor may with, except for mandatory consumer legislation, the contractor be entitled to terminate the contract if satisfactory invoke any limitations of liability, etc. under its contract with the security is provided for the timely performance of the remaining employer against the second or subsequent owner of the building. Norway part of the employer’s obligations under the contract.

Except as stated above, NS 8407 does not include any grounds which 3.14 Can one party (P1) to a construction contract which automatically entitle the innocent party to terminate the contract. owes money to the other (P2) set off against the sums A party must terminate the contract by submitting a written due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off? declaration to the other party.

The right of set-off of a counterclaim against a primary claim is 3.12 Is the concept of force majeure or frustration known recognised under Norwegian law when the following general in your jurisdiction? What remedy does this give conditions are fulfilled: the injured party? Is it usual/possible to argue successfully that a contract which has become (i) the primary claim and the counterclaim must exist between uneconomic is grounds for a claim for force majeure? the same parties (except in cases of “connexity”, i.e. claims arising out of the same contractual relationship); The concepts of both force majeure and “frustration” (known as (ii) the primary claim and the counterclaim must be of the same “failed contractual assumption” or “breach of expectations”) are, nature; subject to certain conditions, recognised in accordance with general (iii) the time of discharge of the primary claim must have principles of Norwegian contract law. occurred; and In accordance with NS 8407, the parties shall be entitled to an (iv) the counterclaim must be due and payable. extension of time if the progress of their obligations is hindered A set-off must be declared. A written notice would be preferable, by circumstances outside their control, such as extraordinary but there are no strict form requirements under Norwegian law. weather conditions, orders or prohibitions by public authorities, etc. However, a party shall not be entitled to an extension of time in 3.15 Do parties to construction contracts owe a duty of respect of hindrances which the party should have taken into account care to each other either in contract or under any when the contract was entered into or the party could reasonably other legal doctrine? have avoided or overcome the consequences of such occurrences. The parties are not entitled to any compensation as a result of force According to NS 8407, both parties shall have a duty to cooperate majeure. and show loyalty during the performance of the contract, which is In accordance with Norwegian case law, the contractor’s risks (and in line with the general principles of Norwegian contract law. A in principle the employer’s risks also) are limited according to the breach of a party’s fiduciary duties may,inter alia, result in liability doctrine of “failed contractual assumptions”. In order for a party for damages and loss of rights under the contract. to succeed with a claim based on this doctrine, the assumption must have been a determining element in the contract (fundamental 3.16 Where the terms of a construction contract are assumption), and the other party must have been aware of the ambiguous, are there rules which will settle how that assumption. In addition, the assumption must be deemed “relevant”, ambiguity is interpreted? which depends on an overall assessment as to what party should carry the risk for the unexpected development. When interpreting a construction contract, the judge’s aim is Based on the above rules, it is not usual and it must be deemed to determine what the parties have meant. A basic principle of extremely difficult, to argue successfully that a contract which has interpretation of contracts is that an agreement shall, regardless of become uneconomic is a ground for claiming force majeure or a the wording, be interpreted in accordance with the joint intention of ground for claiming compensation for increased costs, etc. the parties at the time the agreement was entered into. In respect of commercial contracts, the wording is of particular 3.13 Are parties which are not parties to the contract importance and often given decisive weight. If, however, the entitled to claim the benefit of any contract right wording is unclear and other relevant circumstances (previous which is made for their benefit? E.g. is the second or negotiations, subsequent conduct, the purpose, etc.) are insufficient subsequent owner of a building able to claim against to conclude on the interpretation issue, then the contract will often the original contracts in relation to defects in the be interpreted against the interests of the party who provided the building? wording (contra proferentem doctrine).

In accordance with general principles of Norwegian contract law, a third party may be entitled to claim the benefit of a contractual 3.17 Are there any terms in a construction contract which right which is made for its benefit, i.e. that a contract may grant a are unenforceable? third party rights, but in general not impose any obligations on any third party. This must be assessed based on an interpretation of the The Norwegian standard construction contracts do not include terms relevant contract. which are unenforceable.

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Generally, and as the main rule, parties are free to agree on the terms 3.18 Where the construction contract involves an element that are to govern the arbitration proceedings. The Arbitration Act of design and/or the contract is one for design only, only contains some few mandatory provisions. are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does Section 20 of the Arbitration Act, corresponding to Article 18 of the the designer have to give an absolute guarantee in Model Law, confirms that the parties must receive equal treatment respect of his work? at every stage of the arbitral proceedings. Section 20 also adopts the principle that both parties are fully In construction contracts which involve an element of design entitled to present their cases. It is emphasised in section 28 that the and/or the contract is for design only, the designer has in general parties are responsible for clarifying the facts of the case and that undertaken an obligation as to the result, which may be characterised

Norway they are entitled to present such evidence as they wish. Under this as “absolute”, i.e. the contractor is responsible for the delivery of a section, the arbitral tribunal may, however, refuse to accept evidence contract object in line with the terms and conditions of the contract. which is clearly not relevant and also, to some extent, based on The designer is not obliged to give absolute guarantees in respect proportionality. of his work. In accordance with the principle of contractual The Arbitration Act only specifies a few procedural rules. To the extent freedom, the parties may agree on whatever terms, including limited that neither of the parties have agreed on what shall apply in other guarantees/warranties. respects, the tribunal may apply the rules it considers appropriate. According to NS 8407, the guarantee period is set to five years from The principle of orality (i.e. that the parties, their counsel and take-over of the contract object and the contractor is in principle not witnesses must express themselves orally before the court) and the liable for the employer’s consequential losses. principle of immediacy (i.e. that all evidence must be presented In NS 8401 (standard contract for design only), the contractor’s liability before the court that is to render the judgment) are fundamental for damages is, unless otherwise agreed, limited to approximately principles in legal proceedings in the ordinary courts of Norway. In MNOK 5.5 for liability which is not covered by insurance, and arbitration, these principles are not given the same prominence, but approximately MNOK 14 for liability covered by insurance. are to a considerable extent adopted in most arbitral proceedings. The provisions of sections 12 and 13 of the Arbitration Act 4 Dispute Resolution concerning the appointment of arbitrators correspond to a great extent, in terms of their content, to Articles 10 and 11 of the Model Law. Thus, the parties are free to determine the appointment 4.1 How are disputes generally resolved? procedure. The speed at which the tribunal can be set up, depends on the parties as long as they agree. The Arbitration Act provides that Disputes arising in connection with a construction contract, and the parties shall, to the extent possible, jointly appoint the arbitral which are not resolved by mutual agreement, are normally settled tribunal. This will, at the outset, place an obligation on the parties by ordinary court proceedings at the agreed legal venue (or the right to spend some time ascertaining whether they can reach agreement legal venue in accordance with Norwegian procedural legislation) on a joint appointment. unless the parties agree otherwise, e.g. arbitration. If the parties are unable to agree on who should be appointed, the According to NS 8407, the parties may, unless agreed otherwise and appointment procedure is in essence similar to that provided for in until take-over, also demand that a dispute shall be determined by Articles 10 and 11 of the Model Law: unless otherwise agreed, the an umpire (temporary dispute resolution). Such decision shall be tribunal shall consist of three arbitrators. Each party must appoint binding on the parties if the parties fail to bring an umpire decision an arbitrator within one month of being requested to do so by the before a court or arbitration tribunal within six months of the date other party. These two arbitrators shall thereafter together appoint of the decision. the presiding arbitrator within one month. If a party fails to act as required under the applicable appointment procedure, if the two party-appointed arbitrators are unable to reach 4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general agreement on the third arbitrator, or if an appointing body fails to procedures. act as provided, each of the parties may under section 13 (4) of the Arbitration Act request the relevant district court to appoint the In Norway, we do not have an adjudication process. However, remaining arbitrator(s). there is voluntary court-administered mediation. The purpose of Arbitration awards are not subject to any appeal. The only recourse such mediation is that the parties, with the collaboration of a judge against an arbitral award is to bring an action before the courts (mediator), try to solve the dispute amicably. claiming the setting aside of the award.

4.3 Do your construction contracts commonly have 4.4 Where the contract provides for international arbitration clauses? If so, please explain how arbitration, do your jurisdiction’s courts recognise arbitration works in your jurisdiction. and enforce international arbitration awards? Please advise of any obstacles to enforcement. According to NS 8407, disputes shall be settled by ordinary court proceedings unless it has been agreed to refer disputes to arbitration. Pursuant to section 45 (1) of the Arbitration Act, an arbitration award However, arbitration is often used as a dispute resolution mechanism shall be recognised and enforceable, irrespective of the country in in construction contracts in Norway. which it was made. This means that arbitration awards made in countries not being parties to the New York Convention are also The Norwegian Arbitration Act is based on the UNCITRAL Model recognised and enforceable in Norway. Law on International Commercial Arbitration, follows the Model Law closely in structure and content, and can be considered as a However, for an arbitral award to be recognised and enforced, national implementation of the Model Law, with certain variations. certain conditions have to be met, cf. section 45 (2) of the Arbitration

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Act. A party has to make available the original arbitration award or ■ The case commences when the plaintiff files a writ of a certified copy of the award. If the arbitral award has not been summons to the court of first instance (city court). The writ made in one of the Scandinavian languages (Norwegian, Swedish or shall state the claims invoked by the plaintiff and set out the Danish) or in English, the party shall also make available a certified factual and legal assertions on which the claims are based. translation of the arbitration award. In addition, the evidence on which the plaintiff wishes to rely must be submitted, but additional evidence may also be The court (or administrative agency) may also request that the presented at a later stage. existence of an arbitration agreement is proved. ■ Thereafter the defendant will be given a deadline (usually Although an arbitral award shall be recognised and enforceable, three weeks) for submitting a reply. recognition and enforcement may, however, be refused pursuant to ■ Thereafter, further communication with the court and the

section 46 of the Arbitration Act. This provision corresponds to a other side, including the submission of additional arguments Norway large extent to Article 36 (1) of the Model Law and Article V of the and evidence, is carried out by submitting written pleadings. New York Convention. ■ An oral hearing shall in principle be held within six months Pursuant to section 46 (1) of the Arbitration Act, recognition or from the date on which the writ of summons was filed. In enforcement may be refused at the request of the party against whom practice, the scheduling of the hearing depends on the work it is invoked, if that party furnishes evidence that one of the parties load of the court as well as the complexity of the case. to the arbitration agreement lacked legal capacity or the arbitration ■ The hearing is divided in three parts: the opening arguments agreement is not valid. Such refusal may also result where certain (where written evidence is normally presented); the evidence procedural errors – concerning notice to the parties, jurisdiction of (party and witness testimonies); and the closing arguments. the tribunal, etc. – have been made. ■ The court shall render the judgment within two weeks from the date on which the hearing was adjourned (four weeks The court (or the administrative agency) shall, pursuant to section if there is more than one judge), but the deadline is often 46 (2) of the Arbitration Act, of their own accord refuse to recognise postponed. The judge will normally indicate when the and enforce an award if the dispute could not be settled by arbitration judgment can be expected at the end of the hearing. under Norwegian Law or if recognition and enforcement would be ■ The parties have the right to appeal. The deadline for appeal contrary to “ordre public”. is one month from the day that the judgment is served. The court of appeal may refuse leave to appeal against a judgment if it finds it clear that the appeal will not succeed. However, 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign only on rare occasions does the court of appeal refuse to hear court be upheld and enforced in your jurisdiction? an appeal. ■ The hearing of the appeal will likely be held 6–12 months A judgment rendered by a foreign court will only be recognised after the appeal is submitted. The court of appeal shall in principle render the judgment within four weeks from the as a final and enforceable judgment to the extent prescribed by date on which the hearing was adjourned. law. In accordance with the Norwegian Dispute Act, the Lugano Convention of 2007 between the EU and the EFTA-countries ■ A judgment rendered by the court of appeal may also be appealed to the Norwegian Supreme Court. However, (including Norway) shall be deemed implemented into Norwegian judgments cannot be appealed without leave. Leave can only law by way of incorporation, and Chapter III of the Lugano be granted if the appeal concerns issues whose significance Convention concerns recognition and enforcement of judgments. extends beyond the scope of the current case, or if it is Consequently, judgments from countries being a party to the Lugano important for other reasons that the case is determined by the Convention of 2007 may be enforced in Norway. As to judgments Supreme Court. In construction cases, it is extremely rare from outside the EU, such judgments may be enforceable in Norway that the Supreme Court accepts to hear the appeal. in accordance with treaties between the states. Based on the above, we would estimate that a judgment by In addition, a foreign judgment is enforceable in Norway if the the court in the first instance may be delivered within 6–10 parties have agreed to refer disputes under a contract to a foreign months after submission of the writ of summons. A judgment court. Thus, if the parties agree that disputes arising out of the from the court of appeal – which in most cases will be the “final court of appeal” – may thereafter be delivered within contract shall be solved by court proceedings abroad, then the 7–12 months after the submission of the notice of appeal. judgment will in principle be enforceable in Norway.

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.

Certain main elements related to ordinary court proceedings in Norway may be summarised as follows: ■ Before the plaintiff files the writ of summons to the court, the plaintiff must notify the defendant in writing that the plaintiff is considering initiating court proceedings.

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Jacob F. Bull Henrik Møinichen Advokatfirmaet Thommessen AS Advokatfirmaet Thommessen AS Haakon VIIs gate 10 Haakon VIIs gate 10 Postboks 1484, Vika Postboks 1484, Vika NO-0116 Oslo NO-0116 Oslo Norway Norway

Tel: +47 23 11 11 56 Tel: +47 23 11 11 22 Email: [email protected] Email: [email protected] URL: www.thommessen.no URL: www.thommessen.no Norway Jacob F. Bull (Partner) heads the firm’s practice group for onshore Henrik Møinichen (Senior Associate) works within the firm’s practice and . He has extensive experience with area of construction, oil and gas, oil service and shipping. Henrik has construction projects both in Norway and abroad. Jacob provides been actively involved in several onshore and offshore construction advice in all phases of a project, including preparation of the tendering projects, including assistance in preparing the tender documents, and negotiation strategy, participation in negotiations, follow-up and participation in negotiations and dispute resolution during project handling of matters and claims during project execution and the execution and the warranty period. Henrik has recently assisted warranty period. His name is often highlighted by international rating Norwegian and international clients in major litigations before ordinary agencies. courts and arbitration proceedings.

Thommessen is one of Norway’s leading commercial law firms with offices in Oslo, Bergen and London. The firm has 225 highly qualified employees: 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.

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Peru Gabriel Loli León

Osterling Abogados Miguel Delgado Ramos

from the parties when negotiating, celebrating and/or executing 1 Making Construction Projects their agreements, for their contracts to be legally binding. In addition, legally binding contracts in Peru require: (i) the parties 1.1 What are the standard types of construction contract to be capable agents; (ii) the purpose of the contract to be lawful in your jurisdiction? Do you have contracts which (not contravene an imperative norm, and protect the private and place both design and construction obligations upon socioeconomic equilibrium); (iii) the objective of the contract contractors? If so, please describe the types of to be possible (juridically and physically); (iv) all substantial contract. Please also describe any forms of design- only contract common in your jurisdiction. Do elements of the agreement to be addressed; and (v) form/formality you have any arrangement known as management prescribed by law to be observed (there are no formalities applicable contracting, with one main managing contractor to construction contracts in Peru, but it is recommended for such and with the construction work done by a series contracts to be in writing). of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and 1.3 In your jurisdiction please identify whether there is engineering contracts.) 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 The types of construction contracts used in Peru vary according to enter into a contract later or to commit itself to meet the magnitude of the project. For small (simple) projects, ad hoc certain costs to be incurred by the contractor whether contracts are usually designed and negotiated by the parties and or not a full contract is ever concluded. their . For big (complicated) projects, the construction contracts usually replicate or are inspired by international standard Letters of intent and similar documents are indeed used in Peru. models (such as FIDIC, ICE and ICC, among others). These will be legally binding as agreed in such documents. There is no standard type of contract in Peru. In order to create a Compensation (reasonable/customary) and reliance damages contract, the owner must select an Object Determination System (E, (foreseeable and/or warned) may be awarded when the reluctant C, EC, EPC, EPCM and Turnkey types of contracts are frequently party acted without good faith/diligence. used) and a Price Determination System (such as lump sum, unit When a party (employer) offers in a letter of intent/instruction prices, a combination of the above, reimbursable costs, or target (without indicating that such letter is non-binding) to cover all/part price). Of course, applicable conditions to said type of contracts of the costs (without conditioning such offer) to be incurred by the vary depending on the scope of services to be rendered by the other party (contractor), that employer will indeed be obliged to contractor, and the risk he assumes. compensate the contractor. Default rules apply to all construction contracts in Peru. The Peruvian Civil Code provides general contracting rules, as well as specific rules 1.4 Are there any statutory or standard types of insurance for construction contracts. Some of these rules are mandatory. which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance 1.2 Are there either any legally essential qualities needed for contractors in respect of death and personal to create a legally binding contract (e.g. in common injury, or is there a requirement for the contractor to law jurisdictions, offer, acceptance, consideration have contractors’ all-risk insurance? 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 Insurance for construction workers engaging in high-risk activities any need for the contract to be evidenced in writing)? is compulsory in Peru. Construction All Risk insurance policies (covering the owner’s property) and Professional Liability insurance Offer, acceptance and intention to create legal relations are essential policies (covering damages to third parties) are customarily required qualities for a contract to be legally binding in Peru. Consideration from contractors in Peru, but are not mandatory. is not a requisite in Peru. Good faith is also required (imperative)

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employee is the right of retention. By using the right of retention, 1.5 Are there any statutory requirements in relation a creditor who has in his possession a good of the debtor can retain to construction contracts in terms of: (a) general this good if the debtor’s obligation is not sufficiently guaranteed; requirements; (b) labour (i.e. the legal status of those this right applies when there is a connection between the good that working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of is retained and the obligation. The other way to retain possession employees); or (d) health and safety? is the establishment of a security over the goods and supplies of the employee; this security must be agreed, specifically granting General: a licensed engineer must approve all engineering and possession of the goods to the contractor. structural designs on which contractors base their work. In addition, Peru the local, regional and/or central government(s) (respectively) must 2 Supervising Construction Contracts approve the projects before commencement. Labour: a special labour regime (Legislative Decree 727) will be applicable to projects that involve works costing more than US$ 2.1 Is it common for construction contracts to be 65,000. Under this regime, workers are classified as operators, supervised on behalf of the employer by a third officers and pawns. Minimum wages (established in a Collective party? Does any such third party (e.g. an engineer Agreement) apply to each category. In addition, construction or architect) have a duty to act impartially between contractor and employer? Is that duty absolute or is workers subject to this regime are entitled to the following benefits: it only one which exists in certain situations? If so, unified construction bonus (BUC); mobility bonus; school allocation please identify when the architect/engineer must act bonus; night shift bonus; direct contact with water and wastewater impartially. bonus; height bonus; altitude bonus; death allocation; awards (July and December); overtime; compensation for employees (CTS); It is common for construction contracts to be supervised on behalf vacation compensation; and a life insurance policy (Essalud + Life). of the employer or by a third party. Tax: contractors must pay a contribution to SENCICO (Servicio Since the supervisor is an agent of the employer, it is not required Nacional de Capacitación para la Industria de la Construcción) to be impartial; it only has the duty to act according to good faith. equivalent to 0.2% of the amount paid by the owner/employer, in addition to ordinary taxes (Income Tax: 28%/VAT: 18%). Health and safety: contractors are required to have/implement/ 2.2 Are employers entitled to provide in the contract that monitor a Health and Safety Protocol/Manual replicating at least they will pay the contractor when they, the employer, the standards set by law for ordinary and/or high-risk activities of have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when their workers. paid” clause?

1.6 Is the employer legally permitted to retain part of Yes. Parties can agree to a “paid when paid” clause. 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 2.3 Are the parties permitted to agree in advance a fixed defects liability is complete? 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 The employer can retain part of the purchase price by enforcing a completion? If such arrangements are permitted, are right that is called the Exception of Compliance. This right can be there any restrictions on what can be agreed? E.g. enforced by any of the parties in a contract and entitles the executing does the sum to be paid have to be a genuine pre- party to suspend the performance of its obligations until the other estimate of loss, or can the contractor be bound to party fulfils its obligations or guarantees its fulfilment. However, pay a sum which is wholly unrelated to the amount of this right can only be enforced to retain a part of a purchase price financial loss suffered? until the works are substantially completed. After that, the employer can no longer implement/maintain the retention. Pursuant to the Peruvian Civil Code, the parties can agree a fixed sum to be paid by the contractor to the employer in case of particular breaches. This is called a “Penalty Clause”. There is no restriction 1.7 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee on what can be agreed; however, the sum agreed could be reduced performance, and/or company guarantees provided to by a judge or by an arbitrator, when the sum agreed is manifestly guarantee the performance of subsidiary companies? excessive or the obligation committed has been partially fulfilled, Are there any restrictions on the nature of such bonds unless the parties have waived this possibility. To demand the and guarantees? penalty, it is not necessary that the creditor prove the damages suffered. The Penalty Clause also favours the contractor by capping Yes. It is customary for contractors to provide performance the liability for a breach, the employer cannot request any additional bonds, parent guarantees and/or escrow accounts. There is not any amount unless gross negligence or fraud have been proved. applicable restriction in Peru for these guarantees.

3 Common Issues on Construction 1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and Contracts 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 3.1 Is the employer entitled to vary the works to be done materials supplied from the site? under the contract? Is there any limit on that right?

One way to retain the possession of the goods and supplies of the There is no legal provision that entitles the employer to vary the

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works done under the contract; since the specs of the work have contractor would only be entitled to the effective extra cost incurred been previously agreed, it will require the agreement of both parties by such delay of the owner. to vary the works. It should be noted that it is very common in construction contracts to provide mechanisms for the employer to 3.6 Is there a limit in time beyond which the parties to vary the works to be done, allowing the employer to avoid the legal a construction contract may no longer bring claims provisions that prohibit him from varying the works without an against each other? How long is that period and from agreement of both parties. what date does time start to run?

3.2 Can work be omitted from the contract? If it is The Civil Code establishes time limits beyond which parties cannot omitted, can the employer do it himself or get a third bring claims against each other. Those time limits are, since the Peru party to do it? reception of the edification: ■ 60 days for the employer to communicate to the contractor No, the general rule is that the contractor must make the works the defects of the edification. following the directions agreed with the employer at the conclusion ■ One year for the employer to auction against the contractor of the contract. If the contractor omits works from the contract with for the defects of the edification. no reason, he would be in breach of its obligations; if this happens, ■ Five years for the employer to auction against the contractor the employer can require compliance with the obligation or ask a if the edification gets destroyed, totally or partially, or the third party to do the works. In the latter scenario, the contractor edification presents evidence of ruin. must cover the expenses of the third party. ■ Finally, 10 years for any party to demand performance/ damages for pending obligations of its counterpart. 3.3 Are there terms which will/can be implied into a construction contract? 3.7 Who normally bears the risk of unforeseen ground conditions? The Peruvian Civil Code has default rules that are applicable to all contracts (including those for construction). Among others, we find The default rule is that the employer bears the risk of unforeseen it pertinent to highlight the following: ground conditions. However, the exception to this rule occurs ■ Good faith (which includes cooperation and mitigation when the contractor is the one that carries out the ground condition duties). studies; in that case, the contractor is the one who bears this risk. ■ The obligation not to subcontract any aspect of the works without the consent of the employer. 3.8 Who usually bears the risk of a change in law ■ The obligation not to introduce variations in the works affecting the completion of the works? without the consent of the employer. ■ A five-year warranty period for hidden defects. It will depend on the Price Determination System used in the construction contract; but usually the owner bears the risk of a 3.4 If the contractor is delayed by two events, one the change in law affecting the completion of the works. Nevertheless, fault of the contractor and one the fault or risk of it should be pointed out that a change in law usually falls under his employer, is the contractor entitled to: (a) an the category of force majeure and liberates both parties from their extension of time; or (b) the costs occasioned by that obligations in the contract. Thus, each party shall bear their own concurrent delay? losses derived from the impossibility to complete the works. The owner shall nonetheless compensate the contractor for the works Unless the parties excuse their delays based on force majeure, both performed at that stage. parties will contribute proportionally (the critical path method is usual) to compensate any losses or extra costs caused by such 3.9 Who usually owns the intellectual property in relation delay. When the balance favours the contractor it will be entitled to the design and operation of the property? to such balance, and the corresponding extension of time. If it is not possible to calculate such balance or to proportionally assign Unless the design of the building is exceptionally original, the the delays, none of the parties will be entitled to compensation intellectual property of the design belongs to the employer. (extension of time and associated costs) nor liquidated damages for the delay. However, if the design qualifies as exceptionally original, the designer can sell his patrimonial-intellectual property rights to the employer. Also, if the design qualifies as exceptionally original, 3.5 If the contractor has allowed in his programme a the designer will also have moral-intellectual property rights; this period of time (known as the float) to allow for his own kind of right relates to the incapacity of the employer to modify the delays but the employer uses up that period by, for example, a variation, is the contractor subsequently design without the consent of the designer. entitled to an extension of time if he is then delayed after this float is used up? 3.10 Is the contractor ever entitled to suspend works?

In principle, the float covers the time/cost risk diligently assumed As mentioned above, both the contractor and the employer have by the contractor. Hence, delays attributable to the owner should the right to an Exception for Compliance. Due to such exceptional not prejudice such diligence. Unless agreed otherwise, remaining right, the contractor may suspend the execution of the works until floats should not prevent the contractor to an extension of time. The the employer complies – or secures such compliance.

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■ The cooperation duty is the obligation of the parties to act in 3.11 On what grounds can a contract be terminated? Are good faith, making their best efforts to support to the other there any grounds which automatically or usually party in order for the works to be finished. entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly? 3.16 Where the terms of a construction contract are ambiguous, are there rules which will settle how that Besides the possibility to terminate the contract by mutual ambiguity is interpreted? agreement, generally a contract can be terminated if a party breaches its obligations agreed in the contract. To enforce this right, In the Civil Code, we can find different rules regarding the Peru the innocent party must request the execution of the obligation and, interpretation of ambiguous clauses. These rules must be used all if the obligation is not fulfilled within a 15-day period, the contract at once in order to identify the correct interpretation of the clause: will be terminated. ■ Literal Interpretation: according to this rule, contracts must be interpreted depending on what is expressly stated in the text Also, there is a possibility that the parties agree that certain breaches that contains them, using only the rules of language to do so. will automatically terminate the contract, as it is only necessary for the innocent party to communicate to the other party its intention to ■ Systematic Interpretation: according to this rule, the contracts must be interpreted depending on what had been established terminate the contract. in the entire contract; ergo, an ambiguous clause must be interpreted in a way in which it is best complemented by the 3.12 Is the concept of force majeure or frustration known remaining clauses. in your jurisdiction? What remedy does this give ■ Teleological Interpretation: according to this rule, a contract the injured party? Is it usual/possible to argue must be interpreted according to the will of the parties; to successfully that a contract which has become do so, it is necessary to review every document previously uneconomic is grounds for a claim for force majeure? drafted by the parties in order to establish their real intention.

Under Peruvian law, a force majeure event will indeed liberate 3.17 Are there any terms in a construction contract which the debtor party. In the same sense, when an obligation becomes are unenforceable? excessively onerous due to an extraordinary and unpredictable situation, the affected party is entitled to an adjustment on the price In Peruvian law, provisions limiting liability derived from fraud or (to be determined by a judge) or the termination of the contract. gross negligence are void. Purely discretional conditions are null also.

3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right 3.18 Where the construction contract involves an element which is made for their benefit? E.g. is the second or of design and/or the contract is one for design only, subsequent owner of a building able to claim against are the designer’s obligations absolute or are there the original contracts in relation to defects in the limits on the extent of his liability? In particular, does building? the designer have to give an absolute guarantee in respect of his work?

No, unless the subsequent owner/beneficiary was assigned such The designer’s obligations are absolute. The designer offers an right by the owner and the claim was not prescribed. implicit general guarantee with its work. However, providing any specific guarantee is not mandatory for such designer. 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 4 Dispute Resolution limits on the rights of set-off?

There are two possibilities for setting off sums between parties, 4.1 How are disputes generally resolved? whether conventional or judicial. The parties can agree to establish a set-off and compensate the sum they owe to each other; or if In Peru, disputes related to construction and engineering law one party wants a set-off without the consent of the other, it could generally have five ways to be solved: i) direct contact; ii) request it before a civil judge. conciliation; iii) dispute boards (a growing trend in private contracts, but mandatory in public contracts); iv) arbitration; and v) court proceedings. Even though there are five mechanisms for 3.15 Do parties to construction contracts owe a duty of dispute resolution, the Peruvian market usually resolves disputes care to each other either in contract or under any by arbitration; this is because both direct contact and conciliation other legal doctrine? are considered primarily to be pre-arbitration requirements, causing parties to have no real intention to solve disputes by these means. Yes, every obligation in civil law has an internal General Protection Furthermore, dispute boards are relatively new to the Peruvian Duty – an obligation under which one party is prohibited from market and much remains to be done before this alternative becomes affecting the patrimony of the other party. In construction contracts, efficient, effective or customary. we have two protection duties that are important to mention: the mitigation duty; and the cooperation duty: ■ The mitigation duty is the obligation of the parties to make 4.2 Do you have adjudication processes in your their best efforts to avoid any damage before it happens; or, if jurisdiction? If so, please describe the general the damage already occurred, to do their best efforts to reduce procedures. the damage to the minimum possible. No, there are no such processes in Peru.

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4.3 Do your construction contracts commonly have 4.5 Where the contract provides for court proceedings arbitration clauses? If so, please explain how in a foreign country, will the judgment of that foreign arbitration works in your jurisdiction. court be upheld and enforced in your jurisdiction?

Due to the fact that disputes related to construction contracts discuss Yes, the action is called exequatur. large amounts of patrimony, it is usual, in this type of contract, for an arbitration clause to be agreed. Arbitration in Peru works in the 4.6 Where a contract provides for court proceedings in same way as the international standards; a court made up of one your jurisdiction, please outline the process adopted, or three arbitrators that, after following due process (memorial, any rights of appeal and a general assessment of Peru counter-memorial, hearing, and finally the emission of an arbitral how long proceedings are likely to take to reduce: (a) award), emits a decision on the controversy. The courts are not a decision by the court of first jurisdiction; and (b) a entitled to review the merits of the decisions of the arbitrators; decision by the final court of appeal. however, judicial review is admitted when there is a breach of the due process of law. Court proceedings in Peru have a simple structure: the presentation In complicated projects, it is common that the arbitration be of a plaintiff; the reply; the hearing; and the final decision. After the administrated under the Rules of Arbitration of the International final decision, the party which is not in agreement with the decision Chamber of Commerce. can file an appeal. The estimated time of decision by the court of first jurisdiction is from one to two years, while the decision by the final court of appeal 4.4 Where the contract provides for international could take two more years. arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement.

Foreign arbitration awards will be recognised and enforced in Peru according to the following instruments even if they are based on a foreign law: ■ Convention of Reconnaissance and Execution of Arbitral Decisions, approved in New York on 10 June 1958. ■ Interamerican Convention of International Commercial Arbitration, approved in Panama on 30 January 1975.

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Gabriel Loli León Miguel Delgado Ramos Osterling Abogados Osterling Abogados Av. Santo Toribio 143, Piso 3 Av. Santo Toribio 143, Piso 3 San Isidro, Lima 27 San Isidro, Lima 27 Peru Peru

Tel: +51 1 611 8282 Tel: +51 1 611 8282 Fax: +51 1 611 8284 Fax: +51 1 611 8284 Email: [email protected] Email: [email protected] URL: www.osterlingfirm.com URL: www.osterlingfirm.com Peru

Gabriel Loli León’s professional practice focuses on corporate law Miguel Delgado has a specialised and a long track record of experience (with an emphasis on insurance and reinsurance and construction and in construction and engineering law, applied to both public and private engineering law), arbitration, alternative forms of conflict settlement, construction contracts. and public law. He has represented major contractor companies in negotiations and Gabriel believes that he has the perfect combination of practice areas: arbitrations arising from more than twenty (20) construction contracts “Almost every dispute derived from insurance or reinsurance contracts, for projects in fields such as energy (hydropower, thermoelectric, construction and engineering contracts is settled by arbitration”. etc.), road (highways, bridges) and natural resources (mining, oil and gas). He has also participated in the structuring and negotiation of His experience covers commercial and regulatory aspects of the construction contracts for major projects to be performed in Peru and insurance & reinsurance sector. He works as an advisor to insurance abroad. & reinsurance companies and policyholders in Peru. His in-depth knowledge allows him to provide assistance in both legal His expertise in construction & engineering law enables him to offer and technical matters. He excels at assisting in contract management, assistance to his clients in order to deal with complex and potentially in claims management and in dispute resolution (negotiations, national expensive situations, mitigating or extinguishing existing contingencies and international arbitration). during the execution of the contract or when it is completed. In the field of arbitration, his experience includes representing the interests of Finally, Miguel is a registered arbitrator before the Chamber of well-known national and foreign companies before national arbitration Commerce of Lima. courts.

Our 35 years of experience have established us as one of the leading firms in the country. We are convinced that one of the keys to our success has been to provide consistent and high-quality legal counselling, offering effective, fast and safe solutions to our clients’ needs. This has allowed us to grow and reinforce our long-lasting relationships with major national and international companies. We apply loyalty and efficiency principles with an ethical code that has distinguished our lawyers since our firm’s founding in 1980. All of our actions are based on mutual respect, openness, honesty and integrity.

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Portugal António André Martins

FALM – Sociedade de Advogados, SP, RL Joana Maltez

We are expecting at any time soon the alteration of the Decree-Law 1 Making Construction Projects no. 18/2008 in order to comply with Directives 2014/23/UE and 2014/24/UE of the European Parliament and of the Council of 26 1.1 What are the standard types of construction contract February 2014. Although the regimen regarding the construction in your jurisdiction? Do you have contracts which contracts approved by these Directives is similar to the one foreseen place both design and construction obligations upon in the Public Contracts Code, one cannot yet know the extension of contractors? If so, please describe the types of the changes that may be introduced in the said Code. contract. Please also describe any forms of design- only contract common in your jurisdiction. Do you have any arrangement known as management 1.2 Are there either any legally essential qualities needed contracting, with one main managing contractor to create a legally binding contract (e.g. in common and with the construction work done by a series law jurisdictions, offer, acceptance, consideration of package contractors? (NB For ease of reference and intention to create legal relations), or any throughout the chapter, we refer to “construction specific requirements which need to be included in a contracts” as an abbreviation for construction and construction contract (e.g. provision for adjudication or engineering contracts.) any need for the contract to be evidenced in writing)?

One cannot speak about standard types of construction contracts in For private construction contracts, there are no essential qualities or Portugal, but rather about usual types of construction contracts. formalities required for the contract to be legally binding. However, In fact, there are no standard drafts adopted by the construction in case of a dispute, the party needing to rely on the contract will sector. However, there are two main types of contracts that are require legal proof of the existence of the said contract. Therefore, usually adopted in most construction contracts both in the private it is prudent to have some sort of acknowledgment from both parties and public sector: Contrato de Empreitada por Preço Global and that the contract exists. Contrato de Empreitada por Série de Preços. The first is a lump For public construction contracts, the public procurement procedures sum contract where the price is fixed beforehand, and the latter is a are legally binding and are derived from European law. The so-called “price series contract”, establishing a price for each type procedures involve a large number of formalities and requirements of works, where the contractor is paid in accordance with the result comprising both pre-adjudication and post-adjudication procedures. of the works effectively carried out. These procedures will soon be revised in light of the new European These two main types of contract were, until 2008, expressly Directives (Directives 2014/23/UE and 2014/24/UE of the European provided in the national law. However, the Public Contracts Code Parliament and of the Council of 26 February 2014). approved by means of Decree-Law no. 18/2008 of 29 January no longer establishes a distinction between these two types of contracts. 1.3 In your jurisdiction please identify whether there is This matter is now subject to the liberty of the contracting parties. a concept of what is known as a “letter of intent”, in Design and construction contracts are common in Portugal. These which an employer can give either a legally binding or non-legally binding indication of willingness either to contracts are in fact standard in certain areas, such as in PPP enter into a contract later or to commit itself to meet Agreements. certain costs to be incurred by the contractor whether With regard to management contracting, this has become quite or not a full contract is ever concluded. common in recent years due to the increase in outsourcing. Until very recently, Portuguese law expressly provided for the existence In Portugal, civil law establishes the principle of freedom of of the Empreitada por Percentagem (percentage contracting) by contract, by means of which the parties, with respect to the means of which the contractor is paid a given agreed percentage imperative rules foreseen in the law, are free to agree amongst over the costs incurred. The position of the managing contractor is themselves the contractual discipline by which they wish to recognised by national law. In public contracts, the percentage of abide. Nevertheless, articles 224 and 230 of the Portuguese Civil subcontracting may not be above 75%. Code expressly provide the possibility for any entity to give the other party indication of its will to enter into a contract. The law establishes that, unless otherwise specified, such offer is of an irrevocable nature.

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1.4 Are there any statutory or standard types of insurance 1.8 Is it possible and/or usual for contractors to have which it would be commonplace or compulsory to retention of title rights in relation to goods and have in place when carrying out construction work? supplies used in the works? Is it permissible for For example, is there employer’s liability insurance contractors to claim that until they have been paid for contractors in respect of death and personal they retain title and the right to remove goods and injury, or is there a requirement for the contractor to materials supplied from the site? have contractors’ all-risk insurance? The contractor has the legal right to retain the works as long as there With respect to construction activity, the only insurance that are any amounts due, and the contractor also has the right to judicially is mandatory is accident at work insurance. Such insurance is execute such property with preference over any other common Portugal necessary in accordance with Law no. 41/2015 of 3 June for any creditors, including mortgage creditors. However, the contractor contractor to be allowed to pursue its activity in Portugal. may not remove goods or materials supplied from the site, as such However, there are also some situations where the contractor may goods or materials are considered to have been incorporated into the replace the need to prove its economic capacity to execute some kind of works and therefore transferred to the property of the employee. works by civil liability insurance with an amount equal to the amount of the works to be executed. In these situations, the contractor must have both accidents at work insurance and civil liability insurance. 2 Supervising Construction Contracts It is, however, usual for public and private employers dealing with construction contracts to demand the existence of a more 2.1 Is it common for construction contracts to be comprehensive insurance policy covering all of the relevant risks supervised on behalf of the employer by a third (this is in the situations where there is no legal obligation to have party? Does any such third party (e.g. an engineer civil liability insurance). 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, 1.5 Are there any statutory requirements in relation please identify when the architect/engineer must act to construction contracts in terms of: (a) general impartially. 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 Yes, it is common for construction contracts to be supervised by a employees); or (d) health and safety? third party, acting on behalf of the employer. Such third party does not have a duty to act impartially, as they represent the employer. There are no general requirements that apply exclusively to construction contracts. However, the contractor must be previously 2.2 Are employers entitled to provide in the contract that authorised by the authorities to act as a Constructor, pursuant to Law they will pay the contractor when they, the employer, no. 41/2015 of 3 June, and may not carry out works beyond the have themselves been paid; i.e. can the employer limits of such authorisation. Employees must hold a valid work include in the contract what is known as a “pay when visa. Decree-Law 273/2003 of 29 October also demands that a paid” clause? safety and health plan be included in any public or private offer, and such plan must remain as an annex in public construction contracts. Yes, “pay when paid” clauses are frequent in our jurisdiction, and many times combined with “back-to-back” and “if and when” clauses.

1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be 2.3 Are the parties permitted to agree in advance a fixed released either in whole or in part when: (a) the works sum (known as liquidated damages) which will be are substantially complete; and/or (b) any agreed paid by the contractor to the employer in the event of defects liability is complete? particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are Yes, the employer is allowed to retain part of the purchase price. there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre- In public contracts there is usually a guarantee of 5% which is estimate of loss, or can the contractor be bound to complemented by a retention of an additional 5% of the contract price. pay a sum which is wholly unrelated to the amount of This retention may be replaced by an alternative form of guarantee. financial loss suffered?

1.7 Is it permissible/common for there to be performance The parties are allowed to agree a fixed sum in advance. However, bonds (provided by banks and others) to guarantee a court may reduce, in accordance with the stipulations of the performance, and/or company guarantees provided to applicable law, such amount if it is deemed manifestly excessive. guarantee the performance of subsidiary companies? Portuguese courts have come to limit such amounts on a frequent Are there any restrictions on the nature of such bonds basis whenever they clearly exceed the effective damages incurred. and guarantees?

In private contracts, all forms of guarantee are admissible. The 3 Common Issues on Construction most common form of guarantee is first-demand bank guarantees. Contracts Company guarantees are less common but are not forbidden. In public contracts, the forms of guarantee are legally established 3.1 Is the employer entitled to vary the works to be done and are, in accordance with article 90 of the Public Contracts Code, under the contract? Is there any limit on that right? either made by means of a cash deposit or titles issued, or guaranteed by the Portuguese State, bank guarantees, or an insurance guarantee. In a private construction contract, unless otherwise agreed by the

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parties, the employer may not vary the nature of the works, but only considered as a change of circumstances under which the parties their value, and only up to a fifth of the agreed price. Within public agreed to contract, as long as such event was abnormal and was construction contracts, the employer may request, if certain conditions unpredictable and, in good faith, caused the execution of the contract are met, variations to be performed under the contract. Such variations to be unacceptable. In such case, the risk will be shared either by should not, however, exceed 5% of the price of the contract. changing or reducing the terms of the contract or, if the contract is The new European Directives establish, in certain conditions, different impossible to execute, by resolving it. limits to the variations of the works foreseen in the public construction contracts. However, as referred previously, the impact of these new 3.8 Who usually bears the risk of a change in law limits in the Public Contract Code is not yet known at this moment. affecting the completion of the works? Portugal 3.2 Can work be omitted from the contract? If it is Usually such risk is borne by the employer, although it is common omitted, can the employer do it himself or get a third to make exceptions for tax and in public party to do it? construction contracts.

In private and public construction contracts, works can be omitted 3.9 Who usually owns the intellectual property in relation from the contract. Works omitted from the contract can then be to the design and operation of the property? executed by the employer or a third party on its behalf. Usually such property is transferred to the employer at the end of 3.3 Are there terms which will/can be implied into a the works. construction contract?

3.10 Is the contractor ever entitled to suspend works? Yes, there are terms that may be implied into a construction contract regardless of its public or private nature. Both civil and administrative laws provide an important set of rules which may The parties may agree freely on suspension causes. Delayed supplement a contractual agreement. payments or force majeure are common causes of suspension. Civil law establishes that the contractor may suspend the works if payments are delayed (“exceptio non adimpleti contractus”). 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 3.11 On what grounds can a contract be terminated? Are extension of time; or (b) the costs occasioned by that there any grounds which automatically or usually concurrent delay? entitle the innocent party to terminate the contract? Do those termination rights need to be set out Concurrent delays would probably only entitle the contractor to expressly? an extension of time. The costs occasioned by a concurrent delay would not usually be considered the responsibility of the employer. Grounds to terminate a contract can be freely agreed by the parties. Under objective circumstances, the innocent party may terminate the contract by declaring to the guilty party that they have lost their 3.5 If the contractor has allowed in his programme a interest in the contract. If the execution of the works becomes period of time (known as the float) to allow for his own delays but the employer uses up that period by, for impossible, any of the parties is entitled to terminate the contract. example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed 3.12 Is the concept of force majeure or frustration known after this float is used up? in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue Yes, as long as the float was identified as such in the works schedule. successfully that a contract which has become uneconomic is grounds for a claim for force majeure?

3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims Yes, Portuguese law accepts the concept of force majeure, limited against each other? How long is that period and from to extraordinary events mostly beyond human determination. Force what date does time start to run? majeure situations, which in good faith cause the execution of the contract to be unbearable or impossible, allow the injured party to In Portugal, all claims are subject to a limitation period. In the claim a change, reduction or relief of obligations or the termination case of defects in construction works, such limitation period is of the contract. With regard to the second question, it is not likely five years, except for claims referring to structural elements which that such a claim would be successfully argued, unless the contract have a limitation period of 10 years, beginning from the date the had become uneconomic due to force majeure occurrences. finished works were accepted. However, defects must be notified to the contractor within one year from the moment that the employer 3.13 Are parties which are not parties to the contract entitled becomes aware of such defects, and the claim must be filed within to claim the benefit of any contract right which is made the following year. If these deadlines are not met, the employer may for their benefit? E.g. is the second or subsequent no longer bring claims against the contractor. owner of a building able to claim against the original contracts in relation to defects in the building?

3.7 Who normally bears the risk of unforeseen ground conditions? The answer to both questions is affirmative as such rights are related to the building itself and thus will be transferred with the property This risk is normally borne by the employer. However, it may be rights, within the guarantee period.

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3.14 Can one party (P1) to a construction contract which 4.3 Do your construction contracts commonly have owes money to the other (P2) set off against the sums arbitration clauses? If so, please explain how due to P2 the sums P2 owes to P1? Are there any arbitration works in your jurisdiction. limits on the rights of set-off? Construction contracts of higher values commonly have arbitration The right of set-off in pecuniary undertakings is provided in the clauses. Arbitration is well consolidated in the Portuguese jurisdiction Civil Code and operates by means of a simple statement to the other and is ruled by Law no. 63/2011, of 14 December. Arbitration usually party. Such right of payment must be judicially demandable. This starts with a notice to all interested parties defining the object of the right does not exist in public contracts if the public contractor is the dispute, presenting evidence and arguments, and nominating an Portuguese State. Portugal arbiter. The counterparties are given the opportunity to present their evidence and arguments and (dis)agree with the nominated arbiter, 3.15 Do parties to construction contracts owe a duty of or nominate their own arbiter, when the arbitration is to be held by a care to each other either in contract or under any group of three arbiters. In the latter case, the two nominated arbiters other legal doctrine? shall nominate the third who will preside. Awards are taken according to the Portuguese statutory rules, unless the parties should choose Parties to any contract subject to Portuguese law are obliged to act that the arbiters shall decide according to equity. The arbiters may in good faith towards one another. also determine injunctions. Decisions are binding between parties, although those taken according to statutory rules may be appealed to the State courts if the parties previously agreed so. Decisions may be 3.16 Where the terms of a construction contract are revoked by the State courts if void. ambiguous, are there rules which will settle how that ambiguity is interpreted? 4.4 Where the contract provides for international Yes, the Portuguese Civil Code establishes such rules. In fact, arbitration, do your jurisdiction’s courts recognise unless otherwise agreed by the parties, the interpretation of the and enforce international arbitration awards? Please advise of any obstacles to enforcement. contractual terms shall be made by taking into consideration the hypothetical will of the parties if they had previously foreseen such ambiguity. Nevertheless, if the rules of good faith determine a The Portuguese courts recognise and enforce international arbitration different solution, such solution shall prevail. awards. Enforcement may only be denied within the limitations provided in Law no. 63/2011, of 14 December, related generally to irregularities of the arbitration procedure, violation of the Portuguese 3.17 Are there any terms in a construction contract which statutory rules, or the principles of international order. are unenforceable?

No, as long as such terms comply with the law and the obligations 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign are feasible. court be upheld and enforced in your jurisdiction?

3.18 Where the construction contract involves an element Foreign courts’ judgments on construction contracts can be enforced of design and/or the contract is one for design only, in Portugal after being revised by a higher Portuguese court. For are the designer’s obligations absolute or are there some countries, specific international conventions may be applicable limits on the extent of his liability? In particular, does to ease such procedure. the designer have to give an absolute guarantee in respect of his work? 4.6 Where a contract provides for court proceedings in The liability of the designer may be contractually limited. 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) 4 Dispute Resolution a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal.

4.1 How are disputes generally resolved? Court proceedings related to construction contracts, both of civil and administrative law, will follow a common procedure which Disputes are generally resolved by judicial courts. In contracts with begins with a requirement to define the object of the dispute, then to higher values, however, the parties frequently choose arbitration as present evidences and arguments, and to conclude with the demand. a faster means of resolving their disputes. The counterparty is given the opportunity to present its evidence and arguments. If further evidence is necessary, an audience is adjourned and the final decision will follow. Generally, the right 4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general of appeal is allowed only if the plea has a value superior to the “a procedures. quo” court’s limit, and the party’s loss amounts to more than half as much as such limit. It is not possible to determine how long each Adjudication processes similar to those provided in the UK’s proceeding is likely to take. Construction and Regeneration Act have ceased to exist in public construction contracts, and have never existed in private construction contracts.

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António André Martins Joana Maltez FALM – Sociedade de Advogados, SP, RL FALM – Sociedade de Advogados, SP, RL Rua Abranches Ferrão, n.º 10, 5.º B Rua Abranches Ferrão, n.º 10, 5.º B 1600-001 Lisbon 1600-001 Lisbon Portugal Portugal

Tel: +351 21 722 4200 Tel: +351 21 722 4200 Fax: +351 21 722 4201 Fax: +351 21 722 4201 Email: [email protected] Email: [email protected] URL: www.falm.pt URL: www.falm.pt Portugal António is the Partner in charge of the law practice groups for Joana is an Associate in the law practice groups for the Construction, Construction, Public Procurement, and Project Finance. Within Public Procurement, Project Finance and Expropriation sectors. She these practice areas, he has successfully advised some of Portugal’s has been involved in several public procurement bids with construction largest construction and engineering contracts. António has also been and engineering contracts as a consultant for the bidders, and is on actively participating in the negotiation of numerous project finance the teams that continuously advise the private contractors in managing deals throughout the last 15 years, advising some of the largest such public contracts. Joana has advised on infrastructure projects, European construction companies. railways, highways, hospitals, prisons and other major buildings.

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 11th anniversary this year, the firm thrives on its Partners’ and Associates’ experience of over 30 years within the different areas of public and , 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.

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Russia Semion Melnitsky

Melnitsky & Zakharov, Attorneys-at-Law Olga Kruglova

etc. Such contracts are executed subject to the principles of FIDIC 1 Making Construction Projects and the International Chamber of Commerce, in addition to the relevant industry standards, particularly in the case of construction 1.1 What are the standard types of construction contracts of industrial structures. in your jurisdiction? Do you have contracts which However, in certain cases, it may be more advisable for the employer place both design and construction obligations upon to execute, with respect to a single project, several different contracts contractors? If so, please describe these types of for the each relevant kind of work, e.g. a design contract, a materials contracts. Please also describe any forms of design- only contracts common in your jurisdiction. Do and equipment supply contract, a construction contract, etc. In this you have any arrangement known as management case, the project is primarily managed by the employer. contracting, with one main managing contractor With regard to design-only contracts, Russian law permits the and with the construction work done by a series following types of contracts for the construction of architectural and of package contractors? (NB For ease of reference urban development works: throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and i) a commissioning (author) contract executed directly with the engineering contracts.) individual who will perform the relevant work; ii) a contract for the development of a design concept which The main types of construction contracts provided for under is not executed directly with the author (the individual Russian law are construction agreements and contractor agreements performing the work); and for design and survey works. In practice, however, each particular iii) a design and survey works contract. project is regulated by a contract encompassing much broader issues Under Russian law, architectural and urban development works, than the two aforementioned types of construction agreements. including designs, drawings and scale models, are subject to In choosing a contractual strategy, one must take into account, copyright. among other things, the type of construction (e.g. greenfield, Under a commissioning (author) contract, one party (the author) brownfield, etc.), funding source(s) (equity-/debt-financed), purpose obligates to create the work provided for in the contract, on of the buildings (structures), and distribution of risks between the commission, in a tangible media or other form, for the other party parties. (the employer). A commissioning (author) contract may provide The following three contractual models are used most frequently in for assigning the exclusive right to the work to be created by the construction and are provided for under Russian law: author to the employer or for granting the employer the right to use i) entering into an EPC (engineering, procurement and the commissioned work to the extent provided for in the contract. construction) contract based on a FIDIC (Fédération Under a contract for the development of a design concept not directly Internationale des Ingénieurs-Conseils) template; executed with the author, the exclusive right to the commissioned ii) entering into an EPCM (engineering, procurement and architectural and urban development work will belong to the construction management) contract and into contractor employer, unless the contract between the contractor (the service agreements with those companies actually performing the provider) and the employer states otherwise. construction works; and A design and survey works contract may also provide for iii) entering into several contracts (including with different development of a design concept; the said design, however, is not parties) with respect to each stage of a single project, such subject to copyright. as a design-only contract, a survey works contract, a services contract (including those services related to obtaining planning and building permits), materials and equipment 1.2 Are there either any legally essential qualities needed supply contracts, construction agreements, etc. to create a legally binding contract (e.g. in common The first and second types of contracts are “full-cycle contracts” law jurisdictions, offer, acceptance, consideration which are used to entrust project management to the general and intention to create legal relations), or any specific requirements which need to be included in a contractor (i.e. EPC-contractor or EPCM-contractor), rather than construction contract (e.g. provision for adjudication or to the employer. “Full-cycle contracts” are so-called “combined any need for the contract to be evidenced in writing)? contracts” which combine elements of different contracts, namely, of a construction agreement, a contractor agreement for design Under Russian law, a contract is considered to be concluded when and survey works, an agency contract, a paid services agreement,

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the interested parties agree on all the material terms and conditions of the contract. 1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to The material terms and conditions of a construction contract are: (1) have in place when carrying out construction work? the subject matter of the contract; (2) the scope and contents of the For example, is there employer’s liability insurance work to be performed; (3) the completion deadline(s); and (4) the for contractors in respect of death and personal pricing procedure and other terms and conditions which both parties injury, or is there a requirement for the contractor to must agree upon with each other. have contractors’ all-risk insurance? The contract is executed in writing by executing a single document signed by the parties and through the exchange of letters and other Under Russian law, insurance of a construction project, the risk documents, including in electronic form. of accidental loss or damage which lies with the contractor until Russia acceptance of the project by the employer, as well as liability insurance against death and personal injury is mandatory only if the 1.3 In your jurisdiction please identify whether there is relevant construction contract provides for an obligation to insure a concept of what is known as a “letter of intent”, in the relevant risks. Otherwise, insurance is a right, not an obligation. which an employer can give either a legally binding or non-legally binding indication of willingness either to In practice, the following are the most frequently insured risks: enter into a contract later or to commit itself to meet i) risk of accidental loss or accidental damage to the certain costs to be incurred by the contractor whether construction project, material, equipment or other property or not a full contract is ever concluded. used for construction purposes; and ii) liability for third-party health, life and property damage Russian law does not provide for a “letter of intent”; however, in caused in the course of construction. practice, such a document is often executed by the parties intending However, the parties to a construction contract may provide for other to enter into a contract at a later date. insurable risks, including insurance of the contractor’s personnel A letter of intent sets forth the basic terms and conditions of the against accidents and disease and insurance of movable equipment future contract to be agreed by the parties; however, a letter of intent and ground transport vehicles, including mandatory vehicle owners’ does not obligate the parties to execute the contract and/or to make liability insurance. The relevant construction contract may set forth any payments. the requirements as to the insurer and the amount to be insured. For the purpose of obligating the employer to enter into a contract in the future, Russian law does provide for legal instruments such as a 1.5 Are there any statutory requirements in relation preliminary contract and an option to enter into a contract. to construction contracts in terms of: (a) general The parties to a preliminary contract obligate to enter into the main requirements; (b) labour (i.e. the legal status of those contract on the terms and conditions specified in the preliminary working on site as employees or as self-employed contract. Should a party not enter into the main contract within the sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety? timeframe specified in the preliminary contract, the party in question may be forced to enter into the main contract through legal action. The applicable laws provide only for a general obligation of the Under a preliminary contract, a party may pay the other party contractor to meet the requirements of the applicable environmental a certain amount of money (the security deposit) to secure the and construction safety laws and other regulations when carrying fulfilment of the monetary obligation. Upon the occurrence of the out construction and construction-related works. Pursuant to these events specified in the contract, the security deposit may be used to laws, liability for the failure to comply with these requirements lies offset the relevant obligation. with the contractor. Under an option to enter into a contract, the employer may, by Other matters, including the qualifications of the contractor’s labour making an irrevocable offer, entitle the contractor to enter into the force, their work conditions, etc. are set out, if necessary, by the contract on the terms and conditions provided for in the option. The parties in the construction contract. option must include the conditions set out, as well as the subject matter and other material terms and conditions of the contract to be As a rule, the contractor’s responsibility is to hire all necessary executed. Generally, an option to enter into a contract is granted in employees and workers, to ensure that foreign workers are legally exchange for a payment or other consideration. entitled to work on the construction site, and to arrange for the workers’ remuneration, accommodation, food and transportation. The contractor may enter into the contract by accepting such offer in the manner, timeframe and under the terms and conditions provided So, the contractor, being in an employment relationship with the for in the option. The option may also provide that the offer may workers, must observe the applicable labour laws, including be accepted subject to the occurrence of an event specified in the those concerning employment, healthcare, safety, social security, option, including an event which may depend on the will of one immigration and emigration, and, in general, grant its workforce all party. Unless otherwise agreed by the parties, unlike the security statutory rights. The contractor also acts as a tax agent in respect of deposit under the preliminary contract, the option payment may not its workers and therefore calculates and pays the income tax to the be offset against payments to be made under the contract executed state budget and insurance contributions to extra budgetary funds. pursuant to the irrevocable offer, and the option payment is non- Concerning employees engaged by the contractor under a civil law refundable in the event that the offer is accepted. contract instead of under a labour contract, i.e. self-employed sub- The fundamental difference between the preliminary contract and contractors, the contractor must observe the applicable civil laws the option to enter into a contract lies in the fact that the party to the and also act as a tax agent for self-employed sub-contractors who preliminary contract is obligated to enter into the contract, whereas are individuals not qualifying as sole entrepreneurs. the party acquiring the option to enter into a contract may elect The contractor must also take reasonable precautions to protect whether or not to enter into the contract. the health of its employees and to ensure for their safety, namely However, the preliminary contract and the option to enter into a (i) to ensure that the contractor’s or the employer’s employees contract are rarely used in the case of construction contracts. have permanent access to health professionals and emergency

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medical facilities at the construction site and at the place where processing or treatment of things, unused leftover material and other the employees live, and (ii) to take necessary measures to meet all property belonging to the employer, until the employer pays the household, utility, hygienic and anti-epidemic requirements. amount(s) due. Retention may also be used to secure claims which, The contractor must appoint, at the construction site, an employee though unrelated to the payment for a thing or reimbursement of responsible for compliance with safety regulations to ensure safety associated costs and of other damages, result from a construction and accident prevention. To perform these duties, the employee must contract under which the parties act as entrepreneurs. have the corresponding qualifications and must be authorised to give necessary orders and take protective precautions to prevent accidents. 2 Supervising Construction Contracts

Russia 1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be 2.1 Is it common for construction contracts to be released either in whole or in part when: (a) the works supervised on behalf of the employer by a third are substantially complete; and/or (b) any agreed party? Does any such third party (e.g. an engineer defects liability is complete? 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, The applicable laws do not provide for a security retention instrument please identify when the architect/engineer must act to be held until completion of work; in practice, however, such an impartially. instrument is quite often used. The parties to a construction contract may specify the maximum amount of the security retention or a Engaging an engineer (engineering organisation) to act on the procedure for calculating the figure. employer’s behalf is the employer’s right, not an obligation. For the purposes of construction supervision and to arrange for 1.7 Is it permissible/common for there to be performance someone to make decisions on the employer’s behalf, the employer bonds (provided by banks and others) to guarantee may, without the contractor’s consent, enter into a contract for the performance, and/or company guarantees provided to provision of such services between the employer and the relevant guarantee the performance of subsidiary companies? engineer (engineering organisation). In this case, the consequences Are there any restrictions on the nature of such bonds and guarantees? for the contractor resulting from the engineer’s (engineering organisation’s) actions are specified in the construction contract. As one of the ways of ensuring the fulfilment of obligations, Russian law provides for an independent guarantee as a legal instrument. 2.2 Are employers entitled to provide in the contract that The guarantor under an independent guarantee undertakes, at they will pay the contractor when they, the employer, the request of another party (the principal), an obligation to pay have themselves been paid; i.e. can the employer a third party specified by the principal (the beneficiary) a certain include in the contract what is known as a “pay when paid” clause? sum of money in accordance with the terms and conditions of the obligation assumed by the guarantor. The applicable laws do not prohibit a construction contract from Independent guarantees may be issued by both banks and other including a “pay when paid” clause to pay for the services of the lending institutions (bank guarantees) and by other commercial sub-contractor directly in charge of the construction. organisations. It should be borne in mind, however, that, according to existing court The applicable Russian laws also allow for the use of surety contracts decisions, that such a clause may be included only as a condition under which the surety undertakes to another party’s creditor to be for the deferral of repayment for the completed works and may not liable for the performance of that party’s obligation, in whole or deprive the sub-contractor of the right to remuneration. in part. A surety agreement may be used to secure both monetary and non-monetary obligations, and also to secure an obligation to be Non-payment of remuneration to the sub-contractor is illegal assumed in the future. A surety agreement under which the surety is because: (1) it qualifies as unjust enrichment; (2) gifts between a person engaged in entrepreneurial activities may specify that the legal entities are forbidden; and (3) the sub-contractor’s right to surety securing the debtor’s obligations to the creditor is limited to remuneration for the completed works is unconditional. a certain amount. Therefore, in the event of engaging a sub-contractor, the risk of the Therefore, any company qualifying as a commercial organisation employer’s non-payment of remuneration is borne by the general may issue an independent guarantee to secure another company’s contractor. performance of its obligations under the relevant construction contract and/or to enter into a surety agreement with the employer. 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 1.8 Is it possible and/or usual for contractors to have particular breaches, e.g. liquidated damages for late retention of title rights in relation to goods and completion? If such arrangements are permitted, are supplies used in the works? Is it permissible for there any restrictions on what can be agreed? E.g. contractors to claim that until they have been paid does the sum to be paid have to be a genuine pre- they retain title and the right to remove goods and estimate of loss, or can the contractor be bound to materials supplied from the site? pay a sum which is wholly unrelated to the amount of financial loss suffered? Under Russian law, in the case of the employer’s failure to fulfil its obligation to pay a prescribed or other amount payable to the The parties to a construction contract may provide for a penalty contractor for the performance of works under the relevant contractor payable by one party to another party in the event of failure to agreement, the contractor may retain the work product (construction perform or improper performance of the relevant obligation, namely, project), as well as the employer’s equipment provided for the in the event of a delay in performance.

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The penalty may be in the form of a fine (i.e. a fixed sum paid for the of the applicable laws; therefore, such provisions apply irrespective violation) and in the form of late fee (a certain sum of money paid of whether or not binding provisions of the applicable laws are for each day/month/other period of delay). included in the construction contract. Under Russian law, the creditor requesting payment of a penalty does not have to prove the losses he has incurred. 3.4 If the contractor is delayed by two events, one the The applicable laws do not restrict the amount of the penalty fault of the contractor and one the fault or risk of which the parties may provide for in the relevant contract. The his employer, is the contractor entitled to: (a) an amount of the penalty may be unrelated to the monetary value of extension of time; or (b) the costs occasioned by that the consequences of the breaches in contract for which the penalty concurrent delay? is imposed. It should be borne in mind, however, that the amount Russia of a penalty may be reduced through legal action if that amount is Generally, the contractor is liable for the failure to meet both obviously inadequate when compared with the consequences of the starting and final works completion dates and intermediate works contract breach. Also, if the penalty provided for in the contract is completion dates; therefore, a delay in performance does not imply payable by a person engaged in entrepreneurial activities, the amount an extension of the deadline. A relevant exception may be provided of the penalty may be reduced only in exceptional cases, subject for in the construction contract. to proving that the recovery of the penalty may be unjustifiably The criteria and procedure for amending starting, final and beneficial (in a financial sense) for the creditor. intermediate works completion dates may be provided for in the Generally, if the failure to perform or improper performance of the construction contract if the parties so desire. In practice, however, relevant obligation is subject to a penalty, reimbursement will be such dates may be amended according to the standard contract provided for the portion of the losses not covered by the penalty. amendment procedure, should the parties consider such amendments The applicable laws or the relevant contract may provide for the appropriate. recovery of only the penalty, without the recovery of losses, for Where a delay in performance is caused by the employer, the the recovery of the full value of losses in addition to the recovered contractor will not be deemed to delay the performance of its penalty, or for the recovery of either the penalty or losses, as the obligations which cannot be performed as a result of the employer’s creditor chooses. delay.

3 Common Issues on Construction 3.5 If the contractor has allowed in his programme a Contracts 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 3.1 Is the employer entitled to vary the works to be done after this float is used up? under the contract? Is there any limit on that right?

According to the applicable laws, the employer may unilaterally The applicable laws do not provide for changing work timeframes amend technical documentation setting out the scope of works, using a legal procedure known in international construction projects provided that the value of the additional works provided for by such as “the float”. The parties may provide in the construction contract amendments does not exceed 10 per cent of the total construction for a procedure and criteria for applying a float and change works costs specified in the construction contract and that the additional completion deadlines in accordance with the relevant provisions of works do not change the nature of the works provided for in the the contract. construction contract. In all other cases, the construction contract may be amended only 3.6 Is there a limit in time beyond which the parties to upon the parties’ consent, unless otherwise provided for in the a construction contract may no longer bring claims against each other? How long is that period and from construction contract. what date does time start to run?

3.2 Can work be omitted from the contract? If it is The applicable laws state that poor quality works, for which the omitted, can the employer do it himself or get a third employer may bring claims against the contractor, may be identified party to do it? within the following timeframes: i) Where there is a warranty period The construction contract may provide for a unilateral reduction of the scope of works. If the construction contract does not provide The employer may bring claims with respect to poor quality works identified within the warranty period. The warranty for a unilateral exclusion of any works or part thereof from the period is specified in the contract and, unless otherwise construction contract, the relevant amendments may be made only provided for in the contract, begins on the day on which the with the parties’ consent. relevant completed work was or was to be accepted by the If any works are excluded from the construction contract in the employer. manner prescribed by the applicable laws and the contract, the Where the warranty period provided for in the contract is less employer may carry out the part of work excluded from the than two years and poor-quality works are identified after the construction contract by using the employer’s own resources or by end of the warranty period, but within five years of the day on engaging third parties. which the relevant completed work was or was to be accepted by the employer, the contractor is liable if the employer proves that the relevant defects appeared either before or due 3.3 Are there terms which will/can be implied into a to reasons appearing before the date of the transfer of the construction contract? completed work to the employer.

The construction contract is subject to, inter alia, binding provisions

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ii) Where there is no warranty period Where design development is commissioned by the employer to Where a completed work is not covered by a warranty period, the general contractor under a comprehensive EPC (engineering, poor quality claims with respect to such work may be made procurement and construction) or EPCM (engineering, procurement by the employer on condition that the relevant defects are and construction management) contract, all issues related to the discovered within a reasonable time, e.g. within five years of transfer of exclusive rights to use the design documentation to the the completed work transfer, unless a different timeframe is employer are, as a rule, regulated by the construction contract. provided for in the applicable laws, the contract or business practice. Where design concept development is commissioned by the employer under a separate contract (commissioning (author) The limitation period for claims made in connection with poor contract, design concept development contract, contractor quality of the work performed under a contractor agreement Russia is one year and, in the case of buildings and structures, three agreement for design and survey works) and where, as a result of years. this performance, a copyrightable work is created, all issues related to the employer’s rights to architectural and urban development Generally, if under a contractor agreement the relevant works are accepted by the employer in parts, the limitation period works must be regulated by the aforementioned contracts. begins on the day when the completed work is accepted in its Also, if the employer uses a design concept created earlier, a entirety. However, if the completed works are covered by a contract must be executed to assign the exclusive right to a work warranty period and the relevant claim is made within that or a licence contract granting the right to use a work setting out the warranty period, the limitation period begins from the day on extent of such use. which the claim is made.

3.10 Is the contractor ever entitled to suspend works? 3.7 Who normally bears the risk of unforeseen ground conditions? According to the applicable laws, the contractor may elect not to start work or to suspend work if the employer’s failure to fulfil its Risks (other than those for which the liability is provided for in obligations under a contractor agreement (namely, failure to provide binding provisions of the applicable laws) are distributed between the material, equipment, technical documentation or the thing to be the parties in accordance with the terms and conditions of the processed which prevents the contractor from performing works construction contract. under the contract, and also if there is conclusive evidence that the According to the applicable laws, the contractor also bears: aforementioned obligations will not be fulfilled in good time). ■ the risk of accidental loss or damage to the construction The contract may also provide for additional grounds for the project described in the contractor agreement until acceptance suspension of works by the contractor. of this construction project by the employer; and ■ the liability for the failure to keep undamaged materials and equipment provided by the employer to process a thing or 3.11 On what grounds can a contract be terminated? Are other property in the contractor’s possession in connection there any grounds which automatically or usually with the performance of the contractor agreement. entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly? These provisions may not be amended by agreement between the parties. The applicable laws provide that a construction contract may be terminated on the employer’s initiative in the following cases: 3.8 Who usually bears the risk of a change in law i) if the contractor fulfils its obligations in good faith and affecting the completion of the works? unless otherwise provided for in the construction contract, the employer may, at any time before the transfer of the Both parties to the construction contract bear the risk of a change in completed work, withdraw from the contract, subject to the applicable laws. paying the contractor the part of the agreed cost for the amount of work completed prior to the receipt of the employer’s notice of withdrawal. The employer must also 3.9 Who usually owns the intellectual property in relation reimburse the contractor for losses caused by the termination to the design and operation of the property? of the construction contract not exceeding the difference between the cost of all works and the portion of the cost paid Under Russian law, architectural and urban development works, for the completed works; and including designs, drawings and scale models, are subject to ii) if the contractor fails to fulfil its obligations in good faith, copyright. according to the applicable laws, the employer may: The exclusive right to use the relevant work in any form and in any ■ withdraw from the contract and seek damages, if the manner consistent with the applicable laws is held by the author of contractor fails to commence the performance of the the work or other rights holder. The use of an architectural work is contract in good time or performs the works so slowly its implementation in accordance with its designation. In particular, that it becomes clear that works will not be completed in time; and the holder of the rights may dispose in full of the exclusive right to a work in favour of the right purchaser, but only the right to use the ■ set a reasonable timeframe for the contractor to correct work may be transferred to the extent prescribed by the contract. the shortcomings if, during the performance of the works, it becomes clear that they will not be completed properly; Therefore, to implement a project in accordance with its designation, should the contractor fail to do so, the employer may the employer has to have the relevant rights to the project; the scope withdraw from the contract or commission another party of the employer’s rights is set out in the contract as a result of the to correct the works at the contractor’s expense and also purpose for which the architectural and urban development work seek damages. was created. Unless otherwise provided for in the construction contract, the contract may be terminated on the contractor’s initiative subject to

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the circumstances entitling the contractor to suspend the works (see iv) the contract and business practice do not imply that the risk of question 3.10); in this case, the contractor may seek damages from a change in circumstances is borne by the interested party. the employer in connection with the early termination of the contract. When a contract is terminated as a result of a substantial change The applicable laws also provide for an early termination of the in circumstances, the court, on the request of any of the parties, construction contract pursuant to the relevant court ruling in the determines the consequences of the termination subject to fair event of material breach of the contract or in connection with a distribution between the parties of the costs incurred by them in substantial change in circumstances. connection with the performance of the contract. A material breach of the contract is a party’s breach of the contract Amending a contract in connection with a substantial change in resulting in such damage to the other party that the other party loses circumstances pursuant to a court ruling is allowed in exceptional a substantial portion of what it had the right to expect to receive cases if termination of the said contract would be adverse to Russia when executing the contract. public interests or would result in the parties suffering damages A change in circumstances qualifies as substantial if circumstances substantially in excess of the costs of performing the amended change to a degree that, if the parties could reasonably foresee it, contract pursuant to the court ruling. they would not have entered into the contract or would have entered into it on substantially different terms and conditions. 3.13 Are parties which are not parties to the contract Construction contracts may provide for other grounds for early entitled to claim the benefit of any contract right termination. In this case, the contract must expressly specify the which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against circumstances which may entitle a party to require that the contract the original contracts in relation to defects in the be terminated early. building?

3.12 Is the concept of force majeure or frustration known Generally, third parties who are not parties to the contract may not in your jurisdiction? What remedy does this give make claims for their benefit. However, Russian law does provide the injured party? Is it usual/possible to argue for a “contract for the benefit of a third party”. The parties to a successfully that a contract which has become contract for the benefit of a third party provide that the debtor will uneconomic is grounds for a claim for force majeure? discharge its obligation in favour of a third party (specified or not specified in the contract and entitled to require the debtor to The applicable Russian laws provide for “force majeure events”. discharge the said obligation in that third party’s favour) instead of Such events include extraordinary and unavoidable events, e.g. the creditor. natural disasters (earthquakes, floods) and public life events: Under such contracts, unless otherwise provided for in the applicable operations; epidemics; and large-scale strikes, etc.; that laws, other regulations or the contract, once the third party notifies is, unavoidable external events. It should be mentioned, however, the debtor of its intention to exercise its right, the parties may not that the applicable laws do not qualify as force majeure events, in terminate or amend that contract without the third party’s consent. particular: failure to meet obligations by the debtor’s counterparties; unavailability of the goods necessary to perform obligations on the Therefore, if the relevant construction contract is not a contract for market; and the debtor not having necessary funds. the benefit of a third party, only the employer (the developer) which is a party to the construction contract may make claims regarding Unless otherwise provided for in the applicable laws or the contract, defects of the premises/the building. the party that failed to perform or properly perform an obligation in the course of its entrepreneurial activities will not be liable if it The party that acquired the premises/buildings from the developer (the proves that the improper performance resulted from force majeure first owner) may make claims regarding defects of the building to the events. developer. The developer must either correct the defects discovered within the timeframes specified in question 3.6 or reimburse the costs If a contract becomes uneconomic for reasons other than force incurred by the building owner. The developer, in turn, may then, majeure events, then, as noted in question 3.11, it may be pursuant to the right of recourse, make claims to the contractor with amended or terminated in connection with a substantial change which the developer entered into the construction contract. in circumstances, unless otherwise provided for in the contract or implied by the nature thereof. The party that purchased the premises/the building from the first owner (the second owner) may make claims regarding the quality If the parties fail to agree on terminating or amending the contract of the purchased premises/buildings to the seller of the premises/ to reflect the substantial changes in circumstances, the contract may buildings (to the first owner, etc.). be terminated or amended by a court of law upon the request of a concerned party, subject to all of the following conditions listed below being met: 3.14 Can one party (P1) to a construction contract which i) the parties executed the contract believing that such a change owes money to the other (P2) set off against the sums in circumstances would not take place; due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off? ii) the change in circumstances is due to causes which the party concerned could not negate after their occurrence, subject to exercising the degree of care and prudence required by Under Russian law, an obligation may be discharged, in whole or in the nature of the contract and for the conduct of business part, by offsetting an equivalent counter-obligation that has become transactions; due, or the due date of which is not specified or which depends on iii) performance of the contract without the necessary when the performance thereof is demanded. In this case, a request amendments would upset the contractual balance of the from one party is sufficient to make the offset. parties’ property interests to such a degree that it would According to the applicable laws, the following obligations may not cause such damage to the party concerned that it would lose be offset: a substantial part of what it had the right to expect to receive ■ the obligation to compensate for the damage caused to life or when executing the contract; and health;

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■ the obligation of annuity; and survey works is liable for any improper execution of technical ■ the obligation to recover alimony payments; documentation and the performance of survey works, including ■ obligations with expired limitations periods; and defects discovered afterwards in the course of construction and operation of the relevant facility built on the basis of the technical ■ other obligations provided for under the applicable laws or by documentation and survey works. the contract. If any defects are discovered in the technical documentation and Also, obligations which are the subject matter of legal proceedings survey works, upon the employer’s request, the contractor must may not be offset. Only a counter-claim may be filed in respect of redo the technical documentation, conduct the necessary survey such obligations. works, and reimburse the customer for the resulting losses, unless

Russia otherwise provided for under the applicable laws or by the contract 3.15 Do parties to construction contracts owe a duty of for design and survey works. care to each other either in contract or under any other legal doctrine? If the damage caused by defects in technical documentation was the result of destruction of or damage to the building/or part thereof or failure to meet the requirements for safe operation of the building, The applicable laws require that the parties must act in good faith the reimbursement will be made for damage(s) provided for in the and without the intention to cause harm to the other party. It is applicable civil laws and, in addition, compensation to the injured presumed that the parties to a construction contract act with the individuals/relatives of the injured individuals will be provided. If degree of care and prudence required by the nature of the contract the damage is caused by defects in the technical documentation for and for the conduct of business transactions. a block of flats, the designer will be jointly with a number of others The applicable laws also require that the employer, in the cases, liable as specified in the applicable laws. Namely, the following manner and to the extent provided for in the contractor agreement, parties are jointly with a number of others liable with the designers: assist the contractor in the performance of work. the self-regulatory organisation of which the designer is a member; the organisation which carried out the expert review of the survey 3.16 Where the terms of a construction contract are works; and the organisation which carried out an expert review of ambiguous, are there rules which will settle how that the design documentation. ambiguity is interpreted? The designer’s liability is unlimited and continues throughout the entire operation of the building. According to the applicable laws, a court interprets the terms and According to the applicable Russian laws, the works related to the conditions of a contract on the basis of the literal meaning of the preparation of design documentation influencing the safety of major words and word combinations contain therein. If the literal meaning development and construction projects must only be carried out by of a contractual term is unclear, it is determined by comparing the sole entrepreneurs or legal entities having competency certificates term with other terms and with the general meaning of the contract. to carry out such works issued by the self-regulatory organisation. Where the aforementioned rules are insufficient to determine Self-regulatory organisations check their members’ qualifications, the contents of the contract, the actual intent the parties must be make sure that the applicable laws are observed during the ascertained, subject to taking into account the purpose of the performance of relevant works, insure the civil liability of their contract. Also, account must be taken of any relevant circumstances, members, and set up indemnification funds to bear joint and several including any prior negotiations and correspondence, the practice liability for the obligations of their members, etc. of relationships between the parties, customs and subsequent behaviour of the parties. 4 Dispute Resolution 3.17 Are there any terms in a construction contract which are unenforceable? 4.1 How are disputes generally resolved?

A contract must meet the rules binding upon the parties, prescribed Disputes may be resolved through: by the laws and other regulations (mandatory rules) applicable at the time of execution of the contract. Provisions of the contract which ■ negotiations between the parties; are inconsistent with mandatory rules and principles of public order ■ one party making a complaint or giving the other party other and morality do not apply. written notice setting out, among other things, the relevant demands, the timeframe for their satisfaction and/or making If, after the execution of the relevant contract, a law is adopted a reply, and other conditions allowing the parties to resolve providing for mandatory rules other than those applicable at the the dispute without taking it to court (where the applicable time of execution, the terms and conditions of the contract will laws or the contract provide for a claim-only (out of court) continue in full force and effect, except when the law prescribed resolution of disputes); that it applies to the relations arising from contracts executed earlier. ■ mediation (resolution, with the parties’ consent, of disputes through a mediator to reach a mutually agreeable settlement); 3.18 Where the construction contract involves an element ■ submitting the dispute to an arbitral (non-state) tribunal which of design and/or the contract is one for design only, resolves disputes arising from economic contracts (subject to are the designer’s obligations absolute or are there the contract having an arbitration clause/the parties executing limits on the extent of his liability? In particular, does an arbitration agreement); the designer have to give an absolute guarantee in ■ submitting the dispute to a commercial (arbitrazh) court respect of his work? resolving disputes arising out of entrepreneurial activities and/or civil law relations (economic disputes) or legal Architectural, spatial and structural design is an integral part of relations related to management; and design documentation. The contractor under a contract for design

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■ submitting the dispute to a court of general jurisdiction Both permanent arbitral tribunals and ad hoc arbitral tribunals may resolving disputes involving individuals not engaged in be set up in the Russian Federation. entrepreneurial activities. Permanent arbitral tribunals are set up by chambers of commerce and market makers acting in accordance with the special Law 4.2 Do you have adjudication processes in your “On Stock Market Trading”, nongovernmental associations of jurisdiction? If so, please describe the general entrepreneurs and consumers, other organisations which are legal procedures. entities established in accordance with the applicable Russian laws and their associations (unions) and operate under these organisations Based on the dispute review, the relevant arbitral tribunal, that are legal entities. commercial (arbitrazh) court or court of general jurisdiction passes The parties may set the number of arbitrators which must be uneven. Russia a binding ruling. As a rule, three arbitrators are appointed. There are permanent arbitral tribunals and ad hoc arbitral tribunals. Based on the dispute review, the arbitral tribunal passes its award. A permanent arbitral tribunal conducts arbitration proceedings in The award may be appealed in the relevant competent (state) court. accordance with its rules, unless the parties agree on using other An arbitration award is implemented voluntarily and within the arbitration rules. An ad hoc arbitral tribunal conducts arbitration timeframes specified therein. If an arbitration award does not proceedings in accordance with the rules agreed by the parties. specify a timeframe, it must be implemented at once. The parties executing an arbitration agreement undertake to If an arbitration award is not implemented voluntarily within the voluntarily comply with the arbitration award. The parties and the prescribed timeframe, it must be enforced. An award of an arbitral arbitral tribunal must do their best to ensure that the arbitration tribunal is enforced in accordance with the enforcement process rules award is legally enforceable. applicable at the time of enforcement, pursuant to an enforcement An arbitration award which is not final may be appealed by a party to order issued by a competent state court. the dispute by filing with a competent state commercial arbitrazh( ) court or court of general jurisdiction) an appeal to overturn the 4.4 Where the contract provides for international award. arbitration, do your jurisdiction’s courts recognise Commercial (arbitrazh) court proceedings consist of the following and enforce international arbitration awards? Please stages: advise of any obstacles to enforcement. ■ proceedings at the court of first instance: the court reviews evidence and testimony to determine the facts of the case; Recognition and enforcement of international arbitration awards ■ proceedings at the court of second instance: a second, is governed by international treaties entered into by the Russian thorough review of the case the decision which has not yet Federation and by the applicable provisions of the applicable come into effect; Russian laws. ■ proceedings at the court of appeal: the court verifies the Namely, the Russian Federation is a party to the Convention on the validity and propriety of court rulings that have already come Recognition and Enforcement of Foreign Arbitration Awards (10 into effect (including appellate decisions); June 1958, New York) regulating the issues of mutual recognition ■ proceedings at the court of supervisory review: the court and enforcement in the contracting states of arbitration awards made verifies the validity and propriety of court decisions that have in other contracting states by arbitrators appointed, in the prescribed already come into effect; manner, by the parties to an international commercial dispute or by ■ proceedings to revise court decisions that have already come arbitration bodies with the parties’ consent. into effect in view of new or newly discovered facts; and An arbitration award, irrespective of the country in which it was ■ proceedings related to the enforcement of arbitration awards. made, is recognised as binding and is enforced, subject to the Proceedings at a court of general jurisdiction consist of three stages applicable provisions of the Law “On International Commercial similar those in commercial (arbitrazh) proceedings. Arbitration”, after the relevant written appeal is submitted to a competent court. 4.3 Do your construction contracts commonly have The party basing its case on an arbitration award or petitioning arbitration clauses? If so, please explain how for its enforcement must provide a properly certified original arbitration works in your jurisdiction. arbitration award and an arbitration agreement or properly certified copies thereof. If the arbitration award or arbitration agreement is The parties to a construction contract may refer disputes arising in a foreign language, the party must provide a translation of these from such contracts to an arbitral tribunal, subject to executing an documents into Russian. arbitration agreement. The parties may execute an arbitration agreement with regard to all 4.5 Where the contract provides for court proceedings or certain disputes that have arisen or may arise between the parties in a foreign country, will the judgment of that foreign in connection with a specific legal relation. court be upheld and enforced in your jurisdiction? An arbitration agreement with regard to a dispute tried by a court of general jurisdiction or a commercial (arbitrazh) court may be Decisions of foreign courts, including decisions approving amicable executed before the judgment in this matter is given by a competent agreements are upheld and enforced in the Russian Federation if this court. is provided for by the relevant international treaty entered into by the Russian Federation and under Russian law. However, a dispute may not be referred to an arbitral tribunal if the contract contains a mediation clause. Enforcement of a foreign court decision or a foreign arbitration award may be requested within three years of its effective date.

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appeal against it at an appeal court. The decision of the appellate 4.6 Where a contract provides for court proceedings in court may be appealed against to a court of cassation appeal. your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of Court rulings that have already come into effect may be revised, how long proceedings are likely to take to reduce: (a) subject to a request for supervisory review, by the Presidium of the a decision by the court of first jurisdiction; and (b) a Supreme Court of the Russian Federation. decision by the final court of appeal. Also, cases of a certain category may be tried summarily, within two months. Court proceedings begin following the acceptance of the relevant As a rule, a case is tried by the court of first instance over several claim filed with the court. Several preliminary hearings are held months. It may take several years to reach a final resolution of a Russia to prepare the case for court proceedings. After that, the trial lawsuit, especially in the case of complex lawsuits; for example, if begins. During trial, the claimant and the defendant must prove, in a higher court remits the case for a retrial to the court of the court of accordance with the applicable laws, their complaints/claims. After first or second (appellate) instance. the court of first instance hands down a decision, the parties may

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Semion Melnitsky Olga Kruglova Melnitsky & Zakharov, Attorneys-at-Law Melnitsky & Zakharov, Attorneys-at-Law 10 Malaya Sukharevskaya Square 10 Malaya Sukharevskaya Square Moscow, 127051 Moscow, 127051 Russia Russia

Tel: +7 985 969 9958 Tel: +7 495 363 4440 Email: [email protected] Email: [email protected] URL: www.melnitsky-zakharov.com URL: www.melnitsky-zakharov.com Russia Managing Partner, Melnitsky & Zakharov, Attorneys-at-Law Attorney-at-Law, Melnitsky & Zakharov, Attorneys-at-Law Practice Areas Practice Areas Mr. Melnitsky specialises in the areas of dispute resolution, real estate Ms. Kruglova specialises in investment project support, construction and construction, corporate/M&A, and support of investment projects. and real estate, and public-private partnerships. In 2014, Ms Kruglova defended her Ph.D. thesis, “The Right to Build on Someone Else’s Practice Focus Land Plot: Civil Legal Problems”. Over 20 years of practical experience in the provision of legal support Practice Focus to major and infrastructure construction projects, as well as judicial protection of the interests of market leaders from the construction Substantial experience in the provision of legal support to major and development, telecommunications, oil & gas, transport and investment and development projects, including: public-private pharmaceutical sectors. partnerships; and provision of comprehensive legal support to major Russian companies. Professional Affiliations Ms. Kruglova has been a major contributor to several legal due Since 2010, Head of Melnitsky & Zakharov, Attorneys-at-Law diligence review processes. (previously known as Iniurcolleguia, Attorneys-at-Law). Education & Bar Admittance Education & Bar Admittance In 2014, Ms. Kruglova completed her postgraduate course and Mr. Melnitsky graduated from the Peoples’ Friendship University of received her Ph.D. degree in Law from Kutafin Moscow State Law Russia in 2000. University. Mr. Melnitsky has been a member of the Moscow City Bar Association In 2003, Ms. Kruglova graduated from the Institute of State and Law since 2000. of the Russian Academy of Sciences (Department of International Languages Private Law); and in 1999, from the Faculty of Law of Moscow State Industrial University. Mr. Melnitsky is fluent in Russian and English. Ms. Kruglova has been a member of the Moscow City Bar Association since 2007. Languages Ms. Kruglova is fluent in Russian and English.

Melnitsky & Zakharov, Attorneys-at-Law, was established on the basis of the renowned Iniurcolleguia, Attorneys-at-Law and focuses on expert legal support and judicial protection for businesses. Melnitsky & Zakharov specialises primarily in the resolution of complex commercial and administrative disputes involving entities engaged in telecommunications, metallurgy, oil & gas, gold-mining, major development and construction projects, transportation and investment. We have successfully represented our clients at the Supreme Arbitration Court of the Russian Federation and the Supreme Court of the Russian Federation, as well as at leading international arbitration institutions. Over the past 15 years, Melnitsky & Zakharov has developed and maintained successful practices in corporate law, development & real estate, , maritime law and museum law. Our clients include major Russian and international corporations that are recognised industry leaders: MegaFon; Rostelecom; Severstal; Russian Railways; Gazprom; Polyus Gold; and many others.

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Serbia Slaven Moravčević

Moravčević Vojnović i Partneri in cooperation with Schoenherr Ivana Panić

1 Making Construction Projects 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 1.1 What are the standard types of construction contract and intention to create legal relations), or any in your jurisdiction? Do you have contracts which specific requirements which need to be included in a place both design and construction obligations upon construction contract (e.g. provision for adjudication or contractors? If so, please describe the types of any need for the contract to be evidenced in writing)? contract. Please also describe any forms of design- only contract common in your jurisdiction. Do you have any arrangement known as management Construction contracts are not subject to any specific execution/ contracting, with one main managing contractor notarisation requirements, except for the fact that they must be in and with the construction work done by a series written form. of package contractors? (NB For ease of reference A construction contract is deemed concluded once the offer of one throughout the chapter, we refer to “construction party (the contractor) is accepted by the other party (the investor). contracts” as an abbreviation for construction and Also, a construction contract must contain essential elements engineering contracts.) enabling the execution of the works (prices/terms).

Serbian law is not familiar with specific types of construction Beside the above, specific requirements for design and execution of contracts (model construction contracts) that may be found in some the works set forth under Serbian law must be followed. German-speaking countries; however, high-level construction laws are being developed in Serbia, as well as in the surrounding 1.3 In your jurisdiction please identify whether there is region. General contractual terms and conditions of construction a concept of what is known as a “letter of intent”, in are regulated under the Serbian Contracts and Act; however, which an employer can give either a legally binding or most of these terms are of a dispositive and not an imperative nature. non-legally binding indication of willingness either to Key mandatory rights and obligations pertaining to the general enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether contractor and the employer are set forth under the Planning and or not a full contract is ever concluded. Construction Act (“PCA”). Additionally, these relationships are regulated by the Specific Serbian law is not familiar with the concept of a letter of intent, or Customs on Construction (Posebne uznase o gradjenju); the a letter of acceptance, as it is known under the FIDIC Conditions application of the Specific Customs on Construction is not of Contract. mandatory, but can be agreed between the parties. However, in Serbian and regional construction practice, a letter of Given the extensive foreign investments and financing from banks/ intent is used as a (most often inappropriate) legal ground for the financial institutions for many of the projects, one of the model execution of works while the main agreement is being negotiated agreements most commonly used is the FIDIC (International and implemented. Federation of Consulting Engineers) Conditions of Contract. FIDIC Under applicable Serbian laws, issuing an application for a letter hybrid contracts are also widely applied, especially in engineering, of intent may be interpreted as an agreement (i.e. acceptance of the procurement and construction (“EPC”) contracts. party’s offer constitutes an agreement). Design-only contracts are usually based on the FIDIC White Book Often the main ambiguity arising from a letter of acceptance is its or other tailor-made design contracts for the development of the legal aim, i.e. whether: design for issuance of the construction permit (previously known as (a) the letter of acceptance serves as an investor’s acceptance of concept design) and/or design for construction (previously known the offer provided by the contractor, where the employer will as main design). separately, upon such letter of acceptance being executed, Management construction contracts are typically used under the negotiate and enter into an agreement on the execution of the name “general construction contracts”. However, such contracts works (in other words, the letter would allow negotiations on differ from standard management contracts due to the greater role the agreement, based on the offer by the contractor); or of the main/management contractor. The main issue with such (b) the agreement on the execution of the works would be executed contracts is a matter of licensing (licence for execution of the independently from, but simultaneously with, the letter of acceptance, so that all such documents will form an agreement. construction works).

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In light of the above, it is advisable to prescribe the manner and (ii) service agreements entered into for the purpose of provision of timeline in which the letter of intent (agreement) will be replaced specific material or intellectual works only. Although the term is the with the main agreement. Also, the main agreement should contain main element that differentiates definite and indefinite employment details on the works executed up to that moment (on the basis of the agreements, generally the same rights, obligations and liabilities are letter of acceptance (agreement)) or the remaining scope, and the guaranteed under both types of agreement. Even the termination price paid for such works. conditions that apply to both types of agreement are generally the same (the only difference being that definite time agreements may One alternative is a preliminary agreement on the execution of the not be terminated on the grounds of redundancy). main agreement (containing the obligations of the parties to enter into the main agreement within a certain period of time).

1.6 Is the employer legally permitted to retain part of Serbia the purchase price for the works as a retention to be 1.4 Are there any statutory or standard types of insurance released either in whole or in part when: (a) the works which it would be commonplace or compulsory to are substantially complete; and/or (b) any agreed have in place when carrying out construction work? defects liability is complete? 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 Yes. Most commonly, retention is partially released once have contractors’ all-risk insurance? construction works are taken over by the employer (one-half) and upon expiration of the defect liability period. Most commonly, works are insured under CAR (Contractors’ All-Risk Insurance); design liability is insured under professional 1.7 Is it permissible/common for there to be performance liability insurance. bonds (provided by banks and others) to guarantee Death and personal injury insurance is regulated by the Serbian Law performance, and/or company guarantees provided to on Health and Safety at Work. The party employing the workers guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds is liable for employees’ injuries at work, occupational diseases and and guarantees? work-related diseases, so it should have insurance. The financial means for insurance shall be borne by the employer, and shall be Frequently the performance of works, as well as the liability for determined subject to the level of risk from injury, professional removal of defects during the defect liability period, is secured by disease or work-related disease with regard to the workplace and guarantees/bonds issued by the bank as unconditional, payable at working environment. first demand and irrevocable. In practice, Serbian courts issue drawdown bank guarantees solely 1.5 Are there any statutory requirements in relation for the collection of delay damages. to construction contracts in terms of: (a) general In certain cases, parties provide a corporate guarantee instead of requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed a performance bond; however, given that enforceability of such sub-contractors); (c) tax (payment of income tax of securities when compared to bonds is less efficient, issuance thereof employees); or (d) health and safety? is not common. Finally, the foreign exchange regulations should be followed Serbian laws, in principle, do not prescribe specific constraints carefully when bonds are issued by non-residents. regarding the construction of buildings, besides statutory requirements for obtaining relevant permits and licences for the execution of 1.8 Is it possible and/or usual for contractors to have construction works. However, besides general legal requirements, retention of title rights in relation to goods and projects of specific state interest and/or importance, such as energy supplies used in the works? Is it permissible for projects, may be subject to specific (additional) legal requirements. contractors to claim that until they have been paid In light of the above, for the purposes of execution of the works, they retain title and the right to remove goods and materials supplied from the site? two types of permits/licences will be necessary: (i) permits that relate to the works directly, i.e. permits required for the execution of construction works under applicable laws; and (ii) licences that Right of retention is prescribed under the Serbian Contracts and Torts relate to the contractor itself, i.e. licences required for a foreign Act, which allows a creditor to establish the right to retain (retencija) the goods of a debtor if they are in the possession of the debtor. entity in the capacity of contractor to execute construction works. However, given the nature of the works, this right cannot be qualified Firstly, pursuant to the PCA, construction works cannot commence as a statutory lien over the works. before a permit for the construction of the works has been obtained. Following completion of the works, the employer must obtain an occupancy permit, which is issued for a facility or part of a facility 2 Supervising Construction Contracts whose construction phases have been determined in the construction permit. Contractors and employers are subject to tax payment relating to the 2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third works, as well as income. party? Does any such third party (e.g. an engineer Besides those mentioned above, some additional legal requirements or architect) have a duty to act impartially between relating to the works/labour force must also be met during the contractor and employer? Is that duty absolute or is entire course of the project’s implementation (e.g. work permits it only one which exists in certain situations? If so, for foreign workers, occupational health and safety permits, etc.). please identify when the architect/engineer must act impartially. Namely, construction workers in Serbia are mainly engaged on the basis of (i) definite or indefinite employment agreements, or Construction contracts are most commonly supervised by a third

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party, either through statutory supervision or by engaging an engineer (FIDIC Conditions of Contract). 2.3 Are the parties permitted to agree in advance a fixed sum (known as liquidated damages) which will be In accordance with the PCA, during the execution of works, the paid by the contractor to the employer in the event of investor must ensure statutory supervision of the works. Statutory particular breaches, e.g. liquidated damages for late supervision covers the obligation to review technical documentation, completion? If such arrangements are permitted, are to control and assess the compliance of the works with the technical there any restrictions on what can be agreed? E.g. documentation, to review regulations, standards and quality, does the sum to be paid have to be a genuine pre- and to take appropriate measures with respect to the contractor. estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of Accordingly, statutory supervision may also mean undertaking financial loss suffered?

Serbia measures of suspension. However, most commonly the right of suspension is retained under Yes. Under Serbian law, “liquidated damages” are known as the authority of the employer. contractual penalties for delay and may be agreed as a penalty for late completion for the total works and/or milestones in the 2.2 Are employers entitled to provide in the contract that execution of the works. Also, parties commonly stipulate a cap/ they will pay the contractor when they, the employer, maximum amount of contractual penalties for delay payable by the have themselves been paid; i.e. can the employer contractor to the employer. include in the contract what is known as a “pay when The Serbian Contracts and Torts Act, however, prescribes certain paid” clause? limitations concerning caps/limitations on liability of contractual penalties/damages. Yes, these types of back-to-back clauses, as well as back-to-back agreements, are allowed and not uncommon in practice in Serbia. Initially, the agreement stipulating the maximum amount of compensation shall be valid, provided that the agreed amount is Under Serbian law, there is no concrete/mandatory rule or regulation not in blatant disproportion to the damage and unless otherwise under which the court would request the employer to pay the provided by law for the case at hand. contractor amounts due regardless of an “if and when” clause. Also, in the case that the damage suffered by the creditor is more The validity and enforceability of an “if and when” clause could extensive than the amount of agreed contractual penalty, the be claimed under one of the main principles prescribed by the creditor is entitled to request the difference up to the total amount of Serbian Contracts and Torts Act; specifically the “autonomy of the damages. This standpoint was confirmed by the High Commercial parties’ will”, with respect to contractual relations. This would Court of the Republic of Serbia in its decision Pž. 3970/08, dated 11 apply especially in the case where parties were free to negotiate the November 2008. contract. Conversely, non-negotiable agreements (called “ugovori po pristupu”) are interpreted in favour of the person adhering to However, the parties are not entitled to exclude or limit in such an agreement. It is predominately known in Serbia as “in advance liability in the case of fraud, deliberate default or reckless dubio contra stipulatorem”. misconduct by the defaulting party. Moreover, the competent court, at the request of an interested party, may annul a contractual However, when a party to a bilateral agreement fails to fulfil its provision even for simple negligence if such limitation of liability obligations, the other party may, unless provided otherwise, request is the result of a dominant position of the debtor or, otherwise, of fulfilment of these obligations, and is entitled to compensation of unequal positions of the contracting parties. damages in any event. A contractual cap on liability is also valid unless the set amount is In addition to the above and the general principles of the Obligations in obvious disproportion to the damages sustained. Also, where a Act (e.g. the good faith argument), a contractor could claim payments maximum amount of damages has been agreed, the creditor shall on account of works that were duly executed and taken over by be entitled to seek full compensation should the inability to fulfil the contractor on the basis of the claim for unjustified enrichment. an obligation be caused by the debtor’s wilful misconduct or gross Pursuant to the Obligations Act, after a part of a person’s property negligence. is transferred in any way to another, and such transfer has no legal grounds, the person acquiring the property in such a way is bound In addition to the foregoing specific rules, limitation of liability to restitute it, and where impossible, to compensate the value of the clauses, as well as any other contractual provisions, could be benefits gained. challenged based on certain general principles set forth in the Serbian Contract and Tort Act (e.g. the principle of fairness, equal Legal doctrine has also confirmed that a contractor is entitled to consideration, etc.). recompense where work is carried out at the request (express or implied) of the principal and, for any reason, there is no right to payment under the contract. The contractor would receive the benefit 3 Common Issues on Construction of such work, and it would be unjust if the employer were to retain Contracts the benefit without paying the contractor for the work. The same approach has been admitted in certain cases in which it was held by the court/tribunal that unjustified enrichment may be available to the 3.1 Is the employer entitled to vary the works to be done contractor in the case that no remedy is available under the contract. under the contract? Is there any limit on that right?

The employer is entitled to vary the works to be done by the contractor in quantity and/or quality and/or type. The applicable

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laws do not prescribe a limit on variation procedures; however, Claims shall become unenforceable after a 10-year period (the in the case such a variation would have an impact on the time general limitation period is one in which all the rights expire and for completion and/or price of the works, such change should be that applies unless a right is not anticipated in another period of approved by the contractor. limitation) and a three-year period (special limitation periods are set In Serbia, in practice, variations are generally ordered by the for individual subjective rights which are shorter than the general employer as instructions without a proper assessment of the impact limitation period) for mutual contractual claims in the sphere of on price and time required for the execution of the works. the sale of goods and services, known as commercial contracts. Unenforceability due to the statute of limitations shall begin to run on the first day following the day the creditor was entitled to request 3.2 Can work be omitted from the contract? If it is

fulfilment of the obligation. Serbia omitted, can the employer do it himself or get a third party to do it? 3.7 Who normally bears the risk of unforeseen ground The works can be omitted from the contract by the employer or conditions? the third party administrating the contract (e.g. the engineer). The manner and conditions for omission are determined on a contractual The risk of unforeseen ground conditions is most commonly basis and are most often done in the form of variations. regulated contractually. In addition, the omission can be applied in the form of an annex to the In a standard construction contract and design and build contracts, contract (requiring signature of both parties) or partial termination. the risk of unforeseen ground conditions is borne by the employer. On the other hand, in turnkey projects, such risk is shifted to the contractor. 3.3 Are there terms which will/can be implied into a construction contract? However, based on applicable laws, the unforeseen ground conditions may also qualify as changed circumstances under Serbian Construction contracts must contain key/essential elements (among law, which would allow termination of the contract. other definitions of the works, prices and terms) to be deemed applicable. 3.8 Who usually bears the risk of a change in law All other terms must be agreed on a contractual basis or prescribed affecting the completion of the works? under mandatory provisions of Serbian law, being the law of the country where the works are executed. Usually each party bears the risk of a change in law affecting their scope of obligations under the contract.

3.4 If the contractor is delayed by two events, one the However, in case a change in the law affects the permissibility of fault of the contractor and one the fault or risk of execution of the works, such risk would most likely lie with the his employer, is the contractor entitled to: (a) an employer. extension of time; or (b) the costs occasioned by that It is also worth mentioning that changes in the law may also be concurrent delay? qualified as legal grounds for termination of/addendum to the contract. Serbian laws and regulations do not prescribe a mechanism for However, some construction contracts (with the state or government calculating penalties in the case of concurrent delays. authorities) also have stabilisation clauses in this respect. In practice, however, the contractor is commonly granted an extension of time and/or the costs occasioned by the concurrent delay in the case that the delay of the employer was such to directly 3.9 Who usually owns the intellectual property in relation cause the delay of the contractor. In other words, in cases where to the design and operation of the property? the contractor, due to acts and/or omissions of the employer, was directly prevented from executing the works in a timely manner. Pursuant to the Law on Intellectual Property, intellectual property (IP) rights are defined as both material and moral rights (personal rights of the author). 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own The moral segment of IP rights is not transferable and thus is delays but the employer uses up that period by, for retained by the author. Therefore, it may be deemed that IP rights example, a variation, is the contractor subsequently over the design and the works pertain to the architect. Consequently, entitled to an extension of time if he is then delayed pursuant to the law, such fact triggers the obligation of the employer, after this float is used up? in the case it wishes to change the main design/construction, to address the same architect to undertake respective changes. The concept of variations during the float is not established in However, the material segment of IP rights is transferable, and regional construction practice, and thus must be observed on a case- conditions of such a transfer/assignment should be addressed in the by-case basis, taking into consideration specific circumstances. contract with the employer.

3.6 Is there a limit in time beyond which the parties to 3.10 Is the contractor ever entitled to suspend works? 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? The general right of the contractor to suspend works is not regulated under Serbian law; however, it may be subsumed under one of the Such limits arise out of the Serbian Contracts and Torts Act and are basic principles of the Serbian Contracts and Torts Act. applied to construction contracts. Namely, pursuant to said law, in bilateral agreements neither party is obliged to fulfil its obligation if the other party fails to fulfil or is

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not ready to simultaneously fulfil its obligation, unless otherwise Furthermore, pursuant to the Serbian Contracts and Torts Act, agreed or legally defined. the seller (the employer) is liable for the following material In light of the applicable law, it may be argued that the contractor defects of a building at the moment risk passes to the buyer: (i) is entitled to suspend works due to non-payment by the employer. absence of characteristics required for its normal use; (ii) absence of characteristics required for its particular uses; (iii) absence of characteristics that were agreed upon; and (iv) non-conformity with 3.11 On what grounds can a contract be terminated? Are the model or sample. However, this liability can be excluded or there any grounds which automatically or usually limited in the contract. entitle the innocent party to terminate the contract? Do those termination rights need to be set out

Serbia expressly? 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums The grounds and procedure for termination are most commonly due to P2 the sums P2 owes to P1? Are there any agreed between the respective parties and regulated under the limits on the rights of set-off? construction contract. Set-off of claims is generally permissible under Serbian law. Based on Serbian law, a contract (including a construction contract) may be terminated due to non-fulfilment of the parties’ obligations. According to the Serbian Contracts and Torts Act, a debtor may set Depending on whether the term for fulfilment of the parties’ off the claim by a creditor against him with his claim against the obligations is an essential element of the contract or not, the party creditor. In order to do so, the Obligations Act provides conditions terminating the contract may be required to leave an additional term that need to be fulfilled: for fulfilment of obligation of the breaching party. (i) both claims have to be of a monetary nature, or other replaceable goods of the same nature and kind;

3.12 Is the concept of force majeure or frustration known (ii) both claims have to be due; and in your jurisdiction? What remedy does this give (iii) one party must declare to the other its intention for set-off the injured party? Is it usual/possible to argue (i.e. to send a written notice on set-off). successfully that a contract which has become Upon the notice set-off being dispatched, the settlement will be uneconomic is grounds for a claim for force majeure? considered effectuated upon fulfilment of the conditions set forth under points (i) and (ii) above. Serbian law does not know the concept of force majeure as such, but instead applies it through specific legal concepts such as “inability Upon the set-off, the contractor/employer may initiate the to perform” or “change in circumstances”, which are regulated by proceedings against the party that performed set-off, claiming that the Serbian Contracts and Torts Act and mainly constitute grounds the claim and/or value thereof was unjustified. for termination of, or amendments to, an agreement. In order to support its claims, the claimant shall have the burden Specifically, as a general rule, where the fulfilment of obligations by of proving the facts relied on, i.e. the insubstantiality of the set- one of the parties to a bilateral agreement has become impossible due off of claims with regard to the contract. On the other hand, the to events not attributable to either of the parties, the counterparty’s compensatory objection stands for the respondent in the proceedings. obligations are then also cancelled out; if such a counterparty has fulfilled a part of its obligations until that time, it may claim 3.15 Do parties to construction contracts owe a duty of reimbursement according to the rules governing the reimbursement care to each other either in contract or under any of benefits acquired groundlessly. Accordingly, in the case of other legal doctrine? partial inability to perform due to events not attributable to either of the parties, the counterparty may terminate the agreement if the Duty of care may be subsumed under the basic principle of the partial performance does not correspond to its needs; otherwise the Serbian Contracts and Torts Act, and thus applied. However, the agreement remains in force and the counterparty may request a pro extent of this principle differs from its common-law concept. rata reduction of its obligations. As a rule, in the case referred to above, the agreement is terminated 3.16 Where the terms of a construction contract are out of court. ambiguous, are there rules which will settle how that Force majeure itself is in theory usually defined as an outside ambiguity is interpreted? interference whose effect could not have been foreseen, avoided or eliminated. The basic principle of interpretation that shall be applied in accordance with Serbian law is the of both parties. However, in the region it is mainly recognised for types of non- 3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right negotiable agreements (called “ugovori po pristupu”), which are which is made for their benefit? E.g. is the second or interpreted in favour of the person acceeding to such agreement; in subsequent owner of a building able to claim against principle, known as “in dubio contra stipulatorem”. the original contracts in relation to defects in the building? 3.17 Are there any terms in a construction contract which are unenforceable? According to case law, the contractor and the employer are deemed jointly and severally liable towards the buyer for damage caused The FIDIC Conditions of Contract contain certain provisions in relation to the construction. In accordance with the PCA, the that may be challenged from the perspective of local law in the employer, the contractor and the designer are all liable towards the proceeding (e.g. limitation of liability); however, the risk of such a buyer. challenge is low.

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Disputes are resolved in Serbia by a sole arbitrator or by an 3.18 Where the construction contract involves an element arbitration tribunal. The decisions rendered in the arbitration are of design and/or the contract is one for design only, binding. are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does Arbitration can be conducted as ad hoc or institutional. The the designer have to give an absolute guarantee in Foreign Trade Court of Arbitration is located in Belgrade and has respect of his work? administrated thousands of cases so far. Besides those mentioned above, mediation is another alternative If not agreed otherwise, it is an employer’s obligation to provide dispute mechanism which is available in Serbia. A mediator is a construction plans/designs and a contractor’s obligation to carry out neutral person who helps the parties to come to an agreement in works according to the plans/designs. Therefore, an error in the design relation to the dispute at hand. A mediator’s position can be formal Serbia is an employer’s liability. If the employer trusted the preparation of or informal and he/she does not render a decision that is binding; designs to a third person (a designer/architect), then the designer/ rather, he/she helps the parties to find the solution by themselves. architect shall be individually and fully liable towards the employer for damage that occurred due to errors in the design (the error of the design has to be notified to the employer). If the error in design results 4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how in a defect in the building that affects its solidity, the designer shall be arbitration works in your jurisdiction. liable for any defect that shows within ten (10) years.

In the case that both the contractor and the designer are liable, their Yes, given that court practice in the area of construction law is liability will be measured proportionally to their respective faults. not developed in Serbia, most construction contracts contain an The parties to a contract cannot exclude or limit decennial liability. arbitration clause and thus disputes are referred to arbitration. In light of the above, decennial liability shall be applied to the architect As stated above, arbitration is conducted as ad hoc or institutional, and/or engineering consultant in respect of its design (design error), depending on the dispute’s value and parties’ agreement. notwithstanding that the works are executed by a different person, Commercial entities in Serbia will likely agree on some of the very and not on a design and build basis. Also, and on the same principles, common arbitration rules, such as those set by the United Nations the contractor is held liable for the structural defects of construction Commission on International Trade Law (“UNCITRAL”), the works, even if such defects were a result of a design error. International Chamber of Commerce (“ICC”) and the London Court However, contractually, on a case-by-case basis, mutual liabilities of International Arbitration (“LCIA”). and indemnifications in relations between contractors/employers/ designers may be tailor-made and adjusted to the specific 4.4 Where the contract provides for international circumstances of the case, especially in view of the person liable arbitration, do your jurisdiction’s courts recognise to cover the correction of design errors and/or the rectification of and enforce international arbitration awards? Please defects in works that resulted due to such errors. advise of any obstacles to enforcement. The contractor can, however, be liable for design errors if he noticed an error in design and failed to notify the employer (omission of Serbia signed the New York Convention on the recognition and notification duty). A contractor is obliged to review the design with enforcement of foreign arbitral awards and has accepted its due diligence. principles and norms. That means that in Serbia all foreign arbitral awards will have the same treatment, regardless of whether or not they come from a state that is a New York Convention signatory. 4 Dispute Resolution The reasons for refusal of recognition and enforcement of the foreign arbitral award are listed in the Convention and are as follows: 4.1 How are disputes generally resolved? ■ Considered only at the request of the party against whom it is invoked: In Serbia, disputes are generally resolved by the courts. In recent 1. the arbitration tribunal did not have the jurisdiction; years, however, other dispute resolution mechanisms have become 2. the right of defence was not respected; increasingly popular. One such method, arbitration, finds general 3. the arbitrators decided beyond their authorisation; applicability in commercial disputes. On the other hand, there is 4. the arbitral procedure was not in accordance with the also an intention to resolve disputes through the involvement of a parties’ agreement; or neutral third person acting as a mediator. 5. the arbitration award was not final. ■ Considered ex officio by the competent court: 4.2 Do you have adjudication processes in your 1. the subject matter was not capable of being settled before jurisdiction? If so, please describe the general the arbitration; or procedures. 2. the decision was contrary to public policy.

Litigation still has primacy when considering all the types of disputes. Litigation is governed by the Serbian Litigation Act and 4.5 Where the contract provides for court proceedings can be led by a single judge or a chamber (depending on the type of in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? dispute and its value). As one of the most common adjudication processes, arbitration is Serbian law dealing with the issue of the enforcement of foreign the most important alternative to litigation as a state adjudication. court awards prescribes several reasons for a refusal of their enforcement; among others, the lack of reciprocity.

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court. As regards the appeal procedure, it is normal for the court to 4.6 Where a contract provides for court proceedings in render a decision within six months to one year. your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of In Serbia, the judge would normally schedule the preliminary how long proceedings are likely to take to reduce: (a) hearing, in which all of the evidence that will be presented during a decision by the court of first jurisdiction; and (b) a the proceeding should be proposed. After all of the evidence decision by the final court of appeal. is presented in the proceeding, the judge will conclude the main hearing and render a decision on the matter. There is no common practice with respect to the duration of a The losing party has the right to appeal a decision within 15 days as judicial procedure. This depends on the complexity of the dispute of the receipt of the decision (i.e. eight days in the case of a dispute Serbia at hand and other circumstances that can affect the dynamics of with a minor value). In particular cases explicitly stipulated by the the procedure. However, it is our experience that less complicated law, a party is entitled to submit an extraordinary to the disputes are likely to be resolved within one year by the first instance second instance decision.

Slaven Moravčević Ivana Panić Moravčević Vojnović i Partneri Moravčević Vojnović i Partneri in cooperation with Schoenherr in cooperation with Schoenherr Dobračina 15 Dobračina 15 SRB-11000 Belgrade SRB-11000 Belgrade Serbia Serbia

Tel: +381 11 3202 600 Tel: +381 11 3202 600 Fax: +381 11 3202 610 Fax: +381 11 3202 610 Email: [email protected] Email: [email protected] URL: www.schoenherr.rs URL: www.schoenherr.rs

Slaven Moravčević is a partner with Moravčević Vojnović i Partneri Ivana Panić specialises in construction law with emphasis on FIDIC in cooperation with Schoenherr specialising in M&A, real estate, Conditions of Contract, along with real estate and construction telecommunications and energy, and heads the firm’s operations in arbitration. Given that construction law/FIDIC is her main area of Montenegro. In addition, Slaven is head of Schoenherr’s Real Estate expertise, Ivana has been engaged in all the firm’s FIDIC related projects practice group. He has 15 years’ experience in real estate development on various project sides (investors, contractors and subcontractors) in projects. He is active across different sectors and regulated industries, different industries, such as power plant construction and hotel/resort including the energy, financial services, infrastructure, insurance, development. Ivana acts as the local FIDIC trainer with the Serbian telecommunications, media and pharmaceutical industries. Slaven Association of Consulting Engineers (FIDIC). Ivana has been with the also acts as general counsel to the Government of Montenegro on all firm since 2009. large-scale property investment projects.

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.

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Singapore

Allen & Gledhill LLP Ho Chien Mien

A construction contract in Singapore does not need to expressly 1 Making Construction Projects provide for adjudication. The Building and Construction Industry Security of Payment Act (Cap. 30B) (“SOPA”), which provides 1.1 What are the standard types of construction contract the statutory adjudication scheme in Singapore, applies to any in your jurisdiction? Do you have contracts which construction or construction-related contracts made in writing on or place both design and construction obligations upon after 1 April 2005. contractors? If so, please describe the types of contract. Please also describe any forms of design- only contract common in your jurisdiction. Do 1.3 In your jurisdiction please identify whether there is you have any arrangement known as management a concept of what is known as a “letter of intent”, in contracting, with one main managing contractor which an employer can give either a legally binding or and with the construction work done by a series non-legally binding indication of willingness either to of package contractors? (NB For ease of reference enter into a contract later or to commit itself to meet throughout the chapter, we refer to “construction certain costs to be incurred by the contractor whether contracts” as an abbreviation for construction and or not a full contract is ever concluded. engineering contracts.) In Singapore, it is common for employers to instruct their Commonly used standard form construction contracts in Singapore representative or the architect to issue a letter of intent to indicate include the Singapore Institute of Architects Articles and Conditions their selection of a contractor. While a letter of intent is normally of Building Contract (the “SIA Conditions”), the Public Sector stipulated to be non-binding, it gives the contractor a basis upon Standard Conditions of Contract for Design and Build Conditions which to commence the mobilisation of resources and negotiations of Contract (“PSSCOC”), and the Real Estate Developers’ with subcontractors and suppliers for the project. It also provides Association of Singapore Design and Build Conditions of Contract contractors with a degree of certainty, particularly where contractors (the “REDAS Conditions”). have to place orders for items that require long lead times, such The SIA Conditions is the most widely used standard form for as items to be pre-fabricated in factories before being delivered “construct only” contracts. Under the REDAS Conditions, the for assembly on site. Whether a letter of intent is binding would contractor bears both the design and construction responsibilities. typically depend on its substance, rather than form. On the other hand, the PSSCOC is used for all public projects in Singapore, with different versions catering to both “construct only” 1.4 Are there any statutory or standard types of insurance and “design and build” contracts. which it would be commonplace or compulsory to Management contracting is less common in the Singapore have in place when carrying out construction work? For example, is there employer’s liability insurance construction industry, although this method of procurement is for contractors in respect of death and personal usually used by more sophisticated employers. injury, or is there a requirement for the contractor to have contractors’ all-risk insurance? 1.2 Are there either any legally essential qualities needed to create a legally binding contract (e.g. in common In Singapore, parties typically include in construction contracts law jurisdictions, offer, acceptance, consideration public liability policies, professional indemnity insurance clauses, and intention to create legal relations), or any or Contractors All Risks Insurance (“CAR”) clauses (which specific requirements which need to be included in a encompass all risks associated with material physical loss or construction contract (e.g. provision for adjudication damage in a construction project). Contractors and subcontractors or any need for the contract to be evidenced in writing)? are also required, under the Work Injury Compensation Act (Cap. 354) (“WICA”), to maintain work injury compensation insurance Construction contracts in Singapore are formed when there is a valid for all employees doing manual work and all non-manual employees offer and acceptance and valuable consideration is provided. Within earning S$1,600 a month or less. the construction industry, offers are commonly provided by way of tender or bid. Until such an offer is duly accepted, the general position is that no contractual obligation arises.

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However, parties are free to contractually agree to exclude 1.5 Are there any statutory requirements in relation unconscionability as a basis for stopping a call on the bond, so long to construction contracts in terms of: (a) general as clear language is used to that effect (CKR Contract Services Pte requirements; (b) labour (i.e. the legal status of those Ltd v Asplenium Land Pte Ltd & Anor [2015] 3 SLR 1041). working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety? 1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and Some examples of such statutory requirements are as follows: supplies used in the works? Is it permissible for 1. Generally, under the Building Control Act (Cap. 29) and the contractors to claim that until they have been paid they retain title and the right to remove goods and Building Control (Licensing of Builders) Regulations 2008, materials supplied from the site? Singapore builders must obtain a builder’s licence if the works, broadly speaking, relate to the structural integrity of a building. Such works, and/or works located in areas that may have a The standard form contracts typically vest ownership of goods significant impact on public safety, would typically require and supplies used in the works in the employer, whether or not the approval of the Commissioner of Building Control. the employer has made payment for those plants or materials. In 2. Labour: The Singapore Ministry of Manpower requires such cases, as contractors do not have ownership of such goods and foreign unskilled and semi-skilled workers in the construction supplies, they cannot claim title over such materials in the event industry to hold a Work Permit. To qualify for a Work of non-payment. However, it should be noted that Section 25 of Permit, all foreign workers must obtain a Skill Evaluation the SOPA allows contractors to place liens over unfixed and unpaid Certificate, so as to ensure that they are adequately skilled goods supplied by the contractor if the respondent fails to pay the for various construction trades. Due to quota restrictions on adjudicated amount in full. the employment of foreign employees, the ratio of foreign employees to local full-time employees in the employer’s total workforce must be limited to 7:1. Employers must also 2 Supervising Construction Contracts pay a foreign worker levy. 3. Tax: When payments are made to a non-resident company or individual, he/she is required to withhold a percentage of that 2.1 Is it common for construction contracts to be payment and pay the amount withheld (withholding tax) to supervised on behalf of the employer by a third party? the Inland Revenue Authority of Singapore under the Income Does any such third party (e.g. an engineer or architect) Tax Act (Cap. 134). have a duty to act impartially between contractor and employer? Is that duty absolute or is it only one which 4. Health and Safety: Contractors are required under the WICA exists in certain situations? If so, please identify when to maintain work injury compensation insurance for (i) all the architect/engineer must act impartially. employees doing manual work, and (ii) all employees doing non-manual work and earning less than S$1,600 monthly. The standard form contracts listed in question 1.1 above contemplate the supervision of works on behalf of the employer by a third party. 1.6 Is the employer legally permitted to retain part of The REDAS form refers to such third parties as the “Employer’s the purchase price for the works as a retention to be Representative”, whereas the PSSCOC refers to such third parties released either in whole or in part when: (a) the works as the “Superintending Officer”. The SIA Conditions stipulates that are substantially complete; and/or (b) any agreed such third parties have to be an Architect. defects liability is complete? These third parties are usually obliged to provide their services in an impartial manner when the contract provides for them to undertake a Yes. Generally, the standard conditions of contract permit employers certifier’s or adjudicator’s role. In all other respects, they act as the to withhold retention monies (typically 5–10% of the contract price), employer’s agents, such as when issuing instructions or directions half of which is released upon substantial completion of the works, on behalf of the employer, in the best interests of the employer. and the other half is released upon expiry of the defects liability period. 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, 1.7 Is it permissible/common for there to be performance have themselves been paid; i.e. can the employer bonds (provided by banks and others) to guarantee include in the contract what is known as a “pay when performance, and/or company guarantees provided to paid” clause? guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees? No. “Pay when paid” provisions are prohibited by Section 9(1) of the SOPA. Contractors are commonly obliged to provide employers with performance bond(s). 2.3 Are the parties permitted to agree in advance a fixed sum (known as liquidated damages) which will be In Singapore, there are generally two types – “on-demand” and paid by the contractor to the employer in the event of “conditional” bonds. The employer can only call on a conditional particular breaches, e.g. liquidated damages for late bond upon proof of default, as prescribed in the contract or bond. completion? If such arrangements are permitted, are However, for an on-demand bond, the institution providing the bond there any restrictions on what can be agreed? E.g. has to pay the sum assured on demand by the employer, without any does the sum to be paid have to be a genuine pre- proof of default. estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of The party that procured the bond may attempt to stop the financial loss suffered? beneficiary’s call on the bond by applying for an injunction. To succeed, the applicant must prove either fraud or unconscionability. Yes. A liquidated damages clause will only be enforced if the

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liquidated damages provided for must be a genuine pre-estimate of Con LR 32 (“Malmaison”), if there are two concurrent causes of the losses likely to flow from the breach. delay, one of which is a relevant event allowing for time extension and the other is not, the contractor is entitled to an extension of time for the period of delay caused by the relevant event, notwithstanding 3 Common Issues on Construction the concurrent effect of the other. In contrast, the position in the Contracts Scottish case of City Inn Ltd v Shepherd Construction Ltd [2007] CSOH 190 (“City Inn”) is that, if there are concurrent causes of delay, the delay should be apportioned as between the relevant 3.1 Is the employer entitled to vary the works to be done event and the contractor’s risk events. However, City Inn has been under the contract? Is there any limit on that right? rejected in the context of a JCT Standard Form of Building Contract,

in the recent case of Walter Lilly & Co Ltd v Mackay and Another Singapore Generally, the employer is entitled to direct variations if there is [2012] EWHC 1773 (TCC), which instead upheld the application a variation clause in the construction contract. However, the of Malmaison in England. As such, it is likely that the Malmaison employer usually will not order variations once the certificate of approach will be highly persuasive in the Singapore courts. Of note practical completion has been issued. The contractor is also not is the local case of PPG Industries (Singapore) Pte Ltd v Compact required to undertake works beyond the scope of the variation clause Metal Industries Ltd [2013] SGCA 23, where the Court of Appeal itself, which typically defines a variation as any addition, reduction found concurrent delay and granted an extension of time to the or substitution to the works. Such variations cannot substantially contractor, but without any discussion of any of the above cases. change the nature of the contract. There is no Singapore authority on the contractor’s entitlement to recover prolongation costs occasioned by concurrent delay. A 3.2 Can work be omitted from the contract? If it is leading author on construction law in Singapore, Chow Kok Fong, omitted, can the employer do it himself or get a third states that “[i]t is arguable that given that the contractor would have party to do it? been in some default, it seems inequitable that he should be entitled to recover for these damages or expenses”, but “if the contractor Yes. Standard form contracts such as the SIA Conditions and is unable to establish that the employer events are the dominant PSSCOC contain clauses that allow an employer to omit works cause of the loss, it may be possible to apportion loss between the from the contract. However, an employer generally cannot omit causes…” (Chow Kok Fong, Law and Practice of Construction works such that the contractor is deprived of the substantial benefit Contracts (Sweet & Maxwell Asia, 4th Ed, 2012) p 608). However, of such works. If the omission has changed the character of the in practice, contractors are usually not allowed to claim for costs contract substantially, the contractor may allege that the omitted arising out of any extension of time as a result of concurrent delay. work amounts to a change in the scope of the contract. In practice, however, the employer and contractor may reach a mutual agreement as to the omission of the works. 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own Subject to the above, the employer may then carry out the omitted delays but the employer uses up that period by, for works himself or engage a third party to complete the said works. example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed after this float is used up? 3.3 Are there terms which will/can be implied into a construction contract? While the Singapore Court of Appeal has generally defined ‘float’ Examples of terms that are typically implied under statute include: time as “time [that] caters for contingencies occasioning delay and is also for purpose of coordination and interfacing of different 1. a contractor’s right to refer payment-related disputes to trades” (Jurong Engineering Ltd v Paccan Building Technology adjudication (Section 12 of SOPA); or Pte Ltd [1999] 2 SLR(R) 849, [41]), there is no clear Singapore 2. a contractor’s right to suspend performance for non-payment authority on the point of whether a contractor whose float has been (Section 26 of SOPA). used up by the employer is subsequently entitled to an extension of Terms may also be implied under common law, such as: time if he is then delayed. 1. an employer’s obligation to do all that is necessary on his part However, local case law suggests that ‘float’ time should not be used to bring about completion (Evergreat Construction Co Pte Ltd up by acts of delay by the employer. For example, it was suggested v Presscrete Engineering Pte Ltd [2006] 1 SLR(R) 634); or as obiter in Lian Soon Construction Pte Ltd v Guan Qian Realty Pte 2. an employer will not prevent a contractor from performing Ltd [1999] 3 SLR(R) 518 at [31] that: “[i]t is arguable that the float his obligations under the construction contract (Evergreat time is in principle not available for accommodating variations and Construction Co Pte Ltd v Presscrete Engineering Pte Ltd [2006] 1 SLR(R) 634; TT International Ltd v Ho Lee delays emanating from the employer or other delay events in respect Construction Pte Ltd [2017] SGHC 62). of which the contractor is entitled to extension under the contract.”

3.4 If the contractor is delayed by two events, one the 3.6 Is there a limit in time beyond which the parties to fault of the contractor and one the fault or risk of a construction contract may no longer bring claims his employer, is the contractor entitled to: (a) an against each other? How long is that period and from extension of time; or (b) the costs occasioned by that what date does time start to run? concurrent delay? Under the Limitation Act (Cap. 163), the usual limitation period for The position in Singapore with regard to extensions of time for an action in tort or contract would be six years from the date on concurrent delays remains unsettled. On this issue, Commonwealth which the cause of action accrued. In respect of latent damage, the cases are instructive and have persuasive value. In Henry Boot limitation period is either six years from the date on which the cause Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999) of action accrued, or three years from the earliest date on which the

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claimant first had both (i) the knowledge required for bringing an Separately, sections 23 and 26 of the SOPA entitle a contractor to action for damages in respect of the relevant damage, and (ii) a right stop work in the event of the employer’s failure to pay an adjudicated to bring such an action. amount following the rendering of an adjudication determination in This is, however, subject to a 15-year long-stop limitation. the contractor’s favour. Otherwise, there is no common law right to suspend work (Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 3.7 Who normally bears the risk of unforeseen ground conditions? 288).

In Resource Piling Pte Ltd v Geospecs Pte Ltd [2014] 1 SLR 485, 3.11 On what grounds can a contract be terminated? Are Quentin Loh J stated at [66] that: there any grounds which automatically or usually Singapore entitle the innocent party to terminate the contract? “[I]n the context of the Singapore building and construction Do those termination rights need to be set out industry, the risk of adverse subsoil conditions is variably borne expressly? by the contractor. None of the standard building contract forms commonly in use in Singapore provide otherwise. This is the well- In addition to any express grounds for termination in a contract, the known and accepted commercial environment of long standing…” usual grounds on which an innocent party is entitled to terminate For instance, Clause 5.1 of the PSSCOC states that the risk of a contract include (i) such party’s common law rights to terminate unforeseen ground conditions lies with the contractor. However, for the other party’s repudiation of performance (or abandonment), Clause 5.2 of the PSSCOC allows the contractor to recover (ii) where there is a breach of a condition, or (iii) where the breach additional costs incurred as a result of adverse physical conditions in question deprives the innocent party of substantially the whole which could not have been reasonably foreseen by an experienced benefit of the contract, save where the term expressly, clearly contractor. and unambiguously states that any breach of it, regardless of the seriousness of the consequences to follow, would never entitle the 3.8 Who usually bears the risk of a change in law innocent part to terminate the contract (RDC Concrete Pte Ltd v affecting the completion of the works? Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413; Sports Connection Pte Ltd v Deuter Sports GmbH [2009] 3 SLR(R) 883). A change in law is a risk that is typically allocated between the parties using force majeure clauses. 3.12 Is the concept of force majeure or frustration known There is no clear Singapore authority addressing the issue of which in your jurisdiction? What remedy does this give party should bear the risks arising out of a change in law if this is the injured party? Is it usual/possible to argue successfully that a contract which has become not expressly contemplated by the contract. On one hand, there is uneconomic is grounds for a claim for force majeure? suggestion that if there is no express provision providing that the happening of such a neutral event would allow the contractor a time The concepts of force majeure and frustration are known in extension or a claim in damages, the contractor is taken to have Singapore. accepted the legal risk of the occurrence of such an event. On the other hand, the Singapore courts may adopt the position expounded Parties may contractually provide for non-performance upon the by the Supreme Court of Christchurch in New Zealand Structures & occurrence of specified force ‘ majeure’ events so that such non- Investments Ltd v McKenzie [1979] 1 NZLR 515, which held that, in performance does not amount to a breach. Whether force majeure the absence of an express clause as to who should bear responsibility arises and what rights and obligations follow such an event is subject for additional costs occasioned by changes in statutory regulation, to a precise construction of the contractual clause itself. it is the responsibility of the employer to vary the work and the In the absence of a force majeure clause, the common law doctrine Contractor is entitled to additional payment for the varied work. of frustration may excuse the non-performance of a contractor by treating the contract as having existed until the point when the frustrating event occurred, while any accrued rights and obligations 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? remain enforceable after the frustrating event. However, the doctrine of frustration operates only in exceptional circumstances, where the supervening event is one that radically or fundamentally Generally, the creator of a piece of work owns the copyright of alters the contract such that it is no longer the same as what was that work. However, where the work was created by the person originally entered into. in the course of his employment, the employer would generally be the owner of the copyright in that work. Therefore, technical or commercial information created by the architects or engineers of the 3.13 Are parties which are not parties to the contract employer would usually belong to the employer. 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 3.10 Is the contractor ever entitled to suspend works? the original contracts in relation to defects in the building? Yes. A contractor may suspend work if the contract confers on the contractor a right to do so. Typically, contracts may permit Section 2 of the Contracts (Rights of Third Parties) Act (Cap. 53B) suspension on account of: allows a third party to benefit under the contract if (i) the contract 1. a serious breach (typically in relation to certification and expressly states the same, or (ii) the contract purports to confer payment terms of the contract) by the employer; and a benefit on him and the parties intended that the term would be 2. the architect’s failure to issue a certificate, save for an interim enforceable by the third party. certificate (e.g. clause 33(4) of the SIA Conditions).

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1. clauses which exclude liability for personal injury or death 3.14 Can one party (P1) to a construction contract which (section 2 of the Unfair Contract Terms Act (Cap. 396)); owes money to the other (P2) set off against the sums 2. ‘pay when paid’ provisions (section 9 of the SOPA); due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off? 3. liquidated damages clauses that amount to a penalty; and 4. provisions which might prevent the operation of the terms of Under Singapore law, in addition to any rights conferred by the the SOPA (section 36(2) of the SOPA). contract, P1 may rely on legal and equitable set-off to set-off against the sums due to P2 the sums P2 owes to P1. However, both 3.18 Where the construction contract involves an element legal and equitable rights of set-off can be excluded by clear and of design and/or the contract is one for design only, unequivocal words in a contract (Jia Min Building Construction Pte are the designer’s obligations absolute or are there Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 288). Contracts providing limits on the extent of his liability? In particular, does Singapore for temporary finality on architect’s certificates may also exclude the designer have to give an absolute guarantee in set-offs which have not been certified by the architect Chin( Ivan v respect of his work? H P Construction & Engineering Pte Ltd [2015] 3 SLR 124). Usually, an architect’s liability is not absolute in the sense that At common law, the amount should be ascertainable and due, the architect is liable wholly for all losses that result from the acts while in equity, the right of set-off includes unliquidated damages. of that architect. It must be shown that the architect has fallen However, unlike legal set-off, equitable set-off needs to be short of the standard of the ordinary skilled person exercising and inseparably connected to the claim against which it is raised. professing to have a special skill or competence (Bolam v Friern Hospital Management Committee [1957] 1 W.L.R. 582 at 586). In 3.15 Do parties to construction contracts owe a duty of certain circumstances, an architect may also rely on the independent care to each other either in contract or under any contractor defence (MCST 3322 v Mer Vue Developments Pte Ltd other legal doctrine? [2016] 2 SLR 793). In special circumstances, an architect can enter into a duty beyond Parties to construction contracts can owe a duty of care to each other that of using skill and care in carrying out design. This may occur in contract, with such scope and content as contractually prescribed. expressly (for instance, by contract) or it may be implied that the At the same time, a concurrent duty of care in tort may also arise if designer has warranted the achievement of a certain result. the test laid down in Spandeck Engineering (S) Pte Ltd v Defence Employers may, in practice, try to extract an absolute guarantee Science & Technology Agency [2007] 4 SLR(R) 100 is satisfied: from designers in respect of their work. However, designers seldom 1. it must be factually foreseeable that a failure by one party to agree to this due to difficulties in obtaining professional indemnity take reasonable care could result in the other party suffering insurances in this regard. damages; 2. there must be sufficient legal proximity between the parties, taking into account the physical, circumstantial, and causal 4 Dispute Resolution proximity of the parties and their acts; and 3. there must be no policy considerations which would militate against the establishment of a tortious duty of care. 4.1 How are disputes generally resolved? This tortious duty of care cannot be inconsistent with the terms of Apart from litigation, the SOPA provides for an adjudication the contract. process to achieve a fast and low-cost settlement of payment disputes. Disputes are also commonly resolved through arbitration. 3.16 Where the terms of a construction contract are The SIA Conditions and PSSCOC both provide for this avenue ambiguous, are there rules which will settle how that of dispute resolution. Parties may also proceed to mediation ambiguity is interpreted? before the commencement of arbitration or litigation proceedings. Alternatively, arbitration or litigation proceedings may be stayed in The current approach taken by Singapore Courts for the construction order for parties to pursue mediation. of contract terms is a “contextual” one (Zurich Insurance (Singapore) Pte Ltd v B-Gold & Construction Pte Ltd [2008] 3 SLR(R) 1029 (“Zurich”)). Under this approach, the 4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general court takes into account the “essence and attributes of the document procedures. being examined” (Zurich at [132(a)]).

Extrinsic evidence may be admitted to aid in the interpretation of the Yes. An adjudication typically occurs in the following manner: written words of a contract, provided that the extrinsic evidence in 1. The contractor may activate the adjudication process by question is “relevant, reasonably available to all the contract parties serving a payment claim on the employer. and relates to a clear or obvious context” (Zurich at [132(d)]). 2. The employer is required to provide a payment response If there is still any ambiguity in the interpretation of a clause, stating, amongst other things, the response amount and, if the the contra proferentem rule would apply and the clause is to be response amount is less than the claimed amount, the reason construed against the party seeking to rely on it. for the difference and the reason for any amount withheld. 3. If the contractor to a construction contract disputes the 3.17 Are there any terms in a construction contract which payment response issued by the employer, or if the employer are unenforceable? failed to provide a payment response within the period stipulated by the SOPA, the contractor is entitled to make an adjudication application after a stipulated period. The following are examples of unenforceable terms/clauses in a contract:

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The adjudication process is designed to determine the quantum of payment quickly and economically without the full length of 4.5 Where the contract provides for court proceedings arbitration or litigation. Typically, the adjudication process can be in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? completed within a few weeks.

Generally, yes. Foreign judgments may be enforced in Singapore 4.3 Do your construction contracts commonly have under the: arbitration clauses? If so, please explain how arbitration works in your jurisdiction. 1. Reciprocal Enforcement of Commonwealth Judgments Act (Cap. 264) (“RECJA”): Facilitates the enforcement of judgments or orders of superior courts of the Commonwealth Yes. The SIA Conditions, PSSCOC and REDAS Conditions contain countries. Singapore arbitration clauses. 2. Reciprocal Enforcement of Foreign Judgments Act (Cap. A dual arbitration regime exists in Singapore. Domestic 265) (“REFJA”): Facilitates the enforcement of judgments arbitrations are governed by the Arbitration Act (Cap. 10) (“AA”) by superior courts of non-Commonwealth countries which and international arbitrations are governed by the International have been gazetted under the REFJA. Arbitration Act (Cap. 143A) (“IAA”). Many provisions in the 3. Common law: Facilitates the enforcement of foreign two statutes are similar. Nonetheless, the main distinctions are as judgments which fall outside the ambit of RECJA and follows: REFJA. 1. Stay of court proceeding in favour of arbitration. Under Under the RECJA and REFJA, only foreign judgments or orders the domestic arbitration regime, the court has discretionary made by a foreign court in civil proceedings whereby any sum of power as to whether to grant a stay where one of the parties money is made payable are enforceable. commenced court proceedings in contravention of an Under the common law, an in personam final and conclusive foreign arbitration agreement. However, under the international arbitration regime, it is mandatory for a court to grant a stay judgment rendered by a court of competent jurisdiction, which is if the court is satisfied that there is an arbitration agreement, also a judgment for a definite sum of money, is enforceable in unless such an agreement is null and void, inoperative or Singapore provided, inter alia: incapable of being performed. 1. it was not procured by fraud; 2. Appeal against an award. Under the domestic arbitration 2. its enforcement would not be contrary to public policy; regime, a party who is dissatisfied with an arbitral award may 3. its enforcement would not be an enforcement of foreign appeal to the court. This right to appeal is limited to questions penal, revenue or other public laws; or of law arising out of an award made in the proceeding. Under the international arbitration regime, there is no right of appeal 4. the proceedings in which it was obtained were not contrary to at all. natural justice.

4.4 Where the contract provides for international 4.6 Where a contract provides for court proceedings in arbitration, do your jurisdiction’s courts recognise your jurisdiction, please outline the process adopted, and enforce international arbitration awards? Please any rights of appeal and a general assessment of advise of any obstacles to enforcement. 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. Yes. Singapore is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. An action is commenced with the claimant’s personal service of Thus, an international arbitration award may be enforced, with leave a copy of a writ or any other originating process (supported by a of court, in the same manner as a judgment or an order of the court statement of claim or affidavit, respectively) on the defendant within (i) by an action under common law, (ii) under section 29 of the IAA, six months of its issue by the court, or within 12 months if the claim or (iii) under section 46(3) of the AA. is to be served out of jurisdiction. Once pleadings are exchanged, The Rules of Court set out the procedures for enforcing a foreign discovery, the exchange of affidavits of evidence-in-chief and expert arbitral award. Generally, an application can be made by filing an reports (if necessary), and setting down for trial occur. A party may originating summons, which is supported by an affidavit. Once file an appeal within one month of the rendering of the judgment. leave is given by the court to enter judgment on an application to Typically, as construction disputes involve large volumes of evidence enforce the award, the other party has 14 days to challenge the leave and require the provision of expert evidence, the time required to granted. resolve such disputes may vary between 12 and 24 months. Enforcement of international arbitration awards from arbitrations seated in Singapore may be refused on either the grounds set out in Article 34 of the UNCITRAL Model Law on International Commercial Arbitration, or section 24 of the IAA (PT First Media TBK v Astro Nusantara International BV [2014] 1 SLR 372). Enforcement of all other foreign awards may only be refused on the grounds set out under section 31 of the IAA.

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Ho Chien Mien Allen & Gledhill LLP One Marina Boulevard, #28-00 Singapore 018989 Singapore

Tel: +65 6890 7502 Email: [email protected] URL: www.allenandgledhill.com

Ho Chien Mien is a Partner at Allen & Gledhill LLP. His areas of Singapore practice encompass a wide range of contentious and non-contentious work in the areas of construction, engineering and infrastructure projects. He is constantly recommended as a leading practitioner in several leading publications. 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. He sits on the main panel of arbitrators of the Singapore International Arbitration Centre and the Kuala Lumpur Regional Centre for Arbitration. He is an Accredited Adjudicator with the Singapore Mediation Centre and a Fellow of the Singapore Institute of Arbitrators.

Allen & Gledhill LLP is an award-winning full-service commercial law firm which provides legal services to a wide range of premier clients, including local and multinational corporations and financial institutions. Currently one of the largest law firms in Singapore with over 300 lawyers, we are consistently ranked as a market leader in Singapore for every major practice area, having been involved in numerous challenging, complex and significant deals. Our Partners are specialists in their areas of practice and many are widely recognised as leading legal experts by clients and peers. Our network comprises Rahmat Lim & Partners, our Malaysian associate firm in Kuala Lumpur and our local office in Yangon, Myanmar. The firms are staffed by local lawyers familiar with the distinctive business environment, laws, regulations and practices in the respective jurisdictions. With a growing network of more than 400 lawyers in South-east Asia, and our close collaboration with leading law firms regionally and internationally, we are able to ensure that our clients with multi-jurisdictional interests receive an integrated and seamless legal service. Our experience allows us to take on an effective lead counsel or project manager role in cross-border transactions.

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South Africa Emmanuel Tivana

Norton Rose Fulbright South Africa Inc. Daniel McConnell

have the legal capacity and intention to create binding obligations. 1 Making Construction Projects Consensus is usually achieved and demonstrated by the process of offer and acceptance. Contracts need not be in writing to be valid, 1.1 What are the standard types of construction contract except in relation to special transactions (usually provided for in in your jurisdiction? Do you have contracts which statutes), e.g. the sale of immovable property. Construction contracts place both design and construction obligations upon need not be in writing, though they typically are. Agreements to contractors? If so, please describe the types of arbitrate, which are a common feature of construction contracts, contract. Please also describe any forms of design- must be in writing, in terms of the Arbitration Act 42 of 1965. only contract common in your jurisdiction. Do Notwithstanding that a valid contract exists, courts will not enforce you have any arrangement known as management contracting, with one main managing contractor an obligation, the performance of which will be against the law and with the construction work done by a series or public policy. Construction contracts being concluded with of package contractors? (NB For ease of reference government bodies must comply with the requirements of the throughout the chapter, we refer to “construction relevant government procurement legislation. contracts” as an abbreviation for construction and engineering contracts.) 1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in The standard forms of construction contract in common use in South which an employer can give either a legally binding or Africa include: the Fédération Internationale des Ingénieurs-Conseils non-legally binding indication of willingness either to (FIDIC) suite of contracts; the New Engineering Contract (NEC3) enter into a contract later or to commit itself to meet suite of contracts; the Joint Building Contracts Committee (JBCC) certain costs to be incurred by the contractor whether form of contract; and the General Conditions of Contract (GCC) form or not a full contract is ever concluded. of contract. The Construction Industry Development Board, which regulates construction for public sector entities, makes it mandatory Letters of intent are a recognised legal concept in South Africa and for public sector clients to use one of these forms of contract. can create legally binding obligations. Provisions which constitute an Contracts which place both design and construction obligations on agreement to enter into a further agreement in the future (“agreements to agree”) are not legally binding. However, provisions relating to contractors include the FIDIC yellow, silver and gold books, and the fixed and certain obligations, e.g. the payment of costs, are enforceable. NEC3: Engineering and Construction Contract. Letters of intent are sometimes used in the construction industry as Design-only contracts are often concluded using one of the a stop-gap measure where the conclusion of a complete contract is standard form professional services contracts. These include the delayed but the parties wish to commence a portion of the work. FIDIC white book, the NEC Professional Services Agreement, Parties should take care when concluding letters of intent in these and the Professional Consultants Services Agreement (PROCSA) circumstances to ensure that all possible outcomes (including failure (endorsed by a number of the professional engineering services to conclude the anticipated contract) and the consequences thereof bodies in South Africa). are taken into account. Management contracting (also known as engineering, procurement and construction management (EPCM) contracting) is not uncommon in South Africa. 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? 1.2 Are there either any legally essential qualities needed For example, is there employer’s liability insurance to create a legally binding contract (e.g. in common for contractors in respect of death and personal law jurisdictions, offer, acceptance, consideration injury, or is there a requirement for the contractor to and intention to create legal relations), or any have contractors’ all-risk insurance? specific requirements which need to be included in a construction contract (e.g. provision for adjudication There are no construction-specific statutory insurances which are or any need for the contract to be evidenced in required. In their capacity as employers, contractors are required to writing)? register with the Compensation Fund for Occupational Injuries and Diseases (or a licenced mutual association) under the Compensation A valid contract requires consensus between two (or more) parties for Occupational Injuries and Diseases Act, 130 of 1993 and with regarding the obligations they intend to create and that the parties

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the Unemployment Insurance Fund under the Unemployment advanced payment guarantees and retention guarantees. These Insurance Act, 63 of 2001. instruments are usually issued by banks or insurance companies. The following types of insurance are a common requirement in The JBCC agreement contains a standard form of performance construction contracts: guarantee which is endorsed by the CIDB. These instruments ■ contractors’ all-risk insurance; typically create primary obligations. ■ public liability insurance; Parent-company guarantees, in terms of which a parent company guarantees the performance of a subsidiary, are also common. ■ professional indemnity insurance (if the construction work also involves the rendering of professional services – e.g. These instruments typically create secondary obligations. design or engineering services); and The term “guarantee” in South Africa describes what is referred to ■ special risks insurance (strike, riot, civil unrest and/or as a “bond” in England. There are no restrictions on the nature of terrorism), called SASRIA insurance in South Africa. such bonds and guarantees. The nature of such instruments (i.e. South Africa whether they constitute primary or secondary obligations on the part of the guarantor) is determined by reference to their wording. 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 1.8 Is it possible and/or usual for contractors to have working on site as employees or as self-employed retention of title rights in relation to goods and sub-contractors); (c) tax (payment of income tax of supplies used in the works? Is it permissible for employees); or (d) health and safety? contractors to claim that until they have been paid they retain title and the right to remove goods and (a) There are no general statutory requirements in relation materials supplied from the site? to construction contracts. However, contractors may not undertake work for a public sector entity unless the contractor The common law affords contractors security, in the form of a lien is registered with the Construction Industry Development (i.e. a right of retention), over works carried out until the works are Board (CIDB) in terms of the CIDB Act, 38 of 2000 and has the necessary grading to carry out the work. In terms paid for by the employer. In order for the lien to be enforceable, of Housing Consumers Protection Measures Act, 95 of 1998, payment must be due to the contractor and the contractor must be no person may construct residential buildings unless they are in lawful possession of the works. The lien can be superseded by registered as a home builder under the Act. the provision of alternative security (e.g. provision of a conditional (b) South Africa has a comprehensive set of labour laws with guarantee/bond), in which event the contractor must relinquish which contractors must comply, including the Occupational possession. Employers often require contractors to waive the right Health and Safety Act, 85 of 1993 (OHASA), the Labour to rely on the lien – this is particularly common in project finance Relations Act, 66 of 1995 and the Basic Conditions of transactions. Employment Act, 75 of 1997. Specialist labour advice should be sought by contractors entering the South African market. (c) Employers are required to deduct tax, mainly in the form of 2 Supervising Construction Contracts PAYE (Pay As You Earn), from the wages of employees for payment to the revenue service. Employers are also required to make deductions from employees for co-contributions 2.1 Is it common for construction contracts to be to the Compensation Fund for Occupational Diseases and supervised on behalf of the employer by a third party? Injuries and to the Unemployment Insurance Fund for Does any such third party (e.g. an engineer or architect) unemployment social benefits for employees. have a duty to act impartially between contractor and (d) South Africa’s statutory health and safety requirements are employer? Is that duty absolute or is it only one which contained in the OHASA. The Construction Regulations exists in certain situations? If so, please identify when (2014), published under the OHASA, contain construction- the architect/engineer must act impartially. specific health and safety obligations – they are the equivalent of the English “CDM Regulations”. Construction contracts often provide for a professional third party (engineer, architect or quantity surveyor) to act as an agent on behalf of the employer and supervise the works. In addition to acting as 1.6 Is the employer legally permitted to retain part of the employer’s agent, such third party often performs quasi-judicial the purchase price for the works as a retention to be released either in whole or in part when: (a) the works functions in terms of the construction contract (e.g. determining are substantially complete; and/or (b) any agreed claims by the contractor) in respect of which it must act impartially. defects liability is complete? In other circumstances (e.g. when certifying payments or progress), the third party acts as the employer’s agent but must, nevertheless, Yes, such provisions are common in construction contracts. act honestly and impartially in carrying out such functions. Construction contracts often provide for an on-demand retention In project finance transactions, project funders usually require an guarantee (or bond) to be provided by the contractor in place of a additional person, their agent (the lender’s technical adviser), to cash retention. monitor the works on their behalf. The role of the lender’s technical adviser is to ensure that the interests of the funders are protected. 1.7 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee 2.2 Are employers entitled to provide in the contract that performance, and/or company guarantees provided to they will pay the contractor when they, the employer, guarantee the performance of subsidiary companies? have themselves been paid; i.e. can the employer Are there any restrictions on the nature of such bonds include in the contract what is known as a “pay when and guarantees? paid” clause?

Contractors commonly provide on-demand performance guarantees, “Pay-when-paid” clauses are presently valid and enforceable,

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though they are strictly construed. Proposed regulations under the CIDB Act (which have not yet been passed into law) will, if enacted, 3.4 If the contractor is delayed by two events, one the prohibit pay-when-paid clauses in construction contracts. 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 2.3 Are the parties permitted to agree in advance a fixed concurrent delay? sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of Where cause of the delay is the fault of the employer (or at his risk particular breaches, e.g. liquidated damages for late in terms of the contract), the principle of prevention entitles the completion? If such arrangements are permitted, are contractor to an extension of time (EoT). There are two schools there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre- of thought regarding whether a contractor is entitled to monetary compensation in addition to the EoT. One school follows the current

South Africa estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of English law position, which is that the contractor is generally not financial loss suffered? entitled to monetary compensation in events of true concurrent delay. The other school, based on the fact that South African law The Conventional Penalties Act, 15 of 1962, regulates the does not recognise the apportionment of contractual damages, enforceability of liquidated damages clauses and contractual considers that a contractor is entitled to monetary compensation if it penalty clauses. The Act provides that such clauses are valid and can show that the employer’s actions were a cause of the loss. enforceable. A party may apply to court (under the Act) if the amount of the penalty is “out of proportion to the prejudice suffered 3.5 If the contractor has allowed in his programme a by the creditor”. The court may, if it considers that the penalty is period of time (known as the float) to allow for his own disproportionate to the prejudice suffered, reduce the penalty as it delays but the employer uses up that period by, for considers equitable. example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed after this float is used up? 3 Common Issues on Construction Contracts This will depend on the form of construction contract used by the parties. The float is owned by the project in contracts which only entitle the contractor to an extension of time which delays 3.1 Is the employer entitled to vary the works to be done completion. Contracts often provide that a contractor is only entitled under the contract? Is there any limit on that right? to an extension of time if an event affects the completion date, in these circumstances, the float is for the project. Other contracts Whether or not, and to what extent, an employer is entitled to provide that the contractor is entitled to an extension of time if the vary the works to be done under the contract will depend on the float is used up at the request of or due to the fault of the employer. provisions of the contract. There are no limitations imposed from outside the contract (e.g. by statute) on an employer’s right to vary works. Under the common law, an employer may not instruct a 3.6 Is there a limit in time beyond which the parties to variation which fundamentally changes the nature of the works – this a construction contract may no longer bring claims would constitute a new contract. Whether a particular instruction against each other? How long is that period and from what date does time start to run? constitutes a fundamental change to the nature of the works will be a question of fact. In South African law, the Prescription Act, 68 of 1969, states that claims (subject to certain exceptions) are not actionable unless 3.2 Can work be omitted from the contract? If it is brought within three years of the date on which the “debt” became omitted, can the employer do it himself or get a third due and enforceable. The debt is due and enforceable on the date party to do it? on which a party is aware of all the facts which give rise to their cause of action (or ought reasonably to have become aware) and The right to vary is typically dealt with expressly in construction they are able to issue proceedings to enforce the debt. The Act also contracts. The common law provides that an employer may not vary recognises impediments to a party’s ability to enforce a debt, which the contract to omit items of work with the intention of awarding delay the running of prescription until the impediment is removed. that work to another contractor. If work is to be omitted on the It is possible, by agreement, to vary the time period within which a instruction of the employer, it must be a genuine omission – in the claim may be brought – usually to shorten the period. Such “time sense that the employer has decided not to go on with that particular bar” provisions, which are common in construction contracts, have item of work. The parties may expressly agree that the employer been held to be enforceable under South African law, provided that will be entitled to omit work and award it to another party – though they are not so onerous as to breach public policy. such a clause would be unusual. South African courts have held that internal dispute resolution mechanisms in construction contracts may delay the running of 3.3 Are there terms which will/can be implied into a prescription as the debt is “unenforceable” until the party has satisfied construction contract? the requirements of the internal dispute resolution mechanism.

Yes, South African law recognises implied terms (i.e. they flow from express terms or are implied by operation of law) and tacit terms 3.7 Who normally bears the risk of unforeseen ground (i.e. they are “read in” as being necessarily incorporated, e.g. based conditions? on the conduct of the parties). Implied and tacit terms which would contradict the express terms of the contract cannot be implied into This is determined by the relevant contract; however, the default a contract. position in law is that the contractor bears the risk for ground

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conditions which were reasonably foreseeable. It is common in construction contracts for the contractor to bear the risk for ground 3.13 Are parties which are not parties to the contract conditions the “experienced contractor” ought to have foreseen. 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 3.8 Who usually bears the risk of a change in law the original contracts in relation to defects in the affecting the completion of the works? building?

The contract will specify who bears the risk for a change of law A third party, which is not party to a contract, can only claim the affecting completion. If the contract does not specifically deal benefit of a contract where that third party has accepted an express with the issue, each party is responsible for and bears the risk of stipulation in the contract of benefit to the third party. Outside of complying with its statutory obligations. It is an implied term of such a scenario, a party, which is not party to a contract, cannot construction contracts that a contractor will adhere to the applicable claim any benefits thereunder. This is, however, often dealt with South Africa building and safety regulations in completing the works. by concluding separate contracts (collateral warranties) which give rights under the contract to “third parties”. 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums An employer obtains ownership of intellectual property developed due to P2 the sums P2 owes to P1? Are there any by a designer or contractor in execution of a construction contract, limits on the rights of set-off? once it is paid for, unless otherwise determined by the contract. When two parties are reciprocally indebted to one another, one debt is automatically set off against the other. This can only occur where 3.10 Is the contractor ever entitled to suspend works? the parties both have liquidated claims – it is not possible for a party to set off a debt they owe against a debt which will be owed to that This is governed by the terms of the contract. Normally, a contractor party in the future. is only entitled to suspend works where the employer has failed to make payment in terms of the contract. Suspension by the contractor outside of contractual provisions which grant such a right may result 3.15 Do parties to construction contracts owe a duty of in the contractor being liable for breach of contract or delay. care to each other either in contract or under any other legal doctrine?

3.11 On what grounds can a contract be terminated? Are Whether there is a contractual duty of care would depend on the there any grounds which automatically or usually terms of the contract. Under the South African law of delict, a duty entitle the innocent party to terminate the contract? of care not to cause harm to another exists in certain instances, but Do those termination rights need to be set out expressly? each case will depend on the circumstances. In considering whether a duty of care exists, our courts have considered factors such as the A contract will typically set out the grounds on which a party foreseeability of the harm and public policy. may terminate it, and any notice provisions in that regard. If not regulated in the contract, a material breach of contract (including 3.16 Where the terms of a construction contract are repudiation of the agreement) gives the innocent party the right to ambiguous, are there rules which will settle how that terminate the contract. ambiguity is interpreted?

Yes. The “golden rule” of interpretation followed by South African 3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give courts is to give the language in the document its grammatical and the injured party? Is it usual/possible to argue ordinary meaning, unless doing so would result in some absurdity, successfully that a contract which has become repugnancy or inconsistency with the rest of the document. The uneconomic is grounds for a claim for force majeure? process of interpretation must be undertaken having regard to, amongst other factors, the context in which the provision being South African law recognises the concept of vis maior or supervening interpreted is used, the purpose of the term or contract and the impossibility, i.e. an event, not the fault of either party, which factual matrix surrounding the agreement – the exercise is a unitary absolutely prevents performance, which will then render the contract exercise i.e. all factors must be considered in context. partially or completely void/unenforceable. It is not possible under Our law also recognises specific subsidiary rules of interpretation, South African law to invoke supervening impossibility where a which are applied to assist the court in arriving at a determination, contract has become uneconomic. Notwithstanding the common these include rules such as: law position, the force majeure principle is commonly incorporated ■ the presumption against tautology or superfluity; into construction contracts. Force majeure provisions typically ■ the presumption that a change in language denotes a change excuse the parties from performing obligations affected by force in intention; and majeure for the duration of force majeure. ■ the contra proferentem rule – which provides that if wording in a contract is incurably ambiguous, the provision should be interpreted against the author of the contract (as they had the ability to make the meaning plain).

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Africa. One would usually provide for the appointment of an 3.17 Are there any terms in a construction contract which arbitrator by the parties and set out which rules will apply. Often are unenforceable? these are the Arbitration Foundation of Southern Africa (AFSA) rules, the rules of the Association of Arbitrators (AoA) or the High Generally, under South African law, terms of a contract which are Court rules. either unlawful or contrary to public policy are unenforceable. So- called “agreements to agree” are also unenforceable. 4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise 3.18 Where the construction contract involves an element and enforce international arbitration awards? Please of design and/or the contract is one for design only, advise of any obstacles to enforcement. are the designer’s obligations absolute or are there South Africa limits on the extent of his liability? In particular, does The South African Draft International Arbitration Bill is currently the designer have to give an absolute guarantee in being considered by Parliament. The Bill is at an advanced stage, respect of his work? all stakeholders have been consulted and Parliament is likely to pass the Bill by the end of this year. The Bill will have considerable A designer’s liability will depend on the terms of the contract in effects on international arbitration proceedings in South Africa. question. It is an implied term of contracts with professionals that professionals will exercise due care and skill in the performance of Until the Bill is passed, South African arbitration proceedings their obligations. Typically, where the designer is commissioned are governed by the Arbitration Act of 1965 (as amended) and by the employer, the designer will warrant that the design is “fit the enforcement of foreign arbitration awards is governed by the to build”, and will be liable if the design fails. Where a contractor Recognition and Enforcement of Foreign Arbitral Awards Act, 40 commissions a designer within a “design and build” contract of 1977. commissioned by an employer, the designer is only liable for In terms of section 2 of the Recognition and Enforcement of Foreign negligence, and the constructor is liable otherwise. Arbitral Awards Act, foreign arbitral awards may be made an order of court, subject to certain grounds of refusal listed in section 3 of the Act, including but not limited to, where enforcement of the 4 Dispute Resolution award would be contrary to public policy. An award which is made an order of court would be enforceable in the same manner as a judgment or order to the same effect. South Africa has acceded to 4.1 How are disputes generally resolved? the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The default position is that disputes, unless settled between the parties, are determined by a court with jurisdiction to hear the dispute. However, alternative dispute resolution, such as arbitration, 4.5 Where the contract provides for court proceedings has become the favoured approach, particularly in construction in a foreign country, will the judgment of that foreign contracts. Recourse to arbitration is only possible if the parties have court be upheld and enforced in your jurisdiction? agreed to it as the mandatory dispute resolution mechanism. This can be done in the construction contract (before any disputes arise) The South African courts do recognise and enforce foreign or, less commonly, by agreement in writing after the dispute arises. judgments. The leading South African case in this regard is Jones v Krok 1995(1) SA 677(A), where the court held that foreign judgments are not directly enforceable, but constitute a cause of action which 4.2 Do you have adjudication processes in your will be enforced by our courts, provided: (i) that the court which jurisdiction? If so, please describe the general pronounced the judgment had jurisdiction to entertain the case procedures. according to the principles recognised by our law with reference to the jurisdiction of foreign courts; (ii) that the judgment is final Adjudication is adopted by agreement between the parties in South and conclusive in its effect and has not become superannuated; (iii) Africa and the nature of the adjudication is dictated by the terms of that the recognition and enforcement of the judgment by our courts the agreement. Adjudicators are independent and may be appointed would not be contrary to public policy; (iv) that the judgment was either by the parties or by a named authority and are paid by both not obtained by fraudulent means; (v) that the judgment does not parties. The decision of the adjudication is normally immediately binding and, depending on the terms of the agreement, the parties involve the enforcement of a penal or revenue law of the foreign may challenge the decision through arbitration or litigation. Absent state; and (vi) that enforcement of the judgment is not precluded an express provision to the contrary in the contract, any party may by the provisions of the Protection of Business Act 99 of 1978, as apply to court to have an adjudication award reviewed and/or set amended. aside (though there are limited grounds for doing so). The CIDB has issued a Procurement Practice Guide for adjudication 4.6 Where a contract provides for court proceedings in procedure, including the appointment by the parties of the adjudicator, your jurisdiction, please outline the process adopted, which may be used in any form of contract or subcontract. Currently, any rights of appeal and a general assessment of proposed regulations under the CIDB Act will, if enacted, provide for how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a mandatory adjudication in construction contracts. decision by the final court of appeal.

4.3 Do your construction contracts commonly have Court proceedings normally comprise either an action or an arbitration clauses? If so, please explain how application. An application is brought on affidavit, where there is arbitration works in your jurisdiction. no (foreseeable) dispute of fact and can be brought urgently, semi- urgently or in the normal course. Depending on urgency, the court Arbitration clauses are common in construction contracts in South can make a ruling either immediately or after sets of affidavits have

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been exchanged, followed by a hearing. Non-urgent applications In certain circumstances, a party may apply for summary judgment, normally take about eight to 12 months to be finalised, and another in which they seek an early judgment without having to go to trial. six–eight months if there is an appeal. Typically, this is done where there is a liquid (certain) debt and no Actions are initiated by the plaintiff, who issues a combined bona fide defence. summons with particulars of claim, setting out the grounds of their Once an order has been granted (either following a summary claim. The defendant may then deliver a notice of intention to judgment application or trial), a party may appeal to either the full defend and deliver a plea and, if applicable, a counterclaim. The bench of the High Court or to the Supreme Court of Appeal. An plaintiff may then, where necessary, deliver a replication in response action normally takes about 12 to 18 months to finalise, and another to the defendant’s plea and a plea to any counterclaim. six–eight months if there is an appeal. Court delays are one of the There are a number of steps that take place before trial, including factors to consider when deciding whether to proceed by court discovery and requests for trial particulars, reports, proceedings or alternative dispute resolution, such as arbitration, South Africa etc. The procedure for allocation of a trial depends on the court in when one is presented with the option. question.

Daniel McConnell Emmanuel Tivana Norton Rose Fulbright South Africa Inc. Norton Rose Fulbright South Africa Inc. 15 Alice Lane, Sandton 15 Alice Lane, Sandton Johannesburg Johannesburg South Africa South Africa

Tel: +27 11 685 8923 Tel: +27 11 685 8570 Fax: +27 11 301 3300 Fax: +27 11 301 3200 Email: daniel.mcconnell@ Email: emmanuel.tivana@ nortonrosefulbright.com nortonrosefulbright.com URL: www.nortonrosefulbright.com URL: www.nortonrosefulbright.com

Daniel is a disputes and transactional construction lawyer based in Emmanuel is a disputes and transactional construction lawyer based Johannesburg. He is experienced in complex construction litigation in Johannesburg. He is a qualified Quantity Surveyor. He previously and is a member of the team representing clients in the South African worked for a number of medium to large South African construction Renewable Energy Independent Power Producer Procurement companies as a Quantity Surveyor for seven years. Since joining the Programme (REIPPPP). Daniel has particular expertise in projects legal fraternity five years ago, Emmanuel has gained experience in the subject to public-private partnership (PPP) requirements. He was preparation and negotiation of standard forms and bespoke contracts a leading member of the team which advised Bombela Concession for construction projects, including JBCC, NEC, GCC and FIDIC. His Company and Bombela Civils Joint Venture (CJV) in various disputes practical knowledge and understanding of the construction industry with the Gauteng Provincial Government pertaining to the Gautrain ensures that clients are afforded practical legal solutions to problems. Rapid Rail Link . Emmanuel is currently part of the team acting for Mitsubishi Hitachi Daniel also works with the transactional members of our construction Power Systems Africa (Pty) Ltd in disputes with its main sub-contractor team, preparing and negotiating construction project agreements. In on the Kusile power station. He is also part of the transactional addition to his work on the South African REIPPPP, he is also part of the construction team that is advising a client on a 600MW coal power team advising on a 600MW coal-fired power station to be constructed station in South Africa. under the SA baseload procurement programme and, separately, on a large inland “dry port” logistics platform to be constructed near Lake Malawi.

The 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.

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Sweden Bo Linander

Advokatbyrån Hellgren Linander AB Mikael Lindberg

The Construction Contracts Committee is working with revisions 1 Making Construction Projects of the standard contracts AB 04 and ABT 06, and new versions are planned to be introduced in 2019. 1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which 1.2 Are there either any legally essential qualities needed place both design and construction obligations upon to create a legally binding contract (e.g. in common contractors? If so, please describe the types of law jurisdictions, offer, acceptance, consideration contract. Please also describe any forms of design- and intention to create legal relations), or any only contract common in your jurisdiction. Do specific requirements which need to be included in a you have any arrangement known as management construction contract (e.g. provision for adjudication contracting, with one main managing contractor or any need for the contract to be evidenced in and with the construction work done by a series writing)? of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and There is no law specifically regulating construction contracts, or engineering contracts.) service contracts in general. Whether a legally binding contract is created is determined by the Swedish Contracts Act, applicable to The standard contracts in use in Sweden are as follows: all types of contract. The only requirements for a binding contract ■ AB 04 (General Conditions of Contract for building and civil are offer and acceptance. Oral contracts are accepted. engineering works and building services) is the standard contract for when the contractor has no design obligations 1.3 In your jurisdiction please identify whether there is under the contract. a concept of what is known as a “letter of intent”, in ■ ABT 06 (General Conditions of Contract for ‘design and which an employer can give either a legally binding or build’ contracts for building, civil engineering and installation non-legally binding indication of willingness either to works) is the standard contract when the contractor has both enter into a contract later or to commit itself to meet design and construction obligations. certain costs to be incurred by the contractor whether ■ ABK 09 (General Conditions of Contract for architectural or not a full contract is ever concluded. and engineering consulting services) is the standard contract for design-only obligations. It is possible to enter both binding and non-binding pre-contractual Regarding both AB 04 and ABT 06, it is possible and common for agreements. Whether a “letter of intent” is regarded as a binding the contractor to hire a large number of subcontractors. For those agreement needs to be determined on a case-by-case basis. situations, there are standard contracts for the relationship between the contractor and the subcontractor, which are related to AB 04 1.4 Are there any statutory or standard types of insurance and ABT 06. AB-U 07 (General Conditions for subcontractors) which it would be commonplace or compulsory to is related to AB 04 and incorporates a number of provisions from have in place when carrying out construction work? AB 04 to be applicable between the contractor and subcontractor. For example, is there employer’s liability insurance ABT-U 07 (General Conditions for subcontractors in design and for contractors in respect of death and personal build contracts) incorporates a number of provisions from ABT 06 injury, or is there a requirement for the contractor to have contractors’ all-risk insurance? to be applicable between the contractor and a subcontractor with both design and construction obligations. According to the standard AB 04 and ABT 06 contracts, the The standard contract, if used, allows the parties to agree on contractor shall have all-risk insurance during the contract time and alterations to the provisions in the standard contracts. for two years after approval of the works. The insured amount shall The abovementioned standard contracts are all a product of be equivalent to the replacement value of the contract works. negotiations within the Construction Contracts Committee. The The contractor shall also have liability insurance for construction Committee has representation from within the construction industry works during the contract time and for two years after approval and represents both employers and contractors. There have been of the works. The insured amount shall be no less than 200 times negotiated standard contracts for the construction industry in Sweden the Swedish ‘price base amount’ (in 2017 the Swedish price base since the 1920s. Therefore, these standard contracts are generally amount is SEK 44,800, approximately GBP 4,000). accepted and used in the vast majority of construction contracts.

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1.5 Are there any statutory requirements in relation 2 Supervising Construction Contracts 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 2.1 Is it common for construction contracts to be sub-contractors); (c) tax (payment of income tax of supervised on behalf of the employer by a third employees); or (d) health and safety? 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 There are no statutory requirements that need to be stipulated in a it only one which exists in certain situations? If so, construction contract, but both the employer and the contractor have please identify when the architect/engineer must act a number of statutory requirements that should be considered when impartially. Sweden entering into an agreement, e.g.: ■ Swedish labour law and collective agreements, including It is not unusual for employers to hire a third party to continuously rules applicable to foreign employees. supervise the contractor’s work. A third party has no duty to act ■ Complying with Swedish laws concerning building permits, impartially in such supervisions, and acts only as a representative of land use and environmental protection. the employer. However, the more common scenario is that formal ■ Complying with Swedish laws concerning the work inspections are performed, which is also stipulated in the standard environment and other safety requirements. contracts. ■ Complying with Swedish law concerning reporting to the tax When an inspection is performed in accordance with the standard authorities, for example, developers are obliged to supply contracts, the inspector shall act impartially, and the inspection electronic attendance recorders that register entries and protocol shall also note the question of disqualification. Inspections exits on all construction sites and to inform the Swedish Tax can also be the submitted to arbitration inspection if requested by agency of construction start-up. a party. The arbitration inspection shall be performed by either an impartial person agreed between the parties, or an inspection board 1.6 Is the employer legally permitted to retain part of of three impartial persons. 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 2.2 Are employers entitled to provide in the contract that defects liability is complete? 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 Under the standard AB 04 and ABT 06 contracts, payment for paid” clause? contract works shall be in accordance with an agreed payment plan. If no payment plan is agreed, the employer shall pay for performed There is no legal obstacle for a “pay when paid” clause, but the work. However, the employer may retain 10 per cent of the invoiced standard contracts stipulate payment between contract parties amount as security for future costs for rectification of defects, but regardless of payments by other parties. Therefore, “pay when the retained sum may not exceed five per cent of the contract price. paid” clauses are generally not used. After completion of the works, the employer may retain five per cent of the contract price until the contractor has rectified any defects, but 2.3 Are the parties permitted to agree in advance a fixed for no longer than two months. Thereafter, the employer may retain sum (known as liquidated damages) which will be an adequate amount for rectification of defects. 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 1.7 Is it permissible/common for there to be performance there any restrictions on what can be agreed? E.g. bonds (provided by banks and others) to guarantee does the sum to be paid have to be a genuine pre- performance, and/or company guarantees provided to estimate of loss, or can the contractor be bound to guarantee the performance of subsidiary companies? pay a sum which is wholly unrelated to the amount of Are there any restrictions on the nature of such bonds financial loss suffered? and guarantees?

Liquidated damages are permitted and are included in the standard Performance bonds are permissible and normally provided for the contracts regarding late completion. The agreed sum does not have period of the construction work and for the following two years. to be a genuine pre-estimate of loss.

1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and 3 Common Issues on Construction supplies used in the works? Is it permissible for Contracts contractors to claim that until they have been paid they retain title and the right to remove goods and materials supplied from the site? 3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right? Contractors generally have title rights for goods and supplies until the goods or supplies have actually been paid for by the employer. The employer is entitled to vary the works to a large extent, If goods are used in the construction and integrated into the contract according to the standard contracts. The limitation of the right to works, they are generally regarded as added to the real property as vary the works is that changes need to be directly connected with property fixtures, and the title right is transferred to the owner of the contract works and not essentially different in nature from the the property. contract works.

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Payment for additions and alterations should be settled by balancing However, under standard AB 04 and ABT 06 contracts, the the work added and the work omitted. If a fixed priced is agreed for contractor’s claims in relation to contract works shall be presented the contract works, extensive changes may give the contractor the within six months from the day of final approval of the works. This right not to be bound by a fixed price. is not applicable to payment of the contract price or VAT, which has a period of limitation of two years from final approval of the works.

3.2 Can work be omitted from the contract? If it is Regarding claims for damages, the standard contracts have different omitted, can the employer do it himself or get a third limitation periods. If the damage appeared during the contract time, party to do it? claims shall be presented within three months from the date of final approval of the works. If the damage appeared during the guarantee Work can be omitted from the contract works. However, the period, claims must be presented within three months from the Sweden contractor has an exclusive right to perform contract work, as well expiration of the guarantee period. If the damage appeared after as alterations and additions in the works. Therefore, the employer the guarantee period, claims must be presented within three months may not perform omitted work, or get a third party to perform the from the appearance of damage. work. If the employer performs omitted work, the contractor has a right to claim damages for loss of profit. 3.7 Who normally bears the risk of unforeseen ground conditions? 3.3 Are there terms which will/can be implied into a construction contract? The employer normally bears the risk of unforeseen ground conditions. Deviations from what the contractor had reason to take If no standard contract is agreed, parts of the standard contracts into account when leaving his tender (based primarily on the tender have in a few cases been considered standard business practice documents) is the risk of the employer. and therefore implied into construction contracts. Furthermore, previous practice between contracting parties can be implied. 3.8 Who usually bears the risk of a change in law Since there is no Swedish law regulating commercial services affecting the completion of the works? contracts, it is common to imply provisions from the Swedish Sales of Goods Act or the Swedish Consumer Services Act when Under standard AB 04 and ABT 06 contracts, unknown changes in interpreting construction contracts. law or regulations that affect the works shall lead to an adjustment of the contract price. 3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of 3.9 Who usually owns the intellectual property in relation his employer, is the contractor entitled to: (a) an to the design and operation of the property? extension of time; or (b) the costs occasioned by that concurrent delay? Under standard ABK 09 contracts, the employer has the right to use and copy the result of the work, but only in accordance with the a) According to the standard AB 04 and ABT 06 contracts, a contractor is entitled to an extension of time to the extent the purpose of the contract. delay in works is attributable to the employer. If the delay is Under standard ABT 06 contracts, after the approval of the the fault of the contractor, no right to a time extension exists. contractual works, the owner or user of the works is entitled to use If two events or faults occurs in parallel and one of the events the intellectual property without the creator’s approval. is the fault/risk of the contractor, the contractor (as a main rule) would not be entitled to an extension of time. Except in the abovementioned circumstances, the intellectual property is owned by the creator unless agreed otherwise. b) If the delay is at the risk of the employer, the contractor is entitled to compensation for costs, but not if the delay is attributable to the contractor. 3.10 Is the contractor ever entitled to suspend works?

3.5 If the contractor has allowed in his programme a Under standard AB 04 and ABT 06 contracts, the contractor is period of time (known as the float) to allow for his own entitled to suspend work under certain circumstances that also delays but the employer uses up that period by, for would give the contractor the right to terminate the contract. These example, a variation, is the contractor subsequently circumstances are where: the employer does not fulfil his obligations entitled to an extension of time if he is then delayed to pay according to the contract; the employer does not present after this float is used up? the agreed security for his obligations; or the employer transfers his rights in the contract without presenting sufficient security or This is a question of debate and has no clear answer. Generally, the without the consent of the contractor. contractor is entitled to a time extension if the employer or the risks The contractor has the right to suspend works for a period of a of the employer affect the contractor’s ability to meet his deadlines. month, and within that time the contractor shall inform the employer if the contractor intends to continue work or terminate the contract. 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 3.11 On what grounds can a contract be terminated? Are what date does time start to run? there any grounds which automatically or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out According to the Swedish Act on Limitation, the general limitation expressly? period is 10 years. The standard AB 04 and ABT 06 contracts specify 11 grounds on

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which the employer may terminate the contract, and nine grounds priority of documents that are part of the contract. If two on which the contractor can terminate the contract. documents of differing priority are ambiguous, the document with There is a general right to terminate any type of contract if one of the the highest priority shall determine the terms of the contract. If contractual parties has fundamentally breached the contract. a single document, or documents with the same priority, contains ambiguities, the contract terms shall reflect the alternative which involves the least expense for the contractor. 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 3.17 Are there any terms in a construction contract which successfully that a contract which has become are unenforceable? uneconomic is grounds for a claim for force majeure? Sweden There are none, other than the formal grounds for invalid agreements Force majeure means that if a party to the contract has been according to the Swedish Contracts Act. Terms in a contract hindered in performing its obligations according to the contract, the could also, on a case-by-case basis, be regarded as unenforceable performing party is not liable for damages or breach of contract if according to the Swedish Contracts Act if the terms are regarded the hindrance was due to unforeseen and exceptional events. Force as unfair. majeure events may also entitle the parties to a contract to terminate the contract. 3.18 Where the construction contract involves an element It is normally not possible to claim force majeure on the ground that of design and/or the contract is one for design only, the contract has become uneconomical. 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 3.13 Are parties which are not parties to the contract respect of his work? 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 In standard ABT 06 contracts, the contractor has unlimited liability the original contracts in relation to defects in the for defects and damages to the contract works caused by defects. building? The liability for other damages is limited to 15 per cent of the contract price, unless the contractor has insurance covering a higher If a contract explicitly stipulates rights or benefits for a third party, amount. the third party may claim its rights according to the contract. The contractor shall give a five-year guarantee for the contract However, construction contracts do not generally stipulate such works. rights. If the contract does not contain any explicit third-party In the standard ABK 09 contract, the design consultant has rights, a third party (such as a subsequent owner of a building) can limitation of liability for damages to 120 price base amounts (in acquire those rights by a transfer of contract. 2017 the Swedish price base amount is SEK 44,800, approximately GBP 4,000). 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 4 Dispute Resolution limits on the rights of set-off?

4.1 How are disputes generally resolved? Rights to set-off are allowed in Sweden, and in a construction contract P1 may set off a debt owed to P2 with a debt owed by P2 to P1. Limitations to the rights to set-off exist but are mostly relevant In standard AB 04 and ABT 06 contracts, disputes regarding in relation to one party’s bankruptcy or when one of the debts is claims under 150 Swedish price base amounts shall be settled by barred due to the limitation period having expired. court proceedings. If the claim is for over 150 Swedish price base amounts, the dispute shall be settled by arbitration (in 2016 the Swedish price base amount is SEK 44,800, approximately GBP 3.15 Do parties to construction contracts owe a duty of 4,000). care to each other either in contract or under any other legal doctrine? In standard ABK 09 contracts, disputes shall be settled by court proceedings. In standard AB 04 and ABT 06 contracts, when the contract price is based on the prime cost principle, the contractor has an explicit duty 4.2 Do you have adjudication processes in your to fulfil his obligation in such a manner that the employer obtains the jurisdiction? If so, please describe the general best technical and financial results. procedures. There is also a general legal doctrine applicable to all contracts that both contract parties have an obligation of loyalty. This means In standard AB 04, ABT 06 and ABK 09 contracts, there is a that each contract party should work to follow the contract and to possibility for simplified dispute resolution, in which the parties achieve the best result for the other party. appoint a single arbitrator. The parties shall, within one week from appointing the arbitrator, comment on their position on the question in dispute. The parties also have the possibility to comment once on 3.16 Where the terms of a construction contract are what the other party has alleged. ambiguous, are there rules which will settle how that ambiguity is interpreted? Within four weeks from receiving the parties’ comments, the sole arbitrator shall give his decision in writing. In standard AB 04 and ABT 06 contracts, there are rules of

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4.3 Do your construction contracts commonly have 4.5 Where the contract provides for court proceedings arbitration clauses? If so, please explain how in a foreign country, will the judgment of that foreign arbitration works in your jurisdiction. court be upheld and enforced in your jurisdiction?

Yes, see question 4.1 above. Construction contracts following Judgments of foreign courts will be upheld by Swedish courts normal procedure stipulate ad hoc arbitration in accordance with after application for enforcement in accordance with international the Swedish Arbitration Act. Ad hoc procedures differ from one conventions and EU regulations. dispute to another, but normally each party submits a number of written pleas and the process ends with an oral hearing. The parties 4.6 Where a contract provides for court proceedings in Sweden have strong influence on the procedure, regarding the number of your jurisdiction, please outline the process adopted, written pleas and time limits. 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 4.4 Where the contract provides for international decision by the final court of appeal. arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement. The first instance courts for proceedings in Sweden are the District Courts. A District Court’s decision can be appealed to a Court of Yes, international arbitration awards are, as a general rule, Appeal, if leave for appeal is granted. recognised and enforced by Swedish courts after application to the The Court of Appeal’s judgment can be appealed to the Supreme Svea Court of Appeal in Stockholm. An arbitration award will not Court, if leave of appeal is granted. The Supreme Court only grants be recognised and enforced if certain formal requirements in the leave of appeal for approximately two per cent of all appeals. foreign arbitration process are not fulfilled, e.g. that the arbitration The time for proceedings in each court varies depending on the size clause is valid according to the law of the country applicable to the and complexity of the case. A general rule of thumb is that a legal contract, and that the parties have been correctly informed of the process takes approximately one-and-a-half to two years per court arbitration process before the award. Recognition of an arbitration instance. award can also be rejected due to ordre public.

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Bo Linander Mikael Lindberg Advokatbyrån Hellgren Linander AB Advokatbyrån Hellgren Linander AB P.O. Box 24053 P.O. Box 24053 104 50 Stockholm 104 50 Stockholm Sweden Sweden

Tel: +46 8 662 94 00 Tel: +46 8 662 94 00 Email: [email protected] Email: [email protected] URL: www.advokathl.se URL: www.advokathl.se Sweden Bo Linander is a partner at Advokatbyrån Hellgren Linander. He is Mikael Lindberg is a lawyer and associate at Advokatbyrån Hellgren one of the most experienced construction and engineering lawyers in Linander and has been with the firm since 2013. He works with Sweden and has worked in construction, engineering and consultancy litigation and arbitration proceedings in construction, engineering and law for over 25 years. Bo worked for the Swedish Construction consultancy law, as well as day-to-day advice and counselling to the Federation before founding Advokatbyrån Hellgren Linander. He construction sector. Mikael Lindberg also works with clients in the has extensive litigation and arbitration experience and is frequently public procurement sector, providing both general advice and counsel assigned as an arbitrator, especially in construction law disputes. specific to public procurement review procedures. Bo has also participated in the development and negotiation of most of the standard contracts and administrative instructions that are used in the Swedish construction sector.

Advokatbyrån Hellgren Linander is one of the leading law firms in Sweden within construction law. We are specialised in construction contract law and public procurement for the construction industry, and have extensive experience in working with and within the construction sector. Therefore, both we and our clients regard the firm as very much a part of the construction industry. As one of the leading construction law practices in Sweden, Advokatbyrån Hellgren Linander has, for example, been ranked as a top-tier firm for construction law and as “most outstanding construction law firm” by the Corporate LiveWire Legal Awards. Our lawyers have also been named as leading individuals in construction law by The Legal 500.

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Turkey Şeref Can Arat

TUGA|ARAT Law Offices Umut Tuğa

Building and Engineering Works Designed by the Contractor, 1 Making Construction Projects also known as the Plant and Design-Build Contract; and c) The Silver Book – Conditions of Contract for Engineering, 1.1 What are the standard types of construction contract Procurement and Construction/Turn-key projects also known in your jurisdiction? Do you have contracts which as the EPC/Turn-key Contract. place both design and construction obligations upon We have been involved in EPCM or management contracting contractors? If so, please describe the types of arrangements in the Turkish construction industry, but these are not contract. Please also describe any forms of design- as commonly used. only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor 1.2 Are there either any legally essential qualities needed and with the construction work done by a series to create a legally binding contract (e.g. in common of package contractors? (NB For ease of reference law jurisdictions, offer, acceptance, consideration throughout the chapter, we refer to “construction and intention to create legal relations), or any contracts” as an abbreviation for construction and specific requirements which need to be included in a engineering contracts.) construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)? The most commonly used standard types of contracts in Turkey are those that are drafted for construction work in the public sector. Legally essential qualities needed to create a legally binding contract Annex 7 “Standard Contract for Construction Works” of the General in Turkey are set out in the general provisions of the Turkish Code Specifications for Construction Works is the leading example. It is of Obligations (Law No. 6098) (hereinafter to be referred to as drafted in accordance with Public Procurement Law No. 4734 and “TCO”). A legally binding contract should entail the reciprocal and the Public Procurement Contracts Law No. 4735. matching (either explicit or implicit) declaration of intents of the Law No. 4735 allows for different types of contracts such as: contracting parties, pursuant to Article 1 of the TCO. This principle also applies to construction contracts. ■ Turnkey – Lump Sum Public Procurement Contracts as regulated under Article 6-a; There is no statutory requirement for construction contracts to be ■ Unit Price Public Procurement Construction Contracts as created in writing; with certain exceptions such as a frequently used regulated under Article 6-c; and type of construction contract where the contractor is reimbursed for his/her works via transfer of part of the ownership in the land. ■ Combined Public Procurement Construction Contracts which In this case, the contract validity is subject to being certified by a combine the aforementioned two and are regulated under Article 6-b. notary public. Construction contracts signed pursuant to the State Procurement Law and the Public Procurement Law are also subject Annex 7 may be modified to suit all contract types listed. Since to written form. these form contracts are issued for public tenders, the terms are That being said, Article 200 of the Code of Civil Procedure (Law typically non-negotiable subject to certain exceptions. No.6100) (hereinafter referred to as “CCP”), stipulates that any Other than these, unlike some jurisdictions, the use of standard legal transaction beyond 2,500 Turkish Lira must be proved by a forms such as JCT, NEC and ICE are exceptionally rare in the deed. Considering that the above mentioned rights with regard to Turkish construction sector. a construction contract will almost always be above such monetary Whereas the use of FIDIC (International Federation of Consulting threshold, it is strongly recommended that all construction contracts Engineers) forms in public and private sectors has incrementally be drafted in written form. increased within the last decade. This is particularly the case in the EU funded projects known as IPA (Instrument for Pre-accession Aid). 1.3 In your jurisdiction please identify whether there is The most commonly used FIDIC forms (from the 1999 Edition of a concept of what is known as a “letter of intent”, in the FIDIC ‘Rainbow Suit’ of forms) in Turkey are: which an employer can give either a legally binding or non-legally binding indication of willingness either to a) The Red Book – Conditions of Contract for Construction, for enter into a contract later or to commit itself to meet Building and Engineering Works Designed by the employer, certain costs to be incurred by the contractor whether also known as the Construction Contract; or not a full contract is ever concluded. b) The Yellow Book – Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Letters of intent or other documents having similar effect (e.g.

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memorandums of understanding, heads of terms, etc.) are not and safety, working hours, overtime work, entitlements arising explicitly regulated by Turkish Law even though, in practice, most therefrom, liabilities for work-related accidents, injuries or work- commercial transactions are commenced with a document to such related illnesses. effect.

There are several issues or perspectives that need to be considered 1.6 Is the employer legally permitted to retain part of in such case. Legal practitioners in Turkey tend to identify the legal the purchase price for the works as a retention to be nature of texts within certain categories such as a contract, a pre- released either in whole or in part when: (a) the works contract, an invitation, an offer, etc. For example, if the letter of are substantially complete; and/or (b) any agreed intent contains the mutual declaration of intents on essential matters defects liability is complete?

of the parties involved, under Turkish law such a document may be Turkey identified as a contract. Whereas, if the letter of intent entails one The default position of the TCC is that the employer must pay for party’s statement of intention in reference to the legal relationship the work on delivery. That being said, there is no limitation as to be established with the other parties, the absence of an explicit to the parties right to contract otherwise. If the contract foresees binding commitment, could be identified as an invitation to offer, another payment mechanism, where the employer undertakes to hence be a legally non-binding document. On the other hand, a make payments in instalments, then the employer may retain part ‘letter of intent’, or any document of similar nature containing of the contract price provided that he/she is entitled to do so under provisions of binding obligations, could be identified as a binding the contract. agreement. We should note that it is common practice, especially in large Accordingly, it is crucial for parties to pay extra care to the drafting, construction projects, to set forth in contracts a retention mechanism content and structure of a letter of intent to effectively reach their by which the employer retains an agreed percentage of milestone desired outcome. payments until provisional acceptance or even until final acceptance.

1.4 Are there any statutory or standard types of insurance 1.7 Is it permissible/common for there to be performance which it would be commonplace or compulsory to bonds (provided by banks and others) to guarantee have in place when carrying out construction work? performance, and/or company guarantees provided to For example, is there employer’s liability insurance guarantee the performance of subsidiary companies? for contractors in respect of death and personal Are there any restrictions on the nature of such bonds injury, or is there a requirement for the contractor to and guarantees? have contractors’ all-risk insurance? It is both permissible and common in our jurisdiction for there Except in regard to insurances in relation to employee’s social to be performance bonds to guarantee performance. The most securities, there exists no statutory insurances in Turkey. In common type of performance bonds provided by banks (also known construction practice, the following insurances are usually provided as guarantee agreements) are irrevocable, unconditional and on- for in construction contracts and maintained by the parties thereto: demand bonds. A restriction in regard to bonds is that bonds issued a) All-Risk Insurance. by or counter guaranteed by banks residing in Turkey have to be in the Turkish language. b) Employers’ Liability Insurance which covers bodily injuries and death of workers. Parent company guarantees are also seen in our jurisdiction, however, c) Third Party Liability Insurance which covers any damage they are not as common as bank bonds. Parent company guarantees to third-party property or individuals caused during the are particularly common among Turkish holding companies with execution of the works. subsidiaries operating in construction and energy sectors.

1.5 Are there any statutory requirements in relation 1.8 Is it possible and/or usual for contractors to have to construction contracts in terms of: (a) general retention of title rights in relation to goods and requirements; (b) labour (i.e. the legal status of those supplies used in the works? Is it permissible for working on site as employees or as self-employed contractors to claim that until they have been paid sub-contractors); (c) tax (payment of income tax of they retain title and the right to remove goods and employees); or (d) health and safety? materials supplied from the site?

Certain legal requirements as regards to planning, design and A distinction should be made between the projects in which construction are stipulated in regulations which may be drafted on equipment is supplied from abroad within an incentive regime as the basis of the differing features of specific construction projects. is the case with most of the energy projects in Turkey and projects In addition to these, there are certain permits and licence in which equipment is supplied locally. In the first case, title right requirements for construction projects; the most common are those in relation to imported goods and supplies should be transferred to pertaining to environmental impact assessment, and permits as the employer before customs procedures are finalised in order to regards construction, waste disposal and zoning. enable the employer to take advantage of the related incentives. In the latter, it would only be possible to retain title up to the point that As regards employees, Labour Law No. 4857 and its secondary such goods and supplies become a part of the immovable. legislation regulate the rights and obligations of employees. There are numerous mandatory rules generally protecting the rights Without specific provisions in your contract to that extent, removing of employees. These may be in relation to remuneration, health goods and materials supplied from site would be subject to the employer’s approval and thus extremely difficult.

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adjust/decrease such amount. On the other hand, if the contract 2 Supervising Construction Contracts contains a liquidated damage clause, the contractor may dispute its applicability on the grounds that the liquidated damage amount is 2.1 Is it common for construction contracts to be higher than the amount of damage actually incurred. supervised on behalf of the employer by a third Unlike many other terms of a construction contract which may be party? Does any such third party (e.g. an engineer drafted without the assistance of legal professionals, the drafting or architect) have a duty to act impartially between and structuring of these penalty and/or liquidated damages clauses contractor and employer? Is that duty absolute or is it only one which exists in certain situations? If so, require additional attention as the legal nature of these clauses may please identify when the architect/engineer must act lead to an interpretation opposite to the actual wording that has been

Turkey impartially. used.

It is common, particularly in large projects, for the contracts to be 3 Common Issues on Construction supervised on behalf of the employer by a third party. Scope of such third party’s powers and obligations may vary depending on Contracts the specific contract terms. In the absence of explicit contract terms imposing impartiality, the engineer or architect does not have any 3.1 Is the employer entitled to vary the works to be done such duty. under the contract? Is there any limit on that right? However, the Turkish construction sector utilised the FIDIC Red Book 87 Edition for a long time and became accustomed to the A variation order constitutes a change within the scope of the notion of impartiality of the engineer; effects of which can still contractor’s obligation. This scope is usually determined in the be seen in today’s contracts. This mindset provides useful in our contract as a result of the parties’ mutual agreement at the very negotiations on behalf of contractors when we require the inclusion beginning of their interaction. If the contract does not contain any of an explicit impartiality clause. explicit provision entitling the employer to vary the works via a unilateral decision, then such variation would require an amendment of the contract, which would in return require the parties’ mutual 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, agreement. have themselves been paid; i.e. can the employer Therefore, in order to avoid potential difficulties in obtaining the include in the contract what is known as a “pay when contractor’s approval for each variation, contracts should be drafted paid” clause? in a manner to entitle the employer to issue variation orders.

Pay-when-paid clauses create a condition precedent where the employer’s obligation to make payment to the contractor is subject to 3.2 Can work be omitted from the contract? If it is realisation of the condition of the employer getting paid. Depending omitted, can the employer do it himself or get a third party to do it? on the specific terms of each contract, it would be permissible to create a pay-when-paid clause, however, there may also be specific In parallel to our reasoning provided under question 3.1 above, an cases where it is inadmissible under Turkish law. omission would also necessitate amendment of the contract if the While there are occasional instances where pay-when-paid clauses contract is silent on this issue. Therefore, in order to avoid potential are used in practice, it is certainly not very common due to the fact difficulties in obtaining the contractor’s approval for each omission, that contractors resist assuming the risk of delayed payments. contracts should be drafted in a manner to entitle the employer to make omissions. 2.3 Are the parties permitted to agree in advance a fixed To the extent that the parties have agreed on the terms and sum (known as liquidated damages) which will be conditions enabling a third party (e.g. the engineer or architect) to paid by the contractor to the employer in the event of make omissions, this could be possible. 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. 3.3 Are there terms which will/can be implied into a does the sum to be paid have to be a genuine pre- construction contract? estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss suffered? In contracts that are governed by the Turkish law, respective principles and provisions of the TCO that are applicable to construction contracts will be implied into the contract to the extent It is permissible under the Turkish law to agree in advance on that the parties have not explicitly agreed otherwise. liquidated damages. However, unlike common law, penalty clauses are also allowed under Turkish law. Historically, use of penalty clauses has been more common in our 3.4 If the contractor is delayed by two events, one the jurisdiction when compared to use of liquidated damages. One fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an of the reasons for this preference is that a penalty clause provides extension of time; or (b) the costs occasioned by that its beneficiary a much lesser burden of proof in comparison to concurrent delay? liquidated damages. The only limitation on validity of a penalty clause (in addition to the general principles applicable to validity of Concurrent delay has not been defined under Turkish law. In the contract clauses) is subject to such penalty amount being excessively absence of explicit terms under a contract in this regard, the legal high. However, this does not mean that the fixed amount of penalty principle that “no person should be enabled to take advantage from cannot exceed the damage actually incurred. If the court decides his/her own wrongdoing” and the provisions of the TCO with regard that the penalty clause is excessively high, they could decide to to contributory fault shall apply.

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Our general opinion in this regard which may differ based on the Pursuant to Article 480/II of the TCO, where performance of specifics of each case, is that the contractor would be entitled to an the work was prevented or seriously hindered by extraordinary extension of time. With regard to additional costs, it would be a circumstances that were unforeseeable or excluded according to the difficult task to differentiate among costs and the result would again conditions assumed by both parties, the court may at its discretion be subject to the specifics of the case. authorise an increase in the contract price. There are high court decisions that give effect to this clause in cases where the parties encounter an unforeseen ground condition. 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own Without prejudice to our explanations above, we would like to delays but the employer uses up that period by, for note that a contractor is considered to be a diligent merchant with example, a variation, is the contractor subsequently

experience in his field of business and thus will be held to a higher Turkey entitled to an extension of time if he is then delayed standard of duty of care. Therefore, applicability, if any, of Article after this float is used up? 480/II would be determined according to the specifics of each case. In order to avoid lengthy arguments in court, we recommend that The concept of “float” is not defined under Turkish law and both the risk of unforeseen ground conditions is explicitly dealt with in academics and the have so far been distant from embracing the contract. this concept. Hence, from the Turkish law perspective, it would not be possible to specify exactly which party would own the float as it may differ depending on the specifics of each case, such as 3.8 Who usually bears the risk of a change in law the related terms of the contract and other aspects of the factual affecting the completion of the works? background. Parties should explicitly deal with this risk in the contract and this is Accordingly, we recommend that parties address this issue in detail the usual practice in our jurisdiction. More often it is the employer in their contracts. who assumes the risk of a change in law.

3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims 3.9 Who usually owns the intellectual property in relation against each other? How long is that period and from to the design and operation of the property? what date does time start to run? Pursuant to Article 2 of the Law on Intellectual and Artistic Works; The limit in time beyond which the parties to a contract may no “all kinds of technical and scientific photographic works, all kinds longer bring claims against each other are defined as statutes of of maps, plans, projects, sketches, drawings, geographical or limitations and there are several different limits varying with respect topographical models and similar works, all kinds of architectural to different claims and situations. and urban designs and projects, architectural models…” are regarded as literary and scientific works. Those statutes of limitations applicable to construction contracts are: Such law defines the person who creates these works as the Author of such works. The Author (in our case the engineer or the architect) ■ 5 (five) years for monetary claims arising out of construction contracts (excluding claims arising from situations where holds both the economic and moral rights over the works created. It the contractor does not fulfil its obligations completely or should be noted that it is not legally permissible for the Author to waive properly due to its gross negligence), starting from the date or transfer any of his/her moral rights whereas there is no limitation as such claim is due and payable; to the transfer of economic rights deriving from such works. ■ 2 (two) years for defects in movable property which starts to An important point is to identify whether the Author was, during the run from the date of delivery; creation of works, employed by a third party (such as the employer) ■ 5 (five) years for defects in the construction (i.e. the or was independent. According to the law, the works created by immovable property), which starts to run from the date of civil servants, employees and workers during the execution of their delivery; and duties shall be exercised by the persons who employ or appoint them. ■ 20 (twenty) years for defects in the construction attributable However, if the Author was independent at the time of creation of to the gross negligence of the contractor, which starts from the the work then we recommend that a provision with regard to transfer date of delivery of the construction, regardless of whether the of relevant intellectual property rights be included in the contract. construction is qualified as movable or immovable property.

3.10 Is the contractor ever entitled to suspend works? 3.7 Who normally bears the risk of unforeseen ground conditions? This is a common clause in major construction contracts in our jurisdiction and we strongly recommend this practice. Where the This would depend on the the type of contract, more specifically contract remains silent on the contractor’s right to suspend works, the method of reimbursement agreed by the parties in the contract. the contractor may only be able to resort to the provision of the TCO In contracts where payment is made based on fixed unit prices, stating that “a party to a bilateral (synallagmatic) contract may not the risk would naturally lie with the employer as the price would demand performance until he has discharged or offered to discharge increase in parallel to the work performed. his own obligation, unless the terms or nature of the contract allow However, in lump-sum contracts, the risk of unforeseen ground him to do so at a later date”. A contractor may be able to benefit conditions would initially lie with the contractor who would perform from this provision if the contract price is to be paid in instalments the works, regardless of any increase in the amount at a lump sum and not in a lump sum. It is advisable to contractors that the method, fixed price. circumstances and conditions applicable to the suspension of works be drafted within the contract.

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occur due to the fault of the employer, the contractor may also 3.11 On what grounds can a contract be terminated? Are demand to be indemnified. there any grounds which automatically or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out 3.13 Are parties which are not parties to the contract expressly? entitled to claim the benefit of any contract right which is made for their benefit? E.g. is the second or There are several reasons for termination of a construction contract subsequent owner of a building able to claim against the original contracts in relation to defects in the under the Turkish law. Some of these reasons are attributable to the building? employer, some are attributable to the contractor and some are not

Turkey attributable to either of the parties. The rule in this regard is that parties which are not parties to a The reasons for termination can be categorised as: (a) impossibility contract are not entitled to claim any benefit therefrom. of performance; (b) the employer’s right to withdraw for its However, parties may always draft their contracts to permit such convenience; subject to payment of indemnity to the contractor; (c) scenarios, to the extent that the drafting is performed in a manner the employer’s right to terminate in the event of death or incapacity to satisfy the concerns of both parties (e.g. the contractor’s possible of the contractor; (d) the employer’s right to withdraw upon concern regarding extended guarantees, etc.) and in a manner that contractor’s failure to commence the work on time or in the event would not prejudice the validity of the contract. that the contractors delay is such that there is no prospect of timely completion; (e) the employer’s right to withdraw upon contractors On an additional note, if the contractor is also the designer of the default; (f) the employer’s right to withdraw in the event of defective work, then to the extent that the applicable conditions are met, the work; (g) the employer’s right to withdraw in the event that the subsequent owner may also pursue the contractor in regard to the agreed price estimate is exceeded by a disproportionate amount; (h) contractor’s liabilities under the law. the contractor’s right to withdraw in the event of employers default; (i) the contractor’s right to withdraw where the contract price cannot 3.14 Can one party (P1) to a construction contract which be adjusted in the event that performance of a lump-sum contract is owes money to the other (P2) set off against the sums prevented or seriously hindered due to unforeseeable extraordinary due to P2 the sums P2 owes to P1? Are there any circumstances; and (j) the contractor’s right to withdraw in the event limits on the rights of set-off? the employer hinders performance of the contract. It must be noted that the foregoing reasons for terminating a In the absence of an express term in a construction contract contract are subject to certain conditions and the parties must pay precluding the same, the law recognises and allows the set-off of utmost attention to the existence of these conditions to successfully mutual debts if both are due and payable under Article 139 and terminate a contract. Moreover, parties must pay attention as to following articles of the TCO. whether the termination of contract under the foregoing reasons will In the event that there exists a dispute as to the amounts that are have retrospective (ex tunc) or prospective (ex nunc) effects upon due by one or both parties, then set-off can be requested but the the contractual relationship between the parties. discretion would be with the courts to set-off. The TCO also provides a list of cases where such set-off would be 3.12 Is the concept of force majeure or frustration known subject to the creditor’s consent, such as receivables in regard to the in your jurisdiction? What remedy does this give returning of already delivered goods or reimbursement in relation the injured party? Is it usual/possible to argue thereto. successfully that a contract which has become uneconomic is grounds for a claim for force majeure? 3.15 Do parties to construction contracts owe a duty of care to each other either in contract or under any Although what constitutes force majeure and what force majeure other legal doctrine? entails is not defined under Turkish law, force majeure is frequently referred to in construction contracts. The concept of force The Contractor has, per Article 471 of the TCO, the obligation to majeure is usually discussed under the legal term “impossibility of exercise objective care. This entails the contractor being liable if performance” as per Articles 136 of the TCO. This article stipulates his/her conduct falls below the standard to be expected of a prudent that “[a]n obligation is deemed extinguished where its performance contractor undertaking similar works in accordance with the is made impossible by circumstances not attributable to the obligor”. applicable professional and technical rules. Furthermore, Article 138 defines a concept which may be roughly translated as “extreme difficulty in exercising obligations”. This is In the absence of an express term in a construction contract, the applicable in circumstances where in addition to other conditions employer has no obligation in this regard. stipulated in the article, a previously unforeseeable extraordinary circumstance occurs that cannot be attributed to the debtor. In this 3.16 Where the terms of a construction contract are eventuality, the debtor shall have the right to demand an amendment ambiguous, are there rules which will settle how that entailing an adjustment to the contract through a court proceeding. ambiguity is interpreted? Should this not be an option, the debtor shall have the right to terminate the contract. Where a term of a contract drafting leads to multiple interpretations, In addition to the foregoing, there is reference to “impossiblity of there is ambiguity or unclear language, the following principles are performance” in Article 485 which is particular to construction applied: contracts. Pursuant to this article, should the completion of works 1. The contract is to be interpreted by investigating and taking become impossible due to an unexpected circumstance related to into consideration the true intentions of the parties at the date the employer, the contractor shall have the right to demand the price of signing of the contract. Later actions of parties are only of the works completed and other costs. Should such impossibility considered to the extent that they shed light on the intentions of the parties at the date of signing.

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2. The contract should be interpreted in light of the principle of There has been a legal background for domestic arbitration and good faith (Civil Code Article 2). international arbitration for a very long time, however, domestic 3. The contract should be interpreted within the perspective of arbitration is not as widely utilised as litigation. law. That is: International arbitration is however, becoming more and more ■ Terms and conditions deviating from the complementary popular, especially with the increase in number of foreign parties stipulations of the law should be interpreted in the narrow to contracts, foreign funding options and project financing options. sense of the drafting. In 2016, ICC announced that record figures were recorded for cases ■ In the event of doubt, the interpretation consistent of the registered in ICC to which a Turkish party was involved. complementary stipulations of the law should be favoured as deviations from the complementary stipulations need to be explicitly agreed. 4.2 Do you have adjudication processes in your Turkey jurisdiction? If so, please describe the general ■ If the parties have adopted an article from the law to their procedures. contracts, this term should be interpreted as in the law. 4. The interpretation that would uphold a term or condition of Though there is neither a statutory adjudication envisaged nor contract should be preferred. detailed legal background for an adjudication process under Turkish 5. Terms and conditions in regard to the waiver of a right under law, freedom of contract allows parties to define an adjudication the contract should be interpreted in the narrow sense of the process under their contracts. The construction sector has drafting. become increasingly familiar with the adjudication process due 6. In the event of doubt, the interpretation favouring the debtor to an increase in overseas projects as well as the E.U. funded IPA should be preferred. contracts. The adjudication process that is known relatively better 7. In the event of uncertainty or doubt, ambiguous terms should in our jurisdiction is the one designed under FIDIC form contracts. be construed against the party having drafted such term.

4.3 Do your construction contracts commonly have 3.17 Are there any terms in a construction contract which arbitration clauses? If so, please explain how are unenforceable? arbitration works in your jurisdiction.

Article 27 of the TCO stipulates that contracts which are contrary to International arbitration is one of the most common alternative public order, moral principles, mandatory provisions of the law and dispute resolution methods used for international projects in our personal rights, or which provide for an impossibility are null and void. jurisdiction where there are two basic laws regulating domestic and international arbitration. Relevant procedures detailed under The said Article further stipulates that the fact that part of the terms Civil Procedure Law No. 6100 are applied when a dispute does not and conditions of a contract being null and void does not affect the include a foreign element and the seat of arbitration is designated as remaining part of the contract. However, if such contract would not Turkey. International Arbitration Law No. 4686 is applicable when survive the severance of the defective terms, then the contract would the dispute includes a foreign element and the seat of arbitration is be deemed null and void in its entirety. designated as Turkey. Procedures settled under the aforementioned laws provide that 3.18 Where the construction contract involves an element when a valid arbitration agreement between parties is in place and a of design and/or the contract is one for design only, lawsuit has been filed in local courts by one of the parties in relation are the designer’s obligations absolute or are there to a dispute arising from the contract in question, the defendant limits on the extent of his liability? In particular, does party shall be entitled to raise an objection of arbitration, in pursuant the designer have to give an absolute guarantee in respect of his work? to which the lawsuit in question would be dismissed. Rules dictated under the aforesaid laws are ad hoc. Furthermore, In the absence of any contractual provisions imposing additional the structure of the aforementioned laws are similar to those of the duties, under Turkish Law a designer or a contractor who carries UNCITRAL Model Law on International Commercial Arbitration out design as part of their scope of work is obliged to execute its (1985), with amendments as adopted in 2006 (“Model Law”). works with objective care. Accordingly, a designer (or contractor) Thus, under said laws, parties may choose the law and/or rules would be liable for damages resulting from defects in design if applicable to their arbitration procedure and furthermore they may appoint arbitrator(s). Parties submit their statement to the chosen the designer’s conduct falls below the standard to be expected of arbitrator(s) within the time period set by the parties or determined a prudent contractor undertaking similar works in accordance with by the arbitrator(s). Unless parties have agreed otherwise, the the applicable professional and technical rules. arbitration tribunal rules by majority vote. In turn, parties may The liability of the designer is not subject to any limitation under the challenge arbitral awards. They may file a lawsuit for annulment law, but in practice the liability of the designer/contractor is often within 30 (thirty) days before the court located at the seat of limited to a percentage of the contract price. arbitration. There are several grounds for this process which are There is no absolute guarantee of a designer, unless expressed in designated under the aforementioned laws. the contract. Furthermore, the Istanbul Arbitration Centre (“ISTAC”) was recently established as an independent, neutral and impartial arbitration institution in accordance with the Istanbul Arbitration Centre Law No. 4 Dispute Resolution 6570, published in the Official Gazette dated 29 November 2014. The aim of this Centre is to provide efficient dispute resolution services and to act as supervisor to arbitral proceedings for international and 4.1 How are disputes generally resolved? domestic parties. The ISTAC Arbitration and Mediation Rules were prepared by the Centre in accordance with modern institutional rules The most frequently used method of dispute resolution in Turkey is and these entered into force on October 26, 2015. litigation before local courts.

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(iii) the judgment is rendered on matters not falling within the 4.4 Where the contract provides for international exclusive jurisdiction of the Turkish courts or, conditional arbitration, do your jurisdiction’s courts recognise upon being contested by the defendant, the judgment is not and enforce international arbitration awards? Please given by a state court which has been deemed as competent, advise of any obstacles to enforcement. even if there is no real relationship between the court and the subject or the parties of the lawsuit; Turkey is a party to the 1958 New York Convention on the (iv) the court decree is not expressly contrary to public order; and Recognition and Enforcement of Arbitral Awards (“the New York (v) the person against whom enforcement is requested has not Convention”). Thus, in the case of a commercial dispute arising objected to the enforcement before the Turkish Court on the in connection to the contract under which the parties have agreed grounds that such person was not duly summoned pursuant

Turkey to resolve such dispute through arbitration, a final arbitral award to the laws of that foreign state or to the court that has given rendered outside Turkey and within the territory of a state which the judgment, or was not represented before that court, or the is a party to the New York Convention will be recognised and court decree was rendered in said individual’s absence. enforced by Turkish courts. It will be subject to the criteria and the All aforementioned conditions, except reciprocity, will also be procedures set forth in the New York Convention and subject to the applicable in the case of recognition of foreign court judgments. arbitrability of any such disputes under Turkish law, though there will not be a re-examination of the merits of the case. The applicant shall provide the following documents to the Turkish court: 4.6 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, a) the original or a duly certified copy of the arbitration any rights of appeal and a general assessment of agreement or the arbitration clause; and how long proceedings are likely to take to reduce: (a) b) the duly authenticated original award or a duly certified copy a decision by the court of first jurisdiction; and (b) a of the formal enforceable final arbitral award having binding decision by the final court of appeal. force as an arbitration award. These documents must be submitted to the Turkish court together The civil courts of first instance in Turkey specialise in certain areas with an official translation into Turkish which should be certified and are named after their fields of operation, such as commercial by a Turkish notary public or Consul General. In principle, the courts, labour courts, courts of intellectual and industrial property recognition and enforcement of an arbitral award may also be rights, maritime courts, land register courts, consumer courts, and rejected at the request of the party against whom it is invoked. This family courts. is applicable if that party furnishes several issues set forth under The majority of disputes regarding construction contracts are Article V of the Convention and the International Private Law resolved by commercial courts. and Civil Procedure Law No. 5718 and the proof of such to the When a party initiates a lawsuit via a petition, the court provides the competent authority where recognition and enforcement is sought. respondent 2 (two) weeks for its response and then 2 (two) weeks In cases where an arbitration award is annulled, such arbitration for the parties rebuttal and rejoinder submissions. Extensions may award may not be enforced. be granted to the parties for these periods, to the extent that the requests are justified. Following this stage, the court conducts a 4.5 Where the contract provides for court proceedings preliminary investigation, an investigation and a hearing. Based on in a foreign country, will the judgment of that foreign the nature and complexity of the case, the periods may be further court be upheld and enforced in your jurisdiction? prolonged with procedures for expert witness reports, witness statements, discovery, etc. International Private Law and Civil Procedural Law No. 5718 As a recent development, courts of cassation have been established (“Law No. 5718”) regulate the recognition and enforcement of and in principle the decisions of the first instance courts shall be foreign court judgments. According to Law No. 5718, decisions reviewed in these courts. Following which, certain decisions can be regarding civil lawsuits rendered by foreign courts can be enforced subject to further step of appeal in the Court of Appeal. by the courts of Turkey provided that: Due to the fact that every lawsuit or proceeding varies as regards (i) such decision is finalised according to the law of the state of the level of complication and/or the details of each particular the court; dispute, it is not possible to provide a set time frame for any of these (ii) there is reciprocity between the Republic of Turkey and the procedures. state where the judgment was rendered;

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Şeref Can Arat Umut Tuğa TUGA|ARAT Law Offices TUGA|ARAT Law Offices Arpa Suyu Sok. No:12, Bomonti-Şişli Gezegen Sokak 3/10 GOP İstanbul Ankara Turkey Turkey

Tel: +90 212 705 9569 Tel: +90 312 437 8529 Fax: +90 212 705 9500 Fax: +90 312 446 7346 Email: [email protected] Email: [email protected] URL: www.tugaarat.com URL: www.tugaarat.com Turkey Şeref Can Arat, is a founding partner of TUGA|ARAT Law Offices Umut Tuğa, is a founding partner of TUGA|ARAT. She is a mechanical and provides legal advice to foreign and Turkish clientele in regard engineer and an attorney qualified to practise law in Turkey. She to company law, construction law, projects executed under the has extensive experience in Construction, Power Generation and PPP model, tender and bidding consultancy and dispute resolution Steam Generation, Water Supply, Pipeline and Infrastructure Projects. (Arbitration, Litigation, ADR) services. She provides, inter alia, contract drafting and negotiation, claim management, risk management, strategic project advice, tender Prior to TUGA|ARAT Law Offices, Seref Can Arat, worked for Istanbul and bidding consultancy, material and equipment supply (RFP) and based Cerrahoğlu and Mehmet Gün law firms. He was also a founding subcontracting (RFQ) consultancy and dispute resolution (Arbitration, member of the TAA Legal, which was founded in 2009. He is a member Litigation, ADR) services. of the Board of Young ISTAC (Istanbul Arbitration Center). Prior to TUGA|ARAT, Umut worked as the sole Legal Counsel of Education GAMA Power Systems Inc. an international EPC Contractor, providing ■■ Istanbul Medipol University – Ph.D. Candidate – Programme in legal and commercial guidance in relation to their Projects in Turkey, Private Law. Russia, Ireland, Macedonia, Latvia, Jordan, Saudi Arabia, Algeria, Iraq for over 10 years having concluded to date an overall contract value in ■■ Istanbul Bilgi University – LL.M. (Dissertation subject: Contractor’s excess of two billion USD. Claims for Extension of Time and Additional Payment Under FIDIC Red Book (1999 Edition)). She is a member of the Chartered Institute of Arbitrators and the Society of Construction Law. ■■ Bilkent University – Law School, LL.B. Education Memberships ■■ Middle East Technical University, Turkey – Mech. Eng., Msc. BSc. ■■ Istanbul Bar. ■■ Çankaya University, Turkey – Fac. of Law, LL.B. ■■ Union of Turkish Bar Associations. ■■ International Bar Association. ■■ Association of International Petroleum Negotiators. ■■ ICC Turkey National Committee.

TUGA|ARAT Law Offices has been operating as a dedicated Energy & Construction Law Boutique Practice in Istanbul and Ankara, Turkey since 2014. Our primary focus is on serving the legal needs of international companies doing business in and through Turkey and Turkish companies doing business internationally. Our core practice areas include construction and infrastructure, contracts and risk management, energy and resources, arbitration, commercial litigation and alternative dispute resolution, international commercial transactions, corporate, insolvency and corporate restructuring, insurance and project finance. Our client base reflects the diversity of participants in the construction, engineering and energy industries. We act for employers, including government and statutory authorities, contractors (EPC), consultants, (engineers, architects and surveyors), subcontractors and suppliers.

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United Arab Thanos Karvelis Emirates

Galadari Advocates & Legal Consultants Niel Coertse

of 2007 set out its mandatory build-operate (“BO”) and design-build 1 Making Construction Projects (“DB”) forms. In Dubai, public sector contracts are regulated by Dubai Law No. 6 of 1997 of Contracts of Governmental Departments in the 1.1 What are the standard types of construction contract Emirate of Dubai, which prohibits the adoption of any term imposing in your jurisdiction? Do you have contracts which a FIDIC Condition, whether express or incorporated by reference, place both design and construction obligations upon without special approval from His Highness the Ruler of Dubai. contractors? If so, please describe the types of With regard to management contracting, the employer may choose contract. Please also describe any forms of design- only contract common in your jurisdiction. Do that the construction project is procured on this basis and appoint you have any arrangement known as management an Engineering, Procurement and Construction Management contracting, with one main managing contractor (“EPCM”) Contractor to manage the different works packages, such and with the construction work done by a series as civil works, mechanical, electrical and plumbing works, and the of package contractors? (NB For ease of reference balance of works packages. throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and The UAE is known for its . These types of projects engineering contracts.) will typically fall under the supervision of a master developer who, in turn, appoints several sub-developers for each phase. The sub- As an introduction, it is important to note that the United Arab developers will then appoint the contractors in their phase for a Emirates (“UAE”) is a civil law system, and the UAE Civil particular scope of work. Transactions Law, No. 5 of 1985 (as amended) (known as the “Civil Code”) forms the cornerstone of the law applicable to civil 1.2 Are there either any legally essential qualities needed transactions. Therefore, the basic questions of how a contract to create a legally binding contract (e.g. in common is made, what constitutes offer and acceptance, the capacity of law jurisdictions, offer, acceptance, consideration the parties, the effect of fraud and mistake, the interpretation of and intention to create legal relations), or any agreements, the liberty to withdraw, remedies for breach, and specific requirements which need to be included in a construction contract (e.g. provision for adjudication or general questions of contract law, as well as numerous specific any need for the contract to be evidenced in writing)? types of transaction (including construction contracts), are mainly resolved by the provisions of the Civil Code. Other specialised The essentials to conclude a binding contract are governed by statutes, such as the Commercial Transactions Law, Federal Law Articles 125–129 and 199–206 (Civil Code). In particular, Article No. 18 of 1993 (the “Commercial Code”), supplement the Civil 129 sets out the necessary elements, namely: the two parties to the Code. contract should agree upon the essential elements; the subject matter The FIDIC (Fédération Internationale des Ingénieurs-Conseils) of the contract must be something which is possible and defined, forms of contract are those most commonly encountered in the or capable of being defined, and permissible to be dealt in; and private construction sector. The 1999 edition of the Red and Yellow there must be a lawful purpose for the obligations arising out of the Books are widely accepted and used. However, some consultants contract. Turning to muqawala (construction contracts), Article 874 still use the familiar 1987 edition. Use of the FIDIC EPC/Turnkey (Civil Code) states that there must be a description of the subject Contract (“Silver Book”) is growing. Subcontract agreements are matter, a statement of the type and extent thereof, the manner of frequently bespoke in form, albeit based upon FIDIC forms. performance, the period over which it is to be performed, and the Drafting of construction contracts, and any particular terms, should amount to be paid. The Civil Code does not specifically require a be understood within the parameters of Articles 872 to 896 of the muqawala contract to be in writing. Civil Code that sets out the minimum rights and responsibilities of Article 203(1) of the Civil Procedures Law, No. 11 of 1992 (the employers, contractors and consultants engaged in what is known “Civil Procedures Law”) permits the parties to record that any as muqawala, being a contract to make a thing or to perform a task. dispute between them arising out of or in connection with the contract may be referred to arbitration. The parties may also agree, The public sector continues to use stand-alone bespoke forms of by special conditions, to arbitration in a particular dispute. A party contracts, frequently modelled on the FIDIC forms. Abu Dhabi has will only be able to prove that it was agreed that a dispute may be promulgated a stand-alone FIDIC contract under licence for civil resolved by arbitration if it produces a written arbitration agreement construction projects undertaken in the Emirate on behalf of public (Article 203(2)). Such an agreement is usually set out as a clause entities. Schedules 1 and 2 to Abu Dhabi Executive Decision No. 1 within the contract.

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retention money (or request contractors to provide retention bonds 1.3 In your jurisdiction please identify whether there is in lieu thereof). An amount equal to 10% of the contract price is a concept of what is known as a “letter of intent”, in commonly reserved for retention. The parties are at liberty to agree which an employer can give either a legally binding or the terms which must be met prior to the retention money being non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet released. Provision is usually made for half of the retention money certain costs to be incurred by the contractor whether to be released at completion, and the balance upon expiry of the or not a full contract is ever concluded. defects liability period.

This concept is known in the UAE, and such an ‘intention’ may be 1.7 Is it permissible/common for there to be performance made orally or in writing. Generally, in order to be binding, the bonds (provided by banks and others) to guarantee purpose and terms must be unequivocal and the circumstances must performance, and/or company guarantees provided to leave no doubt that there is mutual consent with regard to the subject guarantee the performance of subsidiary companies? matter in question (Article 132 (Civil Code)). Are there any restrictions on the nature of such bonds and guarantees? United Arab Emirates

1.4 Are there any statutory or standard types of insurance The use of performance bonds, company guarantees and direct which it would be commonplace or compulsory to agreements is common practice, particularly in the case of joint have in place when carrying out construction work? For example, is there employer’s liability insurance ventures or special project vehicles. Further, project bonds, for contractors in respect of death and personal including tender bonds, advance payment guarantees, performance injury, or is there a requirement for the contractor to guarantees, or employer payment guarantees, all backed by banking have contractors’ all-risk insurance? institutions, are all commonly recognised and acceptable forms of guaranteeing performance by a party. Performance bonds and The Civil Code does not prescribe any insurance to be in place payment guarantees are typically unconditional and payable on when carrying out construction works, but the parties are free, demand. subject to the law, to agree the content of their contract. The most Government procurement laws support the provision of interest-free common forms of insurance under construction contracts in the performance bonds equal to 10% of the tender value from private UAE are as follows: All Risk Insurance; Professional Indemnity establishments in the form of an unconditional, irrevocable letter Insurance; Public Liability Insurance; Worker’s Compensation of guarantee from a recognised bank operating in the UAE. In Insurance; Decennial Liability Insurance; and Delay in Start-Up construction contracts, and under government procurement rules, Insurance. The FIDIC suite of contracts, being the prevailing form non-public establishments should provide interest-free performance of construction contracts in the UAE, have extensive provisions bonds equal to 10% of the tender value of construction projects in which address the insurance requirements. With regard to health the form of an unconditional, irrevocable letter of guarantee and the insurance for workers, the Dubai Health No. 11 of guarantor must be a recognised bank operating in the UAE. 2013 is applicable and mandates that all nationals and residents with a Dubai visa should have compulsory health insurance cover. 1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and 1.5 Are there any statutory requirements in relation supplies used in the works? Is it permissible for to construction contracts in terms of: (a) general contractors to claim that until they have been paid requirements; (b) labour (i.e. the legal status of those they retain title and the right to remove goods and working on site as employees or as self-employed materials supplied from the site? sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety? This right is recognised in the Commercial Code, but it is doubtful that the right to retain title to the goods and materials would extend The general requirements (i.e. formation, etc.) applicable to commercial to the right to remove the goods and materials from the site until transactions, which include construction contracts, are covered by the payment is received. Civil Code. However, all labour relations between employers and employees are governed by Federal Law No. 8 of 1980 on Regulation of Labour Relations (the “LRA”). According to its Article 13, no 2 Supervising Construction Contracts non-national may be recruited for work in the United Arab Emirates without the prior approval of the Labour Department and without first obtaining a work permit in accordance with the procedures and 2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third regulations laid down by the Ministry of Labour and Social Affairs. party? Does any such third party (e.g. an engineer Employers are compelled to provide adequate preventive equipment or architect) have a duty to act impartially between and have measures to protect employees against the dangers of contractor and employer? Is that duty absolute or is accidents and diseases in the workplace. The Ministry of Labour it only one which exists in certain situations? If so, and Social Affairs may order further measures to be implemented by please identify when the architect/engineer must act employers to this end. Employees do not pay income tax in the UAE. impartially.

Supervision of construction contracts on behalf of employers is 1.6 Is the employer legally permitted to retain part of common practice but the law does not specifically regulate the the purchase price for the works as a retention to be impartiality of the engineer. As the FIDIC forms of contract are released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed commonly used, the impartiality of the engineer (under the FIDIC defects liability is complete? Red Book) is regulated contractually. The engineer, under the FIDIC Red Book, has a greater duty to act impartially than the employer’s It is common practice in the UAE for employers to withhold representative under the FIDIC Silver Book. The Civil Code

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requires the parties under a contract to act in good faith and good faith is always presumed. To capture this meaning, the following 3.2 Can work be omitted from the contract? If it is terms will be applied to a party’s conduct: “fairness, fair conduct, omitted, can the employer do it himself or get a third party to do it? reasonable standards of fair dealing, decency, reasonableness, decent behaviour, a common ethical sense, having regard to the interests of the other party”. Work may be omitted from the contract, but the exact circumstances under which the employer may execute the works himself, or get a third party to do so, are generally determined by the terms and 2.2 Are employers entitled to provide in the contract that conditions of the contract. 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 3.3 Are there terms which will/can be implied into a paid” clause? construction contract?

United Arab Emirates This arrangement is not expressly prohibited by the law of the UAE The general principles of the laws of the UAE are implied into and the parties are free to include such provisions in construction contracts, and the concept of good faith and custom examples of contracts, and they will be enforceable. The freedom to contract is such implied terms (Article 246 and 50 (Civil Code)). The Contract recognised in Article 257 (Civil Code), but the provisions applicable will be interpreted in accordance with the interpretational maxims to contractual conditions will apply to these arrangements. and rules as set out in the Civil Code and, in the absence of clear However, most pay-when-paid provisions are found in subcontracts. wording, the mutual intention of the parties, the nature of the Considering the fact that such clauses will be enforceable, transaction, the trust and confidence which should exist between the subcontractors should note that, unless the main contractor has parties in accordance with the custom in such transactions, will be assigned its rights against the employer to the subcontractor, examined (Article 265(2) (Civil Code)). Article 891 (Civil Code) prohibits subcontractors from making claims against employers directly. It should be noted that the party 3.4 If the contractor is delayed by two events, one the benefiting from the protection of such a clause may ultimately lose fault of the contractor and one the fault or risk of such protection if it is proven that it has not acted in good faith. his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that concurrent delay? 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 Generally, concurrency will lead to an extension of time being particular breaches, e.g. liquidated damages for late awarded, but without additional payment. The contractor may be completion? If such arrangements are permitted, are entitled to additional payment where it is proven that a part of the there any restrictions on what can be agreed? E.g. delay is not concurrent and where the contractor is not responsible does the sum to be paid have to be a genuine pre- for the delay. estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss suffered? 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own Liquidated damages are enforceable in the UAE. According to delays but the employer uses up that period by, for Article 390(1) (Civil Code), the parties may agree the amount of example, a variation, is the contractor subsequently compensation in advance for a breach of contract, but the Article entitled to an extension of time if he is then delayed after this float is used up? draws no distinction between penalties or liquidated damages. However, Article 390(2) states that the court may, on the application of either party (i.e. the employer or the contractor), vary such Unless there is an express provision to the contrary in the contract, agreement so as to make the compensation equal to the loss (i.e. where there is remaining float in the programme at the time of an increase or decrease the amount), and any agreement to the contrary employer’s risk event, it is anticipated that an extension of time will shall be void. generally only be granted to the extent that the employer’s delay is predicted to reduce the total float on the activity paths affected by the employer’s delay to below zero. 3 Common Issues on Construction Contracts 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 3.1 Is the employer entitled to vary the works to be done what date does time start to run? under the contract? Is there any limit on that right? In principle, the general prescription period of 15 years of Article The employer is entitled to vary the works under the contract. 473(1) (Civil Code) applies to claims under construction contracts Article 877 (Civil Code) states that the contractor must complete the (with the exception of claims under engineering services contracts, work in accordance with the conditions of the contract. Therefore, where the shorter prescription period of five years for claims if the contract provides that the scope of works may be varied, then of professionals under Article 475 may apply). Generally, the the contractor must comply with the conditions applicable to the prescription period will commence from the time that the right is execution of variations. Conversely, the right of the employer to due (Article 478). In cases of structural defects (whether in case of instruct variations may be limited by the contractual provisions. collapse of the structure, or a defect threatening its stability), Article 880 (Civil Code) establishes decennial liability of the contractor, calculated from the time when the works were delivered. The

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designer is jointly liable with the contractor as above, unless he If the contract does not contain a termination clause, then it may has not supervised construction, in which case he will remain liable be terminated by means of a court order in the event of default. It for defects in the design. A claim resulting from this liability will is permissible for the parties to explicitly agree that a contract will prescribe after the lapse of a period of three years, calculated from be considered automatically cancelled, without the need for a court the date of the collapse of the structure, or from the date that a defect order if a party fails to perform its obligations under the contract in the structure was discovered (Article 883 (Civil Code)). (Article 271). The Civil Code requires that, unless the parties have agreed otherwise, notice of cancellation must be given. The parties do not need to detail the conditions for termination in a contract, 3.7 Who normally bears the risk of unforeseen ground conditions? as is the case in a common law jurisdiction, as the grounds for termination are set out in the Civil Code. The designer and contractor will be held jointly liable if the building or installations collapse (totally or partially), or if the 3.12 Is the concept of force majeure or frustration known defect threatens the stability and safety of the building, whether as in your jurisdiction? What remedy does this give a result of ground conditions, or if the employer consented to the the injured party? Is it usual/possible to argue United Arab Emirates erection of the defective buildings. As stated above in question 3.6, successfully that a contract which has become uneconomic is grounds for a claim for force majeure? Article 880 establishes a decennial liability period, calculated from the time that delivery of the work was taken, where contractors and designers will be jointly liable. However, if the work is restricted to Force majeure is an established concept in the UAE. If force design and excludes supervision of the actual construction work, the majeure makes the performance of the contract impossible, the designer shall be liable only for defects in the design. corresponding obligation shall cease, and the contract shall be automatically cancelled (Article 273 (Civil Code)). The Article also notes that, in the case of partial impossibility, the part of the contract 3.8 Who usually bears the risk of a change in law which has become impossible to perform shall be extinguished. It affecting the completion of the works? will not be possible to successfully argue that a contract which has become uneconomic to perform will constitute force majeure. This issue is not specifically addressed in legislation and remains a matter for contractual arrangement. However, the employer will usually bear this risk under FIDIC contracts. 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 3.9 Who usually owns the intellectual property in relation subsequent owner of a building able to claim against to the design and operation of the property? the original contracts in relation to defects in the building? The laws of the UAE are being developed at a rapid pace in this area of specialty, but may not be as developed as in other jurisdictions. The doctrine of privity of contract is applicable in the UAE. Unless Currently, ownership of intellectual property mainly remains a these rights to claim for defects to the building have been assigned matter of contractual arrangement between the parties. The FIDIC to the new owner, the new owner will only have a claim against suite of contracts have extensive provisions for this and provide that the seller for defects. Rights may be granted or transferred to third the contractor retains ownership of the intellectual property, but parties without the consent of the debtor, but obligations cannot grants the employer wide and encompassing rights to the intellectual be transferred to a third party without the consent of the creditor property. (Article 252 (Civil Code)).

3.10 Is the contractor ever entitled to suspend works? 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 The concept of ihtibās (withholding, or withholding performance) limits on the rights of set-off? is addressed in Article 414 (Civil Code). The Article is deliberately general and wide in application in order to avoid undue restriction. Set-off may occur by operation of law, by agreement between the The essential element in the system of retention is that there must be parties, or by means of a court order (Article 369 (Civil Code)). a connection between the two obligations. One of the contracting For a mandatory set-off to apply (that is, by operation of law), each parties in a contract may withhold his performance until the other of the parties must be in debt to the other, the obligations must be contracting party performs his obligation. The performance being of the same kind and description, must be equally due and of equal withheld or delayed until the corresponding obligation is performed strength or weakness, and the set-off must not prejudice third parties, must follow the performance of the corresponding obligation. The irrespective of the cause giving rise to the obligation (Article 370 terms and conditions may be further elaborated on, or prohibited (Civil Code)). contractually between the parties.

3.15 Do parties to construction contracts owe a duty of 3.11 On what grounds can a contract be terminated? Are care to each other either in contract or under any there any grounds which automatically or usually other legal doctrine? entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly? Subject to the overarching doctrine of good faith required by the Civil Code, and save as provided for between the parties in the contract, there is no specific duty of care due in construction A party may, upon notice to the defaulting party, require that the contracts. contract be terminated after giving notice to the defaulting party. In this instance, the judge may order that the contract be terminated.

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an uncommon method of dispute resolution, but the parties may not 3.16 Where the terms of a construction contract are be able to enforce an adjudicator’s award through the courts. There ambiguous, are there rules which will settle how that are instances where disputes are resolved by adjudication under the ambiguity is interpreted? auspices of the International Chamber of Commerce, or Dispute Adjudication Board as established under the FIDIC contracts. If the The Civil Code states that the basic principle in contracts is the agreement states that an adjudicator’s award, or that of the Dispute consent that the parties must have reached an agreement regarding Adjudication Board, is binding on the parties, then failure to comply their obligations (Article 257). The primary rule of interpretation with the award may be considered to be a breach of contract. is that words shall be given their ordinary meaning and, unless it is impossible to do so, a word may not be construed figuratively (Article 258). If there is scope interpretation, an enquiry shall be 4.3 Do your construction contracts commonly have made into the mutual intentions of the parties beyond the literal arbitration clauses? If so, please explain how meaning of the words, and guidance may be sought in so doing from arbitration works in your jurisdiction. the nature of the transaction, and the trust and confidence which United Arab Emirates should exist between the parties in accordance with the custom Almost all construction contracts provide for arbitration as a dispute current in such dealings (Article 265). Please also refer to question resolution mechanism. Agreements to resolve disputes by means 3.3 above in this respect. of arbitration must be clear and in writing, and if the parties have agreed to resolve the dispute through arbitration, they may not institute proceedings in court to resolve the dispute (Article 203 3.17 Are there any terms in a construction contract which (Civil Procedures Law)). However, if one of the parties approaches are unenforceable? the court to resolve the dispute despite the presence of an arbitration clause in the contract, and the other party does not object at the first Any contractual condition which conflicts with a mandatory provision hearing, the action must be tried by the court and the arbitration in the law is unenforceable, such as provisions exempting the contractor clause shall be deemed to be cancelled. Generally, the rules of the or the designer from liability, or provisions limiting such liability. arbitral institution elected in the construction contract are followed. The most popular arbitral institutions are the International Chamber 3.18 Where the construction contract involves an element of Commerce (“ICC”), the Dubai International Arbitration Centre of design and/or the contract is one for design only, (“DIAC”), the Dubai International Financial Centre – London Court are the designer’s obligations absolute or are there of International Arbitration (“DIFC-LCIA”), and the Abu Dhabi limits on the extent of his liability? In particular, does Commercial Conciliation and Arbitration Centre (“ADCCAC”). the designer have to give an absolute guarantee in respect of his work? 4.4 Where the contract provides for international The contractor and the architect are jointly liable for any total or partial arbitration, do your jurisdiction’s courts recognise destruction within 10 years to the buildings they have constructed and enforce international arbitration awards? Please advise of any obstacles to enforcement. (Article 880 (Civil Code)). If the architect did not supervise the construction of the works, its liability will be limited to the defects in the design for a period of 10 years (Article 881 (Civil Code)). The UAE acceded to the New York Convention in 2006 without reservation. The courts are developing a culture and are becoming more accustomed to the idea of enforcing foreign arbitral awards. 4 Dispute Resolution However, the courts sometimes tend to widen the grounds on which the New York Convention allows courts to resist enforcement of foreign arbitral awards. 4.1 How are disputes generally resolved?

Disputes are resolved by referring matters to the courts. In every 4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign Emirate of the UAE, there is a court system, consisting of a Court court be upheld and enforced in your jurisdiction? of First Instance, Court of Appeal and Court of Cassation, with the exception of Ras Al Khaima and Dubai which have their own Courts In general, the test to enforce foreign judgments is higher than that of Cassation. The courts of the Dubai International Financial Centre of enforcing foreign arbitral awards as there is no treaty, such as the (“DIFC”), a free zone, have jurisdiction to resolve disputes where the New York Convention, that governs this issue. Only when there parties have expressly agreed to their jurisdiction. The decisions of the are bilateral or regional treaties between the UAE and the country courts, including DIFC courts, are enforceable in any of the Emirates. in question will the courts in the UAE enforce foreign judgments. Arbitration is also a popular method of resolving disputes in the UAE. Although the UAE does not have a separate Arbitration Act, the Civil Procedures Law, which primarily governs court 4.6 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, proceedings, does contain a small number of articles relating to any rights of appeal and a general assessment of arbitral proceedings. Almost all construction disputes are resolved how long proceedings are likely to take to reduce: (a) through arbitration, which is the most popular method of dispute a decision by the court of first jurisdiction; and (b) a resolution for construction contracts. decision by the final court of appeal.

4.2 Do you have adjudication processes in your To commence a claim, the claim should be filed in the relevant court jurisdiction? If so, please describe the general with jurisdiction to hear the dispute. One must set out the basis procedures. for the dispute and the remedy sought. A court fee is levied and is calculated on the basis of a percentage of the value of the claim and Adjudication is not regulated by legislation in the UAE. It is not this percentage varies in different jurisdictions. The first hearing

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will normally be set two to three weeks after the claim is filed. Court of Appeal decisions may be made on matters of law only and The presiding judge may appoint an expert to assist the court in must be submitted to the Court of Cassation within 30 days from the analysing the presented facts, particularly in cases where technical date of judgment. Court of Appeal decisions usually take between knowledge is necessary, such as construction contracts. Depending two and four months, provided no expert has been appointed by the on the complexity of the claim, judgment from the Court of First Court. If an expert has been appointed it usually takes a minimum Instance may take between nine and 18 months, but this period may of three months before judgment is handed down. The Court of be longer if an expert was appointed by the Court. Parties to court Cassation normally takes six months to one year to hand down proceedings are afforded the right to appeal. Appeals against a judgment. The right to appeal is automatic and does not require decision of the Court of First Instance must be made to the Court of any special permission, provided that the value of the claim is above Appeal within 30 days from the date of judgment. Any such appeal AED 20,000 for the Dubai Court of Appeal and AED 200,000 for may be made in relation to issues of fact or law. Appeals against the Court of Cassation. United Arab Emirates

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Thanos Karvelis Niel Coertse Galadari Advocates & Legal Consultants Galadari Advocates & Legal Consultants Al Ghubaiba Road Al Ghubaiba Road Bur Dubai Bur Dubai Dubai Dubai United Arab Emirates United Arab Emirates

Tel: +971 4 393 7700 Tel: +971 4 393 7700 Fax: +971 4 393 7755 Fax: +971 4 393 7755 Email: [email protected] Email: [email protected] URL: www.galadarilaw.com URL: www.galadarilaw.com

Partner Associate Thanos leads the international arbitration practice as well as the Niel is an Associate at Galadari Advocates and Legal Consultants. He construction practice of Galadari Advocates & Legal Consultants. He has over 10 years of legal experience, specialising in construction and

United Arab Emirates also maintains a strong corporate/commercial practice. Mr. Karvelis engineering law including project finance-related work and dispute acts regularly as lead counsel in many international commercial and resolution practice. construction arbitrations in Europe and the Middle East. Niel’s project finance experience includes reviewing, drafting, He has over 20 years’ of experience in both front-end and contentious negotiating and commenting on the FIDIC and NEC3 standard form construction matters in SE Europe, MENA and the GCC in international construction contracts, specifically EPC/Turnkey, O&M Agreements, construction projects (including public and private projects, residential Client/Consultant contracts, subcontracts, and goods and services and commercial developments, concessions and PPP’s, infrastructure supply contracts. projects, power plants, hospitals and hotels) across the entire project Niel’s dispute resolution experience includes representing developers, life (from pre-bid and joint venture agreements to contract management employers and contractors in the management, drafting, and defending and claims preparation to mediation and arbitration). of claims arising out of and in connection with construction projects In addition, he has extensive experience in multi-billion cross-border through multi-tiered Alternative Dispute Resolution mechanisms such corporate transactions (including acquisitions, joint venture and as adjudication and arbitration. in general cooperation agreements) in a wide range of industries Niel’s experience covers infrastructure, energy (including renewable (including construction, cement, energy, banks, hospitality) across the energy), mining (including iron ore and diamond mining projects), and entire transaction cycle (from drafting and negotiation to arbitration). major rail development projects. Thanos is listed with the Dubai International Arbitration Centre as a Prior to joining Galadari, Niel practised at Edward Nathan Sonnenbergs qualified Arbitrator. Thanos was admitted to the Athens Bar in 1994, Incorporated, Africa’s largest law firm. Prior to that, Niel spent time holds an M.Sc in Business and is currently ranked in Chambers Global with a specialist consulting firm in the construction and engineering as “very eloquent” in relation to his negotiation skills. law field where he gained valuable on-site contract management and claims-related experience on mega infrastructure, power generation and large mining projects in South Africa.

Galadari Advocates & Legal Consultants was established in Dubai in 1983, and is recognised today as one of the leading full-service business law firms in the region. With a team of more than 100 lawyers and supporting professionals from around the world and offices in Abu Dhabi, Dubai, and the Dubai International Financial Centre (DIFC), the team offers an in-depth understanding of the practices and procedures essential to doing business successfully in the region. The firm comprises of internationally and locally qualified lawyers, enabling us to provide effective and commercially focused advice and representation in all UAE courts. Our lawyers are committed to maintaining an understanding of their clients’ industries, and are regularly called upon to speak and publish on legal and market developments. The firm offers clients award-winning experience in many areas of legal practice, including: ■■ Arbitration, Litigation and Dispute Resolution. ■■ Corporate and Commercial. ■■ Finance. ■■ Construction. ■■ Compliance and Regulatory. ■■ Intellectual Property. ■■ Employment and Labour. ■■ Real Estate. ■■ Insurance. ■■ Maritime.

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USA Charles B. Lewis

Duane Morris LLP Jeffrey L. Hamera

build projects. Other delivery systems that combine design and 1 Making Construction Projects build responsibilities, such as EPC, design-build-operate-transfer (“DBOT”) and P3, are used on larger projects. Design work for 1.1 What are the standard types of construction contract certain trades, such as MEPFP, curtain walls and wood trusses, is in your jurisdiction? Do you have contracts which often delegated to subcontractors. place both design and construction obligations upon Design-only contracts are common and included in all the major contractors? If so, please describe the types of form document sets. Design-Build delivery systems often use a contract. Please also describe any forms of design- only contract common in your jurisdiction. Do design contract between the design-builder and designer. Many you have any arrangement known as management design contracts on smaller projects are formed by the acceptance contracting, with one main managing contractor of an architect’s proposal, without a formal contract being issued, and with the construction work done by a series which can cause responsibility gaps if an AIA or other form contract of package contractors? (NB For ease of reference is used for construction. throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and Management contracting is commonly seen in the form of a engineering contracts.) construction management agreement (“CM Agreement”) with the CM either managing multiple prime contractors as an advisor to the Many types of project delivery systems and contract types are used for owner or also having construction responsibility and holding the construction projects in the United States. Common delivery systems contracts with the trade contractors who perform the work. include design-bid-build, design/build, engineer-procure-construct (“EPC”), construction manager as an advisor or as a constructor, 1.2 Are there either any legally essential qualities needed multi-prime and public-private partnerships (“P3”). Some projects to create a legally binding contract (e.g. in common use hybrid delivery systems with only some scopes of work, often law jurisdictions, offer, acceptance, consideration mechanical, electrical, plumbing and fire protection (“MEPFP”), and intention to create legal relations), or any performed on a design/build basis. Government contracts are often specific requirements which need to be included in a construction contract (e.g. provision for adjudication or restricted to certain delivery systems and require competitive bidding. any need for the contract to be evidenced in writing)? The most common construction contract price structures are a lump sum or cost-plus fee with or without a guaranteed maximum A binding contract can be established by proving an offer, an price (“GMP”). The contractor’s fee in cost-plus contracts may be acceptance and consideration or detrimental reliance on a promise a percentage of the cost of the work or a fixed fee. Some GMP to perform. The offer and acceptance must show intent to enter contracts will include a “shared savings” clause. into a binding agreement (or a “meeting of the minds”) and define There are several families of forms published by industry the scope of the work and the price to be paid. Acceptance may be organisations. The most common set of documents, especially established by performance or allowing a party to perform work. If for mixed use, commercial and residential work, is the American a party incurs costs or damages in the performance of work without Institute of Architect’s (“AIA”) documents. Other comprehensive an express contract, it may be able to recover on implied contract, sets of forms include the ConsensusDocs, which is an industry- quasi-contract or quantum meruit theories and generally requires wide attempt to draft balanced documents, the Engineers Joint a written agreement for contracts that cannot be performed within Contract Documents Committee (“EJCDC”), which is geared one year. However, it is difficult to use the Statute of Frauds as a toward public works and industrial projects, Construction Owners defence in most construction disputes. Association of America (“COAA”) and the Design Build Institute of America (“DBIA”). These form documents are typically revised 1.3 In your jurisdiction please identify whether there is and amended to suit specific projects and jurisdictions. Federal, a concept of what is known as a “letter of intent”, in state and municipal governments usually have mandated forms or which an employer can give either a legally binding or regulations that dictate the contract terms. non-legally binding indication of willingness either to Design/build contracts are common in the United States. Design/ enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether build projects are usually contractor-led but can be A/E-led or or not a full contract is ever concluded. performed by a true design-builder with both design and construction capabilities in-house. Joint ventures are often used for design/ A letter of intent may be a binding or non-binding indication

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of a willingness to enter into a contract. A “memorandum of c) Companies involved in construction will be faced with understanding” may also be used. A limited notice to proceed is multiple types of taxation. Taxes owed to the United States often used to authorise a contractor to start a project before the entire federal government include income tax, sales tax, Social contract is agreed upon, usually with a limitation on the scope to be Security tax, Medicare, and Federal Unemployment. Some performed and the costs that will be reimbursed. state governments may also apply an income tax as well as taxes on materials, sales, equipment brought into the state, and use taxes. Municipal governments may apply sales 1.4 Are there any statutory or standard types of insurance taxes, transportation taxes, property taxes and fuel taxes. which it would be commonplace or compulsory to d) Health and safety are also heavily regulated. Construction have in place when carrying out construction work? work is usually governed by the Occupational Safety and USA For example, is there employer’s liability insurance Health Act (“OSHA”) or its state implemented equivalent for contractors in respect of death and personal – optional – maybe unnecessary, or, if mining is involved injury, or is there a requirement for the contractor to the Mine Safety and Health Act (“MSHA”). State worker’s have contractors’ all-risk insurance? compensation acts and the Jones Act for shipboard work provide employees with remedies against their employers in Contractors typically carry and are required by contract to prove the case of injury or death. State and federal environmental they have general liability, automobile, worker’s compensation, protection laws and regulations also impact the safe conduct employer’s liability and, in some cases, excess insurance coverage. of construction work. Contractors may also procure a Contractor Controlled Insurance Program on larger projects (“CCIP”). General liability policies 1.6 Is the employer legally permitted to retain part of usually cover personal injury, death and damage to property under the purchase price for the works as a retention to be the project. There are numerous defences to coverage that will vary released either in whole or in part when: (a) the works from state to state and policy to policy. One commonly litigated are substantially complete; and/or (b) any agreed question is whether a contractor’s or subcontractor’s insurance defects liability is complete? will cover damage caused to the project by construction defects. Designers and any party who provides professional services A project owner may withhold from amounts due a commonly carry errors and omissions coverage or professional contractor, who may in turn withhold retainage from subcontractors, liability coverage to insurance against negligent services. until the work is complete. Also, amounts may be withheld until Builders risk insurance will usually be purchased by the Owner or defective work is corrected. Retainage and withholding for defects Contractor but occasionally the risk may be self-insured or covered is typically addressed in written contracts. Most states have limits by a property insurance policy. Owners of construction projects or conditions on the withholding and release of retainage and may procure an Owner Controlled Insurance Program (“OCIP”), an defective work deductions, such as prompt payment acts and right Owner’s Protective Policy for damages arising from design errors to cure acts. A common practice is for an owner to retain 5% or 10% and omissions, or project specific policies. of the amount earned by a contractor until a project is substantially complete. Another common practice is for an owner to retain 10% Workers compensation insurance is mandated by state laws and, if until a project is 50% complete and then make the remainder of on-road motor vehicles are used, automobile insurance is typically the payments in full and releasing the retention, which will be 5% required by state law. of the total project costs, at substantial completion. The retention There are less common coverages available such as subcontractor’s on payments earned by subcontractors early in a project, such as professional liability coverage, “Contractor’s Errors and Omissions” demolition or foundation work, may be paid 100% when those policies which purport to cover construction defects, delay coverage, subcontractors have fully completed their work despite the project subcontractor default insurance, railroad protective liability and not being substantially complete. pollution coverage.

1.7 Is it permissible/common for there to be performance 1.5 Are there any statutory requirements in relation bonds (provided by banks and others) to guarantee to construction contracts in terms of: (a) general performance, and/or company guarantees provided to requirements; (b) labour (i.e. the legal status of those guarantee the performance of subsidiary companies? working on site as employees or as self-employed Are there any restrictions on the nature of such bonds sub-contractors); (c) tax (payment of income tax of and guarantees? employees); or (d) health and safety? Payment and performance bonds are permissible and common (a) Construction activities are highly regulated and requirements on private construction projects. However, many projects are not vary by state or municipal jurisdiction. Licensing, insurance, bonded or are only partially bonded. Government projects must be mechanic’s lien, prompt payment, right to cure defects, bonded under the Miller Act or “Little Miller Acts” for state projects. government procurement processes, arbitration, venue and jurisdiction are among the regulated issues. Corporate guarantees, letters of credit and “Sub-Guard” insurance are also used to manage the risk of a contractor’s or subcontractor’s (b) Labour relations between employers and their employees non-performance or failure to make payments. are highly regulated. Discriminatory hiring, wage rates, hours and overtime are among the regulated issues. Of Government jobs require the use of approved sureties. Sureties particular concern for federal or federally funded projects are typically licensed, registered and rated based on their financial are Title VII of the Civil Rights Act, the Age Discrimination capability. Private contracts often specify the minimum rating in Employment Act, the Davis-Bacon Act, the Immigration level and place of registration of sureties if bonds are required. and Nationality Act of 1952, the Americans with Disabilities Bond forms and the common law provide several defences to and Act, and the Federal Acquisitions Regulations, particularly restrictions on claims against sureties, including notice of claims, Section 22.1802 dealing with e-verify. preservation of the project funds, and most defences assertable by the principal on the bond.

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almost unheard of in the owner/general contractor relationship. 1.8 Is it possible and/or usual for contractors to have FAR § 52.232.27 requires timely payment for federal contracts and retention of title rights in relation to goods and most states have laws governing the timing of payment on state and supplies used in the works? Is it permissible for municipal contracts. In the contractor/subcontractor context, many contractors to claim that until they have been paid they retain title and the right to remove goods and states distinguish between pay-when-paid and pay-if-paid. Contracts materials supplied from the site? that require payment by a general contractor to a subcontractor only when payment is received by the general contractor from the owner Title to goods and supplies typically passes upon receipt of payment. are often construed as pay-when-paid and require payment within Goods, such as construction materials and equipment that are a reasonable time regardless of receipt of actual payment from the incorporated into or affixed to the real property but not paid for, can owner. A pay-if-paid clause requires the subcontractor to wait until USA support mechanic’s lien rights. Title to off-site stored material will the general contractor is paid regardless of the time but usually usually transfer on proof of payment. Suppliers may have a statutory requires receipt of payment from the owner to be clearly expressed right to recover materials not yet installed or equipment that is not as a condition precedent. Neither pay-if-paid nor pay-when-paid permanently affixed to the real property. State mechanic’s lien laws will typically be a defence to a mechanic’s lien claim and this varies and the Uniform Commercial Code (“UCC”) provide guidance by state with regard to whether it is a defence to a bond claim. on how and when a supplier may recover property. Construction contracts often allow an owner to take over supplies and equipment 2.3 Are the parties permitted to agree in advance a fixed that are necessary to complete the work if a contractor defaults or sum (known as liquidated damages) which will be the contract is terminated, conditioned on paying or giving a credit paid by the contractor to the employer in the event of to the contractor for the supplies and equipment. 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. 2 Supervising Construction Contracts 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 2.1 Is it common for construction contracts to be financial loss suffered? supervised on behalf of the employer by a third party? Does any such third party (e.g. an engineer Liquidated damages are frequently used to assess damages for or architect) have a duty to act impartially between delayed completion by a contractor. If liquidated damages are contractor and employer? Is that duty absolute or is determined to be a penalty, they will not be enforced. To be it only one which exists in certain situations? If so, enforceable, liquidated damages must be the exclusive remedy for please identify when the architect/engineer must act impartially. delay and must not exceed a reasonable estimate of actual damages. The usual justification for liquidated damages is that the actual damages will be difficult to determine and the contract language Architects and engineers hired by the owner are often responsible for will include that justification. Most states assess the reasonableness administration of the construction contract, which typically includes of liquidated damages at the time of contract rather than the time limited express authority to direct the work of the contractor. In of breach. An attempt to claim both liquidated damages and actual general, architects observe the work in progress to determine if it damages may result in being denied both. Because there must be is being performed consistent with the plans and specifications, the reasonable likelihood of incurring actual damages, liquidated but do not supervise the work of the contractors. A construction damages are most often used only for late substantial completion, manager may also be hired by the owner to supervise the work of not late completion of interim milestones or final completion, contractors hired directly by the owner. Generally, an architect or although the standard ConsensusDocs agreement between owner engineer administering a contract is obligated by contract to act and contractor includes the option for liquidated damages for late in the owner’s best interest, not impartially. An exception is Rule final completion, project milestones and performance requirements. 2.4 of The National Council of Architectural Boards (2014–2015), which requires an architect to act impartially when interpreting contract documents and judging contract performance. Most states 3 Common Issues on Construction have adopted some form of 2.4 as part of a Code of Professional Contracts Responsibility for Architects. This standard is also commonly incorporated into agreements between owners and architects and is included in the AIA B101-2007. Despite the language requiring 3.1 Is the employer entitled to vary the works to be done impartiality, it is generally accepted that as architects are hired by under the contract? Is there any limit on that right? the owner, architects and engineers deciding matters between the owner and contractor will favour the owner. Construction managers It is almost universal that a construction contract will allow the have no duty to act impartially either by law or contract. owner to increase or decrease the contractor’s scope of work through a change order. The change order process can be initiated by the owner through the issuance of a change order which delineates what 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, work is being added, deleted or modified. The cost of a change have themselves been paid; i.e. can the employer order can be agreed to before the addition, deletion or modification include in the contract what is known as a “pay when of the work is performed or the owner can order a change with the paid” clause? owner and contractor to negotiate the amount of the change at a later date. If, however, the change alters the essential purpose of Conditioning or restricting a payment obligation to downstream the construction contract so as to constitute a new undertaking, the entities upon receipt of payment from upstream entities is very contractor can consider it a “cardinal change”, which would allow common in the general contractor/subcontractor relationship, but the contractor to refuse to perform the work.

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3.2 Can work be omitted from the contract? If it is 3.6 Is there a limit in time beyond which the parties to omitted, can the employer do it himself or get a third a construction contract may no longer bring claims party to do it? against each other? How long is that period and from what date does time start to run? As noted above, almost all construction contracts in the United States allow the owner to make changes in the contractor’s scope The time in which any party may bring a claim varies from state to of work, adding, deleting or modifying the contractor’s scope of state and can also be addressed in the construction contract itself. work. Typical construction contracts in the United States allow the It is not uncommon for a construction contract to provide that the statute of limitations begins to run on claims arising from work USA owner to bid out the change order work or self-perform such work. However, it is unlikely that a third party, which has not mobilised on performed before substantial completion on the date of substantial the project, or the owner could perform such work in a cost-effective completion. manner. 3.7 Who normally bears the risk of unforeseen ground 3.3 Are there terms which will/can be implied into a conditions? construction contract? Absent a contractual provision allocating the risk of unforeseen While many construction contracts require that the contractor ground conditions, also known as differing site conditions, the represent that it is financially solvent and is able to pay all debts as risk lies with the contractor under common law. Consequently, they mature, possesses sufficient working capital to complete the most construction contracts will allocate that risk depending on work, is authorised to do business in the location of the project, is the type of differing site condition that is discovered. The Federal licensed by any governmental authorities having jurisdiction over Acquisition Regulations, which apply to U.S. government contracts, the project, has visited the site and is familiar with local conditions, provide that an equitable adjustment will be made to the contractor’s certain additional duties or terms will be implied by operation of time and compensation if the conditions found differ materially the law. Every construction contract implies on each of the parties from those indicated in the contract, or the unknown condition is a duty of good faith and fair dealing in its performance, the duty not of an unusual nature and differs materially from that ordinarily to hinder, interfere or delay the completion or early completion of encountered and generally recognised as inherent in the work of the the work and to divulge superior knowledge about site conditions, character provided in the contract. Similar provisions are usually access, or any other aspect of the work. With respect to those items found in private construction contracts as well. which the owner specifies by name or manufacturer, the owner impliedly warrants that the particular item will perform the function 3.8 Who usually bears the risk of a change in law it is intended to perform as part of a completed project. Finally, affecting the completion of the works? when the owner contracts with other contractors, the owner has the obligation of coordinating the work of these other contractors with The cost and other impact of design changes required because of the general contractor and its subcontractors. changes in law, typically building codes, are generally addressed directly or indirectly in the construction contract. For example, the 3.4 If the contractor is delayed by two events, one the AIA A201 – 2007 assigns responsibility to the owner except when fault of the contractor and one the fault or risk of the contractor knowingly fails to comply with laws. Common his employer, is the contractor entitled to: (a) an approaches are to include changes in laws as force majeure events extension of time; or (b) the costs occasioned by that or to include a section addressing changes in laws separately. Some concurrent delay? contracts may expand the contractor’s responsibility to include law changes that were reasonably foreseeable at the time of contracting. Under the circumstances described, the contractor is typically entitled to a time extension but not additional compensation. If, however, the impact caused by the contractor ceases before the 3.9 Who usually owns the intellectual property in relation to the design and operation of the property? impact caused by the owner, the contractor may, under those circumstances, be entitled to compensation for a part but not the whole of the delay. Similarly, if the impact caused by the owner The Architectural Works Copyright Protection Act of 1990 (the ceases before the impact caused by the contractor, the owner may be “Act”) provides copyright protection to the designer for the design entitled to damages from the contractor may be entitled to damages of the building or to other three-dimensional structures, as embodied from the contractor for the part of the delay caused solely by the in that building or structure. This protection extends to plans, contractor. drawings and buildings themselves. While the designer owns the copyright, an architectural agreement often provides that the owner is given a royalty–free licence to use such designs, upon payment to 3.5 If the contractor has allowed in his programme a the architect of what is due and owing, in the event the architectural period of time (known as the float) to allow for his own agreement is terminated and a new architect is brought on board. 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 3.10 Is the contractor ever entitled to suspend works? after this float is used up? The conditions under which a contractor may suspend its If the construction contract does not define who owns the float, performance are typically established in the construction contract courts and arbitrators will often decide that the project owns the and statutes applicable to construction projects. If a contractor has float and whoever uses it first is entitled to it. This concept varies by not been paid in the time or in the amount required by its contract, jurisdiction and plays into the concurrent delay analysis discussed it can usually suspend its performance. There may be contractual above.

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requirements to allow a certain period of time to expire after the contractor gives notice of a breach of a payment obligation before 3.13 Are parties which are not parties to the contract entitled the contractor may suspend its performance. Many states have a to claim the benefit of any contract right which is made for their benefit? E.g. is the second or subsequent provision in a Prompt Payment Act or Mechanic’s Lien Act that will owner of a building able to claim against the original allow a contractor to suspend performance if payment is not made contracts in relation to defects in the building? in conformance with statutory requirements. A contractor may, in some instances, suspend performance if an owner or architect fails A third party may have enforceable rights stemming from a to provide construction documents that are approved by a municipal construction contract if a third party beneficiary status is expressly government having jurisdiction over the project, fails to approve granted or, in limited instances, if implied rights exist. There are submittals of shop drawings and product data or fails to make USA no restrictions to designating third parties’ beneficiaries of express decisions. If an owner does not provide a contractor with access to warranties. It is common for a multi-unit residential developer to the project, performance may be suspended. Government regulations require the builder to issue warranties directly to the purchasers of or orders may also force a contractor to suspend performance. the residences. Extending the warranty to the end user can also Unexpected conditions such as discovery of hazardous materials, be done in a commercial setting. However, it is also common uncovering burial or archeological sites, and safety concerns may for residential developers to limit or require a waiver of implied trigger such suspensions. Force majeure events may also justify warranties. Claims of subsequent purchasers of residential property suspension of work. will typically be made on the basis of implied warranties and the states are split on whether such a claim will be allowed. 3.11 On what grounds can a contract be terminated? Are Rights to take assignment of subcontracts, subordinate liens, or there any grounds which automatically or usually collect accounts receivable are often expressly granted to the benefit entitle the innocent party to terminate the contract? of third parties, such as lenders. Designers and contractors can also Do those termination rights need to be set out expressly? be held liable to third parties for personal injury or property damage arising from their negligence in executing their work under a contract. The grounds for termination of a contract, or termination of performance under a contract, are typically expressed in the contract. 3.14 Can one party (P1) to a construction contract which However, there are statutory bases for termination and limited rights owes money to the other (P2) set off against the sums under the common law to terminate a contract. Material breaches, due to P2 the sums P2 owes to P1? Are there any such as failures to pay, provide access to a site and make decisions, limits on the rights of set-off? or not performing work, correcting defects, staffing a project adequately, following laws or adhering to the schedule, are often The amounts parties to a contract owe to each other can typically express grounds for termination of a contract for cause. Force be set off if the debts are incurred under the same contract. When majeure events may also be grounds for termination of a contract. the same parties are engaged in more than one contract, the right Many contracts permit an owner, especially a governmental body, of set off becomes more difficult to apply. The general rule to terminate a contract for convenience, without needing any is the accounting of amounts due is segregated by contract or cause or breach by a contractor to justify the termination. The project. Thus a contractor would not offset an amount owed by most common statutory grounds for termination are inadequate or a subcontractor for damages on project A from the amount due to untimely payment. Those statutes vary from state to state and may be paid to the subcontractor on project B. Many jurisdictions limit require a notice period to allow an attempt to cure a breach before the grounds on which a payment can be withheld, especially after termination. The common law also allows a party to terminate a an upstream contractor has received a payment, which limits the contract after, or in some cases in anticipation of, a material breach right to set off amounts between contracts. The application of set- by the other party or if an owner fundamentally changes the nature off rules is further complicated if a secured lender has a claim to of the work to be performed such that a “cardinal change” occurs. accounts receivable of a contractor on multiple projects as collateral for a loan, if a project is bonded, if a debtor enters bankruptcy, if mechanics’ liens are filed against real property or if suppliers or 3.12 Is the concept of force majeure or frustration known lower-tier subcontractors make claims on funds on the basis of in your jurisdiction? What remedy does this give constructive trust arguments. 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? 3.15 Do parties to construction contracts owe a duty of care to each other either in contract or under any At common law, a party seeking to avoid performing its contractual other legal doctrine? obligations may argue “impossibility of performance”, which requires a showing that performance has been rendered impossible The common law imposes upon the parties to a construction by the occurrence of an event, the non-occurrence of which was contract the duty to exercise reasonable care so as to avoid injuring a basic assumption on which the contract was made. Given this employees of other contractors on the job. All jurisdictions have difficult burden, parties to a construction contract will include a enacted Worker’s Compensation statutes which impose upon the force majeure provision, which usually is defined as an event beyond party employing the injured worker the obligation of compensating the control of the party asserting it and that was unforeseeable at the injured worker regardless of fault. Most, but not all, jurisdictions the time of contracting. The remedy for a force majeure event is prohibit negligence claims when the damages are economic in a time extension. The fact that contract performance has become nature, i.e. breach of contract damages. In those instances, the unprofitable or more difficult does not generally qualify as a force economic loss doctrine, with limited exceptions, will limit a party’s majeure event. cause of action to one sounding in breach of contract and will look to the language of the contract to determine if there has been a breach.

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Absent federal jurisdiction, litigation in the state court system is the 3.16 Where the terms of a construction contract are venue for resolution of disputes. Construction contracts frequently ambiguous, are there rules which will settle how that include arbitration provisions which require disputes to be arbitrated ambiguity is interpreted? through an administrative body such as the American Arbitration Association with one or three arbitrators. The goal of contract interpretation is to determine the intent of the parties at the time the contract was formed. A contract term is ambiguous if it is reasonably susceptible to more than one 4.2 Do you have adjudication processes in your interpretation looking at the relevant language in its context and as jurisdiction? If so, please describe the general procedures.

USA part of the contract as a whole. Courts may consider the industry knowledge of the parties and the custom and practice relevant to the clause. If an ambiguity is found to exist, it may be resolved by an The term “adjudication process” is not a term generally used in the included hierarchy of the various parts and terms of the contract or by context of dispute resolution in the United States. To the extent one or more of the many contract interpretation rules, such as contra “adjudication process” refers to the use of a third party to resolve proferentum, which states that any ambiguity is to be construed a dispute, parties can choose to submit their dispute to a court of against the drafter. Parole evidence is another means of resolving competent jurisdiction or to an independent third party mediator ambiguity. Some states look to parole evidence only if the ambiguity in a non-binding settlement process or to arbitrator(s), the result of is not resolved by the rules of interpretation of the contract and others which will be a binding determination, subject, of course, to certain may use parole evidence before or in conjunction with such rules. limited rights of appeal.

3.17 Are there any terms in a construction contract which 4.3 Do your construction contracts commonly have are unenforceable? arbitration clauses? If so, please explain how arbitration works in your jurisdiction.

The common law and statutes render several types of contract Construction contracts often, but not always, contain a provision clauses void or unenforceable. Contracts for illegal conduct are that requires disputes to be submitted to either a single arbitrator or not enforceable. Pre-construction waivers of mechanic’s lien and a panel of three arbitrators for a binding determination. A dispute other statutory rights are often not enforceable, unless separate will be arbitrated if such a provision is set forth in a construction consideration is provided for the waiver. Liquidated damages contract or the parties at the time a dispute arises agree to submit the provisions can be held unenforceable if they are deemed a penalty dispute to arbitration. The arbitration process begins with a filing of rather than a true estimate of actual damages. “Pay-if-paid” an arbitration demand by a Petitioner with the administrative body, provisions, indemnification clauses and “no-damages-for-delay” which must reference the agreement to arbitrate and which must be clauses are often held unenforceable or enforced with limitations if accompanied by a filing fee. The Respondent may then either answer they are worded in a way that offends the public policy or statutes the demand but if it chooses not to, generally the demand is deemed of a particular jurisdiction. For example, a “pay-if-paid” provision denied. This process may vary depending on which administrative that would shift the ultimate risk of non-payment by an owner to a body is chosen to administer the arbitration. Depending on the subcontractor may be treated as a “pay-when-paid” provision that monetary amount sought in either the demand or counterclaim, one will only delay the timing of payments but leave the risk on the or three arbitrators will then be selected by the parties. Once selected, contractor. An indemnity clause that facially allows a party to be a schedule of the pre-hearing discovery and hearing dates will be set, indemnified for its own negligence is likely to be unenforceable on usually with agreement of the parties. At the hearing, conformity public policy and statutory grounds. with the rules of evidence is optional. The goal of arbitration is to be quicker, less expensive, confidential and subject to limited appeal. 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, 4.4 Where the contract provides for international are the designer’s obligations absolute or are there arbitration, do your jurisdiction’s courts recognise limits on the extent of his liability? In particular, does and enforce international arbitration awards? Please the designer have to give an absolute guarantee in advise of any obstacles to enforcement. respect of his work?

The Convention on the Recognition and Enforcement of Foreign The standard of care for a designer is one of professional negligence. Arbitral Awards (the “New York Convention”) requires courts of a That is, the designer must exercise the skill, care and diligence signatory nation, such as the United States, to give effect to agreements employed by other competent design professionals designing to arbitrate and enforce awards pursuant to such agreements when similar projects in the same location, under similar circumstances. made in another signatory country. Defences to enforce arbitration That standard allows for a designer to err without liability as long agreements and awards include: lack of due process; that the as he or she performs in accordance with local professional norms. enforcement would be contrary to public policy; and certain other There is no absolute guaranty of the design unless that guaranty is defences as set forth in Article V of the New York Convention. The expressed in the designer’s contract. Federal Arbitration Act, Chapter 2, provides that the courts of the United States shall enforce foreign arbitral awards in accordance with 4 Dispute Resolution the New York Convention and in accordance with Chapter 2.

4.5 Where the contract provides for court proceedings 4.1 How are disputes generally resolved? in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? If the construction contract does not call for a method of alternate dispute resolution, the default is to a state or federal court lawsuit. Unlike the enforcement of a foreign arbitral award pursuant to the

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New York Convention, there is no international agreement to which The federal district courts are trial courts of limited jurisdiction the United States is a signatory that allows a judgment from another and these jurisdictional requirements must be met in order for country to be enforced. Similarly, there is no federal statute akin to the federal district court to proceed. The complaint may be Article 2 of the Federal Arbitration Act that applies to the enforcement accompanied by a request for a trial, which means that six to of a foreign judgment in U.S. courts. Several states have adopted the twelve jurors, depending on the jurisdiction, will decide the facts 2005 Uniform Foreign Money – Judgments Recognition Act, and the of a case. The trial court, which applies the law to the facts of requirements which must be met before a foreign judgment will be the case, will normally allow discovery, which might include the recognised and enforced are set forth therein. submission of written interrogatories and a document production request to the other side. Depositions of witnesses, including party

representatives, third parties and experts is to be expected. The trial USA 4.6 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, itself will be set anywhere from one year to five years from the date any rights of appeal and a general assessment of of filing, depending on the jurisdiction and complexity of the case. 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.

When a construction dispute is tried in a state or federal court of the United States, the process begins with the filing of a complaint.

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Charles B. Lewis Jeffrey L. Hamera Duane Morris LLP Duane Morris LLP 190 S. LaSalle St., Suite 3700 190 S. LaSalle St., Suite 3700 Chicago, IL 60603 Chicago, IL 60603 USA USA

Tel: +1 312 499 6740 Tel: +1 312 499 6786 Fax: +1 312 499 6701 Fax: +1 312 499 6701 Email: [email protected] Email: [email protected] URL: www.duanemorris.com URL: www.duanemorris.com USA

Charles B. Lewis is a partner in the Chicago office of Duane Morris and Jeffrey L. Hamera practises in construction law. Mr. Hamera’s clients is head of the Chicago office Construction Practice Group. Mr. Lewis include general contractors, design/builders, construction managers, represents general contractors, owners, architects and engineers in subcontractors, suppliers, owners, architects, engineers and sureties. matters involving contract drafting, contract negotiation, breach of He represents clients in contract drafting and negotiation of design contract claims, claims for extras, delay, disruption, loss of productivity agreements, construction contracts, EPC contracts, design/build and claims involving mechanics liens. Mr. Lewis is a mediator and agreements and other construction contracts. He also represents arbitrator for the American Arbitration Association, having acted as clients in arbitration and litigation of claims for breach of construction a mediator in over 350 construction disputes and is an arbitrator for contracts, delays, disruptions, loss of productivity, excessive change the International Centre for Disputes Resolution. Mr. Lewis has been orders, out of scope work, mechanic’s liens, errors and omissions, selected by lawyers and construction industry professionals who construction defects, and property damage and personal injury claims specialise in construction mega projects to be part of the American due to design errors and omissions or faulty construction. Arbitration Association’s Mega Project Panel of Arbitrators, a panel Prior to entering the , Mr. Hamera worked as a limited to approximately sixty arbitrators nationwide. Mr. Lewis has professional engineer for clients in the nuclear power, pharmaceutical, also been selected by a rating committee made up of a diverse group petrochemical and manufacturing industries. Mr. Hamera is on the of advocates and in-house counsels representing clients in large board of Engineers Without Borders Chicagoland Professional complex disputes to be one of eleven mediators on the American Chapter (EWB-CPC) and has participated in EWB-CPC foreign Arbitration Association’s Midwest Master Mediation Panel. Mr. Lewis projects in Honduras and domestic projects in Chicago. He is also on is a graduate of the University of San Francisco School of Law (J.D. the board of the Chicago Building Congress. 1976) and the University of Michigan (B.A. 1972). Mr. Hamera is a 1994 cum laude graduate of Northwestern University School of Law and a graduate of the University of Illinois at Urbana- Champaign (M.S., 1987; B.S., 1986).

Duane Morris LLP, a law firm with more than 750 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today’s legal and business challenges. Duane Morris’ Construction Group is consistently ranked as one of the leaders in the field by Chambers USA and U.S. News-Best Lawyers. With construction attorneys throughout our national network of offices, Duane Morris helps clients resolve the legal challenges of engaging in the design, development, financing, performance and management of major construction and government procurement contracts. Our clients include public and private owners and developers, prime contractors and subcontractors, construction managers, equipment suppliers, architects/engineers and other design professionals, and sureties. This breadth of experience enables us to handle the complete spectrum of issues arising before, during and after project completion.

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Zimbabwe Edmore Jori

Wintertons Legal Practitioners Farai Chigavazira

Contractual Penalties Act [Chapter 8:04] and Consumer Contracts 1 Making Construction Projects Act [Chapter 8:03], which impose consumer protectionism and thereby limit the freedom to contract. Although the general law 1.1 What are the standard types of construction contract of contract is Roman-Dutch Law, parties are free to prescribe a in your jurisdiction? Do you have contracts which law applicable to their agreement (lex loci) as well as the dispute place both design and construction obligations upon resolution mechanism. For instance, parties can agree to resolution contractors? If so, please describe the types of of disputes through arbitration proceedings to be held at a place of contract. Please also describe any forms of design- arbitration in another jurisdiction under agreed arbitration rules. only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor 1.3 In your jurisdiction please identify whether there is and with the construction work done by a series a concept of what is known as a “letter of intent”, in of package contractors? (NB For ease of reference which an employer can give either a legally binding or throughout the chapter, we refer to “construction non-legally binding indication of willingness either to contracts” as an abbreviation for construction and enter into a contract later or to commit itself to meet engineering contracts.) certain costs to be incurred by the contractor whether or not a full contract is ever concluded. There is no standard or prescribed contract and parties are free to enter into a contract of their choice as long as it complies with the The concepts of “Letters of Intent”, “Expressions of Interest” and basic common-law requirements. However, in large construction “Memorandums of Understanding” are common in our jurisdiction. projects, parties are increasingly adopting the Fédération Subject to agreement between the parties, these can be binding or Internationale des Ingénieurs-Conseils (FIDIC) Forms of Contract. non-binding. Such arrangements can provide mechanisms for exit/ Contracts which place both design and construction obligations termination of rights and obligations subject to certain circumstances. upon contractors are not uncommon and reliance is placed in this It is not uncommon for parties to provide for payment of costs regard on the FIDIC Yellow Book. Design-only contracts are not incurred by the aggrieved party pursuant to the transaction in the common. The arrangement known as management contracting, with event of the substantive contracts not being concluded for reasons one main managing contractor and with the construction work done attributable to the other party. by a series of package contractors, is very common in Zimbabwe.

1.4 Are there any statutory or standard types of insurance 1.2 Are there either any legally essential qualities needed which it would be commonplace or compulsory to to create a legally binding contract (e.g. in common have in place when carrying out construction work? law jurisdictions, offer, acceptance, consideration For example, is there employer’s liability insurance and intention to create legal relations), or any for contractors in respect of death and personal specific requirements which need to be included in a injury, or is there a requirement for the contractor to construction contract (e.g. provision for adjudication have contractors’ all-risk insurance? or any need for the contract to be evidenced in writing)? Yes. The construction industry normally requires all-risk insurance (including third party liability) due to the high incidence of accidents The general concepts of Offer and Acceptance and the intention to in the construction sector. It is also common for professional create binding legal relations (animus contrahendi) are essential consultants to obtain professional indemnity insurance. In large requirements to any valid contract in our jurisdiction. Generally, construction projects which are funded by international institutions, there is no requirement for contracts to be in written form. Verbal lenders have also started to request procurement of political risk agreements are equally binding where the terms of same are clear insurance, and completion risk insurance. The contractors are also or easily ascertainable. However, parties are generally advised required to procure insurance under the National Social Security to enter into written agreements, as it is easier to prove the terms Authority (NSSA) Accident Prevention and Workers Compensation in the event of disputes arising. The parties’ freedom to agree Scheme (Notice No. 68 of 1990). on the contractual terms is subject to certain statutes such as the

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Where retention money is not provided for, performance guarantees 1.5 Are there any statutory requirements in relation from the contractor and subcontractors are normally required. to construction contracts in terms of: (a) general Sometimes both retention and performance bonds are agreed upon. 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 1.7 Is it permissible/common for there to be performance employees); or (d) health and safety? bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to There are no specific statutory requirements in respect of guarantee the performance of subsidiary companies? construction contracts. Generally, the law in Zimbabwe requires Are there any restrictions on the nature of such bonds and guarantees? every company involved in construction to comply with labour, tax,

Zimbabwe health and safety laws. Performance bonds, insurance, bank and parent company guarantees Generally, occupational health and safety laws that are applicable are used extensively in construction projects. The nature of such to all employers and employees across sectors are the Labour Act bonds and guarantees is subject to agreement between employer and [Chapter 28.01] and the NSSA Accident Prevention and Workers contractor. There are no restrictions on the nature of such bonds or Compensation Scheme (Notice No. 68 of 1990). At a secondary guarantees. level there is the Protection from Smoking (Public Health (Control of Tobacco)) Regulations S.I.264 of 2002 that prohibit smoking in enclosed public places including workplaces, and the Labour 1.8 Is it possible and/or usual for contractors to have Relations (HIV and AIDS) Regulations S.I.202 of 1998 which retention of title rights in relation to goods and prohibit discrimination on the grounds of AIDS/HIV status, the supplies used in the works? Is it permissible for Pneumoconiosis Act [Chapter 15.08] and the Factories and Works contractors to claim that until they have been paid Act [Chapter 14.08] and its regulations. they retain title and the right to remove goods and materials supplied from the site? Construction contractors are allowed to employ expatriate workers with specialised skills, subject to the granting of the relevant It is possible for contractors to have retention of title rights in relation work permits and residency permits by the relevant governmental to goods and supplies used in the works, depending on the terms of the authorities. Zimbabwe’s tax system is a residency-based, as opposed agreement regulating the relationship. In principle, it is permissible to a source-based, system. The contractor is obliged to deduct pay- as-you-earn (PAYE) from the salaries of all taxable employees and and normal for contractors to have retention of title rights in relation remit same to the fiscal authorities. to goods and supplies used in the works, and to remove goods and materials from the site if payment is not forthcoming. All qualifying contractors are required to pay corporate taxes to the fiscal authorities. A new business is required to be registered However, it should be noted that our common law of property with the Zimbabwe Revenue Authority (ZIMRA) within 30 days recognises the principle of accession. If the materials permanently of incorporation. All companies must appoint a public officer of accede to the structure and the land, they become part of the structure the company within one month of the establishment of such office and cannot be removed if such removal will cause damage to the or place of business. The public officer has to be approved by the structure. It is also not possible to contract out of the common-law Commissioner General and is answerable for all company tax matters. principles relating to accession. Where a contractor is not registered for tax purposes, the employer Zimbabwean law also recognises a builder’s or contractor’s lien, is obliged to deduct withholding tax from any payment made to which operates by law and is a form of enrichment lien. The lien such contractor pursuant to the contract, and remit same to the fiscal (ius retentionis or right of retention) entitles the holder thereof, in authorities. this case the builder, to retain possession of the property until the expenses incurred by the builder in respect of the property which are recoverable by the builder are paid to the builder. A lien is 1.6 Is the employer legally permitted to retain part of discharged after the claim is satisfied. 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? 2 Supervising Construction Contracts

This normally depends on the provisions of the contract. In 2.1 Is it common for construction contracts to be practice, provision is normally made for retention money, which is supervised on behalf of the employer by a third party? money that is withheld until the taking over of the works or the end Does any such third party (e.g. an engineer or architect) of the defects liability period, whichever the parties agree to. It have a duty to act impartially between contractor and is not uncommon for parties to agree to the release of part of the employer? Is that duty absolute or is it only one which retention money upon the taking over of the works, with the balance exists in certain situations? If so, please identify when the architect/engineer must act impartially. being paid upon expiration of the agreed defects liability period. The retention money is based on a certain percentage (usually between 5% and 10%) of the amount payable by the employer to Yes, it is common for employers to engage project managers the contractor. to supervise their projects. Subject to agreement, third parties may act as an employer’s representative, in which case they will Typically, payments will be made by the employer to the contractor interface with the contractor, supervise compliance with the terms at intervals based on the production of progress certificates, which of the construction contract and take remedial action if necessary, must state the amount payable. The contract normally provides and give instructions to the contractor on behalf of the employer. that a certain percentage of each of these payments stated in the Alternatively, the third party could play a limited advisory role certificate be withheld as the retention money. where it will monitor the contractor’s performance, report and make The exact amount of the retention money, and when the retention recommendations to the employer who will engage the contractor money is payable, will depend on the terms of the contract. itself. The third-party project manager/supervisor must exercise its

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duties professionally and, to the extent possible, impartially, in order and the procedure to be adopted where a variation to the agreed to ensure compliance with the terms of the contract and applicable works is sought. If the contract does not provide for variations to laws and bye-laws. the works, any variation of the scope of work may be performed It should be noted that there are also regulatory requirements for only on the basis of an additional agreement signed by both parties every construction site to be inspected/supervised by State/local in accordance with the contract’s non-variation clause. Variations government authorities (as part of the authorisation for construction from design documentation require additional approval from State works). In supervising construction projects, the respective authorities. government authorities may suspend construction contracts where there is a breach of law, construction norms or regulations, and only 3.2 Can work be omitted from the contract? If it is through a petition to the courts or using the courts’ administrative omitted, can the employer do it himself or get a third

means. However, in doing so, they will be acting on behalf of the party to do it? Zimbabwe relevant local government authority or administrative institution. It is normal for parties to agree to omission of certain works for various reasons. Such agreed omissions should preferably be 2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, recorded in the construction contract. The omitted works can have themselves been paid; i.e. can the employer be completed by the employer or the third party engaged by the include in the contract what is known as a “pay when employer. paid” clause?

3.3 Are there terms which will/can be implied into a The construction contract, like any commercial contract, records construction contract? the terms agreed to by the parties who are at liberty to agree on any terms and conditions which are not prohibited by law and Where the parties have not specifically addressed this, certain terms which do not offend public policy. In this vein, depending on the are implied into a construction contract by law or practice. For circumstances of the case, the parties may agree that the employer instance, all contracts must comply with applicable laws, and the will pay the contractor when the employer itself has been paid. contractor shall be obliged to follow construction norms, health, safety and environmental rules, and any other law imposed by the 2.3 Are the parties permitted to agree in advance a fixed State, at all times. sum (known as liquidated damages) which will be Normally, general principles of contract apply in this regard. Certain paid by the contractor to the employer in the event of terms, which necessarily arise from the contractual relationship particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are between the employer and the contractor, or which are necessary there any restrictions on what can be agreed? E.g. in the business sense to give effect to the contract, will be implied. does the sum to be paid have to be a genuine pre- Implied terms may include that the employer will co-operate with estimate of loss, or can the contractor be bound to the contractor, or that the employer will not deprive the contractor pay a sum which is wholly unrelated to the amount of of possession of the construction site save in accordance with the financial loss suffered? terms of the agreement. It may also be an implied term that the contractor will do the work in It is permissible for the parties to agree in advance to the quantum a good and workmanlike manner, use suitable material and perform of liquidated damages or penalties payable by the contractor to the his obligations in such a way as to conform to the applicable building employer in the event of particular breaches, e.g. liquidated damages regulations. These are just examples of implied terms. These terms for late completion. This is usually fixed as a percentage of the can of course be express terms in the construction agreement. contract value, and is normally capped at 10%. These liquidated damages or penalties are, however, subject to the provisions of the Contractual Penalties Act [Chapter 8:04] where applicable. 3.4 If the contractor is delayed by two events, one the Parties may agree on the contractual penalty being payable in case of fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an a breach of the parties’ obligations under the construction contract. extension of time; or (b) the costs occasioned by that Zimbabwean law does not require that the amount determined as concurrent delay? a penalty must be a genuine pre-estimate of loss. Invariably the agreed damages are capped at amounts far less than the actual loss In the event of a concurrent delay attributable to both parties, the incurred. contractor would normally be entitled to an extension of time. The The main requirement is that the penalty rate must be agreed by both contractor would normally not be entitled to recover cost in respect parties in the contract and should be in the frameworks prescribed of the concurrent delay. In all instances, however, regard must be in the law (min–max). However, if the intent of the party is to had to the facts, as there are cases where it is appropriate for the compensate the financial loss, the amount must be evidenced by facts. costs to be shared.

3 Common Issues on Construction 3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own Contracts 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 3.1 Is the employer entitled to vary the works to be done after this float is used up? under the contract? Is there any limit on that right?

Such specifics must be addressed in the construction contract. The Normally this is to be stipulated or addressed in the contract, which schedule of works must be a part of the contract and every activity ordinarily prescribes the nature and scope of the allowable variations

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should be agreed upfront, including floats. Any such variations initiated by the employer entitle the contractor to an extension of 3.11 On what grounds can a contract be terminated? Are time. there any grounds which automatically or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out 3.6 Is there a limit in time beyond which the parties to expressly? a construction contract may no longer bring claims against each other? How long is that period and from A contract is usually terminated through performance, novation, what date does time start to run? release, , settlement, set-off, merger, prescription, supervening impossibility and on notice given by an aggrieved party As a general rule, the limitation period for prescription of a claim in accordance with the relevant contractual provisions if the other

Zimbabwe (usually debts) for disputes arising from contracts is three years. party has committed a material breach of the contract. The prescription period starts to run from the date the cause of In addition, the construction contract often provides for the action arises, that being the time from which the claimant became employer’s right to terminate the contract if there is a significant aware of all the facts which are necessary to enable it to prove its delay in the contractor’s execution of the works, or for defaults cause of action. Ordinarily, the limitation period starts upon final listed in the contract. acceptance of the works (taking over), even if the contract provides for partial acceptances. However, if the contract provides for a It is generally preferable to expressly set out the termination rights, warranty period longer than the prescription period then claims and the consequences of such termination in the contract, although under such warranty can be made at any time during the subsistence failure to do so does not take away the aggrieved party’s termination of the warranty. rights at law.

3.7 Who normally bears the risk of unforeseen ground 3.12 Is the concept of force majeure or frustration known conditions? in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue successfully that a contract which has become Normally, construction is carried out on the basis of design uneconomic is grounds for a claim for force majeure? documentation. A geotechnical survey is required to be done before the construction works begin. If such survey is provided Yes, the use of force majeure clauses in commercial contracts, by the employer, the contractor acts on the basis of relied-upon including construction contracts, is common practice in Zimbabwe. information. Contractors are usually permitted to verify the Force majeure circumstances provide full release from liabilities information before a construction contract comes into effect. After under the commercial contract. Force majeure events may widely it comes into effect, the contractor bears the responsibility for be defined as extraordinary, unpreventable and unforeseeable unforeseen ground conditions save where the failure to foresee same circumstances caused by a natural phenomenon (such as an was a consequence of the professional negligence of the persons earthquake, landslide, hurricane, drought and others) or social and conducting the geotechnical survey. In any event, the obligations in economic circumstances (such as war, blockade, import and export the event of unforeseen ground conditions must be addressed in the bans in the State interest and others) which are not controllable by construction contract. the will or action of either party and due to which the parties cannot perform their contractual obligations. In our view, the mere fact 3.8 Who usually bears the risk of a change in law that a contract has become uneconomic is not sufficient grounds for affecting the completion of the works? a claim for force majeure.

Since changes in law affecting contractual relations are regarded 3.13 Are parties which are not parties to the contract as force majeure circumstances, both parties will bear the risk. entitled to claim the benefit of any contract right However, in big construction projects of national interest which are which is made for their benefit? E.g. is the second or funded by international institutions, the Project Company usually subsequent owner of a building able to claim against enters into an Implementation Agreement pursuant to which the the original contracts in relation to defects in the Government undertakes to provide relief to the Project Company building? where it is adversely affected by such changes in law. As a general rule, during transfer of title to the property (building), the new owner acquires rights and obligations related to such 3.9 Who usually owns the intellectual property in relation property. In the circumstances, subsequent owners of a building to the design and operation of the property? may be able to claim against the original contract in relation to defects in the building only if such defects were revealed during the It will depend on the provisions of the design agreement. Normally guarantee period provided by the original contract. the designer is the owner of the intellectual property and the employer has rights of use. 3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums 3.10 Is the contractor ever entitled to suspend works? due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off? Yes, the contractor is entitled to suspend works when the employer fails to fulfil its obligations under the construction agreement, such Set-off is recognised under common law in Zimbabwe. A debt as payment, failure to provide materials, equipment, or technical qualifies for set-off if it is admitted or if it is capable of easy and documentation as may be applicable. speedy proof. In other words, only liquidated debts may be set off. Furthermore, set-off is only possible if the debts are both due and payable at law.

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3.15 Do parties to construction contracts owe a duty of 4.2 Do you have adjudication processes in your care to each other either in contract or under any jurisdiction? If so, please describe the general other legal doctrine? procedures.

Parties to a construction contract generally owe a duty of care to The construction contract typically sets out the procedure that must each other. Should either of the parties commit a delictual act, as be followed in the event of a dispute. If the contract provides for opposed to a breach of the contract, such delictual act could give rise arbitration, the disputes will be settled in terms of the relevant to a damages claim. A delict is a breach of a general duty imposed arbitration clause. Where there is no pre-agreed dispute resolution by law which will ground an action for damages in the suit of the procedure, disputes are resolved through the court system. The High person to whom the duty was owed and who has suffered harm Court has original and inherent jurisdiction to hear and adjudicate in consequence of the breach. A typical delictual claim will arise upon all civil disputes, although with low-value disputes it may be Zimbabwe where a party has suffered damages as a result of the negligence or economic to institute proceedings in the Magistrates Court. other unlawful conduct of the other party.

4.3 Do your construction contracts commonly have 3.16 Where the terms of a construction contract are arbitration clauses? If so, please explain how ambiguous, are there rules which will settle how that arbitration works in your jurisdiction. ambiguity is interpreted? Construction contracts in Zimbabwe commonly have arbitration The normal rule is that, when interpreting a contract, the language clauses providing for referral of disputes to one or more arbitrators used in the contract must be given its ordinary, grammatical meaning. appointed either by agreement between the parties or by some other If this creates ambiguity, our courts have developed various rules body such as the Commercial Arbitration Centre of Zimbabwe. The setting out how contracts may be interpreted. The purpose of these procedure to be followed in arbitration proceedings is stipulated in rules is to establish the true intention of the parties. The courts are the Arbitration Act [Chapter 7:15]. guided, in construing contractual provisions, by the Interpretation Act [Chapter 1:01] and judicial precedent. 4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise 3.17 Are there any terms in a construction contract which and enforce international arbitration awards? Please are unenforceable? advise of any obstacles to enforcement.

A construction contract, like any commercial contract, records the Yes. Zimbabwe ratified the Washington Convention on the terms agreed to by the parties, who are at liberty to agree on any Settlement of Investment Disputes between States and Nationals of terms and conditions which are not prohibited by law and which Other States which was incorporated into Zimbabwean Law by the do not offend public policy. Generally, construction contracts are Arbitration (International Investment Disputes) Act [Chapter 7:03]. unenforceable if they are against any applicable laws or are against The Convention on the Recognition and Enforcement of Foreign public policy and morality (contra bonos mores). Arbitral Awards requires courts of contracting states to give effect to private agreements to arbitrate and to recognise and enforce arbitration awards made in the contracting countries. In terms of 3.18 Where the construction contract involves an element of design and/or the contract is one for design only, Article 3 of the Convention, each contracting state shall recognise are the designer’s obligations absolute or are there arbitral awards as binding and enforce them in accordance with the limits on the extent of his liability? In particular, does rules of procedure of the territory where the award is relied upon. the designer have to give an absolute guarantee in Under the Convention, an arbitration award issued in any contracting respect of his work? state can generally be freely enforced in any other contracting state (save that some contracting states may elect to enforce only awards The designer bears the risk for his design, but the extent of his from other contracting states – the “reciprocity” reservation). liability can be limited contractually. It must be borne in mind, Apart from the above, the Civil Matters (Mutual Assistance) Act however, that the liability of the designer to a third party cannot be [Chapter 8:02] allows for the registration of a foreign judgment in excluded contractually and in the event of the designer being guilty Zimbabwe provided the judgment was handed down in a designated of a delict, such as negligence, and such delict causing damage to a country. third party, the designer will be liable to that third party.

4.5 Where the contract provides for court proceedings 4 Dispute Resolution in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction?

4.1 How are disputes generally resolved? Yes. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards requires courts of contracting states to Disputes can be resolved either by approaching a court or through recognise arbitration agreements and to enforce arbitration awards alternative dispute resolution, such as mediation, arbitration or made in the contracting countries. Apart from that, the Civil Matters referral to an expert. Construction agreements typically contain (Mutual Assistance) Act [Chapter 8:02] allows for the registration of arbitration clauses in terms whereof parties will submit to arbitration a foreign judgment in Zimbabwe provided the judgment was handed in the event of a dispute. down in a designated country.

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six (6) to fourteen (14) months. Depending on the urgency of the 4.6 Where a contract provides for court proceedings in matter, a party can bring an application to court on an urgent basis, your jurisdiction, please outline the process adopted, in which case the rules of court relating to time periods are relaxed. any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) Appeals against decisions of the High Court may be directed to the a decision by the court of first jurisdiction; and (b) a Supreme Court and it normally takes 6 (six) to 12 (twelve) months decision by the final court of appeal. for an appeal to be heard and determined. Where the issue raises a constitutional question, it may be directed to the Constitutional Court. Where there are no factual disputes, a party can approach the court All decisions and proceedings of any inferior court and of any by way of a Court Application instituted by way of notice of motion tribunal, board or officer performing judicial, quasi-judicial or accompanied by supporting affidavits. If, however, there is a factual administrative functions may be taken on review in the High Court,

Zimbabwe dispute, the correct procedure to follow is to approach the court by in respect of grave procedural irregularities or illegalities occurring way of action, which is instituted by summons. Ordinary actions or during the course of such proceedings. applications are usually resolved by the court of first instance within

Edmore Jori Farai Chigavazira Wintertons Legal Practitioners Wintertons Legal Practitioners Beverly Corner, 11 Selous Avenue Beverly Corner, 11 Selous Avenue P.O. Box 452 P.O. Box 452 Harare Harare Zimbabwe Zimbabwe

Tel: +263 4250 113 29 (Ext. 110) Tel: +263 4250 113 29 (Ext. 134) Mob: +263 7722 788 91 Fax: +263 4764 015 / +263 4733 270 Email: [email protected] Email: [email protected] URL: www.wintertons.co.zw URL: www.wintertons.co.zw

Edmore joined Wintertons on 1 July 2002 and became a Partner on Farai Chigavazira is a Legal Practitioner assisting Edmore Jori in 1 July 2005. He heads the firm’s Energy, Infrastructure and Natural Wintertons’ Energy, Infrastructure and Natural Resources Department, Resources Division, where he has developed a niche market, where he has gained considerable experience. His practice involves having handled numerous Power Generation, Transmission and corporate & commercial law, infrastructure & energy, mining, related transactions in this increasingly competitive sphere since the investment, regulatory compliance and regulatory risk management Government adopted a policy of opening up space for private players matters. Prior to joining the firm, he worked for Coghlan, Welsh & in the power sector. As public finance for infrastructure development Guest and for the Law Society of Zimbabwe as a Legal Assistant. He remains elusive, infrastructure development in Zimbabwe is graduated with a Bachelor of Laws (LL.B.) from the University of Fort increasingly being funded through public-private partnerships and Hare and went on to graduate from the same University with an Master Edmore has quickly developed a considerable practice in this of Laws (LL.M.) in International Trade and Business Law. He focuses space. He is also renowned for his extensive knowledge and deep particularly on corporate and commercial regulatory compliance, understanding of the law and diligent and practical application of the regulatory risk management matters, drafting and reviewing contracts same in his chosen areas of specialisation in order to provide timely, such as power purchase agreements, concessions, co-ordination cost-efficient and legally sound solutions to clients’ requirements. and joint venture agreements, together with general due diligence on His areas of specialisation include transactions relating to energy renewable energy projects. and power development, mining, infrastructure development, public- private partnerships, information & communications technology, corporate mergers & acquisitions, banking, bilateral & syndicated finance and construction law, together with property transactions and complex commercial litigation matters.

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.

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