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Table of Contents
Expert Chapter
Force Majeure Clauses in Construction Contracts
1 Nicholas Downing & David Nitek, Herbert Smith Freehills LLP
Q&A Chapters
Brazil Netherlands
6 Mattos Filho, Veiga Filho, Marrey Jr e Quiroga 99 CMS: Jeroen Berlage & Maartje Speksnijder
Advogados: Thiago Fernandes Moreira &
Flávio Spaccaquerche Barbosa Nigeria
107 Abuka & Partners: Patrick C. Abuka &
China Sunday Edward, Esq.
16 Herbert Smith Freehills Kewei (FTZ) Joint Operation
Office: Michelle Li & Hew Kian Heong Norway
115 Advokatfirmaet Thommessen AS: Jacob F. Bull &
Denmark Henrik Møinichen
25 Bruun & Hjejle Advokatpartnerselskab: Gregers Gam
Saudi Arabia
England & Wales 125 Al Tamimi & Company: Euan Lloyd & Emad Salameh
32 Macfarlanes LLP: Angus Dawson & Doug Wass
Singapore
France 132 Allen & Gledhill LLP: Ho Chien Mien
40 Three Crowns LLP: Todd Wetmore & Simon Elliot
Slovenia
Germany 140 Law Firm Neffat: Njives Prelog Neffat & Ana Toni
49 Breyer Rechtsanwälte: Dr. Christian Kruska &
Erlmest E. Burns, III, J.D. Switzerland
150 Meyerlustenberger Lachenal Ltd.: Philippe Prost &
Greece Jacques Johner
58 Kourkoumelis & Partners: Dimitris Kourkoumelis
Taiwan
India 157 Lee and Li, Attorneys-at-Law: Wei-sung Hsiao &
67 Kachwaha and Partners: Sumeet Kachwaha & Chun-wei Chen
Dharmendra Rautray
USA
Italy 163 Oles Morrison Rinker & Baker LLP:
75 Dardani Studio Legale: Luca Di Marco & Douglas Stuart Oles & Alix K. Town
Arianna Perotti
Zimbabwe
Japan 172 Wintertons Legal Practitioners: Nikita Madya &
82 Kanagawa International Law Office: Chantele Sibanda
Hajime Kanagawa
Mexico
91 COMAD, S.C.: Roberto Hernández García &
Juan Pablo Sandoval García
Welcome
Preface
Welcome to the seventh edition of ICLG – Construction & Engineering Law. As contrib-
uting editors, Herbert Smith Freehills LLP are delighted to introduce the latest edition
of this comprehensive global guide to construction and engineering law and regulation.
Clearly, 2020 has been a challenging year for the construction sector. Many projects
have been delayed and disrupted by the COVID-19 pandemic, and, at the time of
writing, it is not clear when some sense of normality will resume. The legal profes-
sion needs to ensure that it is in a position to respond to the new challenges that the
global construction industry will face in the months and years ahead, both in terms of
resolving the issues faced by live projects and ensuring an appropriate allocation of risk
in future contracts. There will be no ‘one size fits all’ approach – each project, and each
jurisdiction, will have its own challenges to overcome.
As with the previous editions, this guide provides valuable insights into how different
legal systems approach the questions that are commonly encountered on construction
and engineering projects. It covers 21 jurisdictions, adopting the form of a Q&A. It
also includes one general chapter, which looks at the importance of Force Majeure clauses
in construction contracts.
We are honoured to join a group of distinguished specialists to provide this authorita-
tive guide, and are grateful to all contributors for sharing their knowledge and experi-
ence. We hope that you find this guide to be useful, practical and thought-provoking.
Nicholas Downing & David Nitek

Herbert Smith Freehills LLP
Welcome
Chapter 1 1
Force Majeure Clauses in

Construction Contracts
Nicholas Downing
Herbert Smith Freehills LLP David Nitek
Introduction Force Majeure in Standard Form Construction

A Force Majeure clause is often considered by contracting parties Contracts
to be a “boiler-plate” clause – included in contracts without
much thought or negotiation, and unlikely to be tested in prac- FIDIC
tice. However, the COVID-19 pandemic, which is having a
significant impact on construction and infrastructure projects The FIDIC contracts include a Force Majeure clause (for example,
throughout the world, is placing these clauses firmly in the spot- clause 19 of the 1999 FIDIC Red Book). The 2017 FIDIC
light as parties seek to ascertain the contractual consequences of contracts refer to “Exceptional Events” rather than Force Majeure
any delay or disruption caused by the pandemic. events, but the principles are essentially the same. This article
Force Majeure is a civil law concept and has no defined meaning looks at the 1999 FIDIC contracts, which, at least for now, are
at common law. It is normally used to describe a situation in more widely used.
which a party may cancel or suspend performance of a contract, “Force Majeure” is defined at clause 19 of the 1999 FIDIC Red
or obtain an extension of time for performance, following the Book as an exceptional event or circumstance:
occurrence of a specified event that is outside that party’s control. 1. which is beyond a Party’s control;
In common law jurisdictions, Force Majeure is a creature 2. which such Party could not reasonably have provided
of contract – it will only arise if the contract includes a Force against before entering into the Contract;
Majeure clause. Without such a clause, the parties may have no 3. which, having arisen, such Party could not reasonably have
contractual mechanism for dealing with exceptional and unan- avoided or overcome; and
ticipated events. As a matter of common law, a contract can 4. which is not substantially attributable to the other Party.
be discharged by frustration where supervening events either Clause 19.1 also sets out a non-exhaustive list of events which
render performance impossible or transform the parties’ obliga- may constitute Force Majeure, provided that any such event also
tions into something radically different than they contemplated. meets the conditions set out above. These events include:
But frustration is both difficult to establish and a blunt tool – it war; hostilities; strike or lockout by persons other than the
simply brings the contract to an end. Contractor’s Personnel; and natural catastrophes such as earth-
A Force Majeure clause has two advantages. First, it creates quakes. However, in principle, any event or circumstance can
a regime for regulating events that might otherwise operate to constitute a Force Majeure if the general tests are met.
frustrate the contract. Second, it allows the parties to specify By clause 19.2, the party that is, or will be, prevented from
the consequences of a Force Majeure event, including, for performing its obligations must give notice within 14 days of
example, extensions of time, additional costs, suspension and the date when that party became aware, or should have become
termination. aware, of the relevant event or circumstance constituting Force
This article will examine: Majeure. That notice must specify (i) the event or circumstance
1. the Force Majeure clauses contained in various standard constituting Force Majeure, and (ii) the obligations which it is, or
form construction and infrastructure contracts, namely will be, prevented from performing.
FIDIC, JCT, NEC and LOGIC; Provided that the Contractor complies with the notice
2. the practical considerations that parties should take into requirement set out above, it will be entitled to an extension of
account when negotiating Force Majeure clauses; time (although it must mitigate delay) and payment of additional
3 the practical considerations that arise when Force Majeure cost. Either party may also terminate the contract, on notice,
clauses are operated; and if the Force Majeure event subsists for a continuous period of 84
4. what happens when there is no Force Majeure clause, or if days or multiple periods totalling 140 days.
the clause is not wide enough to capture a particular event.
There are two points to emphasise: first, the flexibility of
Force Majeure provisions, as shown by the many different forms JCT
they can take; and second, the profound impact that the drafting
can have on how the risk of unforeseen events is allocated JCT contracts also contain Force Majeure provisions, but, in
between the parties in practice. Therefore, one consequence contrast to the FIDIC suite of contracts, Force Majeure is not a
of the pandemic is that Force Majeure provisions may be given defined term. For example, JCT Design and Build Contract
more scrutiny going forward than has sometimes been the case 2016 lists “Force Majeure” as a Relevant Event (i.e., an event enti-
to date. tling the Contractor to an extension of time) at clause 2.26.14.
Construction & Engineering Law 2020

© Published and reproduced with kind permission by Global Legal Group Ltd, London
2 Force Majeure Clauses in Construction Contracts
Given that there is no definition, a tribunal may have regard Further, the Employer may terminate the contract if the event
to case law in which the term “Force Majeure” has been consid- either stops the Contractor from completing the works or is fore-
ered. For example, in Lebeaupin v Crispin ([1920] 2 KB 714) it cast to delay completion by more than 13 weeks (see clause 91.7).
was said that:
LOGIC
“This term is used with reference to all circumstances independent
of the will of man, and which it is not in his power to control …
Thus war, inundations and epidemics are cases of force majeure; it has The LOGIC forms are used in the UK offshore oil and gas
even been decided that a strike of workmen constitutes a case of force industry. Clause 14 of the General Conditions of Contract for
majeure.” Construction (3rd edition) sets out an exhaustive list of Force
Majeure events which includes such matters as riot, war, inva-
Of note, and in contrast to the FIDIC suite of contracts, there sion, earthquake, fire, explosion and/or other natural physical
is no entitlement to additional costs as a result of a Force Majeure disaster, strikes at a national or regional level, and changes to any
event. general or local Statute, Ordinance, Decree or other law.
By clause 2.24.1, if it becomes reasonably apparent that the To obtain relief, the affected party must show that:
progress of the Works or any Section is being or is likely to 1. one of the specific events above has occurred;
be delayed, the Contractor must forthwith give notice to the 2. such event is beyond the control of, and without the fault
Employer of the material circumstances, including the cause of or negligence of, the affected party;
the delay, and must identify in the notice the event which, in its 3. it could not provide against the event by the exercise of
opinion, is a Relevant Event (here, the Force Majeure event). If reasonable diligence; and
practical, the notice should include particulars of the expected 4. it has notified the other party in accordance with clause
effects of the event, including an estimate of the delay to comple- 14.3.
tion. If it is not practicable to provide that information in the If the Contractor is delayed by a Force Majeure event, clause
initial notice, the Contractor must provide such information, in 14.4 provides that the Contractor is entitled to an extension of
writing, as soon as possible thereafter. time but (similar to the JCT approach) not additional cost.
Subject to complying with the notice requirement set out However, and unlike the other forms of contract referred to
above, the Contractor will be entitled to an extension of time. above, a Force Majeure event does not crystallise an entitlement to
Further, both parties have the right to terminate the contract terminate the contract even if it subsists for a substantial period
if the works are suspended as a result of a Force Majeure event for of time.
a particular period (which is chosen by the parties and specified
in the contract particulars). Summary
NEC3 / NEC4 The forms of contract described above each take a slightly
different approach to Force Majeure:
The term Force Majeure is not used in the NEC suite of contracts. 1. In FIDIC, JCT and NEC contracts, Force Majeure is not
However, NEC contracts have a concept of prevention events, defined exhaustively. In LOGIC, by contrast, it is.
which are events: 2. In FIDIC and NEC, the Contractor is entitled to both
1. that stop the Contractor completing the works or stop the an extension of time and additional cost if a Force Majeure
Contractor completing the works by the date shown in the event occurs. JCT and LOGIC provide that a Contractor
latest programme; and will be entitled to an extension of time only.
2. which: 3. Both FIDIC and JCT allow either the Employer or
a. neither party could prevent; and Contractor to terminate if Force Majeure subsists for long
b. an experienced Contractor would have judged at the enough. In NEC, only the Employer can terminate. In
Contract Date to have such a small chance of occur- LOGIC, Force Majeure does not lead to a termination right
ring that it would have been unreasonable to have for either party.
allowed for it.
If a prevention event occurs, the Project Manager is required Practical Considerations
to give an instruction stating how the event should be dealt with
(see clause 19.1). Negotiating Force Majeure Clauses
Pursuant to clause 60.1(19), a prevention event is a compensa-
tion event (i.e., an event entitling the Contractor to an extension
There are multiple factors to consider when negotiating Force
of time and additional cost). Further, any instruction given by
Majeure clauses.
the Project Manager in relation to the prevention event may also
be a compensation event (for example, if it results in a change
Parameters
to the works).
If the parties intend to include specific thresholds in the Force
The Contractor must notify the Project Manager of an event
Majeure definition, for example to cover earthquakes of a certain
which it considers is a compensation event and which the Project
magnitude, any units of measurement should be consistent with
Manager has not notified to the Contractor (see clause 61.3). If
those used in any project specifications. Further, it is advisable
the Contractor does not notify a compensation event within
to ensure that any specific thresholds are measured on an objec-
eight weeks of becoming aware of the event, it will not be enti-
tive basis, thereby reducing the chances of a future dispute.
tled to an extension of time or additional cost.
To take an example: the specification may require a Contractor
Subject to complying with the notification requirement set
to design and build a power plant to withstand an earthquake
out above, a prevention event will, in principle, give rise to time
measured on a scale of ground acceleration (which measures the
and cost relief.
magnitude of the earthquake in an objective manner), but the

Herbert Smith Freehills LLP 3
Force Majeure clause may measure the earthquake on the Modified In practice, establishing causation can be challenging,
Mercalli scale (which measures seismic intensity in a subjec- particularly where the inability to perform has competing
tive manner). As the magnitude and intensity scales measure causes. Whether the Force Majeure event must be the sole cause
two completely different aspects of the earthquake, there may of a party’s inability to perform will ultimately depend upon the
be a disconnect between the project specification requirements wording of the clause itself. In Seadrill Ghana Operations Limited
and the point at which a party would be able to invoke the Force v Tullow Ghana Limited ([2018] EWHC 1640 (Comm)), Tullow
Majeure clause. failed to fulfil its obligations under the contract (namely to
provide a drilling instruction in October 2016) as a result of two
Delay matters, one a Force Majeure event and the other not. The Force
The parties may want to consider whether there should be a Majeure clause on which Tullow sought to rely stated that: “neither
minimum period of delay before a Force Majeure clause can be COMPANY nor CONTR ACTOR shall be responsible for any failure
invoked. Further, the parties may look to address expressly how to fulfil any term or condition of the Contract if and to the extent that fulfil-
to treat any disruption that subsists once the Force Majeure event ment has been delayed or temporarily prevented by an occurrence, as here-
has ended. under defined as FORCE MAJEURE…” The High Court decided
that the clause required the Force Majeure event to be the effective
Interaction with other contractual provisions cause of the failure which, in this case, it was not.
The parties should consider how other provisions of the contract The party relying upon the Force Majeure provision will also
interface with the Force Majeure clause. For example, the rela- have a duty to mitigate the effects of the event – even if this is not
tionship between the Force Majeure clause, the extension of time stated expressly, it is likely to be implied. If it is the failure to take
regime and the liquidated damages provisions should be made steps to mitigate – as opposed to the event itself – that causes the
clear – if the Force Majeure clause simply states that the Contractor inability to perform, there may be no entitlement to relief.
is relieved from its obligations, that would not, strictly, move the
contractual completion date. Lender Practice
Notice
It should be clear when the notice is to be given. For example, is Where a construction project is funded by external financing,
it when the Force Majeure event arises, when it affects the relevant the Project Company will need to consider the implications of
party, or when it actually starts to delay completion? Further, it invoking a Force Majeure clause on the Facility Agreement.
should be clear if the notice is intended to be a condition prece- For example, the Lender’s prior written consent will often
dent to relief (in which case clear drafting to that effect will be be required before the Project Company can claim Force Majeure
needed) and, if so, whether the notifying party loses its entitle- relief or take any steps in response to a Force Majeure notice from
ment altogether if no notice is given, or just has its entitlement a Contractor (for example, by accepting that there is a Force
adjusted to reflect the delay in giving notice. Majeure event). Otherwise an event of default may arise under
the Facility Agreement.
Termination If a Force Majeure event occurs which adversely affects the
If Force Majeure leads to termination, it would be prudent to ability of the Project Company to perform its obligations under
the Project Agreement, the material adverse effect (MAE) provi-
specify which party will bear the risk of:
sions may also be triggered. MAE clauses are used in lending
1. any advance payments made for the services;
transactions as a catch-all default to enable Lenders to accelerate
2. the cost of any materials already delivered to a Contractor,
repayment or refuse to lend additional funds. A MAE clause
or which the Contractor is contractually liable to accept;
cannot be triggered on the basis of circumstances known to the
3. the cost of removing any equipment from the site; and
relevant party on entering into the agreement, although it may
4. the cost of repatriating the Contractor’s staff.
be possible to invoke the clause where conditions worsen in a
way that makes them materially different in nature. The change
PFI contracts
relied upon must also be material, in the sense that it must be
In the context of UK PFI projects, guidance has been issued
sufficiently significant or substantial, and it must not be merely
by HM Treasury on the type of events that should be included
a temporary blip. In any event, there is some legal uncertainty
as Force Majeure events, and this must be taken into account
surrounding the issue of invoking MAE provisions, so Lenders
when drafting. The guidance proposes a relatively narrow (and
often wait until the Project Company defaults under another
closed) list of events.
event of default.
Pandemics
If the parties refer to pandemics or epidemics, they should What Happens if There is No Force Majeure
be aware that there is no clear legal definition of the word Clause
“epidemic”, and there may be room for debate as to whether Where the contract does not contain a Force Majeure provision,
a particular disease has passed the threshold. The position the affected party may seek to rely on the common law doctrine
taken by an international organisation (e.g., the World Health of frustration. Frustration applies where:
Organization) will be a good indication of whether there is a 1. an event occurs after the contract has been entered into;
pandemic or epidemic, but ultimately each case will fall to be 2. which is not due to the fault of either party; and
judged on its facts and the particular drafting in question. 3. which renders further performance impossible or illegal,
or makes the parties’ obligations radically different from
How Force Majeure Clauses are Applied in those contemplated when the contract was entered into.
Practice Establishing frustration is far from straightforward, and there
are few reported cases where it has been argued successfully (at
In practice, the party seeking to rely on the Force Majeure clause least in modern times).
will bear the burden of proving that the event in question falls
within the clause, and that it has caused an inability to perform.

4 Force Majeure Clauses in Construction Contracts
The presence of a Force Majeure clause in a contract does not

automatically exclude the operation of the doctrine of frustra-
Concluding Thoughts
tion. However, frustration only applies to unforeseen events, The COVID-19 pandemic has placed Force Majeure provi-
and if the parties have addressed a particular event in a Force sions firmly in the spotlight. This has served to emphasise the
Majeure clause, it could be said that the parties have foreseen inherent flexibility of such provisions and their importance.
that event, such that the party must pursue relief under the Force Whether the list of Force Majeure events is open or closed, and
Majeure clause rather than assert frustration. whether a Force Majeure event gives rise to an entitlement to
The effect of frustration at common law is to release the cost in addition to relief from performance, can make a signifi-
parties from their future obligations and bring the contract to cant difference to how the risk of unforeseen events is allocated
an end. It is therefore somewhat of a blunt instrument, and lacks between the parties. Perhaps, going forward, they will be nego-
the clarity and nuance that a properly drafted Force Majeure provi- tiated more closely than has sometimes been the case to date.
sion provides.

Herbert Smith Freehills LLP 5
Nicholas Downing, who leads the non-contentious construction and engineering practice at Herbert Smith Freehills, has in excess of 30
years’ experience of major construction and engineering projects, including in the commercial development and infrastructure sectors.
Notable projects on which Nicholas has recently advised include HS2, Thames Tideway and Hinkley Point C. He is a member of the Private
Sector Client (BPF) Representative Group on the JCT Council, the UK correspondent for the International Construction Law Review, is a
member of the construction law committee of the City of London Law Society and is recognised as a top-ranked construction and engi-
neering law practitioner in legal directories.
Herbert Smith Freehills LLP Tel: +44 20 7466 2741

Exchange House Email: [email protected]
Primrose Street URL: www.herbertsmithfreehills.com
London EC2A 2EG
United Kingdom
David Nitek is a partner at Herbert Smith Freehills, specialising in the resolution of construction and engineering disputes through adjudica-
tion, dispute boards, litigation and arbitration. David advises both employers and contractors in a variety of sectors, with a particular focus
on transport and other infrastructure projects. He has advised on disputes arising out of some of the UK’s largest infrastructure projects
of recent years, and has extensive experience in the Middle East, having previously worked in the firm’s Dubai office. David’s practice also
involves the management of claims; in particular, the establishment of robust processes for reviewing and resolving claims without the need
for formal dispute resolution proceedings. He has performed this role on a number of substantial projects, working alongside the project
team and external consultants.
Herbert Smith Freehills LLP Tel: +44 20 7466 2453

Exchange House Email: [email protected]
Primrose Street URL: www.herbertsmithfreehills.com
London EC2A 2EG
United Kingdom
Herbert Smith Freehills is one of the world’s leading professional services

businesses, bringing together the best people across our 27 offices, to
meet clients’ global legal service needs. The firm offers a top-tier seam-
less service across a single global platform and an unparalleled depth of
expertise. It provides access to market-leading dispute resolution, projects
and transactional legal advice, combined with expertise in a number of
industry sectors, including construction and infrastructure, energy, natural
resources, technology and financial services.
The firm’s specialist construction and engineering team offers the full
spectrum of legal services on all aspects of a project from procurement to
completion, and our projects group advises clients throughout every stage
of a project’s life-cycle. On large-scale, long-term projects the firm offers
innovative financing and bespoke contractual structures that allow clients
to meet their projects’ objectives, acting for parties on all sides of projects
and transactions.
www.herbertsmithfreehills.com

6 Chapter 2
Brazil
Brazil
Thiago Fernandes Moreira
Mattos Filho, Veiga Filho, Marrey Jr e

Quiroga Advogados Flávio Spaccaquerche Barbosa
several contractors. The selected contractor will be responsible

12 Making Construction Projects for detailing the basic design provided by the employer and, upon
the employer’s approval (or by the employer’s technical advisor/
1.1 What are the standard types of construction engineer), the selected contractor shall perform the construction
contract in your jurisdiction? Do you have: (i) any
works in accordance with such detailed design.
contracts which place both design and construction
obligations upon contractors; (ii) any forms of design-
only contract; and/or (iii) any arrangement known as Alliance Agreement
management contracting, with one main managing By means of the Alliance Agreement, which is a co-operative
contractor and with the construction work done by a method of contracting, the parties work together, aligning their
series of package contractors? (NB For ease of reference commercial interests, to efficiently share the risks and rewards
throughout the chapter, we refer to “construction resulting from the contract.
contracts” as an abbreviation for construction and
engineering contracts.)
1.2 How prevalent is collaborative contracting (e.g.
alliance contracting and partnering) in your jurisdiction?
Projects developed in Brazil generally use tailor-made contracts To the extent applicable, what forms of collaborative
(i.e. contracts specifically drafted for a particular project) rather contracts are commonly used?
than standard forms. Nevertheless, contracts based on inter-
national standard forms such as FIDIC (Fédération Internationale
Co-operative methods of contracting still represent a small
des Ingénieurs-Conseils) and NEC (New Engineering Contract) are
portion of projects developed in Brazil. When used, it is
being increasingly used whenever a foreign player is involved
normally under the form of an Alliance Agreement and it is
(e.g. a sponsor, partner or lender). Such projects, however, still
common to establish in such contract the goals to be achieved
represent a small percentage of the projects developed in Brazil.
by the parties in exchange for bonuses, and consequences for
The most common contractual structures used in Brazil are
underachievement. Although the FAC-1 Alliance Agreement
the following:
template was launched in Brazil in 2019, it is still too early to say
if there will be an increase in collaborative contracting practices.
Engineering, Procurement and Construction (EPC)
An EPC contract provides for a single point of responsibility.
The employer engages a contractor to provide the design, all 1.3 What industry standard forms of construction
necessary materials and equipment, and the construction works contract are most commonly used in your jurisdiction?
for the project. In large projects involving construction and
erection works, as well as equipment supply (such as power When the parties decide to adopt a standard form for a domestic
plants and factories), the contractor can be hired to provide or international project, they usually use the forms published by
its services on a turn-key basis and would therefore be respon- FIDIC, including, but not limited to:
sible for taking over the project in order to allow the employer ■ The Red Book: conditions of contract for construc-
to be ready to operate it upon completion of the works by the tion for building and engineering works designed by the
contractor. employer – mostly used in the construction of factories
and other specific industrial buildings where the employer
Engineering, Procurement and Construction Management is responsible for the equipment of the plant/factory.
(EPCM) ■ The Yellow Book: conditions of contract for plants and
This type of contract reflects the arrangement known as manage- design-build for electrical and mechanical plants, and for
ment contracting, in which the contractor operates as an employ- building and engineering works, designed by the contractor
er’s agent and enters into separate contracts with different – mostly used in renewable energy projects, especially in
contractors who provide materials, equipment and construction wind farms.
works necessary for the project. ■ The Silver Book: conditions of contract for EPC/turn-key
projects – mostly used in mega infrastructure projects.
Design-Bid-Build (DBB) In addition, the choice of contractual structure depends on
In this type of procurement, the employer engages a designer to various aspects (mainly risk allocation and the sophistication of
provide the basic design of the project. Once such basic design is the parties involved).
completed, the project is submitted to a bidding process involving

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados 7
The most noteworthy structures used in Brazil are: (i) EPC; civil liability of land, maritime, river and lake transporters for
(ii) EPCM; and (iii) DBB. damages caused to the cargo.
It is worth mentioning that although Provisional Presidential
Decree No. 904/19 recently revoked the insurance regarding
1.4 What (if any) legal requirements are there to
create a legally binding contract (e.g. in common law personal damages caused by vessels or by their cargo, its
jurisdictions, offer, acceptance, consideration and effectiveness was suspended by the Federal Supreme Court.
intention to create legal relations are usually required)? Therefore, such insurance is still mandatory.
Are there any mandatory law requirements which need to In addition to the abovementioned mandatory insurance, there
be reflected in a construction contract (e.g. provision for are specific regulations regarding the construction market that
adjudication or any need for the contract to be evidenced also refer to certain insurance coverage, such as: (i) Article 1346 of
in writing)? the Brazilian Civil Code (BCC), which establishes that all build-
ings must be covered by insurance against fire or total/partial
In order to create a legally binding contract under Brazilian law: destruction; (ii) Article 13 of Law No. 4,591/64, which establishes
(i) the contracting parties shall have full capacity and authority to that all units of residential buildings shall be insured against fire
contract; (ii) the object of the contract shall be lawful, possible, and other casualties that may cause full/partial destruction of
determined or determinable; and (iii) the formalities required by the building; (iii) Articles 1 and 2 of Law No. 4,864/65, which
law, if any, must be observed. Although there is no requirement establish that the buyer of a financed real estate building with
for the contract to be evidenced in writing, it is highly recom- a maximum value corresponding to 300 times the minimum
mended to do so, in order to provide for balanced consideration wage in Brazil must purchase life insurance (seguro de vida de renda
and to prevent uncertainties from arising. temporária); and (iv) Paragraph 1 of Section III of Article 56 of
Law No. 8,666/93, which determines the obligation to purchase
a performance bond for public services and constructions when-
1.5 In your jurisdiction please identify whether there
is a concept of what is known as a “letter of intent”, in ever the same is requested in the invitation to bid.
which an employer can give either a legally binding or Notwithstanding the previously specified mandatory insur-
non-legally binding indication of willingness either to ance coverage directly and indirectly related to the construc-
enter into a contract later or to commit itself to meet tion market, contractors and related service providers usually
certain costs to be incurred by the contractor whether or purchase the following coverage, which may be part of one or
not a full contract is ever concluded. more insurance policies:
(a) engineering risks;
Letters of intent are often used in construction projects in Brazil. (b) property;
Such instruments can be binding or non-binding, depending on (c) third parties’ civil liability;
the type of works, project deadlines, risks involved, etc. In most (d) automobile liability;
cases, the purpose of the letter of intent is to allow the commence- (e) employer’s civil liability;
ment of certain activities related to the works and even the mobi- (f) bodily injury and physical damage, and life coverage for
lisation of some contractors’ resources before the detailed design constructors’ employees;
is totally concluded and/or approved. An incomplete binding (g) coverage for the transportation of equipment to be used in
letter of intent may face enforceability issues in Brazilian courts. the construction works;
(h) performance bonds; and
(i) environmental risks.
1.6 Are there any statutory or standard types
Despite there being no market practice, it is advisable for compa-
of insurance which it would be commonplace or
compulsory to have in place when carrying out nies to be assisted by an insurance broker to assess all risks inherent
construction work? For example, is there employer’s to a particular project and determine the most suitable coverage.
liability insurance for contractors in respect of death
and personal injury, or is there a requirement for the
1.7 Are there any statutory requirements in relation to
contractor to have contractors’ all-risk insurance?
construction contracts in terms of: (a) labour (i.e. the
legal status of those working on site as employees or
Brazilian rules stipulate mandatory insurance and the most as self-employed sub-contractors); (b) tax (payment of
crucial, regarding construction works, are described in Article income tax of employees); and/or (c) health and safety?
20 of Decree-Law No. 73/66 (regulated by Decree No.
61,867/67); namely: (i) civil liability for real estate contractors of (a) Labour
urban zone constructions regarding bodily injury and physical In Brazil, employees’ basic labour rights are set forth in the
damage injuries, and property damages; (ii) assets encumbered Federal Constitution, which also establishes the minimum condi-
as guarantees of loans or financings granted by public financing tions that must be complied with in employment relationships.
institutions; (iii) guarantee of compliance with the obligations Labour rights and minimum conditions are also discussed in
of the real estate developer and constructor; (iv) guarantee of federal laws and most of them are restated in the Consolidation
payment incumbent upon the borrower in relation to construc- of Labour Laws (CLT). There are also mandatory regula-
tion, including real estate obligations; (v) buildings divided into tions, established by means of collective bargaining agreements
autonomous units; (vi) fire damage and transportation of goods executed between one or more employers’ unions representing
pertaining to entities located in or transported throughout the companies, and one or more trade unions representing
Brazil; (vii) export credit, whenever deemed convenient by the employees. The relationship between the contracting party and
National Counsel of Private Insurance (CNSP), taking into contractor, however, is governed by the BCC.
account the National Counsel of Foreign Trade (CONCEX); Hiring service providers through an intermediary company is
(viii) bodily injury and physical damage caused by roadway auto- possible. Some changes in the law regarding outsourcing (Law
motive vehicles and vessels – or by their cargo – to individuals, No. 6,019/1974) were enacted by the Brazilian Congress in order
regardless of whether they are being transported or not; and (ix) to reduce the unemployment rates and labour disputes related

8 Brazil
to outsourcing. In addition, the Supreme Court confirmed the reduction of risks inherent to works through compliance with
possibility of outsourcing in core business activities. After such health, hygiene and safety rules; (ii) CLT; (iii) Administrative
changes and the Supreme Court’s precedent, outsourcing is Rulings (Ordinance No. 3,214/78 of the Ministry of Economy);
allowed in any activity of the companies, including core business. (iv) rules and standards issued by ABNT; and (v) International
Brazilian law does not require the execution of a written Labour Organization Conventions.
employment contract. However, to avoid uncertainties relating The Ministry of Economy enacted Normative Resolutions
to conditions of employment, companies usually execute written regarding health and safety standards, which establish rules that
employment contracts with employees, providing for the rights must be complied with by the contractor and its employees. The
and duties to be performed by the parties. In some situations, most important points are:
such as for temporary workers, a written contract is mandatory.
(c.1) Specialised Work Safety and Medicine Service (Serviços
(b) Tax Especializados em Engenharia de Segurança e em Medicina do
(b.1) Employees Trabalho – SESMET)
In general terms, salaries paid to employees of Brazilian companies Companies hiring more than 50 employees must have a SESMET,
are subject to withholding of Social Security Tax at the maximum aiming to promote the protection of health and safety in the
rate of 14% up to a maximum of R$ 713.09, and to withholding of workplace.
Income Tax (WHT) at progressive rates ranging from 0% up to The sizing of the SESMET will vary in accordance with the
27.5%, as per the table below (applicable as from April 2015): risk of a company’s business (established by law) and the number
of employees in a company.
Monthly Tax Portion to be
Tax Rate (%) (c.2) Accident Prevention Commission (Comissão Interna de
Basis (R$) Deducted (R$)
Prevenção de Acidentes – CIPA)
Up to 1,903.98 - - Companies hiring more than 20 employees must have a CIPA,
From 1,903.99 to aiming to prevent occupational accidents or diseases.
7.5 142.80
2,826.65 The size of the CIPA will vary in accordance with the number
From 2,826.66 to of employees in a company.
15.0 354.80
3,751.05
(c.3) Programme for Medical Control of Occupational
From 3,751.06 to Health (Programa de Controle Médico de Saúde Ocupacional
22.5 636.13
4,664.68 – PCMSO)
Over 4,664.68 27.5 869.36 The PCMSO aims to promote and maintain the health of
employees, emphasising the clinical and pathological aspects
In addition to the above, Brazilian companies are subject to Social instrumental in addressing the relationship between health and
Security Tax at an approximate global rate of 28% on payroll. work, from both an individual and collective perspective.
The legal taxpayer of such taxes is the employer, differing from
the ones mentioned above, in which case the employer is only (c.4) Personal Protective Equipment (Equipamentos de
responsible for the withholding. Proteção Individual – EPI)
It is important to clarify that there is an alternative to the The company must provide its employees with personal protec-
Social Security Tax on payroll for most construction companies, tive equipment, aiming to neutralise/reduce the exposure to
which is the payment of 4.5% on gross revenue. Such alterna- chemical, physical and/or biological agents.
tive is not mandatory; however, it may represent tax savings for
companies with high payroll expenses. (c.5) Environment Risk Prevention Programme (Programas
de Prevenção de Riscos Ambientais – PPRA)
(b.2) Self-Employed Sub-Contractors (Individuals) The PPRA aims to provide consulting services in the assessment
The payment of income by Brazilian companies to self-em- and control of environmental risks, such as noise, heat, chem-
ployed individuals is also subject to WHT as indicated above. ical agents, etc.
Please note, however, that payments to self-employed individ-
uals are subject to withholding of Social Security Tax at a rate of 1.8 Is the employer legally permitted to retain part of
11% (considering the offset authorised by law of 9% subject to a the purchase price for the works as a retention to be
maximum amount of R$ 671.11). released either in whole or in part when: (a) the works are
In this case, Brazilian companies paying fees to self-employed substantially complete; and/or (b) any agreed defects
sub-contractors are also subject to Social Security Tax at a rate liability period is complete?
of 20% on these payments.
The alternative reported above also applies here, and instead The employer is allowed to retain part of the purchase price as
of contributing 20% over the payroll, some construction compa- a retention to be released either in whole or in part when the
nies may contribute a rate of 4.5% on gross revenue. works are substantially complete, and/or any agreed defects
Brazilian companies are also obligated to withhold 11% of liability period has expired, as long as the retention is supported
payments made to other companies that render certain services. by a contractual clause.
In case the renderer of the service is subject to the payment of The retention right is meant to protect the employer against
Social Security Tax on gross revenue, the withholding shall be potential breaches by the contractor; nevertheless, it must not be
made at a rate of 3.5%. abusive or the contractor might challenge it.
The BCC establishes that private contracts are governed by the
(c) Health and Safety principles of good faith and pacta sunt servanda, which means that
In Brazil, health and safety constitute main concerns in construc- contracts are laws with binding force between the contracting
tion contracts and are regulated by: (i) the Federal Constitution, parties and require that every contracting party must keep its
which establishes employees’ rights, including, among others, the promises and fulfil the obligations undertaken. It is noteworthy

to mention that Law No. 13,874/19, which recently came into In this sense, materials and goods applied in the works are
force and is known as the “Economic Freedom Law”, rein- normally not comprised within the scope of application of the
forces such principles as it provides for less court intervention BCC concerning retention of title. Notwithstanding, scholars, as
in contract interpretation. Therefore, the amount of the reten- well as parts of relevant case law, understand that the contractor
tion and the conditions for its release shall be agreed upon by the may retain the title regarding goods and supplies used, as well
contractual parties. as the right to remove from the site any goods and materials
supplied, provided that: (i) the contractor has a credit right
against the employer; (ii) there is a link between the credit and
1.9 Is it permissible/common for there to be
performance bonds (provided by banks and others) to the goods/materials retained; (iii) the retention or the posses-
guarantee the contractor’s performance? Are there any sion of the goods/materials is lawful; and (iv) the parties did not
restrictions on the nature of such bonds? Are there any agree otherwise in the contract. Such situation may be altered in
grounds on which a call on such bonds may be restrained cases where the employer is subject to a judicial recovery proce-
(e.g. by interim injunction); and, if so, how often is such dure (recuperação judicial ).
relief generally granted in your jurisdiction? Would such
bonds typically provide for payment on demand (without
pre-condition) or only upon default of the contractor? 22 Supervising Construction Contracts
2.1 Is it common for construction contracts to be

In Brazil, it is common for construction contracts to provide for
supervised on behalf of the employer by a third party
a performance bond in order to guarantee the fulfilment of the (e.g. an engineer)? Does any such third party have a
contractor’s obligations under such contract. The performance duty to act impartially between the contractor and the
bond may be a bank guarantee, an insurance bond, or a combi- employer? If so, what is the nature of such duty (e.g. is
nation of both. it absolute or qualified)? What (if any) recourse does a
Considering the ongoing crisis scenario from which Brazil party to a construction contract have in the event that
is still recovering, contractors usually favour insurance bonds the third party breaches such duty?
rather than bank guarantees, as these are more expensive and
thus may create additional constraints for contractors due to the In Brazil, it is common, under construction contracts, for the
non-liquidity of the Brazilian market. employer to engage a third party to supervise the progress of
Although, in theory, performance bonds are not “on demand” works on its behalf. Nevertheless, such third party does not have
guarantees in Brazil – as they are an accessory of the principal a duty to act impartially between the contractor and employer.
obligation – in effect, bank guarantees work as if they were “on When the parties intend to have a third party to act impartially
demand”, given that local banks will rarely challenge or even between the contractor and the employer, they usually hire an
discuss their foreclosure by the employer. independent engineer or architect, or even an expert, as the case
Given the preponderance of the principles of freedom of may be, to execute this specific task.
contract and of legal certainty, the Brazilian courts tend to rule Dispute boards, the relevance of which has been increasing
against the restraints of insurance bonds, assuming that the in the Brazilian construction market, may be considered an
parties complied with the previously stated legal requirements example of this. Dispute boards are committees composed of
to create a legally binding contract. experienced and impartial professionals (in most cases engineers)
Typically, the performance bonds provide that the contractor hired before the commencement of the construction project to
shall be in default in order to allow the employer to withdraw monitor the progress of the works, encouraging the parties to
any payment under the bond. avoid disputes and assisting them when needed to solve those
that cannot be avoided. The advantage of the dispute boards is
1.10 Is it permissible/common for there to be company that they can be appointed at the commencement of the project,
guarantees provided to guarantee the performance of taking responsibility to conduct regular visits to the site and to
subsidiary companies? Are there any restrictions on the be directly involved in the works from the beginning, making
nature of such guarantees? recommendations and influencing the behaviour of the parties.
If the parties agree on contracting an impartial third party,
The use of parent company guarantees in construction contracts legal and contractual sanctions (e.g. penalties and indemnifica-
is very common, especially when the contractor is not in a good tion for losses) would apply if impartiality duties are breached. In
financial standing and/or does not have sufficient assets to the event of a dispute, the arbitral tribunal or court, depending
guarantee a possible default. The BCC provides that the amount on the case, may be called upon to settle it.
of the guarantee shall not exceed the amount of the secured
obligation. 2.2 Are employers free to provide in the contract that
they will pay the contractor when they, the employer,
have themselves been paid; i.e. can the employer include
1.11 Is it possible and/or usual for contractors to have in the contract what is known as a “pay when paid”
retention of title rights in relation to goods and supplies clause?
used in the works? Is it permissible for contractors to
claim that, until they have been paid, they retain title and
the right to remove goods and materials supplied from The “pay when paid” clause is customarily found in sub-con-
the site? tracts, and purports to indicate that the payments to be made
by the contractor to the sub-contractor shall only occur upon
The BCC provides for the possibility of sales with retention of receipt by the contractor of the payments made by the final
title. However, legal provisions for retention of title are only client (i.e. the employer).
applicable to goods that are capable of being identified and Although the inclusion of this clause is not unusual, such provi-
differentiated from their peers (e.g. equipment that can be iden- sion may be challenged as being abusive if the sub-contractor
tified through a serial number or vehicles).

10 Brazil
has fully and duly performed its contractual obligations – i.e. has If the contract does not provide for such variations’ provi-
supplied the goods and services contracted – without receiving sions, the BCC will apply and the employer will be respon-
the related payments. sible for paying the additional costs arising from the varia-
The inclusion of a “pay when paid” clause is not possible in tions requested by him. Notwithstanding, in case the variations
contracts entered into with public/governmental entities (Public requested by the employer are disproportionate to the design
Contracts). However, a private contractor may include a “pay when already approved, the contractor has the right to refuse the varia-
paid” provision in the sub-contracts related to a Public Contract, as tion, even if the employer agrees to pay the additional costs.
long as the relevant Public Contract allows a sub-contracting part Additionally, variations to reduce the scope of work are only
of the works. allowed if expressly provided for in the contract and/or agreed
between the parties, otherwise the employer may be required
to indemnify the contractor for the losses and damages arising
2.3 Are the parties free to agree in advance a fixed
sum (known as liquidated damages) which will be from such reduction.
paid by the contractor to the employer in the event of With respect to Public Contracts, the employer (i.e. the public/
particular breaches, e.g. liquidated damages for late governmental entity) may unilaterally vary the works whenever
completion? If such arrangements are permitted, are it is necessary to: (i) modify the design or the project specifica-
there any restrictions on what can be agreed? E.g. does tions to better achieve the technical goals of the project; or (ii)
the sum to be paid have to be a genuine pre-estimate increase or reduce the scope of the works. In both cases, the
of loss, or can the contractor be bound to pay a sum contractor is obliged to accept such variations under the same
which is wholly unrelated to the amount of financial loss
contractual conditions, provided that such increases or reduc-
likely to be suffered by the employer? Will the courts
in your jurisdiction ever look to revise an agreed rate of tions to the works, services or purchases do not exceed 25% of
liquidated damages; and, if so, in what circumstances? the original price. This limit may be increased to up to 50% if
the increases are related to restoration of buildings or equip-
ment. In all cases, the economic and financial balance of the
Brazilian law allows the parties to agree in advance on a penalty
agreement shall be ensured.
amount to be paid by the defaulting party in the event of a breach
The same limits related to increases or reductions of the
of the contract. Unlike common law, the Brazilian legal system
works apply to contracts entered into by state-owned compa-
accepts contractual penalty clauses, which may be due for delay/
nies and mixed-capital companies. However, Federal Law
breach (penalty for delay) in performing a specific obligation or
No. 13,303/2016 provides that these modifications can only
as compensation (compensation penalty) in case the entirety of
be implemented by means of negotiation between the parties.
the contract is breached.
Therefore, state-owned companies and mixed-capital compa-
The amount of the penalty clause does not necessarily need to
nies cannot increase or reduce the scope of the works without
represent a genuine pre-estimate of loss; however, in any case, it
the private party’s consent.
must be limited to the value of the breached obligation and may
even be lowered in court should it be deemed patently excessive
vis-à-vis the committed breach or if the main obligation has been 3.2 Can work be omitted from the contract? If it is
partially performed. omitted, can the employer carry out the omitted work
Both the penalty for delay and the compensation penalty himself or procure a third party to perform it?
may have a similar function to liquidated damages (pre-deter-
mined damages), whereby the creditor may collect the penal- Please see our answer to question 3.1 regarding the reduction of
ties irrespectively of having incurred actual damages and the the scope of work by the employer.
parties may agree that no further damages will be due in this In case of reduction of the contractor’s scope of work, the
case. Nevertheless, the parties may also agree that the contrac- employer may perform such works by himself or contract a third
tual penalty does not preclude the claim for additional indem- party to do it. Generally, a contractor will push back on providing
nification for damages arising out of the breach. In such case, a warranty in respect of any portions of the works performed by
the amount of damages specified in the contract is deemed to be a third party.
the minimum amount of indemnification due. If the damages With respect to Public Contracts, public tenders comprise a
exceed this minimum amount, it is possible to recover addi- succession of steps provided for in the applicable laws that do
tional indemnification from the breaching party. Additionally, not admit discretion on their fulfilment, except in specific cases
according to the BCC, the party to which the penalties for delay contemplated by the law based on convenience and opportunity
are owed also has the right to require the performance of the of the government; in such cases the tender may be waived. It
delayed obligation. is unlikely that the public employer would reduce the scope of a
Public Contract and enter into another in order to perform part
32 Common Issues on Construction of the scope of the Public Contract in place. Nevertheless, there
is no express prohibition of such practice. Therefore, if the work
Contracts
is completely omitted, the employer may do it himself or get a
third party to do it.
3.1 Is the employer entitled to vary the works to be
performed under the contract? Is there any limit on that
right? 3.3 Are there terms which will/can be implied into
a construction contract (e.g. a fitness for purpose
obligation, or duty to act in good faith)?
In private contracts, the employer usually may order variations
on the works at any time prior to taking over the works.
Construction contracts usually include “change order provi- In the absence of a specific contractual obligation to the
sions”, whereby the parties shall discuss the impact of the contrary, all applicable legal provisions that are not expressly
respective variation and, regarding material changes, negotiate a stated in the contract will apply to the contract (e.g. five-year
price adjustment and/or an extension of time. guarantee, time-bar, force majeure, limitation of liability with

respect to indirect damages and termination). The parties may The purposes of such legal provision are to: (i) prevent the
expressly waive the application of certain legal provisions as unjust enrichment of the employer since it is the beneficiary of
long as they are not considered mandatory or of public policy. the works; and (ii) indicate that the employer, as the final bene-
It is noteworthy to mention that contracts under Brazilian law ficiary of the work, shall bear bad ground conditions whenever
must always have regard for the social purpose of the contract such conditions are unforeseeable and make the performance of
and the principle of good faith, and that interpretation of the works excessively onerous on the contractor.
contracts in Brazil will always consider the parties’ real intention Although Brazilian law provides that, in such extraordinary
rather than the literality of words. cases, the risk of unforeseen ground conditions lies with the
employer, the parties can alter it contractually.
3.4 If the contractor is delayed by two concurrent
events, one the fault of the contractor and one the fault 3.7 Which party usually bears the risk of a change
or risk of his employer, is the contractor entitled to: (a) in law affecting the completion of the works under
an extension of time; and/or (b) the costs arising from construction contracts in your jurisdiction?
that concurrent delay?
Except if otherwise provided in the contract, the employer

The consequences arising from a delay caused by concurrent usually bears the risk of a change in law, mainly with respect to
events may be agreed by the parties in the contract, and it has been a tax burden and technical matters.
noticed that “time but no money” approaches have increased
among contractual arrangements. If there is specific provision
addressing concurrent delays, each party’s responsibility will be 3.8 Which party usually owns the intellectual property
in relation to the design and operation of the property?
proportionate to the fraction of the delay it has caused.
Considering that the contractor’s fault contributed to the
delay, the employer shall not be required to pay the total costs Generally, the contract establishes which party owns the intel-
regarding the concurrent delay and the contractor will not lectual property rights in relation to the design and operation of
be entitled to an extension of time with respect to the whole the property. In most cases, the designer or the contractor, as
period of the delay. The purpose is to avoid any imbalance and the case may be, grants the employer a perpetual licence for the
to compensate proportionally the employer’s delay with the use of the intellectual property related to the design or opera-
contractor’s concurrent delay. tion of the property.
3.5 Is there a time limit beyond which the parties to 3.9 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 when
In the absence of contractual provisions to the contrary, the
does time start to run?
contractor may suspend the works without paying an indemnity
to the employer due to: (i) the employer’s fault (such as delays in
Brazilian law establishes different statutes of limitations depending obtaining applicable licences or authorisations); (ii) occurrence
on each case. The general rule provides for a 10-year period, of force majeure events; (iii) changes resulting from unforeseeable
usually counted from the date of the illicit act or violation, for the events (such as geological, hydraulic or similar events), which
plaintiff to file its contractual claim. The BCC also states some affect the economic balance of the contract, resulting in exces-
specific cases in which the statute of limitations ranges from one to sively onerous obligations on the contractor; and (iv) dispropor-
five years, counted from the date of certain events described in it. tionate change orders requested by the employer with respect to
The BCC also establishes that for construction comprising the project already approved, even if the employer agrees to pay
substantial equipment or buildings, the contractor shall be liable the additional costs.
for the soundness and safety of the works performed during
five years counted from the issuance of the taking-over certif-
icate for the works. Such five-year warranty period may not 3.10 Are there any grounds which automatically or
usually entitle a party to terminate the contract? Are
be reduced by the parties to the contract. In case a defect is
there any legal requirements as to how the terminating
found during such period, the plaintiff may be required to file party’s grounds for termination must be set out (e.g. in a
the claim within 180 days from the date it becomes aware of the termination notice)?
defect. Certain scholars and parts of case law maintain that such
term may be extended up to 10 years.
In case the parties did not stipulate the circumstances in which
Please see also our answer to question 3.20.
the contract could be terminated, Brazilian law provides that
termination may occur in the following events: (i) fundamental
3.6 Which party usually bears the risk of unforeseen breach; and/or (ii) occurrence of an extraordinary supervening
ground conditions under construction contracts in your event, which was unforeseeable to the parties and results in
jurisdiction? excessively onerous obligations on the party claiming the termi-
nation. In such cases, the claimant must request the termination
The allocation of the risk of unforeseen ground conditions from the relevant court or arbitral tribunal, as the case may be.
will depend on the type of construction contract. Usually, in The parties are allowed to determine in the contract the
EPC lump-sum contracts, the rule is that such risk lies with the termination events that shall apply, and even the termination at
contractor. However, under Brazilian law, the risk is shifted the convenience of either or both of them. The most common
to the employer when such unforeseen ground conditions are termination events are: (i) bankruptcy or insolvency; (ii) a breach
an extraordinary supervening event that places an excessively not remedied within a specified period; (iii) delays in the works
onerous obligation on the contractor. attributable to the contractor; and (iv) force majeure events contin-
uing for a determined period of time agreed in the contract.

12 Brazil
3.11 Do construction contracts in your jurisdiction 3.14 On construction and engineering projects in
commonly provide that the employer can terminate at your jurisdiction, how common is the use of direct
any time and for any reason? If so, would an employer agreements or collateral warranties (i.e. agreements
exercising that right need to pay the contractor’s profit between the contractor and parties other than the
on the part of the works that remains unperformed as at employer with an interest in the project, e.g. funders,
termination? other stakeholders, and forward purchasers)?
Pursuant to Article 623 of the BCC, the employer may withdraw Direct agreements are commonly executed between lenders and
from the contract even when the execution of the works has contractors, in order to grant lenders a step-in right enabling them
already started, provided that the contractor is compensated for to assume direct control of the project company and/or to remedy
the expenses, the work done, costs incurred and profits in rela- breaches by the employer that could jeopardise or terminate the
tion to the services already provided, plus a reasonable indemni- project. Therefore, a contractor would not be able to terminate
fication calculated in light of the gains that the contractor would a contract due to a contractual breach by the employer, but must
receive if the works have been concluded. instead give the financing party an opportunity to remedy the
Notwithstanding, the parties usually agree in the contract default and/or take over the contract.
on specific termination for convenience provisions by the In this sense, the step-in clause limits in certain circumstances
employer, stipulating more detailed criteria for the calculation the contractor’s ability to exercise the rights and remedies avail-
of the indemnification due to the contractor in such scenario, able to it under the contract and grants financing parties the
which may include a termination penalty. right to step in and cure any default, as well as to assume any or
all of the obligations of the employer under the contract.
3.12 Is the concept of force majeure or frustration known
in your jurisdiction? What remedy does this give the 3.15 Can one party (P1) to a construction contract, who
affected party? Is it usual/possible to argue successfully owes money to the other (P2), set off against the sums
that a contract which has become uneconomic is due to P2 the sums P2 owes to P1? Are there any limits
grounds for a claim for force majeure? on the rights of set-off?
The concept of force majeure is known and enforceable in Brazil. The set-off of credits is permitted by the BCC, provided that the
According to the BCC, force majeure shall be considered “the debts have the same legal nature, are clear and defined, overdue
necessary event, whose effects were impossible to avoid or and of fungible goods. Therefore, in this particular example, it
impair”. The affected party shall not be responsible for losses is most likely to be possible.
resulting from force majeure events, unless such responsibility was
expressly stated in the contract.
3.16 Do parties to construction contracts owe a duty of
Thus, under Brazilian law, force majeure is a legal exemption
care to each other either in contract or under any other
of performance and liability during its occurrence. Under a legal doctrine? If the duty of care is extra-contractual,
contractual relationship, the party affected by a force majeure event can such duty exist concurrently with any contractual
will not be held liable for damages arising from it, provided that: obligations and liabilities?
(i) such party submits enough evidence of the event; and (ii)
such event was unforeseeable and beyond the party’s control.
The concept of duty of care is not applicable under Brazilian law.
In principle, each party will bear its respective expenses and
The parties are liable to each other in accordance with the terms
costs resulting from the force majeure event, but it is possible to
of the contract and the provisions of the applicable law.
provide in the contract for a different allocation of such risk.
The parties may agree upon a contractual definition of force
majeure and even waive the application to the contract of the 3.17 Where the terms of a construction contract are
concept established in the BCC. It is common to exclude certain ambiguous, are there rules which will settle how that
events from the concept of force majeure, such as: (i) changes ambiguity is interpreted?
affecting the economic balance of the contract, even if the
contract becomes uneconomic; (ii) labour or materials shortage; Ambiguity is settled by general rules of interpretation of the law,
and (iii) strikes restricted to the contractor’s employees. which are provided by the BCC, as amended by the previously
mentioned Economic Freedom Law. Currently, the BCC estab-
lishes that a contract’s interpretation must give it the meaning
3.13 Are parties, who are not parties to the contract,
entitled to claim the benefit of any contractual right that: (i) is confirmed by the behaviour of the parties after its
which is made for their benefit? E.g. is the second or execution; (ii) is in accordance with the uses, customs and market
subsequent owner of a building able to claim against common practices; (iii) is in accordance with good faith; (iv) is
the contractor pursuant to the original construction more beneficial to the party that did not write the provision, in
contracts in relation to defects in the building? case it is possible to distinguish the parties in such sense; and (v)
is in accordance with what would be reasonably negotiated by
According to the BCC, a party that is not a party to a contract is the parties, taking into consideration the other provisions of the
entitled to claim the benefit of any right under said contract as contract and the parties’ economic condition, considering the
long as the contract was executed for its benefit. information available at the time of its execution.
Brazilian law provides for a five-year guarantee with respect to It is worth mentioning that the BCC, in Article 113, §2,
the soundness and safety of the project. Therefore, a subsequent inserted by the Economic Freedom Law, provides that the
owner of a building may bring a claim against the contractor in parties are free to agree on the rules of interpretation of the
case of any defect in the building during this period. contract outside of those provided by law.

Lastly, Articles 421 and 421-A of the BCC, also amended by

the Economic Freedom Law, provide that: (i) in private relations,
42 Dispute Resolution
there shall be minimum interference by the State and contract
review should be exceptional; (ii) the negotiating parties may 4.1 How are construction disputes generally resolved?
establish objective parameters for the interpretation of the nego-
tiation clauses and their assumptions for review or resolution; If no amicable settlement is reached, disputes are usually resolved
(iii) the allocation of risk agreed between the parties should by arbitration. If no arbitration clause is provided for in the
be preserved; and (iv) in business relationships, the parties are contracts, the disputes are resolved through court litigation.
presumed to be equally equipped.
4.2 Do you have adjudication processes in your
3.18 Are there any terms which, if included in a jurisdiction (whether statutory or otherwise) or any other
construction contract, would be unenforceable? forms of interim dispute resolution (e.g. a dispute review
board)? If so, please describe the general procedures.
Contractual provisions contrary to public policy or mandatory

law will be unenforceable. However, such assessment can only Regarding dispute boards, please refer to our answer to ques-
be made on a case-by-case basis. tion 2.1.
Brazilian law does not provide for statutory adjudication as in
the UK. However, the inclusion of dispute boards in construc-
3.19 Where the construction contract involves an tion contracts has become more frequent in the past few years,
element of design and/or the contract is one for design
which in practice creates a contractual adjudication mechanism
only, are the designer’s obligations absolute or are there
limits on the extent of his liability? In particular, does the for certain projects. In 2018, the Municipality of São Paulo
designer have to give an absolute guarantee in respect of passed the first law allowing and regulating the use of dispute
his work? review and adjudication boards in public procurement contracts
executed by the Municipality.
The designer can be contracted to provide design services either
(i) without any interference in the performance of the works, or 4.3 Do the construction contracts in your jurisdiction
(ii) with the additional incumbency to supervise the works and commonly have arbitration clauses? If so, please
give directions to the contractor. explain how, in general terms, arbitration works in your
In the first case, the responsibility of the designer is limited to jurisdiction.
the soundness and safety of the works related to the project for
a five-year period, counted from the issuance of the taking-over Construction contracts usually provide for an arbitration clause.
certificate for the works. With respect to the second case, in In sum, Brazilian arbitration is regulated by federal law (Law
addition to the above, the designer is also responsible for the No. 9,307/96, as amended by Law No. 13,129/15, which is
damages caused to the employer for any omission related to the based on the UNCITRAL Model Law and the 1958 New York
supervision of the performance of the works. Convention on the Recognition and Enforcement of Foreign
Please note that, under Brazilian law, the employer is not Arbitral Awards (New York Convention)). Therefore, some
allowed to modify the design without the approval of the designer, important principles and features may be applied, such as due
except if the change is irrelevant or if it is required due to super- process, the right to be heard, impartiality and independence of
vening events or technical reasons making the project incon- arbitrators, kompetenz-kompetenz , and separability of the arbitra-
venient or excessively onerous. In case the design is changed tion agreement, among many others.
without the designer’s approval, the designer will not be liable Any party that can enter into a contract is permitted to submit
for any damages resulting from such change. disputes to arbitration. However, the dispute must relate to
rights and assets that can be freely transferred by the parties.
Domestic awards – those rendered inside Brazilian territory –
3.20 Does the concept of decennial liability apply in your
jurisdiction? If so, what is the nature of such liability and are considered as final judgments and do not require any confir-
what is the scope of its application? mation by courts for the purposes of enforcement. Foreign
awards, on the other hand, are subject to recognition proceedings
within the STJ, in accordance with the New York Convention.
The BCC provides for decennial liability as the general rule that
Parties are allowed to choose an arbitral institution to admin-
is applicable to civil liability whenever the law does not provide
ister the case, the language, the law applicable to the dispute and
for a shorter period.
the number of arbitrators to constitute the tribunal, as well as
Over recent years, the Brazilian Superior Court of Justice
other procedural aspects related to the arbitration.
(STJ) has been discussing whether such decennial liability period
would apply to contractual liability, after divergence in the court
where certain justices considered that a triennial liability period 4.4 Where the contract provides for international
should apply in contractual relationships. At least for now, the arbitration, do your jurisdiction’s courts recognise and
STJ’s understanding, as ruled in a decision taken in May 2019, enforce international arbitration awards? Please advise
of any obstacles (legal or practical) to enforcement.
is that the decennial period shall apply to contractual liability
and the triennial period to non-contractual liabilities based on
Article 205 of the BCC. There is no legal concept defining international arbitration.
Foreign arbitral awards (those rendered outside Brazil) do require
recognition in order to be enforced in Brazil. However, it is fair
to say that Brazilian courts tend to be friendly in the enforcement
of arbitral awards.

14 Brazil
The STJ has exclusive jurisdiction to recognise foreign arbi- be appealed. However, all first instance judgments are subject
tral awards, which must be executed through a recognition to appeal. The court of appeals is entitled to reanalyse facts and
proceeding subject to STJ’s Internal Rules, and in accordance legal arguments of the parties, therefore confirming, annul-
with some requirements, such as authentication by a Brazilian ling or modifying the judgment/decision. The court of appeals’
consulate and a sworn Portuguese translation. decision can also be submitted to the STJ in case of violation
The defendant can object. The grounds for opposing enforce- or incongruent application of any federal law, or to the Federal
ment of a foreign arbitral award are, however, limited to those Supreme Court in case of violation of any constitutional right.
provided for in the New York Convention, the Brazilian Enforcement proceedings end by satisfaction of the debt/
Arbitration Law, Law No. 4,657/42, the Code of Civil Procedure obligation or by withdrawal by means of a specific motion called
and STJ’s Internal Rules, such as: (i) incapacity of the parties; “embargos”. Embargos follows the same steps and procedural rules
(ii) invalidity of the arbitration agreement according to the as an ordinary procedure.
law chosen by the parties or, failing any indication thereon, In terms of the timing of civil court procedures, it depends on
under the law of the country where the award was made; (iii) the complexity of the case and the courts in which the lawsuit
absence of proper notice and other impediments to presenting is being processed. A fair assessment would be between five
a proper defence; (iv) the award is rendered outside the scope of and 10 years, if the case goes to the higher courts. In the courts
the arbitration agreement; (v) the arbitration proceedings were of first instance, ordinary procedures take one to five years;
conducted contrary to the arbitration agreement; (vi) the award and in the courts of appeal, another six months to three years,
is not yet binding, or it was annulled or suspended by the courts depending on the jurisdiction where the lawsuit is filed.
of the country of the seat of the arbitration; or (vii) the award
is contrary to Brazilian public policy, human dignity or Brazil’s
4.6 Where the contract provides for court proceedings
sovereignty. in a foreign country, will the judgment of that foreign
The parties may only start the enforcement proceedings in the court be upheld and enforced in your jurisdiction? If
courts where the defendant is located after the award is recog- the answer depends on the foreign country in question,
nised. Once recognition is granted, the creditor may file for are there any foreign countries in respect of which
enforcement before a federal court. enforcement is more straightforward (whether as a
result of international treaties or otherwise)?
4.5 Where a contract provides for court proceedings

in your jurisdiction, please outline the process adopted, Enforcing a foreign judgment is only possible after such judg-
any rights of appeal and a general assessment of ment is recognised by the STJ. Therefore, a party seeking to
how long proceedings are likely to take to reduce: (a) enforce a foreign court judgment must fulfil some legal proce-
a decision by the court of first jurisdiction; and (b) a dural requirements, as described in our answer to question 4.4
decision by the final court of appeal. above, which include, among other requirements contained in
STJ’s Internal Rules and the Code of Civil Procedure: to prove
There are different court proceedings in Brazil. In a private that the decision is protected by res judicata; to indicate the
contractual relationship, two proceedings could be used: jurisdiction of the authority that granted the decision; and to
(a) ordinary procedure – by which a party requests a decla- present the sworn translation of the decision into Portuguese.
ration or recognition of a right and seeks to hold the other Furthermore, foreign judgments must not violate public policy,
party liable to comply with a contractual obligation, pay human dignity or Brazil’s sovereignty.
a certain amount or indemnify for losses and damages Moreover, according to Article 25 of the Brazilian Code of
caused to the plaintiff; and Civil Procedure, provisions providing for the competence of
(b) enforcement procedure – by which the plaintiff uses the foreign courts only exclude the jurisdiction of Brazilian courts
contract as a title (título extrajudicial ) to enforce compli- in cases where the contract is considered to be an interna-
ance with a specific contractual obligation or payment of a tional contract. In cases where Brazilian courts consider the
specific amount of money. contract not to be international, they may claim that either court
In the ordinary procedure, a lawsuit should normally comply (national or foreign) has jurisdiction over the dispute. In that
with the following steps: (i) written statements of the plaintiff case, if a Brazilian issues a final and binding decision on the case
and the defendants; (ii) mediation or preliminary conciliatory prior to the recognition of the foreign decision, the recognition
hearing; (iii) taking of evidence; (iv) final statements; and (v) first shall be denied.
instance judgment. Prior to judgment, only a few decisions can

Thiago Fernandes Moreira concentrates his practice on construction and complex contracts, including onshore and offshore contracts,
equipment supply contracts, contracts typical to the oil and gas industry (e.g. charter agreements, O&M agreements, FPSOs, DPUs and
platform construction contracts, and gas supply contracts), take-or-pay contracts, contracts related to the hotel industry (e.g. construction of
hotels, built to suit, hotel management agreements and franchising), as well as project development and infrastructure-related transactions.
His experience includes advice to owners and contractors on the preparation, negotiation, pre-litigation and arbitration involving complex
contracts. He has substantial experience in sectors such as energy, ports, airports, subways, railways, shipbuilding, and oil and gas. Prior
to joining Mattos Filho, Thiago worked for the Inter-American Investment Corporation (IDB Group) in Washington, D.C. He is a member of
the Society of Construction Law in London and is currently the Co-Vice Chair of the Project Execution Subcommittee of the International
Construction Projects Committee of the International Bar Association (IBA).
Mattos Filho, Veiga Filho, Marrey Jr e Tel: +55 21 3231 8115

Quiroga Advogados Email: [email protected]
Praia do Flamengo, 200, 11º andar URL: www.mattosfilho.com.br
Rio de Janeiro, RJ 22210-901
Brazil
Flávio Spaccaquerche Barbosa concentrates his practice on pre-ligation, settlement negotiations and dispute resolution mechanisms
involving complex disputes. He has experience in litigation and arbitration, advising and representing clients in court proceedings and in
domestic and international arbitrations. He advises clients from a variety of economic sectors, focusing on oil and gas and construction
disputes, among other infrastructure-related matters. In his experience, he has advised on disputes involving different types of projects,
such as paper mills, windfarms, solar power plants, hydroelectric plants, nuclear power plants, FPSOs, among others. He has also advised
in construction disputes involving the public sector and government authorities. As an arbitration specialist, he is the former regional repre-
sentative of the International Chamber of Commerce (ICC) Young Arbitrators Forum for the Latin America Chapter and former member of
the ICC arbitrator appointing committee for the Brazilian National Committee. He is a member of the Advisory Council of the Arbitration and
Mediation Center of the American Chamber of Commerce for Brazil and arbitration director of the Centro Brasileiro de Mediação e Arbitragem
(CBMA).
Mattos Filho, Veiga Filho, Marrey Jr e Tel: +55 21 3231 8225

Quiroga Advogados Email: [email protected]
Praia do Flamengo, 200, 11º andar URL: www.mattosfilho.com.br
Rio de Janeiro, RJ 22210-901
Brazil
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 its clients, thereby enhancing the understanding
of their business and making them a valuable partner. Mattos Filho is a
leader in more than 30 different practice areas and works continuously to
ensure that all these practices are benchmarks for the market. Creation of
industry groups and market niches, combined with their comprehensive
knowledge of the market and their clients’ business needs, are examples of
their efforts to keep them at the forefront in providing legal services. They
represent domestic and foreign companies, financial institutions, inves-
tors, multilateral agencies, investment funds, pension funds, insurers and
reinsurers and non-profit organisations.
www.mattosfilho.com.br

16 Chapter 3
China
China
Michelle Li
Herbert Smith Freehills Kewei (FTZ)

Joint Operation Office Hew Kian Heong
For private projects in Mainland China involving foreign-in-

12 Making Construction Projects vested employers, the suite of contract forms published by
FIDIC (the International Federation of Consulting Engineers),
1.1 What are the standard types of construction contract known as the “Rainbow Suite” (both the 1999 First Edition and
in your jurisdiction? Do you have: (i) any contracts which
the 2017 Second Edition), is one of the more commonly used
place both design and construction obligations upon
contractors; (ii) any forms of design-only contract;
non-government model forms. Among them, the “Red Book”
and/or (iii) any arrangement known as management (for construction), the “Yellow Book” (for plant and design-
contracting, with one main managing contractor and build) and the “Silver Book” (for EPC/turnkey projects) are the
with the construction work done by a series of package most commonly used forms.
contractors? (NB For ease of reference throughout
the chapter, we refer to “construction contracts” as an
abbreviation for construction and engineering contracts.) 1.4 What (if any) legal requirements are there to
create a legally binding contract (e.g. in common law
jurisdictions, offer, acceptance, consideration and
The standard types of construction contract used in Mainland intention to create legal relations are usually required)?
China are (i) build-only contracts, (ii) design-only contracts, (iii) Are there any mandatory law requirements which need to
design-and-build contracts, and (iv) engineering, procurement be reflected in a construction contract (e.g. provision for
and construction contracts. Management contracting is not adjudication or any need for the contract to be evidenced
considered common. in writing)?
Under PRC law, in broad terms, the following are the necessary
requirements for a contract to be legally binding: (a) an offer; (b)
To the extent applicable, what forms of collaborative acceptance of that offer; (c) the intentions of the parties to create
contracts are commonly used? legal relations and that they have the capacity to do so; and (d) the
contract terms do not contravene mandatory provisions in laws
and administrative regulations and are not against public interest.
The construction contracting market in Mainland China is still
As far as construction contracts are concerned, the minimum
fairly traditional (please refer to the answer to question 1.1).
requirements are that (i) they are in writing, and (ii) they contain
There is limited understanding of what collaborative contracting
essential terms. The essential terms are the contracting parties,
is. Both alliance contracting and partnering are not considered
the subject matter of the contract and the quantity of the subject
common.
matter being contracted for.
Depending on a number of factors such as (a) the contract value,
1.3 What industry standard forms of construction (b) the source of funding of the project, and (c) whether it qualifies
contract are most commonly used in your jurisdiction? as a major national construction project, a construction contract
may need to be awarded through tendering and go through formal
The most commonly used standard forms for the PRC domestic investment planning and a feasibility study process.
market are the model forms published by the PRC Government There is no statutory adjudication for the construction industry
(jointly published by the Ministry of Housing and Urban-Rural in Mainland China and so no provision for adjudication in the
Development (“MOHURD”) and the State Administration for contract terms.
Market Regulation (“SAMR”)). They are not mandatory forms
but are quite commonly used (with amendments). These model 1.5 In your jurisdiction please identify whether there
forms include: is a concept of what is known as a “letter of intent”, in
■ For build-only: Model Contract for Construction Works which an employer can give either a legally binding or
(GF-2017-0201). non-legally binding indication of willingness either to
■ For design-only: Model Engineering Contract for Civil enter into a contract later or to commit itself to meet
Construction Projects (GF-2015-0209) and Model certain costs to be incurred by the contractor whether or
Engineering Contract for Specialist Construction Projects not a full contract is ever concluded.
(GF-2015-0210).
■ For EPC: Model Engineering, Procurement and A “letter of intent” is more often used in projects not procured
Construction Contract (GF-2011-0216). through tendering – if a construction contract is let through

Herbert Smith Freehills Kewei (FTZ) Joint Operation Office 17
tendering, the PRC Bidding Law requires that the response to a 1.7 Are there any statutory requirements in relation to
successful bid is an award of the contract, often in the form of a construction contracts in terms of: (a) labour (i.e. the
“letter of award”, as opposed to issuing a “letter of intent” or a legal status of those working on site as employees or
“limited notice to proceed” (with the works). as self-employed sub-contractors); (b) tax (payment of
There are no specific legal principles under PRC law used for income tax of employees); and/or (c) health and safety?
determining the effect of “letters of intent”. The provisions
in the PRC Contract Law will apply in determining whether it In terms of labour, there is no general requirement under PRC
creates legally binding obligations, especially whether it is suffi- law for a minimum portion of the works or services to be under-
cient to constitute a “pre-contract” under PRC law. A “pre-con- taken by or subcontracted to Chinese nationals or companies.
tract” is an agreement between the parties to enter into a formal Generally speaking, all lawfully employable persons can be
contract within an agreed period of time. engaged to perform work or services either as an employee or
If a letter of intent is general in content and does not specify as a sub-contractor. In an employer-employee relationship, the
the subject matter of the contract and the quantity of the subject PRC Labour Law and the PRC Labour Contract Law will apply.
matter to be contracted for, in some judicial cases the PRC In terms of tax, as with any party employing individuals, under
courts have found that the letter is not legally binding. PRC law a contractor has a general obligation to withhold (as
If a letter of intent does not refer to a contract to be entered the statutory tax withholding agent) the Individual Income Tax
into, or a draft contract, but it stipulates that a party will meet amounts from the income to be released to its employees and
certain costs to be incurred by the other party, this may be pay the tax amounts directly to the tax authorities. The with-
regarded by the PRC courts as a unilateral undertaking by the holding and direct payment arrangement is not unique to the
employer, which will be legally binding on the employer. construction sector or construction contractors. Value-added
If a letter of intent stipulates or indicates the parties’ intention tax also applies to construction contractors (in their capacity as
to enter into a contract, is signed by the contractor to confirm service suppliers).
its agreement to the terms of the letter and refers to the specific In terms of health and safety, the mandatory statutory require-
draft contract to be entered into or otherwise specifies the ments are provided for in various laws and regulations. By way
subject matter of the contract and the quantity of the subject of example:
matter to be contracted for, this may constitute a pre-contract ■ contractors shall establish a work safety management insti-
under PRC law. Such pre-contract will oblige the employer to tution and staff it with full-time work safety management
enter into a formal contract with the contractor. If the employer personnel;
decides not to do so, it will be in breach of the pre-contract. ■ contractors shall establish a safety training system for
employees and workers and take out accident liability insur-
1.6 Are there any statutory or standard types ance for employees who engage in dangerous operations
of insurance which it would be commonplace or (refer to the answer to question 1.6). Workers who have not
compulsory to have in place when carrying out completed their work safety education and training are not
construction work? For example, is there employer’s permitted to commence works on site;
liability insurance for contractors in respect of death ■ contractors shall provide personal protection equipment
and personal injury, or is there a requirement for the and clothing to operatives, inform them of the operational
contractor to have contractors’ all-risk insurance? procedures for dangerous operations, and alert them to the
hazards of operating in violation of the rules and regula-
Under the PRC Construction Law, when carrying out constructions; and
tion work, a contractor should have in place work injury insur- ■ as an employer, contractors shall make arrangements
ance for its employees. Pursuant to the Administrative Regulations for occupational health check-ups prior to, during and
on Work Safety for Construction Projects, a contractor should have after the end of employment for their employed workers
in place accident liability insurance for employees that engage engaged in operations that may expose them to occupa-
in dangerous operations (what constitutes dangerous operational hazards.
tions is not defined) – the carrying of accident liability insur-
ance is also encouraged under the PRC Construction Law, but
1.8 Is the employer legally permitted to retain part of
the Administrative Regulations on Work Safety for Construction Projects the purchase price for the works as a retention to be
make it compulsory. released either in whole or in part when: (a) the works are
The other most common types of insurance (although not substantially complete; and/or (b) any agreed defects
mandatory) include construction/erection all-risk insurance, liability period is complete?
public/third-party liability insurance and insurance that covers
a contractor’s construction equipment. Where it is the employer Yes, the employer is legally permitted to take retentions, to be
(i.e. project owner) who takes out the construction/erection released in whole or in part on completion and/or on the expiry
all-risk insurance, it is not uncommon to see that coverage will of the defects liability period and the completion of defects
be extended to cover losses for delay in start-up (especially for rectification. The Measures on the Management of Construction Project
production plant construction). Quality Deposits (“Measures”), jointly issued by the Ministry
There is no mandatory requirement in the PRC for construc- of Finance and MOHURD, stipulate that retentions shall not
tion professionals to maintain professional liability/indemnity exceed 3% of the contract price and the defects liability period
insurance. shall not exceed two years. However, the Measures, carrying
only the status of a department regulatory document, are not consid-
ered to be mandatory requirements. It is quite common for
employers to retain between 5% and 10% of the contract price
as retentions, with at least 5% of it only to be released after the
defects liability period expires and the defects are all rectified.

18 China
1.9 Is it permissible/common for there to be specified conditions (e.g. in the event of non-payment). The
performance bonds (provided by banks and others) to right to remove goods and materials from the site in the event
guarantee the contractor’s performance? Are there any of non-payment is, however, not commonly provided to the
restrictions on the nature of such bonds? Are there any contractor in contracts – employers in Mainland China seldom
grounds on which a call on such bonds may be restrained agree to this.
(e.g. by interim injunction); and, if so, how often is such However, the PRC Contract Law does give the contractor
a priority right (over other creditors) to compensation if the
pre-condition) or only upon default of the contractor? employer defaults in paying the contractor. Article 286 of the
PRC Contract Law provides that, if the employer fails to pay
the price for the works as agreed, then after demanding such
The use of performance bonds is both permissible and common. payment from the employer and giving the employer a reason-
There are no general restrictions on the nature of such bonds, able period thereafter to pay, if the employer still fails to pay, the
and both independent bonds (creating a primary obligation contractor may apply to the court for the liquidation or auction
on the bondsman to pay) and traditional contracts of guar- of the project in accordance with law, except projects that are by
antee (creating a secondary obligation to pay) are used in the their nature unsaleable. The contractor shall have the right to
PRC construction market. Typically, independent performance be compensated from the proceeds of the liquidation or auction
bonds are issued as on-demand bonds, whilst contracts of guar- sale, prior to mortgagees, chargees and other creditors over the
antee are conditional and do require default of the contractor, as project, if any. However, this right needs to be exercised within
described in the guarantee, to be established. six months of the project completion date, and the compensa-
It is possible for a call on an independent performance bond to tion will be limited to payment for the materials and manpower
be restrained by the courts (by forbidding payment) on limited supplied, and does not include, for example, damages for breach
grounds, but the evidential threshold for making out a case is of contract.
considered high. Generally speaking, following the issuance in
late 2016 of the Provisions of the Supreme People’s Court on Several
Issues concerning the Trial of Independent Guarantee Dispute Cases, the
22 Supervising Construction Contracts
PRC courts may issue a ruling to temporarily forbid payment
under an on-demand bond if all of the following conditions are 2.1 Is it common for construction contracts to be
satisfied: supervised on behalf of the employer by a third party
(e.g. an engineer)? Does any such third party have a
■ the applicant has submitted sufficient evidence to establish
duty to act impartially between the contractor and the
a highly likely case that “the beneficiary made a fraudulent bond employer? If so, what is the nature of such duty (e.g. is
call ”; it absolute or qualified)? What (if any) recourse does a
■ it is urgent and the applicant may suffer irreparable damage party to a construction contract have in the event that
if payment is not stopped; and the third party breaches such duty?
■ the applicant has lodged with the court sufficient coun-
ter-guarantee or counter-security for the application. It is common for an employer to appoint a third party to super-
Interim injunctions temporarily forbidding bond payments vise the construction project on its behalf. Under PRC law, the
are difficult to obtain because of the high evidential burden of appointment by the employer of a project supervisor (a “Jian
proof required, and thus the number of such injunctions granted Li ”) is mandatory for the following projects:
is limited as a matter of court practice. ■ key construction projects of the State;
■ large and medium-scale public utility projects;
1.10 Is it permissible/common for there to be company ■ large-area residential development projects;
guarantees provided to guarantee the performance of ■ projects using loans or aids from foreign governments or
subsidiary companies? Are there any restrictions on the international organisations; and
nature of such guarantees? ■ other projects that should be subject to project supervision
as stipulated by the law.
It is permissible for parent companies to provide guarantees for Under PRC law, the role of a project supervisor is not one
the performance of subsidiary companies, but it is not common of contract administration for the employer. The Regulations on
practice in the PRC construction market. There are no general the Quality Management of Construction Projects impose various stat-
restrictions on the nature of such guarantees under law, but in utory duties on project supervisors. By way of example, the
order for the guarantee to be valid, the provision of the guar- project supervisor shall possess a qualification certificate of the
antee will have been approved by way of a shareholder resolu- required grade and shall not:
tion or a board resolution (as required by the PRC Company Law), ■ act beyond the scope of its licensed qualification;
and the guaranteed amount must also be in line with the require- ■ conduct supervision in the name of another project super-
ments prescribed in the company’s articles of association. vision entity;
■ assign the project supervision for others to perform; or
■ supervise a project where he has a subsidiary relationship
1.11 Is it possible and/or usual for contractors to have
or any other relationship of interest with the contractors or
retention of title rights in relation to goods and supplies
the suppliers.
claim that, until they have been paid, they retain title and There are administrative penalties and, in some circum-
the right to remove goods and materials supplied from stances, even criminal liability for the project supervisor if he is
the site? found to be in breach of his statutory duties. If he is in breach
of his project supervision contract with the employer, he will be
It is possible for the parties to agree for the contractor to retain liable to the employer for the losses caused by his breach. In the
title, insofar as the goods and supplies have not been incorpo- Model Contract Form for Project Supervision jointly published
rated into the works, and to remove them from the site under by the MOHURD and SAMR (GF-2012-0202), it is stipu-
lated that the project supervision shall be carried out in a fair,

independent, honest and scientific manner. It is noteworthy that A party will also generally not be allowed to claim compensa-
“project supervision” in this context is not contract administration by way of both liquidated damages and general damages in
tion for the employer. respect of the same loss.
If a third-party contract administrator is appointed by the
employer, there is no general duty for this contract administrator 32 Common Issues on Construction
(who can be an engineer) to act impartially between the parties. Contracts
2.2 Are employers free to provide in the contract that 3.1 Is the employer entitled to vary the works to be
they will pay the contractor when they, the employer, performed under the contract? Is there any limit on that
have themselves been paid; i.e. can the employer include right?
in the contract what is known as a “pay when paid”
clause?
The right to vary the works to be performed under a construc-
tion contract is not expressly provided for under PRC law, but
Yes. PRC law does not prohibit the stipulation of “pay when invariably construction contracts provide for such a right, to be
paid” clauses or arrangements in main contracts, but they are exercised prior to completion. By way of example, the Model
not common in Mainland China since, in practice, the establish- Contract for Construction Works (GF-2017-0201) provides for
ment of most construction projects in Mainland China will have the employer’s right to vary the works.
required the employer to have secured sufficient funding at the
outset of the project formation.
“Pay when paid” clauses or arrangements, if used, are more 3.2 Can work be omitted from the contract? If it is
often at the subcontract level. Generally speaking, there is no omitted, can the employer carry out the omitted work
himself or procure a third party to perform it?
prohibition against “pay when paid” clauses and, as such, they
can be enforceable. However, in judicial practice, in order to avail
itself of the “defence”, the main contractor typically has to satisfy The right to omit work under a construction contract is not
the court evidentially that it actively demanded payment from the enshrined under PRC laws and regulations. Rather, it is left to
employer and that it is not due to its own reasons that the condi- the parties to agree between themselves. In practice, even if it
tions for payment under the main contract have not been satisfied. is not expressly agreed, it is generally taken as the position that
the employer may omit work (often as part of its express right to
vary the works) and perform it either itself or have it performed
by a third party.
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 3.3 Are there terms which will/can be implied into
completion? If such arrangements are permitted, are a construction contract (e.g. a fitness for purpose
there any restrictions on what can be agreed? E.g. does obligation, or duty to act in good faith)?
the sum to be paid have to be a genuine pre-estimate
of loss, or can the contractor be bound to pay a sum
which is wholly unrelated to the amount of financial loss By way of implication of terms by law, the PRC Contract Law
likely to be suffered by the employer? Will the courts imposes a number of general obligations on contracting parties
in your jurisdiction ever look to revise an agreed rate of in their contract performance including, amongst others, the
liquidated damages; and, if so, in what circumstances? obligation:
(a) to comply with laws and regulations and to respect social
Yes. Parties are free to agree liquidated damages for breach in codes of conduct;
the contract, including for late completion. This is permitted (b) not to disrupt socioeconomic order or impair social and
under the PRC Contract Law. However, the PRC Contract Law public interests;
also allows the court to revise the agreed rate of liquidated (c) to perform the parties’ respective obligations under the
damages, effectively to ensure that the total damages are not less contract;
than the actual losses suffered, in the following manner: (d) to provide notifications and assistance to other parties;
(a) If the liquidated damages are significantly higher than the (e) to maintain confidentiality regarding the contract; and
actual losses suffered and one party applies to the court for (f) to comply with the principle of good faith.
a reasonable deduction, the court may consider adjusting There is, however, no implied fitness for purpose obligation
the rate of liquidated damages. Based on subsequent judi- under PRC law for construction works and construction design.
cial clarification, typically if the liquidated damages are
more than 30% higher than the actual losses suffered, it 3.4 If the contractor is delayed by two concurrent
will be regarded as being significantly higher than actual events, one the fault of the contractor and one the fault
losses. In practice, in addition to considering the amount or risk of his employer, is the contractor entitled to: (a)
of the actual losses, the court will look into other factors an extension of time; and/or (b) the costs arising from
such as the performance of the contract concerned, the that concurrent delay?
extent of culpability of the relevant party in causing the
losses suffered and the anticipated benefits from the PRC law is silent on whether a contractor is entitled to an exten-
contract performance, and then decide whether to adjust sion of time and/or additional payment in the event of concur-
the liquidated damages in accordance with the principles rent delays. This issue very much turns on the terms of the
of justice, fairness and good faith. parties’ contract. Unless otherwise provided under a contract, it
(b) If the liquidated damages are lower than the actual losses is, in principle, possible for the contractor to claim for time and
suffered, then on a party’s application, the court may increase cost consequences of delay events for which it is not responsible,
the amount of the liquidated damages and such increased even if these events may be concurrent with other, non-excus-
amounts shall not exceed the actual losses suffered. able events.

20 China
3.5 Is there a time limit beyond which the parties to 3.9 Is the contractor ever entitled to suspend works?
does time start to run? Under PRC law, the contractor is entitled to suspend works in
certain situations, such as where the employer fails to make
payment. The statutory grounds for suspension of performance
According to Article 188 of the General Principles of the Civil Law, of a contract are, however, limited. Parties usually expressly stip-
the time limit for the parties to bring claims under a contract ulate the grounds for suspension under construction contracts.
(including a construction contract) is three years. Time starts to
run from the day when the aggrieved party knows or ought to
have known that his or her right has been violated (i.e. breach). 3.10 Are there any grounds which automatically or
3.6 Which party usually bears the risk of unforeseen party’s grounds for termination must be set out (e.g. in a
ground conditions under construction contracts in your termination notice)?
jurisdiction?
The general grounds for termination of a contract are set out in
It is common in practice for the employer to bear the risk of the PRC Contract Law. Article 93 gives parties a right to termi-
unforeseen ground conditions under construction contracts. nate a contract by mutual consent. Article 94 further allows
The Model Contract for Construction Works (GF-2017-0201), either party to terminate where:
for instance, provides that in the event that the contractor (a) the objective of the contract may no longer be achieved
encounters unforeseen ground conditions, it shall take reason- due to force majeure;
able measures to overcome such conditions and is entitled to an (b) the other party clearly indicates by word or conduct an
extension of time and additional payment for any delays or costs intention not to perform its obligation before the obliga-
it has incurred as a result of taking such measures. Similarly, tion is due to be performed;
insofar as EPC contracting is concerned, pursuant to Article (c) the other party delays performance of its obligation and,
15 of the Measures for Administration on EPC Contracting for Houses after being requested to perform such obligation, fails to
and Infrastructure Projects jointly issued by MOHURD and the do so within a reasonable period;
National Development and Reform Commission in December (d) the objective of the contract may no longer be achieved
2019, the risk of unforeseen ground conditions is also allocated due to the other party’s delay in performance of its obliga-
to the employer for EPC works. tions or other breaches of contract; or
(e) there is any other circumstance as stipulated by law.
3.7 Which party usually bears the risk of a change Additional grounds for termination under a construction
in law affecting the completion of the works under contract are set out in the Interpretation of the Supreme People’s Court
construction contracts in your jurisdiction? on Issues Concerning the Application of Law for the Trial of Cases of
Dispute over Contracts on Undertaking Construction Projects. According
to it, the employer is entitled to terminate the contract if:
The risk of a change in law is usually borne by the employer.
(a) the contractor clearly indicates by word or conduct an
This practice is reflected in the Model Contract for Construction
intention not to perform its obligation before the obliga-
Works (GF-2017-0201), which provides that the employer is
tion is due to be performed;
responsible for any increase in costs incurred by the contractor
(b) the contractor fails to complete the works by the agreed
for the execution of the contract as a result of any change in law
date of completion and thereafter within a reasonable time
after the base date of the contract. Similarly, insofar as EPC
after receiving the employer’s notice to do so;
contracting is concerned, pursuant to Article 15 of the Measures
(c) the contractor refuses to rectify works that are sub-standard;
for Administration on EPC Contracting for Houses and Infrastructure
or
Projects (please refer to the answer to question 3.6), the employer
(d) the contractor illegally assigns the construction contract.
bears the risk of a change in contract price caused by a change in
In the event that the employer fails to perform its obliga-
law for EPC works. Although in both of the above cases, there
tions despite being requested to do so by the contractor, the
is no express stipulation as to which party should bear the time
contractor is entitled to terminate the contract if the following
implication, if any, of a change in law, consistent with the allo-
circumstances render it impossible for the contractor to carry
cation of risk to the employer in both cases, it is expected that
out the construction works:
a contractor’s application for extension of time resulting from a
(a) the employer fails to make a payment due under the
change in law will likely be supported by the courts.
contract;
(b) the employer provides construction materials, parts and
3.8 Which party usually owns the intellectual property equipment that do not meet the relevant mandatory tech-
in relation to the design and operation of the property? nical standards; or
(c) the employer fails to perform its contractual obligations to
Under PRC law, unless otherwise agreed by the parties, the provide assistance.
intellectual property in relation to the design and operation of To terminate a contract, the terminating party must give
the property is owned by the party creating it. In construction notice of termination to the other party. The contract shall be
contracts, the intellectual property of any documents prepared by terminated upon the receipt of the notice by the other party.
the contractor in the course of its performance of the construc-
tion contract is usually agreed to be owned by the employer. The
contractor is, however, usually entitled to copy and use these
documents for the purpose of carrying out, commissioning,
or executing repair and modification to the works under the
construction contract.

3.11 Do construction contracts in your jurisdiction such right. This principle, however, does not apply in cases where
commonly provide that the employer can terminate at the second or subsequent owner of a building discovers defects
any time and for any reason? If so, would an employer in the building; such owner has no right to claim pursuant to
exercising that right need to pay the contractor’s profit the original construction contract for its losses resulting from
on the part of the works that remains unperformed as at the defects against the contractor. The right to bring a claim for
termination? defects against the contractor pursuant to the original construc-
tion contract rests with the party with whom the contractor
The employer has no express right under PRC law to terminate a entered into the contract.
contract for convenience. The employer can only terminate the
contract on the statutory grounds mentioned in the answer to
3.14 On construction and engineering projects in
question 3.10 above. The parties are, however, free to include a your jurisdiction, how common is the use of direct
right to terminate for convenience under construction contracts agreements or collateral warranties (i.e. agreements
and to specify the entitlements arising from the optional termina- between the contractor and parties other than the
tion. It is quite common that construction contracts do provide employer with an interest in the project, e.g. funders,
for such a right for the employer to terminate for convenience. other stakeholders, and forward purchasers)?
However, it is much less often that there will be clear stipulation
in the contract that the contractor will be compensated for the Whilst it is possible for parties to conclude direct agreements or
loss of profit on the part of the works unperformed. issue collateral warranties under PRC law, this is not common
practice for construction projects in Mainland China.
in your jurisdiction? What remedy does this give the 3.15 Can one party (P1) to a construction contract, who
affected party? Is it usual/possible to argue successfully owes money to the other (P2), set off against the sums
that a contract which has become uneconomic is due to P2 the sums P2 owes to P1? Are there any limits
grounds for a claim for force majeure? on the rights of set-off?
The concept of force majeure is recognised under PRC law and The PRC Contract Law recognises the right of set-off. Such right
is enshrined in Article 180 of the General Principles of the Civil arises in cases where one party (P1) owes the other party (P2) a
Law: it defines force majeure as circumstances that are unforesee- sum that has become due under the contract, in which case such
able, unavoidable and insurmountable. In practice, however, sum can be set off by P1 against any sums that P2 owes to P1.
PRC courts are unlikely to find that a contract that has become The right of set-off is not available if it is excluded by contract
uneconomic, in itself, will give rise to a claim for force majeure. or by law.
In the event of force majeure, the party affected may, depending
on the circumstances, be relieved in whole or in part from its
liability for failure of contract performance. 3.16 Do parties to construction contracts owe a duty of
There is no formal concept of frustration under PRC law but care to each other either in contract or under any other
legal doctrine? If the duty of care is extra-contractual,
there is a recognised legal principle/remedy of “change of circum-
can such duty exist concurrently with any contractual
stances” which offers relief in appropriate situations. The general obligations and liabilities?
principle/remedy of “change of circumstances” is laid out in the
Interpretation of the Supreme People’s Court on Several Issues Concerning
Application of the “Contract Law of the People’s Republic of China” (2). There are certain requirements under PRC law that broadly echo
Article 26 therein provides that, if there is a significant change of the principle of duty of care. For instance, Article 60 of the
the objective circumstances which renders the continual perfor- PRC Contract Law imposes on contracting parties the general
mance of the contract manifestly unfair to the relevant party, or duty to perform their contractual obligations and the duty of
makes it impossible to achieve the objective of the contract, and good faith. Article 60 also imposes on contracting parties the
if such change could not have been foreseen by the parties at the general obligations to provide notifications, provide assistance
time of entering into the contract and is not due to force majeure or and maintain confidentiality, subject to the nature and objective
commercial risks, the relevant party may apply to the courts to of the contract and trade customs. These duties and obligations
have the contract amended or discharged. The affected party may under PRC law exist concurrently with the parties’ contractual
seek judicial relief from the courts, either in the form of amend- obligations.
ment(s) to the contract or the termination of the contract, and the There is otherwise no formal duty of care (comparable to that
courts may make a decision based on the facts and the principle in tort in common law jurisdictions) owed by the parties towards
of fairness. Based on judicial practice, it is usually not easy for a each other.
party to argue change of circumstances successfully, especially if
it is obvious that a party is merely seeking to get out of contractual 3.17 Where the terms of a construction contract are
arrangements that have become uneconomic. ambiguous, are there rules which will settle how that
ambiguity is interpreted?

entitled to claim the benefit of any contractual right Article 125 of the PRC Contract Law provides that, where the
which is made for their benefit? E.g. is the second or parties dispute the effect of a contractual clause, the actual
subsequent owner of a building able to claim against meaning of the clause shall be inferred and determined by refer-
the contractor pursuant to the original construction ence to: the words and sentences used in the contract; the rele-
contracts in relation to defects in the building? vant provisions of the contract; the objective of the contract;
trade customs; and the principle of good faith.
It is possible under PRC law for a third party to claim the benefit
of a contractual right if that party is the intended beneficiary of

22 China
3.18 Are there any terms which, if included in a The warranty period runs from the day when the works are
construction contract, would be unenforceable? accepted. During this period, the contractor will be liable to
make good any defects in the works.
Under the PRC Contract Law, the following clauses are invalid
and thus unenforceable: 42 Dispute Resolution
(a) Exemption clauses that exempt one party’s liabilities for
causing physical injury to another party, or for causing the 4.1 How are construction disputes generally resolved?
other party to suffer losses either intentionally or by gross
negligence (Article 52). In Mainland China, construction disputes are generally resolved
(b) Standard clauses that either (i) exempt the party proposing through litigation or arbitration. The parties are also free to
those clauses from liabilities, (ii) increase the extent of the resolve disputes through consultation or mediation. Whichever
other party’s liability, or (iii) exclude substantive rights of form of dispute resolution they prefer and choose, it is impor-
the other party (Article 40). tant that the parties’ choice is expressed clearly in their contract.
The use of multi-tiered dispute resolution processes is not
3.19 Where the construction contract involves an very common for projects in Mainland China.
limits on the extent of his liability? In particular, does the 4.2 Do you have adjudication processes in your
designer have to give an absolute guarantee in respect of jurisdiction (whether statutory or otherwise) or any other
his work? forms of interim dispute resolution (e.g. a dispute review
Under PRC law, the liabilities for design defects are stipulated in
There is no statutory adjudication for the construction industry
Article 73 of the PRC Construction Law. Article 73 provides that,
in Mainland China.
in the event that design works fail to meet relevant quality and
The Model Contract for Construction Works (GF-2017-0201)
safety standards:
provides for the use of a dispute review board (“DRB”) mecha-
(a) the designer shall rectify the non-compliance and be liable
nism. Generally speaking, DRB may comprise a single member
for fines;
or a panel of three members. The parties to the contract shall
(b) if such non-compliance causes quality-related incidents, the
appoint the DRB members within 28 days after the contract is
designer shall suspend its business operations, have its qual-
signed or within 14 days after the dispute arises. The parties to
ification downgraded or revoked, surrender any unlawful
the contract may jointly submit a dispute relating to the contract
proceeds and be liable for fines;
to the DRB for review at any time.
(c) if such non-compliance causes damage or losses to other
The DRB shall, within 14 days of receiving a dispute for
parties, the designer shall compensate the same; and
review, make a written and reasoned decision in accordance
(d) if such non-compliance constitutes a criminal offence, the
with relevant laws, norms, standards, case experience and busi-
designer shall be subject to prosecution.
ness practice. The written decision made by the DRB shall be
In practice, the parties are free to limit their design liability
binding on both parties after being signed and confirmed by the
(other than criminal liability) under the contract. This is typi-
parties to the contract and both parties shall comply with the
cally at, or by reference to, the design portion of the contract
same. If either party does not accept or comply with the deci-
price, together with the usual exclusions of indirect losses, loss
sion of the DRB, the parties may refer the dispute to arbitration
of profits, etc.
or litigation, as agreed.

jurisdiction? If so, what is the nature of such liability and 4.3 Do the construction contracts in your jurisdiction
what is the scope of its application? commonly have arbitration clauses? If so, please
explain how, in general terms, arbitration works in your
jurisdiction.
Whilst the concept of decennial liability is not expressly enshrined
under PRC law, contractors remain liable for defects in the works In Mainland China, it is not uncommon for parties to include an
during statutory quality warranty periods. Article 40 of the arbitration clause in their construction contracts. According to
Regulations on the Quality Management of Construction Projects (Revision the PRC Arbitration Law, an arbitration agreement must include:
2017) provides the following minimum warranty periods in rela- (a) the expression of the parties’ intention to refer disputes to
tion to construction works: arbitration;
(a) for infrastructure works, ground foundations works and (b) the scope of matters for arbitration; and
main structural works for building construction, the (c) the arbitration commission chosen by the parties.
quality warranty period shall be the reasonable design life The more popular (and among the busiest) arbitration insti-
as specified in the design documents; tutions in Mainland China include the China International
(b) for roofing and waterproofing works, the quality warranty Economic and Trade Arbitration Commission, the Beijing
period shall be five years; Arbitration Commission and the Shenzhen Court of International
(c) for heating and air-conditioning systems, the quality Arbitration. Generally speaking, as a method of dispute resolu-
warranty period shall be two cycles of heating or air-condition in China, arbitrations tend to be more flexible than litigation.
tioning periods; and
(d) for works regarding electric wiring, gas, water supply,
drainage pipes, equipment installation and renovation
works, the quality warranty period shall be two years.

4.4 Where the contract provides for international a party disagrees with a judgment or ruling of first instance, it
arbitration, do your jurisdiction’s courts recognise and may file an appeal with a higher-level people’s court within 15
enforce international arbitration awards? Please advise days from the date on which the judgment comes into effect or,
of any obstacles (legal or practical) to enforcement. in the case of a ruling, within 10 days from the date on which the
ruling comes into effect.
According to the PRC Civil Procedure Law, arbitral awards The appeal court shall investigate and review the facts and
issued by foreign arbitration institutions can be recognised and issues determined by the first instance court. If there are no
enforced in Mainland China. new facts, evidence or causes of action, the court may dispense
The PRC is a Contracting State to the United Nations Convention with the need for an oral hearing. The appeal court is to render
on the Recognition and Enforcement of Foreign Arbitral Awards (the a judgment within three months of the filing of the appeal,
“New York Convention”). The local law (PRC Civil Procedure subject to extension with the prior approval of the president of
Law, see below) in relation to recognising and enforcing foreign the court.
arbitral awards made in another Contracting State now largely For simple and uncontroversial civil cases involving facts,
mirrors the grounds for refusal of recognition and enforcement rights and obligations that are relatively clear-cut, a summary
in the New York Convention. Where a Chinese court is inclined procedure may be applied in the first instance. In that case, the
to refuse enforcement of a foreign arbitral award, it must court is to render a judgment within three months of the filing
follow a vertical reporting system to seek non-objection to its of the case.
intended decision to refuse from all higher courts (including the
Supreme People’s Court) before making an order for refusing 4.6 Where the contract provides for court proceedings
enforcement. in a foreign country, will the judgment of that foreign
The grounds for refusing an application for the recognition court be upheld and enforced in your jurisdiction? If
and enforcement of foreign arbitral awards in Mainland China the answer depends on the foreign country in question,
are provided for in Article 274 of the PRC Civil Procedure Law and are there any foreign countries in respect of which
are as follows: enforcement is more straightforward (whether as a
(a) the parties have neither included an arbitration clause in
their contract nor subsequently reached a written arbitra-
tion agreement; A judgment of a foreign court can be recognised and enforced in
(b) the person against whom the application is made was not Mainland China in accordance with a bilateral or multinational
requested to appoint an arbitrator or take part in the arbi- treaty concluded or acceded to by the PRC, or under the prin-
tration proceedings, or he was unable to state his opinions ciple of reciprocity, provided that such judgment is not detri-
due to reasons for which he is not responsible; mental to the sovereignty, security or public interest of the PRC.
(c) the constitution of the arbitral tribunal or the arbitration The PRC has signed mutual judicial assistance treaties in rela-
procedure was not in conformity with the arbitration rules; tion to civil or commercial matters with more than 30 coun-
or tries, such as Singapore, Korea, France and Italy. Pursuant to
(d) matters decided in the award exceed the scope of the arbi- such treaties, the foreign judgments in those countries can be
tration agreement or are beyond the arbitral authority. recognised and enforced in Mainland China. Although a special
If the court determines that the enforcement of the award administrative region of the PRC, Hong Kong SAR is consid-
would be against public interest, it shall also refuse enforcement. ered a separate jurisdiction from Mainland China. There is a
formal framework in place providing for the mutual recognition
and enforcement of civil judgments between Mainland China
and Hong Kong SAR (as are there similar formal frameworks
in your jurisdiction, please outline the process adopted,
any rights of appeal and a general assessment of in place for the mutual recognition and enforcement of arbitral
how long proceedings are likely to take to reduce: (a) awards between Mainland China and Hong Kong SAR).
a decision by the court of first jurisdiction; and (b) a In instances where there is no mutual judicial assistance treaty
decision by the final court of appeal. between the PRC and a foreign country, PRC courts may also
recognise and enforce court judgments from that country based
In general, court proceedings in Mainland China can be on the principle of reciprocity, particularly if there are prece-
divided into first instance proceedings and appeal proceed- dents that the foreign country has previously recognised and
ings. According to the PRC Civil Procedure Law, a people’s court enforced PRC court judgments. On this basis, PRC courts have
shall close first instance proceedings within six months of the recognised and enforced court judgments from Singapore and
date the case was filed. This time limit can be extended by six the United States (California).
months with the prior approval of the president of the court. If

24 China
Michelle Li has over 15 years’ experience advising Chinese and international clients on construction contracts, claims, disputes, as well as
transactional matters, with a particular focus on the infrastructure and energy sectors, including power, oil & gas, petrochemicals, chemicals,
mining, railways and expressways. Michelle’s clients include contractors, employers, consultants, as well as banks.
As part of her contentious practice, Michelle advises and assists Chinese and international clients in arbitration, court litigation and mediation
in many jurisdictions, such as Mainland China, Hong Kong SAR, Singapore, Sweden, London and other Southeast Asian and African nations.
Michelle regularly speaks at conferences and seminars on the subject of construction risks, claims and dispute management. She has
taught classes on construction arbitration, international construction and project management, resolving Belt and Road disputes and inves-
tor-state arbitration at programmes organised by Tsinghua University. She is recognised in Who’s Who Legal: Construction as a Future Leader
(Partners).
Herbert Smith Freehills Kewei (FTZ) Joint Operation Office Tel: +86 21 2322 2000
c/o Herbert Smith Freehills LLP Email: [email protected]
38th Floor, Bund Center URL: www.herbertsmithfreehills.com
222 Yan An Road East
Shanghai 200002
China
Hew Kian Heong is the most experienced international construction lawyer based in mainland China. He has nearly 28 years of experience
in all areas of construction law, from transactional and project life services to conducting the most complex construction arbitrations and
litigations. He has been recognised as an Eminent Practitioner for Construction work in Chambers for a number of years.
Fluent in English, Mandarin and Cantonese, Hew qualified in Singapore and is also qualified to practise in Hong Kong and England & Wales.
He has worked on projects in many jurisdictions across the world, including all the countries in Southeast Asia and the Indian subcontinent
and a number of countries in Africa, the Middle East, Europe and South America.
Splitting his time between Shanghai and Beijing, Hew lectures on construction law issues at seminars organised by the Chinese government
and is a member of the Panel of Arbitrators of CIETAC, SHIAC and BAC. Hew was appointed Vice Chair of the Legal Committee of China
Association of International Engineering Consultants (CAIEC) (which operates under the auspices of the Ministry of Commerce) and consist-
ently invited to speak on Belt & Road issues at the annual CAIEC Summit.
Hew is also a much sought-after speaker/trainer who has given talks and taught workshops to many Chinese international contractors on
topics related to international construction.
Herbert Smith Freehills Kewei (FTZ) Joint Operation Office Tel: +86 21 2322 2000
c/o Herbert Smith Freehills LLP Email: [email protected]
38th Floor, Bund Center URL: www.herbertsmithfreehills.com
222 Yan An Road East
Shanghai 200002
China
Herbert Smith Freehills is one of the world’s leading professional services The firm’s specialist construction and engineering team offers the full
businesses, bringing together the best people across our 27 offices, to spectrum of legal services on all aspects of a project from procurement to
meet clients’ global legal service needs. The firm offers a top-tier, seam- completion and our projects group advises clients throughout every stage
less service across a single global platform and an unparalleled depth of of a project’s life-cycle. On large-scale, long-term projects the firm offers
expertise. It provides access to market-leading dispute resolution, projects innovative financing and bespoke contractual structures that allow clients
and transactional legal advice, combined with expertise in a number of to meet their projects’ objectives, acting for parties on all sides of projects
industry sectors, including construction and infrastructure, energy, natural and transactions.
resources, technology and financial services. The establishment of www.herbertsmithfreehills.com
Herbert Smith Freehills Kewei Joint Operation (JO) integrates and expands
China legal services for our clients, allowing us to provide access to quality
PRC law advice through the JO alongside our international legal expertise.
Coupled with our 30-year understanding of China business, we can now
manage China-related legal work through a single relationship, delivering
to the high standards clients expect, regardless of product, sector or legal
background.

Chapter 4 25
Denmark
Denmark
Bruun & Hjejle Advokatpartnerselskab Gregers Gam
12 Making Construction Projects 1.4 What (if any) legal requirements are there to
1.1 What are the standard types of construction contract intention to create legal relations are usually required)?
in your jurisdiction? Do you have: (i) any contracts which Are there any mandatory law requirements which need to
place both design and construction obligations upon be reflected in a construction contract (e.g. provision for
contractors; (ii) any forms of design-only contract; adjudication or any need for the contract to be evidenced
and/or (iii) any arrangement known as management in writing)?
contracting, with one main managing contractor and
with the construction work done by a series of package
contractors? (NB For ease of reference throughout According to the Danish Contracts Act, an agreement is legally
the chapter, we refer to “construction contracts” as an binding once an offer has been made and that offer has been
abbreviation for construction and engineering contracts.) accepted. There are, in general, no formal requirements requiring,
e.g., that the agreement be in writing, registered, signed or approved.
A committee appointed by the Minister for Climate, Energy and The AB Standards prescribe that the construction contract
Building has prepared several documents which have the status is to be concluded in writing. However, this is not a require-
of “agreed documents” and which consist of: ment for the contract to be valid, but a party arguing that an
■ General conditions for building and construction works and oral agreement has been concluded bears the burden of proof in
supplies (AB 18), where the contractor carries out the building documenting that this is the case.
and construction works, and where the design, drawings,
descriptions, etc. are mainly supplied by the employer. 1.5 In your jurisdiction please identify whether there
■ General conditions for design and build contracts (ABT is a concept of what is known as a “letter of intent”, in
18), where the contractor both supplies the design and which an employer can give either a legally binding or
carries out the works. non-legally binding indication of willingness either to
■ General conditions for consultancy services for building enter into a contract later or to commit itself to meet
and construction works (ABR 18), which are commonly certain costs to be incurred by the contractor whether or
agreed between the employer and the employer’s consultant not a full contract is ever concluded.
and/or the contractor and the contractor’s consultant.
When the terms and conditions in AB 18, ABT 18 or ABR 18 Pursuant to Danish case law, the general rule is that a letter of
(the “AB Standards”) are agreed between the parties, they apply intent is not legally binding for the parties. However, dependent
alongside the specific contract. Deviation from the AB Standards on its content – including a specification that certain provisions
is then only valid if the points to be deviated from are clearly and are to be considered legally binding and/or subsequent behav-
explicitly specified in the specific construction contract. iour by the parties – the letter of intent can entail legal conse-
quences, cf. Gam, Letters of Intent, Erhvervsjuridisk Tidsskrift
2009/3, pp. 247–260.
To the extent applicable, what forms of collaborative 1.6 Are there any statutory or standard types
contracts are commonly used? of insurance which it would be commonplace or
compulsory to have in place when carrying out
Partnering is not commonly used in Denmark; however, it is not construction work? For example, is there employer’s
an unfamiliar concept. Four Danish industrial organisations in
the construction industry have produced a guide to partnering contractor to have contractors’ all-risk insurance?
in practice (Partnering i praksis – vejledning i partnering, 2. ed. 2005),
which also contains three paradigms for partnering contracts.
In accordance with AB 18 and ABT 18, the employer is obliged
to take out and pay for fire and storm damage insurance.
1.3 What industry standard forms of construction The parties can agree to a more extensive insurance obliga-
contract are most commonly used in your jurisdiction? tion for the employer or the contractor such as all-risk insurance,
and such agreement is common in large building or civil engi-
The AB Standards described in question 1.1 are the most neering work contracts.
commonly used standard forms.

26 Denmark
The contractor(s) must take out professional and product are obliged to provide a performance bond as security for the due
liability insurance. This insurance will include cover for performance of their obligations towards one another. This does
damages to the employer’s or a third party’s person or prop- not apply to the employer if the employer is a public employer or
erty, but there are notable exceptions to cover of particular rele- social housing organisation.
vance to construction works, including that such insurance does The contractor’s performance bond must correspond to 15%
not cover damage to objects that the insured has accepted to of the contract sum excluding VAT. After handover, the perfor-
install, repair, mount or in other ways rework or treat, where the mance bond is reduced to 10% and then again to 2% one year
damage is caused during performance of these works. after handover. Five years after handover, the performance bond
If the building is to be mainly used for residency, the employer ceases. These reductions take place unless the employer prior
must take out building damage insurance, cf. the Danish Building hereto has submitted a written complaint of the defects, in which
Act, unless the building is intended to be rented out. case the reductions are made once the defects are remedied.
The employer’s performance bond must correspond to three
months’ average payments, but no less than 10% of the contract
construction contracts in terms of: (a) labour (i.e. the sum excluding VAT. It will cease once the contractor has
legal status of those working on site as employees or submitted the final account and has no outstanding claims.
as self-employed sub-contractors); (b) tax (payment of For both the employer’s and the contractor’s performance
income tax of employees); and/or (c) health and safety? bonds, the parties can request payment in writing by simulta-
neously notifying the other party and the guarantor. A call on
In relation to labour, all employees who are not citizens in the the performance bond must be paid within 10 working days,
EU, the Nordics, the EEA or Switzerland must obtain a resi- unless the other party files a request with the Danish Building
dence and work permit in Denmark. and Construction Arbitration Board, asking the Board to issue a
When determining whether a worker is an employee or decision on the security provided. It is not uncommon for full
a self-employed subcontractor, it is essential if the works are or partial relief to be granted on a call on a bond.
performed on the worker’s own account and risk.
Whether an employee is liable to pay tax in Denmark will 1.10 Is it permissible/common for there to be company
depend on sections 1 and 2 of the Danish Withholding of Tax guarantees provided to guarantee the performance of
Act. For instance, the employee will be liable to pay tax in subsidiary companies? Are there any restrictions on the
Denmark if the employee has taken residence in Denmark or if nature of such guarantees?
the work is performed in Denmark. If the employee is liable to
pay tax in Denmark, the contractor will be obliged to withhold According to AB 18 and ABT 18, performance bonds must
tax when paying wages. be in the form of a bank guarantee, fidelity insurance or other
If the employee is employed by a foreign firm and is then adequate type of security.
hired out by a Danish contractor to perform work in Denmark, A guarantee from a parent company will not be sufficient as
the employee will be liable to pay 8% labour market contribu- “other adequate type of security”, hence neither the contractor
tions and 30% hiring-out of labour tax on gross earnings. The nor the employer will be obliged to accept such a guarantee.
contractor will pay this tax on behalf of the employee.
Denmark’s taxation rights can be limited by double taxation
treaties.
The employer and contractors working on the construction used in the works? Is it permissible for contractors to
site must comply with the provisions of the Danish Working claim that, until they have been paid, they retain title and
Environment Act and the statutory orders issued under the the right to remove goods and materials supplied from
provisions of this Act. the site?
1.8 Is the employer legally permitted to retain part of If AB 18 or ABT 18 has been agreed and not deviated from,
the purchase price for the works as a retention to be materials and other supplies intended for incorporation in the
released either in whole or in part when: (a) the works are works must be supplied by the contractor without any retention
substantially complete; and/or (b) any agreed defects of title. Once such materials and supplies have been delivered to
liability period is complete? the construction site, they belong to the employer.
According to AB 18 and ABT 18, the employer may retain a 22 Supervising Construction Contracts
reasonable amount of the purchase price as security for the
rectification of defects detected at the time of handover. The
retained amount must be reasonable in relation to the extent of supervised on behalf of the employer by a third party
the detected defects and the expected costs of rectification. (e.g. an engineer)? Does any such third party have a
employer? If so, what is the nature of such duty (e.g. is
it absolute or qualified)? What (if any) recourse does a
performance bonds (provided by banks and others) to
party to a construction contract have in the event that
guarantee the contractor’s performance? Are there any
the third party breaches such duty?
restrictions on the nature of such bonds? Are there any
grounds on which a call on such bonds may be restrained
(e.g. by interim injunction); and, if so, how often is such According to AB 18, the employer must appoint a supervisor to
relief generally granted in your jurisdiction? Would such represent the employer in relation to the contractor with regard
bonds typically provide for payment on demand (without to the organisation and execution of the work. The supervisor
pre-condition) or only upon default of the contractor?
will often be the employer’s technical advisor. Such an agree-
ment will most often be based on ABR 18.
Under AB 18 and ABT 18, both the employer and the contractor

Bruun & Hjejle Advokatpartnerselskab 27
There is no duty to act impartially between the employer and are omitted. The AB Standards do not specifically regulate
the contractor, but the supervisor should be independent of the the employer’s right to transfer the omitted works to another
employer. There is a general contractual duty to act in good contractor but, based on the AB-committee’s report no. 1570
faith (please see question 3.3). (2018), the employer will most likely not be entitled to perform
the work himself or to instruct a third party to perform it.
2.2 Are employers free to provide in the contract that
they will pay the contractor when they, the employer, have 3.3 Are there terms which will/can be implied into
themselves been paid; i.e. can the employer include in a construction contract (e.g. a fitness for purpose
the contract what is known as a “pay when paid” clause? obligation, or duty to act in good faith)?
The parties may include a “pay when paid” clause in their contract. In Danish contract law, the parties to a contract have a general
Such a clause is rarely seen in the contracts with the employer, but duty to act in good faith towards one another. This has been
is sometimes found in the contractor’s subcontracts. It cannot codified in the AB Standards and applies towards all parties
be ruled out that such clause would be considered unreasonably involved in the construction project.
burdensome, and the parties must therefore be aware of the risk According to AB 18 and ABT 18, works are to be performed
that a Danish court will modify or set aside the clause. in accordance with the contract, good professional practices and
the employer’s instructions. A general “fitness for purpose”
2.3 Are the parties free to agree in advance a fixed obligation, to the extent that this reflects an objective, no-fault
sum (known as liquidated damages) which will be warranty as known under English law, is not implied into
paid by the contractor to the employer in the event of construction contracts based on AB 18 and ABT 18.
particular breaches, e.g. liquidated damages for late However, if the materials used in the construction project
completion? If such arrangements are permitted, are are directly unfit for the purpose, the materials can be deemed
there any restrictions on what can be agreed? E.g. does defective. This issue has recently been tried before the Danish
the sum to be paid have to be a genuine pre-estimate Building and Construction Arbitration Board in several cases
regarding the use of MgO-plates.
likely to be suffered by the employer? Will the courts There is no question that MgO-plates are unfit to use in
in your jurisdiction ever look to revise an agreed rate of Denmark, as the Danish climate causes the boards to break
liquidated damages; and, if so, in what circumstances? down. The question in these cases was who was liable for
the use of unfit MgO-plates. This depended on whether the
damages could be considered development damages, meaning
The parties are free to agree on liquidated damages in the event
damages that develop over time even though the works were
of breach of contract. Most contracts contain an agreement on
performed in compliance with the general knowledge at the time
liquidated damages. The parties often agree on a daily penalty
of construction. If this is the case, the employer bears the risk.
fixed as a percentage of the contract sum.
In the cases where the MgO-plates were used either prior
There are no specific requirements or restrictions on such an
to becoming generally accepted or after the issues with the
agreement. However, the Danish courts can revise an agreed
plates became known, the Arbitration Board decided against
rate of liquidated damages if the agreement is deemed unrea-
development damages. If the Board decided against develop-
sonable. The amount that can be claimed as liquidated damages
ment damages, the liability was placed on either the contrac-
may, by agreement, be capped.
tors or the employer’s advisors, depending on the structure of
the contracts, which party had the design obligation and which
32 Common Issues on Construction party made the decision to use the MgO-plates.
Contracts The cases stress that the parties to a construction project
should exercise caution if using new and untested materials.
right?
events, one the fault of the contractor and one the fault
or risk of his employer, is the contractor entitled to: (a)
According to AB 18 and ABT 18, the employer can order varia- an extension of time; and/or (b) the costs arising from
tions to the works. Such variations can consist of the employer that concurrent delay?
ordering the contractor to supply a service in addition to or
instead of a service originally agreed, or that the nature, quality, The principle of “time, no money” (the Malmaison doctrine) has
type or execution of a service is changed. recently been recognised in Danish case law.
The employer’s right to order variations is not unlimited as it is a This only applies if the two concurrent events are in fact inde-
requirement that any variations are naturally linked to the services pendent and of equal importance. For instance, if the delaying
agreed in the construction contract. The employer’s right to order event which is the fault or risk of the employer is insignificant
variations is also balanced by the contractor’s right (to the exclu- compared to the event which is the fault of the contractor, the
sion of others) to perform the variation, unless the employer can contractor will not be entitled to an extension of time.
show particular reasons why others should perform the variation. The contractor will also be entitled to an extension of time
due to other reasons such as force majeure or public enforcement
3.2 Can work be omitted from the contract? If it is notices and prohibitions, which are not the fault of either the
omitted, can the employer carry out the omitted work employer or the contractor.
himself or procure a third party to perform it? In addition to an extension of time, the contractor may be
entitled to compensation. If the delay is caused by the employ-
The employer is entitled to order that services agreed upon er’s error or neglect, the contractor will be entitled to compen-
sation for loss sustained. If the employer has not shown error

28 Denmark
or neglect, but the event still relates to the employer’s circum- 3.10 Are there any grounds which automatically or
stances, the contractor will only be entitled to partial compensa- usually entitle a party to terminate the contract? Are
tion. The same applies if the delay is caused by public enforce- there any legal requirements as to how the terminating
ment notices and prohibitions. In case of force majeure, the party’s grounds for termination must be set out (e.g. in a
contractor will not be entitled to compensation. termination notice)?
3.5 Is there a time limit beyond which the parties to If AB 18 or ABT 18 have been agreed, the employer will be enti-
a construction contract may no longer bring claims tled to terminate the contract in whole or in part with imme-
against each other? How long is that period and when diate effect:
does time start to run? ■ if the contractor causes material actionable delay in the
execution of the works where such delay causes substantial
Pursuant to the Danish Statute of Limitations Act, the standard inconvenience to the employer;
limitation period is three years from the time when the claimant ■ if the contractor causes other material delay with regard to
could have demanded the claim be fulfilled. If the claimant is matters of decisive importance to the employer;
not and should not be aware of the claim’s existence, the limi- ■ if the works executed are of such quality that the employer
tation period can be suspended up to a maximum of 10 years. has reason to believe that the contractor will not be able to
AB 18 and ABT 18 prescribe both a relative and an absolute complete the works without material defects; or
deadline to present claims regarding defects detected after hand- ■ if the contractor otherwise commits a material breach with
over. The employer can only present such claims if the contractor regard to matters of decisive importance to the employer.
has been notified in writing within a reasonable period of time The contractor will be entitled to terminate the contract with
after the defects were or should have been discovered. Such immediate effect:
claims must be submitted no longer than five years after hand- ■ in the event of a material delay as a result of the circum-
over, after which the contractor’s liability for defects ceases. stances of the employer or a delay on the part of another
contractor where the employer does not make reasonable
efforts to expedite the works to the fullest possible extent; or
3.6 Which party usually bears the risk of unforeseen ■ if the employer causes other material delay or commits a
ground conditions under construction contracts in your material breach with regard to matters of decisive impor-
jurisdiction?
tance to the contractor.
In addition, both parties are entitled to terminate the contract
According to AB 18 and ABT 18, the employer will, as a general in the event of the other party’s bankruptcy, subject to the limi-
rule, bear the risk of unforeseen ground conditions, as the tations found in the Danish Bankruptcy Act.
employer must provide adequate information on hindrances Notice of termination must be given in writing while also
with respect to ground conditions. issuing a written notice summoning the parties to attend a regis-
tration meeting (status meeting).
3.7 Which party usually bears the risk of a change
in law affecting the completion of the works under 3.11 Do construction contracts in your jurisdiction
construction contracts in your jurisdiction? commonly provide that the employer can terminate at
any time and for any reason? If so, would an employer
The risk of changes in law being implemented after the contrac- exercising that right need to pay the contractor’s profit
on the part of the works that remains unperformed as at
tor’s offer is usually borne by the employer.
termination?
3.8 Which party usually owns the intellectual property The employer may terminate the construction contract without
probable cause, which in itself is a breach of contract entitling
the contractor to damages, which includes profit on the part of
If ABR 18 has been agreed, the consultant owns all rights to the works that remains unperformed.
ideas developed and material prepared by the consultant. The
employer will be entitled to use the material prepared for the
project, which entails a right to execute the project and subse-
in your jurisdiction? What remedy does this give the
quently operate, maintain, alter and extend the property. affected party? Is it usual/possible to argue successfully
that a contract which has become uneconomic is
3.9 Is the contractor ever entitled to suspend works? grounds for a claim for force majeure?
In accordance with AB 18 and ABT 18, the contractor is enti- Force majeure has been incorporated into AB 18 and ABT 18 in
tled to suspend works if the employer fails to pay an amount due relation to both the risk of damage to/loss of the works and in
and provided that the contractor has given a written notice of relation to delays.
three working days. In the event of damage to or loss of the works caused by excep-
The contractor is also entitled to suspend works if the tional external events beyond the control of the contractor, the
employer is declared bankrupt, is subjected to reconstruction employer will bear the risk.
proceedings or if the employer’s financial situation is of such In relation to delays, both the employer and the contractor
nature that the employer must be assumed to be unable to meet will be entitled to an extension of time in the event of circum-
its obligations. However, if the employer has provided adequate stances that are without the fault and beyond the control of the
security for the performance of the remainder of the contract, party in question. In respect of the employer, the events must
the contractor will not be entitled to suspend works. also be beyond the control of other contractors working on the
contract.

In general, it is not possible to argue that a contract which In the case of conflict between terms in the contract docu-
has become uneconomic constitutes force majeure, but in certain ments, the AB Standards prescribe in which priority the docu-
circumstances, a party may be released from its obligations to ments will apply.
perform under the contract due to such performance exceeding
the threshold of sacrifice.
3.18 Are there any terms which, if included in a
construction contract, would be unenforceable?
entitled to claim the benefit of any contractual right According to the Danish Contracts Act, a contract can be modi-
which is made for their benefit? E.g. is the second or
fied or set aside as a whole or in part if terms or the agreement
subsequent owner of a building able to claim against
the contractor pursuant to the original construction itself are deemed unreasonable or in conflict with common
contracts in relation to defects in the building? decency.
The AB Standards do not contain any terms which would be
unenforceable.
A second or subsequent owner of the building, who is not enti-
tled under the original construction contract, can potentially
pursue claims against the contractor based on the principle of 3.19 Where the construction contract involves an
succession or a claim in tort. element of design and/or the contract is one for design
A claim based on the principle of succession will be subject to only, are the designer’s obligations absolute or are there
limits on the extent of his liability? In particular, does the
the condition that the third party’s contracting party would be
designer have to give an absolute guarantee in respect of
able to make the same claim towards the contractor. Such direct his work?
claims can be limited by terms in the construction contract.
If the claim is based on tort, the contractor must have acted in
a way giving rise to liability towards the third party. Such a claim The contractor/designer will be liable to perform the works and
will not be limited by the terms in the construction contract. supply any design agreed upon. There is no general obligation
to supply an absolute guarantee of the work.
If ABT 18 has been agreed, the contractor’s liability will
3.14 On construction and engineering projects in expire five years after handover and the contractor will not be
your jurisdiction, how common is the use of direct liable for loss of business, loss of profit or other indirect loss.
agreements or collateral warranties (i.e. agreements
If ABR 18 has been agreed, the consultant’s liability will
between the contractor and parties other than the
employer with an interest in the project, e.g. funders, expire five years after the conclusion of services or handover.
other stakeholders, and forward purchasers)? The consultant will not be liable for loss of business, loss of
profit or other indirect loss. If project liability insurance has
been taken out, the consultant’s liability is limited to the cover
Forward purchasing agreements and collateral warranties are
provided by the insurance policy. If not, the consultant’s liability
increasingly common in Danish real estate development projects.
is limited to twice the agreed consultancy fee, but no less than
DKK 2.5 million.
3.15 Can one party (P1) to a construction contract, who
owes money to the other (P2), set off against the sums
due to P2 the sums P2 owes to P1? Are there any limits 3.20 Does the concept of decennial liability apply in your
on the rights of set-off? jurisdiction? If so, what is the nature of such liability and
what is the scope of its application?
The right of set-off is recognised under Danish law, if certain

In accordance with the Danish Statute of Limitations Act, the
mandatory conditions are met. The right of set-off can be
absolute limitation period is 10 years from the time when the
limited by contract and certain claims are precluded from the
claimant could have demanded the claim be fulfilled (please see
right to set-off by mandatory law.
question 3.5).
3.16 Do parties to construction contracts owe a duty of 42 Dispute Resolution

can such duty exist concurrently with any contractual 4.1 How are construction disputes generally resolved?
obligations and liabilities?
In Denmark, legal disputes are generally resolved by public court
A duty to act in good faith towards one’s contracting parties is a proceedings. However, if the new AB Standards have been
general principle in Danish law (please see question 3.3). agreed, the terms dictate a so-called dispute resolution ladder.
First, efforts must be made to resolve and settle a dispute
between the parties through negotiation between the parties’
3.17 Where the terms of a construction contract are
ambiguous, are there rules which will settle how that
project managers. The procedure for the negotiations is
ambiguity is interpreted? prescribed in the AB Standards. If these negotiations are unsuc-
cessful, the next step can consist of mediation, conciliation,
speedy resolution or arbitration.
If certain terms of a construction contract are ambiguous, such It is also possible to initiate an expert appraisal or decision on
terms are interpreted in accordance with the intended meaning security provided. This can be requested without preceding nego-
of the term. It can also be interpreted using a linguistic method tiations, for the expert appraisal, subject to the condition that it is
or to the disadvantage of the party who drafted it. necessary to ensure evidence which may otherwise be lost.

30 Denmark
4.2 Do you have adjudication processes in your 4.5 Where a contract provides for court proceedings
jurisdiction (whether statutory or otherwise) or any other in your jurisdiction, please outline the process adopted,
forms of interim dispute resolution (e.g. a dispute review any rights of appeal and a general assessment of
board)? If so, please describe the general procedures. 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.
The AB Standards provide for the use of different adjudica-
tion processes such as decisions on security provided or speedy
resolution. In Denmark, the so-called two-instance principle applies, thus
At the request of a party and after having heard the parties, the all cases can be tried in two court instances. Generally, all cases
Danish Building and Construction Arbitration Board appoints begin in one of the 24 district courts. The district court’s ruling
an expert to make a decision on security provided. The AB can be appealed to one of the two high courts. The high court
Standards provide the procedure for such decision. ruling can only be appealed to the Supreme Court with permis-
At the request of a party and after having heard the parties, sion from the Appeals Permission Board.
the Danish Building and Construction Arbitration Board The oral hearing will begin with the plaintiff presenting the
appoints one or more umpires to make a speedy resolution. The facts and documents of the case. Hereafter, party, witness and
procedure is similar to decisions on security provided; however, expert testimonies are given, and such are subjected to exam-
speedy resolution is applicable for a wider selection of disputes. ination/cross-examination. Finally, the parties present their
Dispute review boards are also commonly agreed upon, but closing statements.
not included in the AB Standards. The court will make the decision on the case as soon as
possible after the oral hearing, and generally no later than either
one or two months following the oral hearing depending on
4.3 Do the construction contracts in your jurisdiction which court the case was tried by.
commonly have arbitration clauses? If so, please
jurisdiction. 4.6 Where the contract provides for court proceedings
in a foreign country, will the judgment of that foreign
court be upheld and enforced in your jurisdiction? If
According to the dispute resolution ladder prescribed in the AB
the answer depends on the foreign country in question,
Standards, disputes are finally resolved by arbitration before the are there any foreign countries in respect of which
Danish Building and Construction Arbitration Board. The arbi- enforcement is more straightforward (whether as a
tral procedure is governed by the Danish Arbitration Act and result of international treaties or otherwise)?
rules prepared by the Board.
In accordance with Chapter III of EU Regulation no. 1215/2012,
4.4 Where the contract provides for international a court judgment given in another EU Member State will be
arbitration, do your jurisdiction’s courts recognise and recognisable and enforceable in Denmark, subject to the limited
enforce international arbitration awards? Please advise exceptions provided in article 45. The same applies if the court
of any obstacles (legal or practical) to enforcement. judgment is given by an EFTA Member State, cf. title III of the
Lugano Convention.
In accordance with section 38 of the Danish Arbitration Act, If the court judgment is given by a country outside the EU and
Denmark both recognises and enforces international arbitra- EFTA, the judgment is – as a matter of principle – not recog-
tion awards, cf. also Gam, Recognition of foreign judgments and nisable and enforceable in Denmark; however, the foreign judg-
arbitral awards under Danish law, Ugeskrift for Retsvæsen 2013B, ment can have evidential weight – and in some cases a very high
p. 185 ff. The party seeking the recognition and enforcement evidential weight – if the case is tried by the Danish courts, cf.
of the award must present a certified copy of both the award Gam, Recognition of foreign judgments and arbitral awards
and the arbitration agreement with, where applicable, a certified under Danish law, Ugeskrift for Retsvæsen 2013B, p. 185 ff.
Danish translation.
Recognition and enforcement of an international arbitration
award can only be refused if one of the reasons listed in section
39(1) of the Danish Arbitration Act applies, which matches
those found in the UNCITRAL Model Law.

Gregers Gam advises Danish and international clients on all matters relating to real estate transactions, construction and commercial law.
He advises on large, challenging and complex mandates. He is highly sought after for his expertise in the construction field, where he acts
as general counsel servicing a diverse range of clients including, notably, companies with an international presence or ownership. His work
also includes advising clients in relation to drafting commercial contracts as well as dispute resolution. Recent highlights include, inter alia,
advising Copenhagen Metro Team (CMT) on the construction of the new metro line, Cityringen, in Copenhagen – the largest construction
project in the past 400 years in Copenhagen.
Bruun & Hjejle Advokatpartnerselskab Tel: +45 29 38 11 39

Nørregade 21 Email: [email protected]
1165 Copenhagen K URL: www.bruunhjejle.dk/en
Denmark
Bruun & Hjejle is a leading Danish law firm focusing on M&A, Real Estate
and Dispute Resolution. Bruun & Hjejle has one of the most active teams in
the Danish market, advising on high-end, complex real estate and construc-
tion matters. The firm is consistently sought out to assist with large-scale,
challenging real estate transactions and construction projects, in addition
to offering market-leading dispute resolution capabilities to support clients
with any related disputes. Bruun & Hjejle is a frontrunner in the real estate
sphere, advising on the largest transactions in the Danish market.
www.bruunhjejle.dk/en

32 Chapter 5
England & Wales

England & Wales
Angus Dawson
Macfarlanes LLP Doug Wass
are also used, as well as contracts published by: the International

12 Making Construction Projects Federation of Consulting Engineers (FIDIC); the ACA; the
Association for Consultancy and Engineering (known as the
1.1 What are the standard types of construction contract ICC forms); and the Institute of Chemical Engineers (IChemE),
depending on the nature of the work being carried out.
and/or (iii) any arrangement known as management 1.4 What (if any) legal requirements are there to create a
contracting, with one main managing contractor and legally binding contract (e.g. in common law jurisdictions,
with the construction work done by a series of package offer, acceptance, consideration and intention to create
contractors? (NB For ease of reference throughout legal relations are usually required)? Are there any
the chapter, we refer to “construction contracts” as an mandatory law requirements which need to be reflected in
abbreviation for construction and engineering contracts.) a construction contract (e.g. provision for adjudication or
any need for the contract to be evidenced in writing)?
There are a number of standard forms of construction contract
and there are options which require a contractor to: All the elements referred to above are required to create a legally
■ build only; binding contract.
■ build and carry out specified elements of design; The Housing Grants, Construction and Regeneration Act
■ both design and build; or 1996 (as amended) (HGCRA) applies to contracts for the
■ assist with design and procurement and manage others to carrying out of “construction operations” in England and Wales
carry out the build. (subject to certain exceptions). What amounts to “construc-
A contractor can be engaged on a design-only basis, but this is tion operations” is defined in the HGCRA. The HGCRA
usually before the construction phase. requires contracts relating to such operations to comply with the
minimum requirements. If a contract does not do so, elements
of the Scheme for Construction Contracts (the Scheme) or the
alliance contracting and partnering) in your jurisdiction? HGCRA will be implied into a contract to make it compliant.
To the extent applicable, what forms of collaborative
contracts are commonly used? 1.5 In your jurisdiction please identify whether there
is a concept of what is known as a “letter of intent”, in
The National Construction Contracts and Law Report 2018 which an employer can give either a legally binding or
– published by the NBS (originally the National Building non-legally binding indication of willingness either to
enter into a contract later or to commit itself to meet
Specification) and still the most recent edition as at February
certain costs to be incurred by the contractor whether or
2020 – indicates that partnering/alliancing contracting was not a full contract is ever concluded.
used on 3% of the projects respondents were involved with.
This compares with: traditional procurement (46%); design and
build procurement (41%); construction management (3%); and There is a concept of a letter of intent. However, the phrase is not a
management contracting (1%). “term of art” and letters of intent can vary considerably, depending
The Association of Consultant Architects (ACA) publishes on parties’ needs. They can range from: (i) non-binding state-
partnering/alliancing contracts for use on individual projects ments of future intent; to (ii) binding contracts for all or part of
and for term works. The New Engineering Contract (NEC) the works; to (iii) binding contracts to carry out preliminary steps.
forms are often used for collaborative projects and the Joint
Contracts Tribunal (JCT) also publishes the Constructing 1.6 Are there any statutory or standard types
Excellence contract. of insurance which it would be commonplace or
construction work? For example, is there employer’s
1.3 What industry standard forms of construction liability insurance for contractors in respect of death
contract are most commonly used in your jurisdiction? and personal injury, or is there a requirement for the
The most commonly used are those published by the JCT. The
NEC contracts (published by the Institute of Civil Engineers) Most businesses have a statutory obligation to maintain the

Macfarlanes LLP 33
employer’s liability insurance which provides cover for the death 1.9 Is it permissible/common for there to be
of, or personal injury to, employees during the course of employ- performance bonds (provided by banks and others) to
ment. Other insurances usually in place include: guarantee the contractor’s performance? Are there any
■ Public liability insurance: provides cover in the event of restrictions on the nature of such bonds? Are there any
death or personal injury to persons other than employees grounds on which a call on such bonds may be restrained
and loss or damage to third-party property (i.e. other than (e.g. by interim injunction); and, if so, how often is such
the works) due to negligence.
■ Professional indemnity insurance: covers the insured’s pre-condition) or only upon default of the contractor?
legal liability if it is negligent and provides cover for defec-
tive design, but not defective workmanship or materials.
■ All risks insurance (or works insurance): covers the risk Performance bonds are common. They are usually guaran-
of loss or damage to the works and any materials on site. tees rather than on-demand bonds, which means contractor
■ Existing structures insurance: an employer will usually default is required before a call can be made. The bond may also
insure any existing structure against loss or damage due to include a right to make a call if the contractor becomes insol-
specified perils (i.e. fire, lightning, flooding, etc.). vent. Bondsmen may be able to rely on any defences which the
contractor could use to defend a claim by the employer under the
construction contract to defend a claim under the bond. Interim
1.7 Are there any statutory requirements in relation to injunctions to prevent calls on guarantee bonds are unusual as
construction contracts in terms of: (a) labour (i.e. the contractor default is required before a call can be made.
The bonds are generally limited to 10% of the contract sum
as self-employed sub-contractors); (b) tax (payment of
income tax of employees); and/or (c) health and safety? and expire on or shortly after practical completion (unless a
claim has been notified before that date).
The following statutory requirements exist:

(a) The general rules for establishing the employment status of 1.10 Is it permissible/common for there to be company
an individual apply to those working on a construction site. guarantees provided to guarantee the performance of
subsidiary companies? Are there any restrictions on the
(b) The Construction Industry Scheme is a tax deduction
nature of such guarantees?
scheme which involves the deduction of tax at source
from payments under construction contracts (to reduce
tax and National Insurance avoidance) if the payee is not It is permissible, and fairly common, for an employer to ask for
registered for gross payment status with HMRC. a parent company guarantee (PCG).
(c) The main pieces of health and safety legislation are: PCGs usually require a breach by the contractor before a claim
■ Health and Safety at Work etc. Act 1974: sets out the can be made. In the event of a contractor breach, the guarantor
basic health and safety duties of a company, its direc- may be required to take over and perform the contractor’s obli-
tors, managers and employees and acts as the frame- gations and/or be liable for the losses and damages the employer
work for other health and safety regulations. has incurred. The guarantor can usually rely on any defences
■ Management of Health and Safety at Work available to the contractor under the construction contract to
Regulations 1999: require employers to assess and defend a claim under the guarantee. The limitation period for
manage risks which affect their employees and others bringing a claim tends to be either six or 12 years from the date
as a result of the businesses’ activities. of contractor breach and the sums recoverable are not usually
■ Construction (Design and Management) capped to a percentage of the contract sum.
Regulations 2015: impose specific requirements on
those involved in construction projects. This covers 1.11 Is it possible and/or usual for contractors to have
the design and construction phases of a project and retention of title rights in relation to goods and supplies
information to be handed over at the end of a project. used in the works? Is it permissible for contractors to
the right to remove goods and materials supplied from
1.8 Is the employer legally permitted to retain part of the site?
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 Yes, it is possible for contractors and their supply chain to
liability period is complete? include retention of title provisions in their contracts. Those
provisions are effective as long as the goods or materials have
Contractual retentions are common. They usually range from not been incorporated into a building or structure, have not
3–5% of each interim payment. Half is usually released at prac- been mixed with other materials or have not been turned into
tical completion and the balance is released once all defects another item (i.e. glue and chippings used to create chipboard).
notified in accordance with the contract have been made good. Once any of these things happen or the goods or materials have
Retention bonds may be accepted as an alternative. Retention been paid for, the retention of title provisions are likely to cease
use is currently under review by the government and proposals to be effective and title will pass to the employer by operation
include keeping the status quo, banning retentions or introducing of law.
a requirement to place retentions in a deposit scheme.

34 England & Wales
Following a 2019 judgment, contract drafting needs to be clear

22 Supervising Construction Contracts that liquidated damages for delay can continue to be levied if
completion of the works is delayed and the contractor’s employ-
2.1 Is it common for construction contracts to be ment is terminated before the works are actually completed.
duty to act impartially between the contractor and the 32 Common Issues on Construction
employer? If so, what is the nature of such duty (e.g. is Contracts
the third party breaches such duty? 3.1 Is the employer entitled to vary the works to be
right?
Construction contracts are commonly administered by a third
party. It is also possible for the employer (or an employee) to
Unless the contract expressly permits the employer to vary the
supervise/administer a construction contract as long as it is clear
works, an employer has no right to do so. Most standard forms,
in the contract that such person is to fulfil the role.
therefore, include a contractual right for the works to be varied
Appointments of third-party consultants will often include
by the employer or by the party administering the contract.
an obligation on the consultant, where it has to exercise discre-
Variations are usually given by written instruction and if the
tion between the employer and another party, to do so fairly and
works are varied the contractor will usually (unless the variation
impartially. Case law also imposes obligations on those acting
is required because of contractor breach) have grounds to claim
in these roles.
additional time and money for the variation.
The decisions of the third-party certifier can be challenged
in accordance with the dispute resolution procedures in the
construction contract, but the contractor will not generally have 3.2 Can work be omitted from the contract? If it is
the right to bring a claim directly against the certifier. omitted, can the employer carry out the omitted work

they will pay the contractor when they, the employer, The employer may only omit work if the construction contract
have themselves been paid; i.e. can the employer include expressly permits this. Contracts usually allow an employer to
in the contract what is known as a “pay when paid” omit works and for an adjustment to be made to the contract
clause? sum. If work is otherwise omitted, it will amount to a breach of
contract. Whether an employer can carry out omitted work or
The HGCRA makes “pay when paid” clauses ineffective in procure a third party to do so depends on the contract drafting.
construction contracts except in situations when the third party Most standard form construction contracts do not expressly deal
paying the employer (or any other person contributing to payment with this. The contractor may still be entitled to be paid the
by that third party) is insolvent (as defined in the HGCRA). Some profit it would otherwise have earnt on the part of the works
contracts such as certain private finance initiative (PFI) contracts omitted.
and development agreements with a land transfer are excluded
from the remit of the HGCRA and the restriction does not apply. 3.3 Are there terms which will/can be implied into
paid by the contractor to the employer in the event of Terms may be implied by statute, a course of dealings, industry
particular breaches, e.g. liquidated damages for late practice or by case law, e.g.:
completion? If such arrangements are permitted, are ■ If a contract does not include a “substantial remedy” for late
there any restrictions on what can be agreed? E.g. does payment, a statutory rate of interest will be implied.
■ If a contract is silent on issues such as price, quality and
which is wholly unrelated to the amount of financial loss timing, the Supply of Goods and Services Act 1982 (as
likely to be suffered by the employer? Will the courts amended) may imply terms.
in your jurisdiction ever look to revise an agreed rate of ■ If a contractor designs and builds a project and the contract
liquidated damages; and, if so, in what circumstances? does not clarify the level of skill and care required, there
may be an implied fitness for purpose obligation. It is diffi-
Parties are free to agree liquidated damages which will be paid cult to insure such an obligation and so most construction
in the event of a breach. They tend to be limited to late comple- contracts include an express requirement that the contractor
tion or failure to meet particular performance requirements. will exercise reasonable skill and care in the design.
Since 2015, the test for whether liquidated damages are enforce- The courts are unwilling to imply a duty of good faith into
able is whether they impose consequences which are “… out of contracts (including construction contracts) between commer-
all proportion to any legitimate interest of the innocent party…”. The cial parties. There has been a slight shift in position recently
fact that a liquidated damages sum does not represent a genuine (in relation to long-term “relational” contracts) but decisions
pre-estimate of loss likely to be suffered by the employer no from 2019 cast doubt on whether this trend will continue.
longer means it will not be enforceable as long as there is a legit- Notwithstanding this, where there is an element of discre-
imate business interest in the sum being levied. tion when making a decision under a contract, there may be an
The courts will not adjust an agreed level of liquidated implied term that the discretion will be exercised in good faith.
damages. They will simply consider whether the damages are
enforceable or should be struck out as a penalty.

Macfarlanes LLP 35
3.4 If the contractor is delayed by two concurrent of non-payment provided that it gives at least seven days’ notice
events, one the fault of the contractor and one the fault of its intention to do so. Other than this, a contractor cannot
or risk of his employer, is the contractor entitled to: (a) suspend the works unless there is a contract right (which is
an extension of time; and/or (b) the costs arising from highly unusual).
3.10 Are there any grounds which automatically or

It depends on the way in which the contract is written. If an usually entitle a party to terminate the contract? Are
un-amended JCT construction contract is used, then based on there any legal requirements as to how the terminating
current case law, the contractor will be entitled to an extension party’s grounds for termination must be set out (e.g. in a
of time in the event of concurrent delay, but not to recover its termination notice)?
associated delay costs. Parties are free to change the way in
which concurrency is dealt with in a contract and the Court of A party is entitled to terminate a contract if the other party
Appeal has recently upheld a clause which shifted the risk of commits a repudiatory breach.
concurrency from the employer to the contractor. Construction contracts also usually include contractual
grounds for termination; for example: insolvency of either party;
3.5 Is there a time limit beyond which the parties to bribery or corruption by either party; failure to comply with
a construction contract may no longer bring claims instructions by the contractor; failure to proceed regularly and
against each other? How long is that period and when diligently with the works by the contractor; the employer not
does time start to run? paying on time; or the contractor suspending the works without
good reason. Contractual rights have to be exercised in accord-
The statutory limitation period for a breach of contract claim is ance with the timescales and notice requirements in the rele-
six years unless the contract is entered into as a deed, in which vant contract.
case it is 12 years. Time typically starts to run from the date of
practical completion. Statutory limitation periods can be short- 3.11 Do construction contracts in your jurisdiction
ened contractually and it is possible to extend the statutory limi- commonly provide that the employer can terminate at
tation period provided that very clear wording is used. any time and for any reason? If so, would an employer
There are statutory time limits for bringing a claim in tort exercising that right need to pay the contractor’s profit
(but the ability to bring a claim in tort on construction projects on the part of the works that remains unperformed as at
is limited). termination?
Standard form construction contracts do not generally allow

3.6 Which party usually bears the risk of unforeseen
ground conditions under construction contracts in your this. It is possible (but not usual) to include a bespoke term
jurisdiction? allowing an employer to terminate at will. Whether an employer
would be liable for loss of profit in those circumstances depends
upon the terms of the contract.
If the construction contract is silent, it is the contractor. Some
standard form construction contracts alter this by making the
contractor responsible for ground conditions unless something 3.12 Is the concept of force majeure or frustration known
is encountered which an experienced and competent contractor in your jurisdiction? What remedy does this give the
could not have reasonably foreseen at the date of tender. affected party? Is it usual/possible to argue successfully
grounds for a claim for force majeure?
in law affecting the completion of the works under
Force majeure has no particular meaning in England. Despite
construction contracts in your jurisdiction?
this, construction contracts may refer to force majeure, which can
prove problematic as there is no clarity about what is covered.
If the construction contract is silent, it is the contractor. Some Elements of what might be considered force majeure (i.e. adverse
standard forms change this so that the contractor is responsible weather, lightning strike, flood and civil commotion) may be
unless the change was not reasonably foreseeable at the date of listed as express grounds allowing a contractor to claim addi-
tender. tional time and/or money and may also be grounds for suspen-
sion (and termination if suspension lasts longer than a pre-agreed
3.8 Which party usually owns the intellectual property period). The fact that a contract has become uneconomic is not
in relation to the design and operation of the property? generally a ground to claim force majeure. The meaning of force
majeure under English law is likely to be given close attention in
the context of the current COVID-19 global pandemic.
Copyright vests in the author of the copyright material. It is
Frustration is recognised in England. If a contract is “frus-
possible to assign copyright but this is unusual. More often,
trated”, it will be automatically discharged. The contract is
the copyright owner will grant an irrevocable and royalty-free
effectively brought to an end without the parties having to do
licence to use and reproduce the copyright material to the
anything and the parties are excused from performing any more
employer and third parties such as purchasers, tenants, funders
obligations under the contract (although, if a party incurred obli-
and landlords. The licence usually allows sub-licensing.
gations before the contract was frustrated, it still has to perform
those). Parties cannot claim damages for future non-perfor-
3.9 Is the contractor ever entitled to suspend works? mance by the other(s).
The HGCRA includes a statutory right for a contractor to

suspend performance of any or all of its obligations in the event

36 England & Wales
3.13 Are parties, who are not parties to the contract, 3.17 Where the terms of a construction contract are
entitled to claim the benefit of any contractual right ambiguous, are there rules which will settle how that
which is made for their benefit? E.g. is the second or ambiguity is interpreted?
the contractor pursuant to the original construction
contracts in relation to defects in the building? The court will:
■ look at the contract as a whole rather than the clause/
drafting in isolation;
The Contracts (Rights of Third Parties) Act 1999 (C(ROTP)A) ■ apply, in the absence of ambiguity, the natural and ordi-
provides that a third party can enforce a term/benefit of a nary meaning of the clause – the worse the drafting, the
contract if the contract expressly provides that it may do so more readily the court will accept a meaning other than its
or the term(s) purport(s) to confer a benefit on it (and there is natural one;
nothing in the contract to suggest that the parties did not intend ■ take into account the facts and circumstances known to
the third party to be able to enforce that term). The third party the parties at the time the contract was concluded;
can be identified by name, by membership of a “class” or group ■ take into account commercial common sense; and
(i.e. tenants of the development) or by reference to a particular ■ not impose its own view of what the parties should have
description. They do not have to be in existence at the time that reasonably agreed when the literal meaning is clear.
the construction contract is entered into.

3.14 On construction and engineering projects in construction contract, would be unenforceable?
your jurisdiction, how common is the use of direct
between the contractor and parties other than the Yes:
employer with an interest in the project, e.g. funders, ■ A “pay when paid” clause if the third-party payer is not
other stakeholders, and forward purchasers)? insolvent (as defined in the HGCRA) and the construction
contract is not excluded from the HGCRA definition of a
Collateral warranties are commonly used. It is a separate contract for the carrying out of “construction operations”.
contract between a contractor and a third party in which the ■ A penalty clause.
contractor: warrants that it has performed and will continue to ■ An indemnity against criminal liability.
perform its obligations under the construction contract; agrees ■ A clause which allocates adjudication costs between the
to maintain insurance; and grants a copyright licence and, in parties before adjudication is commenced, except in
some instances, agrees to step-in rights (amongst other things). certain circumstances.
3.15 Can one party (P1) to a construction contract, who 3.19 Where the construction contract involves an
owes money to the other (P2), set off against the sums element of design and/or the contract is one for design
due to P2 the sums P2 owes to P1? Are there any limits only, are the designer’s obligations absolute or are there
on the rights of set-off? limits on the extent of his liability? In particular, does the
his work?
There are various rights of set-off including legal set-off, equi-
table set-off, contractual set-off and statutory/insolvency set-off.
Design-only contracts
P1 can potentially set off sums which P2 owes to it from sums
Common law and statute mean a designer is only liable if its
which P1 owes to P2 under the rules of equitable set-off and
conduct falls below the standard of an ordinary and compe-
possibly under any contractual rights of set-off. P1 may need to
tent consultant of their profession. Contracts generally impose
comply with the notice requirements under the HGCRA and (if
a higher requirement – to exercise the reasonable skill and care
contractual set-off rights are being relied upon) any contractual
to be expected of a consultant experienced in providing services
notice requirements.
similar to the services the consultant is retained to complete on
similar projects. Fitness for purpose obligations (i.e. an absolute
3.16 Do parties to construction contracts owe a duty of guarantee) are unusual.
legal doctrine? If the duty of care is extra-contractual, Design and build contracts
If a contractor designs and builds a project and there is no
contractual skill and care requirement, there may be an implied
fitness for purpose obligation (i.e. an absolute guarantee in
Construction contracts generally contain an obligation on the respect of the works). However, it is difficult to insure and
contractor to carry out the works in accordance with the contract construction contracts tend to include a contractual skill and
and, if the contractor is carrying out design, to do so using care provision. In 2017, the Supreme Court confirmed that a
reasonable skill and care. construction contract can include a mix of obligations – reason-
If there is no contract, a contractor may owe a tortious duty able skill and care, and an absolute requirement in relation to
of care to an employer to avoid causing personal injury and not particular elements.
to cause loss or damage to property other than the works. Case
law restricts an employer’s ability to recover in tort for defects and
damage to the works or the property constructed as part of the 3.20 Does the concept of decennial liability apply in your
jurisdiction? If so, what is the nature of such liability and
works itself.
A contractor may, in limited circumstances, owe a tortious duty
of care to an employer in addition to any obligations under the
contract with the employer. There is no concept of decennial liability in England.

Macfarlanes LLP 37
their seats in other signatory states. This is subject only to a

42 Dispute Resolution discretion to refuse enforcement on the grounds set out in the
New York Convention.
4.1 How are construction disputes generally resolved? English courts are generally regarded as being supportive of
the arbitral process and this is reflected in their approach to the
By adjudication, litigation and arbitration. Parties may also use public policy ground for refusing enforcement under the New
mediation during the course of litigation or arbitration proceed- York Convention. A party seeking to resist enforcement on this
ings to try to resolve disputes and this is actively encouraged by ground will normally need to prove fraud, corruption or some
the courts. other “universally condemned” activity (i.e. terrorism or drug
trafficking).
jurisdiction (whether statutory or otherwise) or any other 4.5 Where a contract provides for court proceedings
forms of interim dispute resolution (e.g. a dispute review in your jurisdiction, please outline the process adopted,
board)? If so, please describe the general procedures. any rights of appeal and a general assessment of
how long proceedings are likely to take to reduce: (a)
Parties to a “construction contract”, as defined in the HGCRA
(subject to some exceptions), have a statutory right to refer a
dispute “under or in connection” with that contract to adjudi-
cation at any time. Construction claims are usually dealt with by the TCC, with
An adjudicator should be appointed within seven days of a smaller and less complex claims being dealt with in County
party being notified that a dispute is being referred to adjudica- Courts.
tion. The adjudicator has 28 days to reach a decision, which can Before commencing proceedings, parties have to engage
be extended in certain circumstances. in the Pre-Action Protocol for Construction and Engineering
An adjudicator’s decision is binding until the dispute is finally Disputes. Parties set out their respective positions in corre-
determined by arbitration, litigation or agreement between the spondence and then meet on a “without prejudice” basis (unless
parties. The successful party can apply to court to enforce an there is a good reason not to) to identify the main issues in
adjudicator’s decision if the other party does not comply with it. dispute, consider how the dispute might be resolved without
The grounds for challenging an adjudicator’s decision and/or litigation and, if litigation is inevitable, how it can be managed
asking for a stay of enforcement are very limited. cost-effectively. The process is designed to be completed within
If a contract is not a “construction contract” for the purposes 49–105 days.
of the HGCRA, the parties are free to include a contractual Proceedings in the TCC are governed by the Civil Procedure
adjudication mechanism (which tend to follow the requirements Rules and the Technology and Construction Court Guide.
of the HGCRA). The following procedure is generally adopted:
There are no other statutory forms of interim dispute resolu- ■ the claimant issues a claim form and particulars of claim;
tion. The popularity of adjudication makes it rare for parties to ■ the defendant serves its defence and any counterclaim;
create other forms of interim dispute resolution in their contracts. ■ the court holds a case management conference during which
it sets out what the parties, their representatives and experts
need to do and by when; and
4.3 Do the construction contracts in your jurisdiction ■ there is a trial, following which the judge gives written
judgment.
jurisdiction.
The process usually takes 10–18 months (depending on the
case’s complexity and court availability).
Parties can apply for permission to appeal from the High
Construction contracts in England do not tend to include arbi- Court to the Court of Appeal and from the Court of Appeal to
tration clauses and it is rare for parties to agree to refer disputes the Supreme Court, but it is not often given. Where it is, it can
to arbitration. This is because the Technology and Construction take around a further year to obtain a decision from the Court of
Court (TCC) is considered to provide high-quality decisions Appeal and a further year to obtain a decision from the Supreme
more quickly and cost-effectively than arbitration. However, Court. Again, this depends on the complexity and importance
arbitration is still a popular choice for large international projects. of the case and court availability.
Arbitration is governed by the Arbitration Act 1996, which
allows parties the freedom to choose the number and identity of
arbitrators and the applicable rules. The English courts are very 4.6 Where the contract provides for court proceedings
supportive of arbitration and arbitration clauses are enforced; in a foreign country, will the judgment of that foreign
the grounds on which decisions can be challenged are limited
and successful challenges are very rare. are there any foreign countries in respect of which
enforcement is more straightforward (whether as a
4.4 Where the contract provides for international result of international treaties or otherwise)?
arbitration, do your jurisdiction’s courts recognise and
enforce international arbitration awards? Please advise Until 31 December 2020 (i.e. during the transition period when
of any obstacles (legal or practical) to enforcement. the UK remains subject to EU law), judgments of EU and EFTA
states (except Liechtenstein) will be enforced in England in
The UK is a signatory to the New York Convention and English accordance with the Recast Brussels Regulation and the 2007
courts will enforce awards made by arbitral tribunals which have Lugano Convention, respectively.

38 England & Wales
On leaving the EU, the UK will become a party to the Hague The UK also has bilateral arrangements for the reciprocal
Convention on Choice of Court Agreements (the Hague enforcement of judgments with a number of other countries
Convention) in its own right. The Hague Convention requires (predominantly Commonwealth countries).
contracting states (currently all EU Member States, Mexico, Where none of the above applies, a party seeking to enforce
Singapore and Montenegro) to recognise exclusive choice of a foreign judgment has to issue fresh proceedings in England to
court agreements in favour of other contracting states and to recover the judgment sum as a debt.
enforce any resulting judgments.

Macfarlanes LLP 39
Angus Dawson is head of the non-contentious side of Macfarlanes’ construction and engineering group. He specialises in all aspects of
construction law, predominantly advising developers and institutional investors on major development projects.
Angus acts for a broad spectrum of clients including developers, funders, owner-occupiers, tenants, architects and contractors. He advises
on procurement strategies, building contracts, consultant appointments, warranties, third-party rights, bonds and guarantees. He also
advises on construction aspects of agreements for lease and development and funding agreements.
Angus is a member of the City of London Law Society Construction Committee and has an M.Sc. in Construction Law and Dispute Resolution
from King’s College London.
Macfarlanes LLP Tel: +44 20 7849 2419

20 Cursitor Street Email: [email protected]
London, EC4A 1LT URL: www.macfarlanes.com
United Kingdom
Doug Wass is head of the contentious side of Macfarlanes’ construction and engineering practice. He acts on a wide range of substantial
international and domestic arbitration, litigation and adjudication matters and has particular expertise in complex construction, engineering
and real estate claims and related professional negligence issues.
Doug has advised a wide range of clients, including large developers, project companies, professional consultants, contractors and sub-con-
tractors. His experience includes office, residential, hotel, industrial, hospital, university, school, power plant, airport and roads projects.
Doug’s arbitration work has included major international ICC and LCIA arbitrations. Doug also regularly advises clients in relation to media-
tion and other forms of alternative dispute resolution.
Doug has an M.Sc. in Construction Law and Arbitration from King’s College London and is a member of the Society of Construction Law, the
Adjudication Society and the Property Litigation Association. Doug is also a Solicitor-Advocate.
Macfarlanes LLP Tel: +44 20 7849 2569

20 Cursitor Street Email: [email protected]
London, EC4A 1LT URL: www.macfarlanes.com
United Kingdom
Macfarlanes is a distinctive London-based law firm, focused on our clients behind it. Our dedicated construction litigators are able to offer strategic
and on delivering excellence in the international legal market. and tactical advice to best protect our clients in the event of a dispute
Our four-partner construction practice provides specialist, in-depth exper- arising. They advise on all forms of dispute resolution, including litigation,
tise for clients across the full spectrum of the construction industry arbitration, adjudication and mediation.
including: developers; occupiers; contractors; institutions; banks; consult- www.macfarlanes.com
ants; and insurers.
On the non-contentious side, we advise on procurement strategies, develop-
ment agreements, building contracts, professional appointments, warran-
ties, third-party rights, guarantees and bonds, risk and project management
and dispute avoidance. We advise on all forms of procurement, from design
and build, through to traditional construction management.
Our work often involves working hand in hand with the firm’s real estate,
finance, tax and corporate lawyers and we always ensure that our advice is
delivered in the context of the wider transaction and the commercial drivers

40 Chapter 6
France
France
Todd Wetmore
Three Crowns LLP Simon Elliot
Employers can, however, contract: (i) with multiple contrac-

12 Making Construction Projects tors separately; (ii) with an entreprise générale (general contractor)
who subcontracts certain work packages; or (iii) with a group of
1.1 What are the standard types of construction contractors led by a main contractor in charge of coordinating
the works (usually the contractor with the largest work package).
In practical terms, the two latter scenarios are comparable to
only contract; and/or (iii) any arrangement known as management contracting.
management contracting, with one main managing
contractor and with the construction work done by a
series of package contractors? (NB For ease of reference
throughout the chapter, we refer to “construction
contracts are commonly used?
In France, traditional approaches to risk allocation are gener-

The most common type of construction contract in the private
ally preferred and collaborative contracting methods are not
sector is the contrat d’entreprise (construction contract) which
widely used. This is particularly true in the public sector where
typically requires the contractor to deliver a complete and
procurement processes and contracts are heavily regulated in
fit-for-purpose project and imposes an obligation to advise and
ways that do not lend themselves to collaborative contracting.
inform the maître d’ouvrage (the employer) and the maître d’oeuvre
For example, the Public Procurement Code (Code de la Commande
(design and management team).
Publique or CCP) contemplates only prix forfaitaires (lump-sum)
Other contracts commonly encountered in the private sector
and prix unitaires (bill of quantities) arrangements.
are: (i) the contrat de promotion immobilière (real estate development
There is, however, a nascent trend towards using collaborative
agreement) by which the employer entrusts a developer with the
contracts for international projects in the private sector. While
performance of a defined construction programme for a fixed
these agreements are often bespoke, Joint Contracts Tribunals
price and completion date; and (ii) vente en l’état future d’achève-
( JCT) contracts and New Engineering Contracts (NEC) are
ment (off-plan property sales) by which the maître d’ouvrage (the
sometimes used as a model.
employer) finances the project by sales made prior to completion.
In the public sector, construction contracts are strictly regu-
lated. The most common types of contracts are: (i) marché public 1.3 What industry standard forms of construction
de travaux (public works contract); (ii) contrat de concession (conces- contract are most commonly used in your jurisdiction?
sion contract); and (iii) partenariat public-privé (PPP) (public-pri-
vate partnership). In both the private and public sectors, construction contracts
Design, project management and construction services are are generally bespoke but are often inspired by standard forms.
typically procured under separate contracts. Design and project In the private sector, the most commonly used standard forms
management services are usually provided by the maître d’oeuvre are those published by AFNOR (the French Standardization
(an architect or engineering firm) under a contrat de maîtrise d’oeuvre Association). For example, AFNOR norm NF P03-001 applies
(design and project management contract), while the contractor to building works and norm NF P03-002 to civil works.
is in charge of construction. It is less common for design and In the public sector, contracts typically derive from the Cahiers
construction to be entrusted to the same entity but this does des Clauses Administratives Générales (CCAG), which provide
occur (for example, pursuant to a marché de conception-réalisation or general terms and conditions for public works contracts. The
design-build public contract). provisions of the CCAG, which are no longer mandatory, are
While maîtrise d’œuvre covers both maîtrise d’oeuvre de conception regularly updated by public authorities.
(design) and maîtrise d’oeuvre de réalisation (project management), For large-scale international projects, FIDIC standard forms
those disciplines may be contracted separately. are often relied upon; most commonly the Red Book (construc-
Contracts for “management contracting” are uncommon in tion works), Yellow Book (design-build) and Silver Book (EPC/
France. A maître d’oeuvre is usually in charge of supervising the turnkey contracts). The FIDIC standard forms require adapta-
works and coordinating the various contractors, but does not tion to align with relevant mandatory provisions of French law
assume responsibility for the timely completion of the works or (e.g., relating to subcontractor payments and subcontractors’
cost overruns (other than by way of bonus or penalty incentives). ability to claim payment directly from the employer).

Three Crowns LLP 41
1.4 What (if any) legal requirements are there to Other compulsory insurance include assurance de responsabilité
create a legally binding contract (e.g. in common law civile professionnelle (professional liability insurance) for some
jurisdictions, offer, acceptance, consideration and construction professionals (e.g., architects).
intention to create legal relations are usually required)? Standard non-compulsory insurance policies include: (i) assur-
Are there any mandatory law requirements which need to ance responsabilité civile (third-party liability); (ii) assurance tous
be reflected in a construction contract (e.g. provision for risques chantier (construction all-risk insurance); and (iii) subcon-
adjudication or any need for the contract to be evidenced
tractors’ decennial liability insurance. The requirement to have
in writing)?
such insurance in place is typically governed by contract.
In the private sector, parties are in principle free to determine

the content and form of their contracts, subject to mandatory 1.7 Are there any statutory requirements in relation to
provisions of French law. Contracts are made by the mere
exchange of the parties’ consent, and, in principle, verbal offer as self-employed sub-contractors); (b) tax (payment of
and acceptance are sufficient as a matter of form. This is subject income tax of employees); and/or (c) health and safety?
to certain exceptions (notably those involving consumers) – e.g.,
contrat de promotion immobilière (real estate development agree-
Labour and health and safety matters are heavily regulated in
ments) and vente en l’état future d’achèvement (VEFA) (off-plan sale)
France and on-site inspections are conducted on a regular basis
(see question 1.1).
by authorities.
In the public sector, contracts are heavily regulated. They
In France, the Labour Code contains strict provisions in rela-
must be in writing and their content compliant with national and
tion to employment contracts – e.g., the type and content of the
European public procurement rules. Rather than invalidating
contract, working conditions, dismissal. There are, however, no
a non-compliant contract, French courts may deem mandatory
specific requirements in relation to the construction sector insofar
rules to have been incorporated where the parties have failed to
as the employer/employee relationship is concerned. Employers
do so expressly or ignore non-compliant provisions.
must submit a declaration of employment to the social security
agency in respect of each employee prior to the start of the employ-
1.5 In your jurisdiction please identify whether there ment and failing to do so may result in financial and criminal sanc-
is a concept of what is known as a “letter of intent”, in tions. Non-EU foreign workers must generally obtain work and
which an employer can give either a legally binding or residence permits, unless they already hold permits allowing them
non-legally binding indication of willingness either to
to work in France – e.g., a carte de résident (resident card).
certain costs to be incurred by the contractor whether or Collective agreements supplement general labour law in
not a full contract is ever concluded. certain sectors, including the construction sector.
Although not specific to the construction sector, France
now operates a pay-as-you-earn system for income tax, under
Letters of intent are used in the private sector. Letters of intent
which employers are required to collect and remit income tax on
do not, however, enjoy codified status and their form is not
employees’ salaries.
regulated. In principle, letters of intent are not binding and do
Health and safety requirements in the construction industry
not give rise to contractual obligations.
are primarily found in the Labour Code, which notably imple-
However, where the letter of intent sets out the key terms of
ments European directives no. 89/391 and no. 92/57. These
the bargain (e.g., parties, price and conditions precedent) and it
requirements apply to all the parties involved in a construction
is clear that the parties intend to be bound by it, a letter of intent
project (employers, contractors, consultants, etc.).
may constitute a binding agreement notwithstanding that some
There are two main sets of requirements. First, employers
terms remain to be agreed.
have a general safety obligation. They must take all necessary
Even where a letter of intent does not give rise to contractual
steps to ensure safety and protect the health of their employees
obligations, the undertaking of negotiations attracts the obliga-
through preventive actions, information and training. Second,
tion to conduct them in good faith. Abruptly terminating nego-
project owners must: (i) appoint a coordinateur sécurité-protection-santé
tiations may therefore give rise to liability for the other party’s
(health and safety coordinator) in charge of monitoring and
reliance losses (i.e., wasted costs and expenses) but not its expec-
managing health and safety risks; (ii) ensure that this coordinator
tation losses (i.e., lost profits or loss of opportunity).
prepares and maintains a health and safety plan until completion
of the project; and (iii) ensure that this coordinator prepares a
1.6 Are there any statutory or standard types dossier d’intervention ultérieure sur l’ouvrage which addresses health and
of insurance which it would be commonplace or safety risks during the subsequent maintenance phase.
compulsory to have in place when carrying out Violations of health and safety requirements can result in
construction work? For example, is there employer’s criminal penalties.
contractor to have contractors’ all-risk insurance? 1.8 Is the employer legally permitted to retain part of
The two main types of insurance that are compulsory relate
substantially complete; and/or (b) any agreed defects
to decennial liability (i.e., unfitness for purpose and structural liability period is complete?
damages occurring within 10 years after taking over – see ques-
tion 3.20). Both the employer and the contractor must subscribe
to such insurance (known as assurance dommage ouvrage for the Retention provisions are permitted under French law. The prin-
employer and assurance responsabilité décennale for the contractor). cipal purpose of the retention is usually to cover the remediation
Although rare in practice, these two insurances can be merged of defects during the defects liability period (typically one year
into a single policy known as a police unique de chantier. after take-over). However, the release of retention monies may
also be tied to the completion of the works.

42 France
Subject to a few exceptions (e.g., in the defence industry), Unlike a sales contract, contrats d’entreprise (see question 1.1)
retention provisions are limited by law to 5% of the contract do not transfer ownership at the time of contract formation.
price and contractors have the option to replace them by bank Equipment and materials used in the works become the prop-
guarantees (cautions solidaires) of the equivalent amount. Despite erty of the employer as and when they are incorporated into the
this cap, however, it is not uncommon to see parties agree higher works.
amounts for retentions (or replacement bank guarantees) in their Retention of title is possible in respect of goods and supplies
contracts. not yet incorporated into the building or which can be removed
without damaging the building.
By exception, certain contracts also provide that the
performance bonds (provided by banks and others) to contractor will remain the owner of the work until full payment
guarantee the contractor’s performance? Are there any is effected – e.g., the model works contract of the Office Général
restrictions on the nature of such bonds? Are there any du Bâtiment et des Travaux Publics (OGBTP). However, the validity
grounds on which a call on such bonds may be restrained of such clauses is debated and they are not enforceable against
(e.g. by interim injunction); and, if so, how often is such third parties.
pre-condition) or only upon default of the contractor? 22 Supervising Construction Contracts

In the private sector, performance bonds guaranteeing the
contractor’s performance are common. The form of such bonds (e.g. an engineer)? Does any such third party have a
is a matter for the parties but they most frequently take the duty to act impartially between the contractor and the
form of a garantie autonome (on-demand guarantee) or a caution- employer? If so, what is the nature of such duty (e.g. is
nement (i.e., a personal surety by which the caution undertakes to it absolute or qualified)? What (if any) recourse does a
perform the debtor’s obligation if the debtor fails to perform party to a construction contract have in the event that
it himself). If a cautionnement is given, the caution is broadly in a the third party breaches such duty?
position of joint and several liability with the contractor.
On-demand guarantees are autonomous from the underlying The role of the maître d’oeuvre (see question 1.1) is comparable to
construction contract and calls upon them may only be opposed that of an engineer. The maître d’oeuvre supervises the works and
in the event of fraud or an abusive call by the beneficiary. Under coordinates the various work-package contractors engaged by
a cautionnement, the caution may resist payment or performance the employer. The maître d’oeuvre acts on behalf of the employer
on the same grounds as the contractor, except those which are and is not required to act impartially. However, the maître
purely personal to the contractor (e.g., a defect in consent that d’oeuvre (typically an architect or engineering company) may be
results in the nullity of the underlying contract). prevented from acting solely in the employer’s interests where
In the private sector, it is not uncommon for performance doing so would contravene professional conduct rules.
bonds to exceed 5% of the contract price. The rights and obligations of the maître d’oeuvre vis-à-vis the
In the public sector, the applicable procurement rules do not contractor are usually set out in the contract concluded with
contemplate the provision of performance bonds by contractors the employer. A breach of an obligation of the maître d’oeuvre is
but they are sought in practice. Public authorities seldom seek deemed to be a contractual breach of the employer, who may in
performance bonds in excess of 5% of the contract price. turn seek compensation from the maître d’oeuvre.
1.10 Is it permissible/common for there to be company 2.2 Are employers free to provide in the contract that
guarantees provided to guarantee the performance of they will pay the contractor when they, the employer,
subsidiary companies? Are there any restrictions on the have themselves been paid; i.e. can the employer include
nature of such guarantees? in the contract what is known as a “pay when paid”
clause?
Parent company guarantees are permitted in France and are
common in the private sector. Such guarantees may take the “Pay when paid” clauses are permitted between employers
form of a garantie autonome (on-demand guarantees), cautionnement and contractors in France and are primarily used in the project
(see question 1.9) or lettre d’intention (comfort letter). finance context (although not typically in respect of the agreed
Parent company guarantees are not commonly seen in the contract price).
public sector, where procurement processes provide suffi- In the private sector, “pay when paid” clauses will be ineffec-
cient comfort as to the financial wherewithal of the successful tive as against subcontractors. Mandatory provisions of French
candidate. law governing subcontracting provide that subcontractors can
seek payment directly from the employer and contractors are
required to either delegate payment of the subcontractors to
the employer or provide a bond guaranteeing subcontractor
used in the works? Is it permissible for contractors to payments. In the public sector, subcontractors are generally
claim that, until they have been paid, they retain title and paid directly by the employer.
the site?
It is possible but very uncommon for contractors to have reten-

tion of title rights in relation to goods and supplies used in the
works.

Three Crowns LLP 43
2.3 Are the parties free to agree in advance a fixed contracts – to vary the terms of the contract (see question 3.1).
sum (known as liquidated damages) which will be This right is subject to the same limits as the right to instruct
paid by the contractor to the employer in the event of a positive variation and generally entitles the contractor to
particular breaches, e.g. liquidated damages for late compensation, subject to any countervailing contractual provi-
completion? If such arrangements are permitted, are sions. For example, in the public sector, the contractor may only
there any restrictions on what can be agreed? E.g. does be entitled to receive compensation if the reduction of the value
of the omitted works is more than 5% of the contract price for a
which is wholly unrelated to the amount of financial loss lump-sum contract and 20% of the contract price in a measure-
likely to be suffered by the employer? Will the courts ment contract (CCAG, Article 16).
in your jurisdiction ever look to revise an agreed rate of The contractor, on the other hand, may not omit any part of
liquidated damages; and, if so, in what circumstances? the work without the employer’s consent. Such omission would
otherwise constitute breach of the contract. If the contractor
Pénalités (liquidated damages) are permitted and common in refuses to carry out the omitted work, the employer may refuse
France. Delay liquidated damages are particularly prevalent takeover, terminate the contract and claim damages. The
but clauses pénales (liquidated damages clauses) may apply to employer may also, subject to certain requirements, carry out
other contractual violations (e.g., failure to achieve agreed plant the omitted work himself or procure a third party to perform
capacity). it, and require the contractor, who failed to perform, to advance
Unless specifically agreed, liquidated damages are not exclu- the necessary sums for the work.
sive of other remedies and may thus serve a purely punitive
function. Liquidated damages therefore do not need to reflect 3.3 Are there terms which will/can be implied into
a genuine pre-estimate of loss and may be due to the employer a construction contract (e.g. a fitness for purpose
irrespective of whether the actual loss suffered is equivalent to obligation, or duty to act in good faith)?
the liquidated damages amount.
French courts may revise the liquidated damages payable As a general principle, the parties must comply not only with
when they are manifestly excessive or derisory relative to actual the explicit terms of the contract, but also with all terms implied
loss suffered and the overall value of the contract. Parties by equity, customs or the law (Civil Code, Article 1194). An
cannot exclude the courts’ intervention by contract; it is, in prac- example of such an implied term is the contractor’s obligation de
tice, a power that is rarely exercised. conseil (duty of advice), which obliges the contractor to inform
himself of all information relevant to the work (including its
32 Common Issues on Construction intended use) and to advise the employer of certain risks.
Contracts Lois de police or règles d’ordre public (mandatory rules of law)
cannot be excluded and will thus also be implied into construc-
tion contracts. The obligation to act in good faith is an example
performed under the contract? Is there any limit on that of a mandatory rule that cannot be excluded or modified by
right? agreement. It governs the negotiation, conclusion and perfor-
mance of the contract (Civil Code, Article 1104). Other exam-
ples of mandatory rules include those relating to subcontracting,
In the public sector, the employer has a special prerogative
liability and insurance, on employer’s retention and payment
( prérogative de puissance publique) entitling it to vary the terms of
guarantees and statutory warranty regimes (see question 3.5).
the contract unilaterally, provided the conditions set out in the
The fitness for purpose obligation is a term implied by law,
CCP are met. This right is subject to certain limits developed
which cannot not be excluded by agreement. The contractor’s
by case law, some of which have been codified in the CCP. For
ouvrage (works) must not be impropre à sa destination (unfit for its
example, the employer is not entitled to vary the financial terms
purpose) (Civil Code, Article 1792). The fitness for purpose
of the contract, change the overall nature of the contract or
obligation covers a wide range of defects and is the subject of
substantially alter its terms (i.e., a modification essentielle des condi-
abundant case law.
tions), or require the execution of additional works foreign to the
object of the contract. The parties may also agree to limit this
right by contract (e.g., Article 15.2.2 of the CCAG entitles the 3.4 If the contractor is delayed by two concurrent
contractor to refuse a variation that increases the price of the events, one the fault of the contractor and one the fault
works by more than 10% of the contract price). or risk of his employer, is the contractor entitled to: (a)
an extension of time; and/or (b) the costs arising from
In the private sector, the general principle is that contracts can
only be varied with the parties’ mutual consent or for reasons
expressly authorised by law (e.g., under the théorie de l’imprévision
or hardship doctrine). In practice, however, private construc- In French law, there is no established set of rules on concur-
tion contracts often include provisions entitling the employer to rent delay and its effects as to the contractor’s entitlement to an
issue variation orders. For example, the contracts which use the extension of time and costs.
form NF P 03-001 issued by AFNOR provide for the possibility In principle, the contractor is under an obligation de résultat
to vary the works (Article 11). (absolute obligation), as opposed to an obligation de moyens (obli-
gation of means), to complete the works by the contractual
deadline. If delay occurs, the contractor may be liable and
3.2 Can work be omitted from the contract? If it is subject to penalties unless it can prove that the delay is due to
omitted, can the employer carry out the omitted work
causes outside its contractual sphere of responsibility, including
employer delays.
In the event of concurrent employer delays, a French court
The employer may omit work from the contract as part of its would typically seek to apportion the liability for the delay as
right – unilateral for public contracts and contractual for private between the delay events caused by the employer and those

44 France
caused by the contractor. The analysis is highly fact-sensitive Certain other risks – such as unexploded munitions, asbestos
and is conducted as part of the appréciation souveraine des juges du and archeological remains – are typically borne by employers.
fond (the court’s sovereign appreciation). The contractor would
usually be granted an extension of time and compensation in
respect of the delays attributed to the employer. in law affecting the completion of the works under
3.5 Is there a time limit beyond which the parties to
a construction contract may no longer bring claims The allocation of risk for a change in law affecting the project
against each other? How long is that period and when largely depends on the contract itself, as this matter is not regu-
lated by mandatory rules and may be agreed between the parties.
Public law contracts generally provide for protection against
There are a number of limitation periods that may apply, subject changes in law that would specifically affect the project. Absent
to the nature of the claim brought. specific provision in the contract, protection may be offered
There are three specific limitation periods that apply to employer under the case law theories of imprévision or fait du prince. Under
claims in the construction context. These are the garantie de parfait the former and provided its conditions are met, the contracting
achèvement (one-year warranty) covering all defects indicated by authority provides financial compensation to the contractor
the employer during the first year after the handover (Civil Code, where the economic balance of the contract has been disrupted by
Article 1792-6), the garantie biennale (two-year warranty) covering an unforeseeable event beyond the parties’ control. Such unfore-
all defects affecting separable equipment (Code Civil, Article seeable events include measures adopted by public authorities in
1792-3) and the garantie décennale (10-year warranty) covering all general. The theory of fait du prince entitles the contractor to full
defects that compromise the stability of the work or the equip- compensation if the contracting authority adopts a measure (e.g.,
ment forming part thereof, or rendering it unfit for its purpose tax or social policy) which was unforeseeable and produces an
(Civil Code, Article 1792, 1792-2). These limitation periods run adverse impact specifically on the contractor or one of the essen-
from the date the work has been handed over to the employer (la tial elements of the contract. However, it is rarely used today.
réception) (Civil Code, Article 1792-4-1). In the private sector, and in the absence of any contractual
Otherwise, the prescription de droit commun (general limitation clause dealing with the allocation of risk in the case of unfore-
period) applies to employer and contractor claims. That period seen circumstances, contractors may possibly invoke the prin-
is five years from the date on which the right holder knows, or ciple of imprévision introduced by the new Article 1195 of the
ought to have known, the facts giving rise to the claim (Civil Civil Code (see question 3.6).
Code, Article 2224). Parties may agree to extend or shorten the
limitation period, albeit to no less than one year and no more
3.8 Which party usually owns the intellectual property
than 10 years.
In the public sector, payment claims against the State, dépar-
tements, communes and établissements publics are subject to specific
procedural requirements and must be brought within a four- The designer (usually the architect) is the owner of the intellec-
year limitation period, starting from the first day of the year tual property rights in the design. These rights form part of the
following the year in which the rights were acquired. If used, designer’s intangible property in its oeuvre de l’esprit (creation) under
the CCAG also include a specific set of limitation periods within the Intellectual Property Code (Articles L111-1, L112-2). This
which contractors must bring claims. right is independent from the employer’s property right over the
work, which does not automatically confer a right to the design.
For this reason, design contracts usually grant the employer a
3.6 Which party usually bears the risk of unforeseen licence or assign reproduction and representation rights.
ground conditions under construction contracts in your
One aspect of the designer’s intangible property is the droit
jurisdiction?
moral. Provided it is an original design, the droit moral entitles
the designer to oppose any modification to the design during
The allocation of risk for unforeseen ground conditions is not construction and after completion. The droit moral is perpetual,
regulated by mandatory rules and is thus a matter for agree- inalienable and imprescriptible. In practice, however, it is
ment between the parties. Contractual provisions allocating the subject to limitations, such as when public interest demands
risk to one party or another are, in principle, valid. In practice, modifications (including demolition).
contracts in the private and public sectors typically allocate the
risk to the contractor.
Absent an express contractual allocation of risk, contractors 3.9 Is the contractor ever entitled to suspend works?
in the public sector may resort to the théorie des sujétions imprévues.
This principle entitles the contractor, under certain conditions, In the private sector, the contractor may suspend works in
to full compensation for the loss caused by unforeseen ground certain circumstances. This includes, for example, when the
conditions, including the costs of additional works. other party is in default, provided the failure to perform is suffi-
Until recently, there was no equivalent principle in the private ciently serious (l’exception d’inexécution). A right to suspend may
sector. However, the Civil Code provides a remedy in case of also arise when the employer has not paid the contractor and
imprévision (or hardship). This principle may apply when there is not provided a payment guarantee. This rule is mandatory and
a change of circumstances, unforeseen at the time of the conclu- cannot be excluded by agreement. The right to suspend is also
sion of the contract, that makes performance of the contract recognised, subject to specific requirements, in the Housing and
excessively onerous for one of the parties, who had not assumed Construction Code (Article L111-3-1).
the risk. Where its requirements are satisfied, a party may seek In the public sector, the contractor’s right to suspend works is
to renegotiate the terms of the contract or agree to terminate it. generally more limited, reflecting the need to ensure the conti-
In the absence of agreement, either party may, within a reason- nuity of public services.
able time, apply to the courts to revise or terminate the contract.

Three Crowns LLP 45
3.10 Are there any grounds which automatically or If the impossibility of performance is permanent, the contract
usually entitle a party to terminate the contract? Are can be automatically terminated. If it is temporary, the parties’
there any legal requirements as to how the terminating obligations are suspended until the event ceases to exist, unless
party’s grounds for termination must be set out (e.g. in a the delay caused by the event is such that termination is justified.
termination notice)? The parties may agree to vary the statutory regime by contract.
Where an event has rendered performance of the contract
In the public sector, a construction contract terminates auto- uneconomic, in both the private and public sectors, a party may
matically in case of force majeure or if the contractor ceases to seek to invoke the principle of hardship (imprévision) (see ques-
exist (e.g., because of death, bankruptcy or civil incapacity). The tions 3.6 and 3.7).
employer also has the right to terminate the contract unilaterally
when public interest considerations require it or the contractor 3.13 Are parties, who are not parties to the contract,
commits a sufficiently serious breach. The contractor, on the entitled to claim the benefit of any contractual right
other hand, may not terminate the contract unilaterally absent which is made for their benefit? E.g. is the second or
an express contractual right (save for force majeure). subsequent owner of a building able to claim against
In the private sector, a contract can be terminated by one party the contractor pursuant to the original construction
unilaterally or through court proceedings in the event of a suffi- contracts in relation to defects in the building?
ciently serious breach by the other party (e.g., abandonment of
the construction site, significant delay, serious non-compliance The effet relatif des contrats (principle of privity of contracts) applies
with contractual specifications, or the employer’s failure to pay, but may be subject to certain exceptions. Parties may agree to
etc.). For lump-sum contracts, there is a statutory default regime confer rights on third parties by way of a stipulation pour autrui (for
allowing the employer to unilaterally terminate the contract at example, to a lender financing the project when no direct agree-
will. Otherwise, termination may occur by operation of a clause ment exists).
résolutoire (express termination clause), which must be invoked in Additionally, certain exceptions to the privity of contracts
good faith. The clause must specify the obligations the non-per- are provided by law (e.g., Civil Code, Article 1341-3). In certain
formance of which will give rise to the right to terminate. circumstances, sub-contractors may claim payment directly
Termination is generally subject to a requirement that prior against the employer ( paiement direct when the employer is a public
notice is given that affords the other party a reasonable time to authority and action directe when the employer is a private person).
cure the breach. The principle of l’accessoire suit le principal may entitle subse-
quent owners to pursue the contractor under the initial contract.
3.11 Do construction contracts in your jurisdiction Subsequent owners are also entitled to claim against the
commonly provide that the employer can terminate at contractor under the biennial and decennial guaranties.
exercising that right need to pay the contractor’s profit
termination?
Construction contracts with public authorities commonly employer with an interest in the project, e.g. funders,
provide that the employer may terminate at any time for public other stakeholders, and forward purchasers)?
interest reasons. This right exists notwithstanding any provision
to the contrary. Subject to any contrary contractual provisions, Direct agreements are commonly used in project finance to
the contractor is entitled to full compensation, including its perte protect the lenders’ interests by conferring specific rights, such
subie (direct losses) and manque à gagner (lost profits). as step-in rights in the event of default. In the public sector,
In the private sector, there is a statutory regime that allows the the consent of the relevant authority is required before the
employer to terminate lump-sum contracts at will, in which case contractor may be replaced. Lenders are often granted a secu-
the contractor is entitled to be fully compensated (i.e., for costs rity – known as a Dailly assignment – by which the core receiva-
incurred, works already performed and profits lost). Otherwise, bles of the project may be assigned to them.
the employer is generally only entitled to terminate for cause (as Collateral warranties are also used, the most frequent being
to which, see Article 22 of the AFNOR NF P 03-001 form for the parent company guarantee, which are generally required in
an example of the causes for which the employer may terminate). the form of a cautionnement or garantie autonome (see question 1.9).
3.12 Is the concept of force majeure or frustration known 3.15 Can one party (P1) to a construction contract, who
in your jurisdiction? What remedy does this give the owes money to the other (P2), set off against the sums
affected party? Is it usual/possible to argue successfully due to P2 the sums P2 owes to P1? Are there any limits
that a contract which has become uneconomic is on the rights of set-off?
In France, set-off may operate by law (compensation légale) or

The principle of force majeure is codified in French law. The stat- contract (compensation conventionnelle).
utory regime defines a force majeure event as an event outside of Legal set-off is subject to certain conditions. The debts must
the parties’ control, that could not have been reasonably fore- be: interrelated; fungible; certain; immediately due; and payable.
seen at the time the contract was made and the effects of which For example, an employer may set-off delay liquidated damages
cannot be prevented through appropriate measures. For force against the sums it owes to the contractor if the liquidated
majeure to apply, the event must render the performance of the damages are not contested.
contract impossible, and not simply uneconomic. The parties may limit or expand their set-off rights by contract.

46 France
3.16 Do parties to construction contracts owe a duty of 3.20 Does the concept of decennial liability apply in your
care to each other either in contract or under any other jurisdiction? If so, what is the nature of such liability and
legal doctrine? If the duty of care is extra-contractual, what is the scope of its application?
Decennial liability does apply in France. The garantie décennale is
a 10-year statutory warranty that cannot be limited and applies
French law does not recognise a contractual or tortious duty notwithstanding any contractual provision to the contrary. It
of care, as that duty is understood in common law countries. applies to constructeurs d’un ouvrage (construction contractors),
Analogous obligations do, however, apply (e.g., the obligation of widely defined (e.g., architects, contractors, persons who sell,
good faith, the pre-contractual obligation to inform, the contrac- after completion, a work that he built or had built, etc.). Such
tor’s duty to advise, the employer’s duty of cooperation, etc.). contractors are strictly liable to owners and purchasers, for a
A devoir de vigilance (corporate duty of vigilance) has recently period of 10 years after handover, for defects (including ground
been created. This duty, which applies to large companies in defects – vices du sol ) which impair the solidity of the work or its
France, requires a party to, inter alia, identify and mitigate social, inseparable equipment, or render it unfit for its purpose. The
environmental and governance risks related to their activities, contractors can only escape liability by proving that the damage
but also those of their suppliers or subcontractors, or compa- was caused by an external cause (e.g., force majeure, employer’s
nies they control. fault, act of a third party). Decennial liability is subject to abun-
dant case law which continues to define and expand its limits.
ambiguous, are there rules which will settle how that 42 Dispute Resolution
4.1 How are construction disputes generally resolved?
In general terms, in the event of ambiguity, a French court will
interpret the contract by seeking the common intention of the In the private sector, parties tend to choose to resolve their
parties (commune intention). If the parties’ actual common inten- domestic construction disputes in civil courts, even for major
tion cannot be determined, the contract is interpreted according projects. There is, however, increasing recourse to mediation or
to the meaning that a reasonable person would have given to it fast-track arbitration proceedings.
in the same situation. The majority of disputes under public construction contracts
The objective is to discover the parties’ volonté réelle (real are settled by way of a preliminary amicable settlement phase,
common intention), which prevails over the literal meaning of which allows the parties to refer their dispute to a special
the terms. To do so, the judge may rely on the parties’ behav- committee – Comité Consultatif de Règlement Amiable des litiges
iour before and after the conclusion of the contract. However, (CCRA) – which issues a non-binding decision. Rates of settle-
clear and unambiguous terms are, in principle, not open to revi- ment by well-organised CCRAs are high. Otherwise, disputes are
sion by way of interpretation. commonly referred to administrative courts for final resolution.

jurisdiction (whether statutory or otherwise) or any other
forms of interim dispute resolution (e.g. a dispute review
Any term that purports to exclude or modify the lois de police or board)? If so, please describe the general procedures.
règles d’ordre public, which are mandatory rules, will be unenforceable
(réputée non écrite or nulle) (see question 3.3). The obligation to nego- There are no statutory adjudication processes in France, but the
tiate, conclude and perform a contract in good faith is an example dispute review boards are becoming more popular in the private
of such a rule. Moreover, an obligation subject to a condition, the sector. For example, dispute review boards have been provided
fulfilment of which depends solely on the will of the debtor (i.e., a for in some of the contracts relating to the Grand Paris Project,
clause potestative), may be unenforceable. which is currently the largest infrastructure project in Europe
(with 200km of new metro lines and 68 stations, for a cost in
3.19 Where the construction contract involves an element excess of €32.5 billion).
of design and/or the contract is one for design only, are the
designer’s obligations absolute or are there limits on the
4.3 Do the construction contracts in your jurisdiction
extent of his liability? In particular, does the designer have
to give an absolute guarantee in respect of his work?
jurisdiction.
Liability for design works is subject to the same rules as for
construction works. The design must comply with the contrac- In public contracts, arbitration clauses are rare. Save in certain,
tually agreed requirements. This obligation is one of result (obli- limited circumstances, arbitration is not available to French
gation de résultat) and is thus absolute. The designer’s work is also public entities. Where the dispute is international, public enti-
subject to mandatory warranties (see questions 3.5 and 3.20), ties may not rely on domestic law restrictions and are bound by
and the designer may be jointly and severally liable with the arbitration agreements they enter into.
construction contractor. In the private sector, arbitration is more common, but civil
litigation still prevails. Where parties do agree to arbitration,
they most frequently choose arbitration under the ICC rules or
the rules of the French arbitration association (AFA).

Three Crowns LLP 47
4.4 Where the contract provides for international to pay cannot be reasonably contested. All decisions can be
arbitration, do your jurisdiction’s courts recognise and appealed before a competent court of appeal (Cour d’appel or Cour
enforce international arbitration awards? Please advise administrative d’appel ). Final review on points of law, not fact, is
of any obstacles (legal or practical) to enforcement. available before the competent superior court (Cour de cassation or
Conseil d’Etat).
France is viewed as an “arbitration-friendly” jurisdiction and The length of proceedings depends on the competent juris-
enforcement may only be refused in certain limited circum- diction and complexity of the dispute. On average, administra-
stances, which are set out in Article 1520 of the Civil Procedure tive courts are likely to render a first instance decision in less
Code. In certain respects, French law on the enforceability of than a year, and civil courts in more than a year. However, this
arbitral awards is more favourable than that provided in the New average tends to double if recourse is made to a judicial expert,
York Convention of 1958 (e.g., French courts may recognise and who are often appointed in construction disputes in France. The
enforce awards that have been set aside at the seat). Awards may time required to obtain a decision on appeal is usually at least 13
only be set aside in limited circumstances. To be enforceable in months.
France, the award must receive an exequatur, a seal affixed on the
original and/or the copy of the award on a without-notice basis. 4.6 Where the contract provides for court proceedings
are there any foreign countries in respect of which
any rights of appeal and a general assessment of
The judgments of courts of EU Member States enjoy automatic
Where a contract provides for court proceedings, administrative recognition in France, but a titre exécutoire européen (European
courts will have jurisdiction over disputes arising out of contracts enforcement order) or a declaration of enforceability is generally
with public entities; and civil courts over disputes arising out required to enforce a judgment.
of contracts involving private parties. Most civil courts have a Foreign judgments are otherwise enforceable in France subject
section dedicated to construction matters. Courts of both the to receiving an exequatur, which is granted, absent a specific
administrative and judicial orders have wide powers to order international agreement, under three cumulative conditions: the
interim measures, including référé-provision, which allows a court to foreign court had jurisdiction; there was no fraud; and the judg-
order payment of an amount where the existence of the obligation ment is compatible with French international public policy.

48 France
Todd Wetmore, a Three Crowns founding partner based in Paris, has over 25 years’ experience handling some of the most challenging and
complex commercial cases. He regularly acts as counsel and arbitrator in the oil and gas, electricity, technology, transportation, manufac-
turing, mining, and commodities sectors. A recognised specialist in infrastructure and construction disputes, Todd has acted for contractors
and owners in relation to design, defects, delays, and disruption in civil and facilities construction projects of all kinds. He regularly appears
as an advocate before experts, mediators, and arbitral tribunals. Market commentaries note that Todd has “a lightning-quick mind and
profound insight”, “is very impressive at cross-examination”, and is “particularly reputed for his expertise in construction matters”. Who’s Who
Legal recognises him as a “Thought Leader” in arbitration and a “Recommended Global Leader” in construction and energy law. Todd is a
Vice-President of the ICC Court and qualified in England, France and Canada.
Three Crowns LLP Tel: +33 1 8379 0950

104 avenue des Champs-Elysées Email: [email protected]
75008 Paris URL: www.threecrownsllp.com
France
Simon Elliot is a partner in Three Crowns’ Paris office. Over the last decade, he has acted as counsel in some of the most significant disputes
to arise in the oil and gas, mining, electricity generation, healthcare, and transport sectors. Simon’s practice has a particular focus on
disputes arising out of large infrastructure and other major projects involving hotly contested technical, delay, and quantum-related issues.
The Legal 500 reports that clients say Simon is “a rising star” and has a “very impressive ability to handle highly complex technical issues”.
Three Crowns LLP Tel: +33 1 8379 0957

104 avenue des Champs-Elysées Email: [email protected]
75008 Paris URL: www.threecrownsllp.com
France
With offices in Paris, London, Washington, D.C. and Bahrain, Three Crowns
is devoted to the practice of international arbitration. Founded by practice
leaders combining decades of experience, the firm is an industry leader in
commercial, investment, and public international law disputes. It acts for
private and sovereign clients, including Fortune 10 companies and leading
construction and engineering firms. It has represented clients in some
of the largest and most complex construction cases in the world, and
routinely represents owners and contractors in pre-arbitral dispute reso-
lution proceedings, mediations, and arbitrations to resolve the full range
of technical and commercial issues that arise in infrastructure projects.
The firm has particular expertise in upstream and downstream oil and gas
and chemicals infrastructure, as well as electricity generation facilities and
classic civil works disputes.
www.threecrownsllp.com

Chapter 7 49
Germany
Germany
Dr. Christian Kruska
Breyer Rechtsanwälte Erlmest E. Burns, III, J.D.
12 Making Construction Projects 1.2 How prevalent is collaborative contracting (e.g.

1.1 What are the standard types of construction contracts are commonly used?
obligations upon contractors; (ii) any forms of design- Since the mid-1990s, partnering models have successfully estab-
only contract; and/or (iii) any arrangement known as lished themselves in local construction markets, especially in the
management contracting, with one main managing USA and Great Britain. In Germany, the emergence of part-
contractor and with the construction work done by a nering models only occurred at the end of the 20th century,
series of package contractors? (NB For ease of reference partly as a result of the construction boom following reunifica-
tion. Beginning in 2002, major German construction conglom-
erates developed project-related business models for the German
construction market based on the partnering philosophy. In
recent years, partnering models have become increasingly present
Construction services in Germany are usually awarded in the in the German construction industry, especially with regard
form of individual works contracts or, in the case of larger to large-scale construction projects. Small and medium-sized
construction projects, to a general contractor (“GU contract”). construction projects are still carried out in accordance with the
In addition, to avoid overlapping warranties, some contracts for types of contract described under question 1.1.
services from a single trade are also awarded to a partial general A wide variety of partnering models are commonly used.
contractor (the so-called “package GU contract”). In prin- Project management is based on partnership models, which
ciple, the owner must make the necessary design available to the include: long-term and project partnering; one- and two-stage
contractor. Often only a part of the design services (the execu- partnering, guaranteed maximum price (“GMP”); construc-
tion design) is provided by the contractor, while the so-called tion management at agency/at risk; and alliance contracting.
approval design remains the responsibility of the owner or his Combinations are also possible, including those in conjunction
architects. with other management approaches. Most recently, several inte-
German law essentially distinguishes between unit price and grated project delivery (“IPD”)-based pilot projects have been
lump-sum contracts. In the case of lump-sum contracts, there is introduced, and in March 2020, the official German adapta-
a further distinction between detailed lump-sum contracts and tion of the FAC-1 framework alliance contract was released for
simple or complex global lump-sum contracts. use in the German market (available at https://shop.reguvis.de/
In the case of a unit price (remeasurement) contract, the bau-und-architektenrecht-hoai/fac-1-e-book/).
owner bears the mass and quantity risk, i.e. the services are
invoiced according to the quantities and masses incurred and
determined by a measurement (see § 2 para. 2 of the German 1.3 What industry standard forms of construction
Construction Contract Procedures – “VOB/B”). In the case contract are most commonly used in your jurisdiction?
of a detailed lump-sum contract, this risk is transferred to the
contractor and cannot, therefore, demand additional remunera- In Germany, construction contracts are concluded almost exclu-
tion due to deviations in quantity and/or mass. Additional costs sively on the basis of the “contract for works” provisions of the
resulting from modified and/or additional services (see § 2 para. German Civil Code (“BGB”) (§§ 631 et seq. BGB), including those
7 No. 2 VOB/B) remain unaffected. In the case of simple and of the Construction Contract Law (§§ 650a et seq. BGB), and/or the
complex global lump-sum contracts, the contractor must take contractual conditions of the VOB/B. The latter must be agreed
on even more risk, namely with regard to the sufficiency of the separately. Contracts for architectural and engineering services
design. In contrast to the detailed lump-sum contract (with are subject not only to the provisions of the law on contracts for
detailed specifications), the global lump-sum contract describes works (§§ 631 et seq. BGB in conjunction with §§ 650p et seq. BGB),
the performance owed more functionally. Of course, a combi- but also to the price specifications of the Fee Regulations for
nation of the different types of contract is also possible and Architects and Engineers (“HOAI”). Other standard forms of
common practice. contract, such as those published by the International Federation
of Consulting Engineers (“FIDIC”), are virtually never used in
purely domestic German construction projects.

50 Germany
1.4 What (if any) legal requirements are there to 1.6 Are there any statutory or standard types
create a legally binding contract (e.g. in common law of insurance which it would be commonplace or
jurisdictions, offer, acceptance, consideration and compulsory to have in place when carrying out
intention to create legal relations are usually required)? construction work? For example, is there employer’s
Are there any mandatory law requirements which need to liability insurance for contractors in respect of death
be reflected in a construction contract (e.g. provision for and personal injury, or is there a requirement for the
adjudication or any need for the contract to be evidenced contractor to have contractors’ all-risk insurance?
in writing)?
Although there is no compulsory third-party liability insurance
Under German law, a contract is generally concluded when two in Germany, it is nevertheless customary in the industry, and the
identical declarations of intent are made; namely, offer and accept- vast majority of building contractors and architectural firms take
ance. Furthermore, depending on the type of contract, there may out such insurance in order to protect themselves against third-
be additional minimum requirements. As a rule, these include the party claims. However, there is a legal obligation for all free-
contracting parties, performance and counter-performance. A lance architects and engineers to be adequately insured against
special feature of a works contract is that a specific counter-perfor- such third-party claims.
mance must be expressly agreed. According to § 632 para. 1 BGB, For complex construction projects with correspondingly
remuneration is deemed to be tacitly agreed if, under the circum- complex project structures and high risks, tailor-made project
stances, the contractor’s performance can only be expected in insurance policies are generally taken out in Germany to cover
return for compensation. If the amount of the remuneration is not such complex risk profiles. Which individual insurance cover-
expressly agreed, the usual remuneration for the work performed ages are bundled together in the respective project policy depends
in the locality is to be regarded as agreed (cf. § 632 para. 2 BGB). on the individual risks of the project.
From a formal point of view, a contract for works can generally be
concluded in writing, orally or by implication. The same applies
to variations or even to the architect’s contract. For a few types
of contract, the law on works contracts prescribes a certain form, legal status of those working on site as employees or
such as the consumer building contract (where there is a writing as self-employed sub-contractors); (b) tax (payment of
requirement, cf. § 650i BGB in conjunction with § 126b BGB) or income tax of employees); and/or (c) health and safety?
the developer contract (here a notarial contract is required due to
the transfer of ownership of land or residential/partial ownership;
It is important for the owner to obtain confirmation from
cf. § 650u BGB in conjunction with § 126b and § 311b BGB).
the contractor that all legal, contractual and wage regulations
governing the use of labour have been complied with, and to
1.5 In your jurisdiction please identify whether there demand evidence demonstrating such compliance. Furthermore,
is a concept of what is known as a “letter of intent”, in it is recommended that security agreements (secured by bank
which an employer can give either a legally binding or guarantees) be put in place in the event that the owner is held
non-legally binding indication of willingness either to liable for any amounts outstanding from the contractor. German
law provides numerous legal regulations that impose a guaran-
not a full contract is ever concluded. tor-like liability on the owner if the contractor does not meet
his obligation to make the required employer payroll contribu-
tions for its employees (for social security contributions, see §
Rights and obligations can arise for both contracting parties as 28e para. 3a of the Social Code (“SGB”) IV; for accident insur-
early as the pre-contract phase through the commencement of ance contributions, see § 150 III SGB VII). Furthermore, the
contractual negotiations, the initiation of a contract, as well as owner is also liable if the contractor and/or its subcontractors fail
through similar business contacts and the conduct of the parties to pay their employees the minimum wage prescribed by law or
(see § 311 (2) BGB). Typical (“agreed upon”) pre-contractual obli- collective bargaining agreements (cf. § 14 of the Posted Workers
gations in Germany are the so-called Letter of Intent (“LOI”) and Act – “AEntG”).
the pre-contractual agreement. An example of a special tax in the construction industry is the
The LOI is not regulated by law in Germany, but has been building deduction tax. This is a form of taxation designed to
adopted from common law practice in Anglo-Saxon legal systems. curb illegal employment in the construction industry. According
In the event of large-scale, complex contracts, its purpose is usually to this law, commercial owners of construction services are
to structure contractual negotiations, as well as to determine the obliged to withhold 15% of the invoice amount and pay it to the
status of such negotiations and the (partial) results achieved. If tax authority. If the contractor presents a so-called exemption
desired, certain duties may be stipulated; in particular, exclusivity, certificate, this obligation falls away. The same applies if the de
confidentiality and, if appropriate, reimbursement of costs in the minimis limit of €15,000.00 per year is not exceeded. If the owner
event the contract is not concluded. Depending on its content, does not withhold the construction deduction tax, he may face a
the LOI may take the form of a mere protocol of negotiations, a fine of up to €25,000.00 and, in particularly serious cases, even
declaration of intent to conclude a contract, a pre-contract or even a prison sentence.
a binding contract, the terms of which may have to be determined
by interpreting the content of the letter.
In contrast, a pre-contractual agreement is a contract under 1.8 Is the employer legally permitted to retain part of
the law of obligations with a primary obligation to subsequently the purchase price for the works as a retention to be
conclude the main contract. As a rule, the main contract must be
concluded in accordance with the terms of the pre-contractual liability period is complete?
agreement. A secondary obligation on the parties is to refrain
from performing any act that could negatively affect the conclu-
sion of the main contract. The contract price is generally due and payable upon acceptance
of the work (similar to substantial completion under common

Breyer Rechtsanwälte 51
law) (cf. § 641 para. 1 BGB). If the owner is entitled to the reme- 1.11 Is it possible and/or usual for contractors to have
dying of a defect, he can withhold a reasonable amount after the retention of title rights in relation to goods and supplies
due date to secure this performance. A reasonable amount is used in the works? Is it permissible for contractors to
usually double the cost of remedying the defect (see § 641 para. claim that, until they have been paid, they retain title and
3 BGB). Once the defect has been remedied by the contractor, the right to remove goods and materials supplied from
he may demand payment of the withheld amount. Even in the the site?
case of payments on account, the owner may exercise his right
to withhold payment if the invoiced services do not correspond German law generally recognises retention of title rights (see §
with the actual progress on site. In addition, the parties may 449 BGB). However, the scope of their application is primarily
agree on security for an advance payment by the owner; for limited to sales contracts and works contracts dealing with
example, for ordering materials, or to ensure performance of the fungible goods, so that, as a rule, no claims based on a retention
contract and any warranty period (see also question 1.9 below). of title can be effectively substantiated in the case of a construc-
tion contract. The background is as follows: if a movable object
becomes so connected to a property that it becomes an essen-
performance bonds (provided by banks and others) to tial part of that property (a fixture), the ownership of the prop-
guarantee the contractor’s performance? Are there any erty also extends to the (once movable) object (§ 946 BGB).
restrictions on the nature of such bonds? Are there any If objects are erected on a plot of land only for a temporary
grounds on which a call on such bonds may be restrained purpose, they are still considered movable and the enforcement
(e.g. by interim injunction); and, if so, how often is such of a claim of retention of title is still possible. It must be deter-
relief generally granted in your jurisdiction? Would such mined on a case-by-case basis whether such a fungible object
bonds typically provide for payment on demand (without retains its characteristic as such or is to be seen as a fixture.

In the German construction industry, both performance and
warranty bonds are very common. Under the German General
Terms and Conditions Act (“GTCA”), the maximum permis- supervised on behalf of the employer by a third party
sible amount of a performance bond is 10% of the contract price; (e.g. an engineer)? Does any such third party have a
for a warranty bond, the maximum is 5% of the final invoice. duty to act impartially between the contractor and the
Additionally, security can be provided through monies retained employer? If so, what is the nature of such duty (e.g. is
by the owner, of interim payments or of the final payment. The it absolute or qualified)? What (if any) recourse does a
contractor generally has the right to have this retention money party to a construction contract have in the event that
returned to him by providing another form of security, usually the third party breaches such duty?
in the form of a bank guarantee. Bank guarantees in Germany
are usually not issued on first (written) demand, as German The commissioning of construction/site supervision services is
courts have deemed such bonds to be impermissible under the quite common in Germany, for which there are relevant require-
GTCA. An exception exists for advance payment guarantees. ments under German law. In general, a distinction is made
Conversely, the contractor may also have his claims on the between: (1) site supervision based on the service description of
building contract secured through a security mortgage on the service phase 8 of HOAI (see question 1.3 above), which moni-
building plot (see § 650e BGB) or through a so-called building tors the execution of the works in accordance with the building
craftsman’s guarantee (see § 650f BGB). In the case of the permit, the execution designs and the specifications, as well as
latter, payment is only to be made if the owner acknowledges with the generally accepted rules of technology and relevant
the contractor’s claim for remuneration or has been ordered to regulations; (2) artistic site supervision, which monitors the
pay such amounts in the form of an enforceable judgment. implementation and conformity with the design; and (3) public-
sector site management or specialist construction supervision,
1.10 Is it permissible/common for there to be company
with corresponding obligations on the responsible authori-
guarantees provided to guarantee the performance of ties for the supervision of the public-law requirements in rela-
subsidiary companies? Are there any restrictions on the tion to a given construction project, which are defined in more
nature of such guarantees? detail, inter alia, in the 16 state building codes of the individual
federal states in Germany. The construction supervisor, unlike
Company guarantees are permissible and are also provided a publicly appointed expert, primarily represents the interests of
by some large construction groups, but are rather rare in the the party that commissioned it. Of course, it is bound by the
German construction industry as a whole. The same require- law. From a technical point of view, the specifications of the
ments apply to company guarantees as described in question recognised rules of technology must be observed unless other-
1.9 above. Otherwise, the parties may very rarely also agree on wise agreed. If the construction supervisor culpably violates any
so-called letters of comfort (“Patronatserklärungen”), under which contractual obligations – in particular, if defects in the work,
the parent company (the “Patron”) guarantees the obligations which should have been detected, are not detected – then claims
of the subsidiary in the event of non-payment. These letters are for damages against the construction supervisor may, of course,
not regulated by German law. In case of doubt, the obligation arise. This is by no means an exception; rather, it is the subject
to pay under the contract must be determined by interpreting its of many court decisions and proceedings in Germany.
terms (see Sections 133 and 157 BGB). In general, a distinction
is made between soft letters of comfort (goodwill declarations)
and hard letters of comfort (unrestricted indemnification of the
obligated subsidiary in its internal and/or even external relation-
ship with the creditor).

52 Germany
2.2 Are employers free to provide in the contract that days of delay, it must be stated as a fixed amount per day, with a
they will pay the contractor when they, the employer, maximum amount (i.e. 0.1% of the contract price per day up to a
have themselves been paid; i.e. can the employer include maximum of 5% of the contract price).
clause?
32 Common Issues on Construction
Contracts
German law recognises a kind of “pay when paid” rule in § 641
(2) BGB, but this is primarily intended to protect the contractor
and not the owner. According to § 641 para. 2 BGB, the remu-
neration of a sub-contractor becomes due once the contractor right?
has received his remuneration from a third party (the owner) or
if the work has been accepted by the third party. The contractor
cannot then object that the work of the sub-contractor is not In the case of construction contracts based on the statutory provi-
ready for acceptance. sions governing works contracts of the BGB, as well as on the
Irrespective of the above, payment for services is typically VOB/B, the owner is permitted to instruct the contractor to make
only based on the respective contractual relationships between changes to the agreed scope of work and/or to make changes that
the owner and the contractor (or between the contractor and are necessary to achieve the agreed scope of work (additionally
its sub-contractors). In the case of a contract for works, the required services) (see § 650b BGB or §§ 1 paras 3 and 4 VOB/B).
payment is due when acceptance has been declared by the owner Both BGB and VOB/B contracts differ fundamentally with
and the final invoice has been issued by the contractor. The ques- respect to the particulars concerning the agreement or instruc-
tion of whether performance is ready for acceptance is gener- tion of variations and establishing the price for such changes.
ally assessed purely within the respective contractual relation- The right to instruct changes is limited to the reasonableness of
ship and is not dependent on any contractual relationships with the change or variation to the contractor; in particular, whether
third parties. Therefore, an agreement is not permitted under the contractor is technically and/or operationally equipped to
the GTCA, where payment to the sub-contractor is dependent carry out the changed service.
on the receipt by the contractor of the owner’s payment, if and to
the extent that the sub-contractor’s work is ready for acceptance. 3.2 Can work be omitted from the contract? If it is
paid by the contractor to the employer in the event of In general, only the owner has the right to omit services from
particular breaches, e.g. liquidated damages for late the agreed scope of the contract. From a legal point of view,
completion? If such arrangements are permitted, are this represents a partial termination of the contract (see § 648
there any restrictions on what can be agreed? E.g. does BGB or § 8 para. 1 VOB/B). If the owner makes such an omis-
sion, the contractor is entitled to demand the agreed remunera-
tion, less any savings as a result of the omission or such savings
likely to be suffered by the employer? Will the courts as would have been realised but for his wilful refusal to repur-
in your jurisdiction ever look to revise an agreed rate of pose his labour elsewhere.
liquidated damages; and, if so, in what circumstances? The contractor, on the other hand, has no right of his own to
reduce the scope of his performance under the contract. If the
In Germany, there are two means of ensuring that the contrac- contractor fails to perform services owed under the contract,
tual deadlines are kept; namely, contractual penalties and liqui- this will lead to a defect in the work, or will constitute a breach
dated damages clauses. Contractual penalties (“Vertragsstrafen”) of contract. If the conditions of the VOB/B have been agreed,
are regulated in §§ 339 to 345 BGB. The ability to claim contrac- the owner may terminate the contract prior to acceptance if the
tual penalties is independent of whether actual damages have contractor does not remedy the defect (i.e. perform) within a
been incurred, and generally serves two purposes. On the one reasonable period of time. The owner may then remedy the
hand, it is intended to exert pressure on the contractor to fulfil defect himself or have it remedied by a third party and claim
his main obligation (a leverage function). On the other hand, it is any additional costs/damages from the contractor for breach of
intended to cover any damages which may have been incurred as contract. In the case of a BGB construction contract, the rights
a result of the delay (a compensatory function). Since it does not in respect of defects shall, in principle, only exist after accept-
presuppose any damage, it is particularly suitable for cases where ance of the services. Otherwise, the owner may seek substitute
it is difficult or impossible to determine the amount of damage. performance or demand payment for the removal of the defect
Liquidated damages clauses (“Pauschalierter Schadensersatz”) are in advance.
seen as a pre-estimate of damage likely to be incurred upon the
occurrence of the event anticipated in the contract. Since it is 3.3 Are there terms which will/can be implied into
based on an existing claim for compensation, it merely reverses a construction contract (e.g. a fitness for purpose
the burden of proof with regard to its amount. If the breaching obligation, or duty to act in good faith)?
party believes that the actual damages incurred constitute less
damage than those recovered under the liquidated damages In Germany, the principles of freedom of contract and private
clause, he must prove this. For both contractual penalties and autonomy apply. The parties are free to determine the terms of
lump-sum damages, the law and case law impose a large number their contracts and to deviate from the law, as long as all manda-
of requirements for the clause to be effective, which require an tory provisions are adhered to. Further limits to these principles
in-depth analysis on a case-by-case basis. In general, however, are the prohibitions of immorality and usury, and the general
neither may be unreasonably high. Particularly with regard principle of “good faith”. If contracts or contractual provi-
to delay damages, if the amount of the claim is determined by sions are drafted to be used on more than one occasion (this

will be presumed in the case of two identical contracts/contrac- 3.6 Which party usually bears the risk of unforeseen
tual provisions), the special protective provisions of the GTCA ground conditions under construction contracts in your
(see §§ 305 et seq. BGB) apply, not only to business-to-consumer jurisdiction?
(“B2C”) but also, with some limitations (see §§ 308 and 309
BGB), to business-to-business (“B2B”) transactions. Unforeseeable ground conditions generally fall within the owner’s
Regarding the “fitness for purpose” obligation, this is a ques- sphere of responsibility. However, through individually negotiated
tion of the work being free of material defects and is regulated agreements with the contractor (not in general terms and condi-
by law. According to § 633 para. 2 BGB, the work is free of tions), it is possible to transfer these risks to the contractor. The
material defects if it has the agreed quality. If the quality has burden of proof that an individually negotiated agreement exists
not been agreed, the work is free of material defects if: (1) it is lies with the party who seeks to rely on it; in this case, the owner.
suitable for its intended use under the contract; otherwise (2)
it must be suitable for ordinary use and have a quality which is
customary for works of the same kind and which the owner can 3.7 Which party usually bears the risk of a change
expect according to the nature of the work. in law affecting the completion of the works under
The duty to act in “good faith” is enshrined in § 242 BGB
(“Treue und Glauben”). This duty arises in the German construc-
tion context in particular through the “duty to cooperate”. The party who bears the risk of a change in law is always deter-
Since construction requires a long and trustworthy partnership mined on case-by-case basis; for example, the contractor gener-
between the parties, they should, if possible, strive for amicable ally bears the risk of changes in the law because, under German
solutions and not rely on (alleged) legal/contractual remedies; in law, he owes the owner a work that is fit for purpose. If, due to a
particular, the refusal of performance or payment. change in the law, the performance must be executed differently
than originally planned, the contractor may have a claim against
the owner for additional remuneration due to the changed
execution of the works. In this case, the owner would bear the
or risk of his employer, is the contractor entitled to: (a) risk in relation to the additional costs. It is also permissible to
an extension of time; and/or (b) the costs arising from address the risk of changes in law contractually.
Whether a contractor may be entitled to an extension of in relation to the design and operation of the property?
time and/or additional costs due to concurrent employer and
contractor delays and/or disruptions requires a case-by-case The author is the person who is individually responsible for the
assessment and can therefore only be answered in very general creation of a work. In construction projects, this is usually the
terms. In the case of the BGB and VOB/B contracts, the architect. The copyright created by the author through his/
contractor is entitled to an extension of time in the event of a her creation is an absolute right which cannot be transferred (cf.
delay caused by an event within the owner’s responsibility. In Section 29 (1) of the Copyright Law – “UrhG”). However, it is
the case of concurrent delays or disruptions running parallel to possible to transfer rights of use to third parties through various
each other, the contractor is generally only entitled to an exten- contractual arrangements (e.g. as an exclusive or limited right,
sion of time; in such a case, however, he can only claim damages unlimited or time-limited right, etc.) in relation to the work. For
for the period of time during which the disruption was caused a copyright to come into existence at all, the work must contain
by or within the responsibility the owner and the contractor a minimum level of creative effort and personal character. This
himself was capable of performing. is usually the case with architectural designs of an exceptional
nature, but not necessarily for buildings which are more func-
3.5 Is there a time limit beyond which the parties to tional in nature.
3.9 Is the contractor ever entitled to suspend works?
Both BGB and VOB/B construction contracts stipulate a large

The statutory limitations period under German law for contrac-
number of instances in which the contractor may permissibly
tual claims is three years from the end of the year in which the
suspend his performance. German law generally differenti-
right to claim arose and the injured party knew, or should have
ates between temporary and permanent suspension of services.
known, of that right. For example, a contractor’s claim for
A temporary (permissible) suspension of performance occurs
remuneration shall become statute-barred three years from the
when the contractor is hindered in the execution of his perfor-
end of the year of acceptance and issuance of the final invoice.
mance for reasons attributable to the owner (see § 6 VOB/B); for
Furthermore, the owner can assert claims for defects up to
example, where the owner fails to provide the contractor with
five years after acceptance in the case of a BGB building and
the necessary design for the execution of the works. The same
architect contract, and up to four years after acceptance in the
applies in the case of force majeure or other unavoidable circum-
case of a VOB/B contract. Longer or shorter periods are permis-
stances. The contractor may also be entitled to suspend perfor-
sible by agreement, whereby the GTCA prescribes limits. In
mance in the event of non-payment by the owner. However,
determining whether an agreed modification of the limitations
the contractor is generally obliged to undertake all reasonable
period is effective, case law focuses on whether there is a reason-
measures to continue performance despite the hindrance (e.g. by
able factual basis for the change. For example, an extension of
changing the construction process).
warranty claims to 10 years due to leaks in parts of buildings
caused by pressurised water (“weiße Wanne”) has been recognised.

54 Germany
A permanent suspension of performance is deemed to be applicable, taking into account having to resume performance
permissible if the performance of the services becomes legally during a less favourable time of year. As a rule, the contractor
or factually impossible (cf. § 275 BGB), e.g. if a building permit is is not entitled to additional costs or compensation for damages,
irrevocably denied. In this case the contractor will be “released” since force majeure does not fall within the owner’s sphere of risk.
from his contractual obligations. For suspension of perfor- A contract becoming uneconomical does not constitute force
mance by the contractor to be permissible, it is always a prereq- majeure under German law. For this purpose, German law
uisite that the circumstances giving rise to the suspension are provides for the doctrine of frustration of purpose (cf. § 313 BGB).
not attributable to him or to risks which are to be borne by him. If the circumstances which formed the basis of the contract
changed so significantly after the conclusion of the contract that
the parties would not have concluded the contract or would have
usually entitle a party to terminate the contract? Are concluded it under different terms had they foreseen this change
there any legal requirements as to how the terminating in circumstances, an adjustment or rescission of the contract can
party’s grounds for termination must be set out (e.g. in a be demanded. Proving frustration is a high bar, and the party
termination notice)? seeking to invoke frustration must show that performance of the
contract in its current form is patently unreasonable.
Under the BGB law on construction contracts, both parties
have the right to extraordinary termination for good cause (see § 3.13 Are parties, who are not parties to the contract,
648a BGB). In addition, the owner is entitled to ordinary (free) entitled to claim the benefit of any contractual right
termination of the construction contract (cf. § 648 BGB, Nos which is made for their benefit? E.g. is the second or
3.2 and 3.11). Furthermore, § 643 BGB provides for termina- subsequent owner of a building able to claim against
tion by the contractor in the event of failure to cooperate by the the contractor pursuant to the original construction
contracts in relation to defects in the building?
owner. If the VOB/B has been agreed, the parties are entitled
to further/modified reasons for termination in §§ 8 and 9 (e.g.
in the event of insolvency). The party seeking to terminate the Rights and obligations arising from a contract generally only
contract bears the burden of proof that the conditions for termi- exist between the respective contracting parties. Third parties
nation have been met (e.g. prior warning, if necessary). In the may only assert rights and/or incur obligations arising from a
case of termination, especially for good cause, the reasons for third-party contract if such a contract is agreed in their favour
termination should be stated in detail. It is not recommended to or if the respective claims arising from the contract have been
“put off” providing the grounds for termination, even though assigned to third parties (insofar as there is no prohibition of
this may be permissible in individual cases. Under the VOB/B, assignment). The assignment of rights vis-à-vis the building
notices of termination must be made in writing (cf. Sections 8 contractor is common practice in the sale of real estate. It is also
and 9 VOB/B); otherwise, although not required, it is recom- possible, unless contractually excluded, to re-assign these rights
mended for the purposes of proof. to additional third parties.
3.11 Do construction contracts in your jurisdiction 3.14 On construction and engineering projects in
commonly provide that the employer can terminate at your jurisdiction, how common is the use of direct
any time and for any reason? If so, would an employer agreements or collateral warranties (i.e. agreements
exercising that right need to pay the contractor’s profit between the contractor and parties other than the
on the part of the works that remains unperformed as at employer with an interest in the project, e.g. funders,
termination? other stakeholders, and forward purchasers)?
According to § 648 BGB, the owner may terminate the contract Direct agreements or “collateral warranties” between the
at any time and for any reason, or for no reason, until the works contractor and the above-mentioned third parties are rather
have been completed. If the owner terminates the contract, unusual in Germany. In construction projects, the contractor
the contractor is entitled to demand the agreed remuneration, is usually only in privity with the owner, his subcontractors and
less any savings as a result of the termination or such savings as suppliers. The contractor’s bank is usually only involved as a
would have been realised but for his wilful refusal to repurpose guarantor for the provision of collateral guarantees for contract
his labour elsewhere. It is generally presumed that the contractor performance and liability for defects. Financing of the construc-
is then entitled to 5% of the agreed remuneration for the part of tion project is usually provided by the owner.
the work not yet performed. The latter presumption is rebuttable,
so that a greater claim for remuneration may also be justified. 3.15 Can one party (P1) to a construction contract, who
3.12 Is the concept of force majeure or frustration known due to P2 the sums P2 owes to P1? Are there any limits
in your jurisdiction? What remedy does this give the on the rights of set-off?
affected party? Is it usual/possible to argue successfully
that a contract which has become uneconomic is A prerequisite for an effective set-off under German law is the
grounds for a claim for force majeure? existence of so-called set-off conditions. These exist where (1)
the claims are reciprocal (the debtor of one claim must also be
VOB/B contracts address force majeure specifically in § 6; in BGB the creditor of the other claim), (2) the claims are similar (e.g. a
construction contracts, it is regulated through the doctrine of monetary claim cannot be set off against a claim for the return of
impossibility in § 275. In general, performance is excused for an object), (3) the principal claim is capable of being satisfied, and
the duration of the disruption caused by the force majeure event. (4) the counterclaim is due. The set-off shall be made through
The contractor may further be entitled to an extension of time. a declaration of intent to set off. Set-offs are not permitted in
The extension of time is calculated according to the duration a BGB construction contract (e.g. § 393 BGB). Set-offs can be
of the hindrance plus an allowance for resuming work and, if excluded or limited by contract; however, under the GTCA, this

is only permissible to the extent that recognised or legally estab- in the same way as a building contractor according to the statu-
lished claims are still allowed to be set off. tory provisions for works contracts; such liability is unlimited in
scope and amount. A separate express warranty is therefore not
required. However, it is not unusual for guarantees concerning
care to each other either in contract or under any other a maximum construction cost, which may lead to additional
legal doctrine? If the duty of care is extra-contractual, liability of the architect in the event of (culpable) non-compli-
can such duty exist concurrently with any contractual ance, to be included in an architect’s contract.
There are a number of duties and secondary obligations in jurisdiction? If so, what is the nature of such liability and
German law with respect to construction contracts. In general, what is the scope of its application?
a duty is an action that cannot be enforced in its own right, but
which is in one’s own interest to be taken in order to avoid legal “Decennial liability” does not exist in this form in German law.
disadvantages or consequences. Secondary obligations include However, as explained in question 3.5 above, it is permissible by
duties of care, custody, assistance or consideration (cf. § 241 (2) agreement to agree longer or shorter limitation periods for claims
BGB), the violation of which may give rise to claims for damages for defects. For example, the extension of the warranty claims
in individual cases. Perhaps the most important obligation in of the owner to 10 years due to leakage of parts of the building
this respect in German building law is the duty of cooperation due to pressurised water (“weiße Wanne”) has been recognised by
under the building contract (see question 3.3 above), which is the courts.
intended to achieve the amicable settlement of disputes and
conflicts during construction. 42 Dispute Resolution
3.17 Where the terms of a construction contract are 4.1 How are construction disputes generally resolved?
The vast majority of construction-related disputes in Germany,
particularly those concerning payment for variations or the
Construction contracts usually contain provisions for dealing remedying of defects, are settled out of court by agreement of
with contradictions or ambiguities with regard to the works to the parties. If such an agreement cannot be reached, the parties
be performed (cf. § 1 para. 2 VOB/B) and, in the case of non-re- generally bring their dispute before ordinary courts.
solvable contradictions, the owner has the right to determine the Particularly with regard to disputes concerning defects, there
performance at his own discretion (cf. § 315 BGB). In the absence is a special procedure for the inclusion of evidence presented
of contractual provisions, courts will attempt to determine the by an independent judicial expert in Germany, the so-called
intent of the parties by supplementary interpretation of the independent evidence procedure (“Selbständiges Beweisverfahren”),
contract, whereby the construction contract is to be considered which is often less complex and expensive for the claimant than
as a whole, including annexes and all other contractual elements. a lawsuit. In most cases, the parties come to an agreement after
If the ambiguity or contradiction is still not resolved, the legal the presentation of the independent expert’s report, so this is an
rules of interpretation are used. In the case of general terms and effective way of avoiding a long and expensive lawsuit. In the
conditions, the doctrine of contra proferentem applies, where the case of large construction projects, the parties tend to agree in
ambiguity will be resolved against the party responsible for the the construction contract to have disputes settled by arbitration.
ambiguity (usually the drafter). The solicitation of an arbitrator’s expert opinions, comparable
to the above-mentioned independent evidence procedure, is also
3.18 Are there any terms which, if included in a practised in Germany.
All contractual provisions that violate mandatory law in Germany jurisdiction (whether statutory or otherwise) or any other
are invalid. In addition, contractual terms which do not relate forms of interim dispute resolution (e.g. a dispute review
to mandatory laws, but which interfere with and alter the core board)? If so, please describe the general procedures.
area of a statutory provision in such a way that they are incom-
patible with the intentions of the legislature, may also be held In Germany, it is permissible but not common for the parties to
invalid. The key determining factors for the court’s decision are: contractually agree to have their disputes heard by an adjudicator.
whether the contractual provision in question has been individu- Otherwise, preliminary injunctions can be sought before German
ally negotiated (in which case a more far-reaching deviation from courts. Particularly with regard to disputes concerning the
the law is possible); whether such provisions are to be regarded owner’s instructions and remuneration for variations in construc-
as general terms and conditions; and, in the case of general terms tion projects, German construction contract law provides for an
and conditions, whether they were made in the context of a B2B easing of the burden of justifying the use of injunctive relief.
or B2C transaction.
3.19 Where the construction contract involves an element commonly have arbitration clauses? If so, please
of design and/or the contract is one for design only, are the explain how, in general terms, arbitration works in your
designer’s obligations absolute or are there limits on the jurisdiction.
to give an absolute guarantee in respect of his work? Arbitration agreements are primarily, and regularly, found in
German construction contracts for major construction and
Unless the parties have agreed otherwise, the architect is liable infrastructure projects. In the case of small and medium-sized

56 Germany
construction projects, disputes are most often settled before the Jurisdiction for administrative disputes, for example the issu-
ordinary courts. The arbitration agreement generally takes the ance of permits, rests with the administrative courts (“Verwaltungs-
form of a contract between the parties. The arbitral award is gericht ”) of the individual federal states. The appeals process is
usually legally binding on the parties and can be declared enforce- similar to that outlined above. Appeals are initially made to the
able before state courts. The course of an arbitration proceeding High Administrative Court “Oberverwaltungsgericht ”), whose deci-
is described in detail in the German Code of Civil Procedure sions may be further appealed to the Federal Administrative
(introduction, appointment of arbitrators, taking of evidence and Court (“Bundesverwaltungsgericht ”) for final adjudication.
oral proceedings, arbitral award, appeal against arbitral award, On average, civil cases before the courts of first instance take
enforcement). The rules of arbitral institutions, such as the about eight to 10 months; appellate cases last another six to 10
International Chamber of Commerce, sometimes provide for a months or more, depending on the court and individual federal
slightly different procedure. In addition, the parties can, and state. Complex building disputes with comprehensive expert
often do, adapt the procedure to their own needs. opinions usually take considerably longer than other proceed-
ings. Furthermore, the evidence presented by the parties is of
decisive importance. For example, according to survey statistics,
4.4 Where the contract provides for international
arbitration, do your jurisdiction’s courts recognise and 100 additional pages of presentation lead to an extension of 2.7
enforce international arbitration awards? Please advise months in the length of the proceedings. Problems in finding
of any obstacles (legal or practical) to enforcement. a date for an oral hearing may further delay the process by 1.2
months on average.
The formal requirements for cross-border arbitral proceedings
are provided for in Germany. The legal basis and procedural rules 4.6 Where the contract provides for court proceedings
for arbitration proceedings within the European Union are largely in a foreign country, will the judgment of that foreign
uniform. Pursuant to § 1060 German Code of Civil Procedure court be upheld and enforced in your jurisdiction? If
(“ZPO”), arbitral awards issued in Germany must be declared the answer depends on the foreign country in question,
enforceable by a state court before any enforcement action can
be taken against them. Foreign arbitral awards are recognised result of international treaties or otherwise)?
and enforceable under the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (§ 1061 ZPO).
Judgments from other Member States of the European Union
are automatically recognised in Germany and can be directly
4.5 Where a contract provides for court proceedings enforced (since the abolition of the so-called enforceability
in your jurisdiction, please outline the process adopted, declaration procedure). The same applies to non-EU countries
(third countries) with which Germany has entered into multi-
a decision by the court of first jurisdiction; and (b) a or bilateral agreements on the direct enforcement or simplified
decision by the final court of appeal. recognition of foreign judgments. If no such agreements exist,
a so-called exequatur procedure must be conducted in order to
approve foreign judgments or arbitral awards for enforcement in
In civil disputes where the amount in controversy exceeds €5,000,
Germany. This is the case for third countries such as the USA,
the regional court (“Landgericht ”) has original jurisdiction; where
China and Turkey, with whom no such treaty has been agreed.
the amount in controversy is less than €5,000, original juris-
diction rests with the local courts (“Amtsgericht ”) (uncommon
for construction projects). Appellate jurisdiction lies initially
with the High Regional Court (“Oberlandesgericht ”), whose deci-
sions may be further appealed to the Federal Court of Justice
(“Bundesgerichtshof ”).

Dr. Christian Kruska is a lawyer specialised in construction and architectural law at Breyer Rechtsanwälte, which advises exclusively on
national and international construction and architectural law, public procurement law and real estate law, and is based in Stuttgart. His main
areas of practice are construction and architectural law and real estate law. He advises and represents companies, investors, project devel-
opers and many others during the entire life cycle of a project, from project development and procurement, through the drafting of contracts
and legal advice during construction. Dr. Kruska also advises on real estate transactions and commercial leasing, as well as on legal issues
concerning facility management. Since 2019, Dr. Kruska has been head of the real estate law department in the Stuttgart office of Breyer
Rechtsanwälte.
Breyer Rechtsanwälte Tel: +49 711 341 8000

Flughafenstraße 32 Fax: +49 711 341 80020
70629 Stuttgart Email: [email protected]
Germany URL: www.breyer-rechtsanwaelte.de
Erlmest E. Burns, III, J.D. is an international construction lawyer and has been an attorney at Breyer Rechtsanwälte since 2018. Based in
Stuttgart, Erl is a member of Dr. Wolfgang Breyer’s International Team and assists owners with specialised contentious and non-contentious
matters related to international construction law and private international law. Erl advises on international standard form construction
contracts (including FIDIC, NEC, JCT and AIA). An invaluable member of the International Team, one of Erl’s key strengths is his ability to advise
owners and manage complex international negotiations in both German and English. Prior to joining the firm, Erl worked for a Boston-based
law firm specialised in commercial law and small business management. In addition, he was a Massachusetts Bar Examination Teacher and
a professional language instructor (English and German), who is qualified to teach integration courses in Germany. Erl also assists Dr. Breyer
with administering the International Construction Law Master’s programme at the University of Stuttgart and the International Construction
Law Association (ICLA). In his spare time, he is a soccer enthusiast and referee in the Landesliga (WFV).
Breyer Rechtsanwälte Tel: +49 711 341 8000

Flughafenstraße 32 Fax: +49 711 341 80020
70629 Stuttgart Email: [email protected]
Germany URL: www.breyer-rechtsanwaelte.de
Breyer Rechtsanwälte is a highly specialised law firm of medium size proceedings. In addition, we look after medium and large engineering and
with offices in Stuttgart, Frankfurt, Munich, Vienna, Bucharest, Paris and architectural firms, i.a. in compensation issues. Accompanying the various
San Francisco (in cooperation). We are also a member of the Global market participants in real estate law, including for large-volume transac-
Construction and Infrastucture Legal Alliance (GcilA) in Paris. We operate tions, completes the profile of our law firm.
nationally and internationally, exclusively in the field of construction and www.breyer-rechtsanwaelte.de
architectural law, procurement law and real estate law. Our clients include
many of the largest German construction companies, project developers
and well-known international investors. In addition, we enjoy the trust of
the public sector and many small and medium-sized construction compa-
nies, who increasingly turn to us before the emergence of common prob-
lems, in the knowledge that professional support before and during the
construction phase often helps to avoid expensive and long-lasting legal

58 Chapter 8
Greece
Greece
Kourkoumelis & Partners Dimitris Kourkoumelis
12 Making Construction Projects 1.4 What (if any) legal requirements are there to
1.1 What are the standard types of construction intention to create legal relations are usually required)?
contract in your jurisdiction? Do you have: (i) any Are there any mandatory law requirements which need to
contracts which place both design and construction be reflected in a construction contract (e.g. provision for
obligations upon contractors; (ii) any forms of design- adjudication or any need for the contract to be evidenced
only contract; and/or (iii) any arrangement known as in writing)?
series of package contractors? (NB For ease of reference Construction contracts are works contracts, either under civil law
throughout the chapter, we refer to “construction or when tendered by a public authority under public law. In the
contracts” as an abbreviation for construction and case of private contracts, all agreements for works are entered into
engineering contracts.) by offer and acceptance by two parties: the Contractor that is to
provide the works and the Employer that will provide the agreed-
The most common types of contracts used in Greece for private upon remuneration (Art. 681 GCC). The parties must have the
construction work are: a) Measurement Contracts; b) Design- capacity to perform legal acts (Art. 127 GCC). The works contract
Build Contracts (DB); c) Design-Bid-Build Contracts; and d) is an informal agreement; nonetheless, the contracting parties can
Construction Management Contracts (CM). opt for a written format. The parties may include any terms they
In public works, Design-Build Contracts are very commonly see fit in the agreement, as long as they do not violate the princi-
used as it is also common practice regarding the construction ples of good faith and fair trade (Arts 178 and 281 GCC).
agreements used for concession contracts that the central govern- In the case of public contracts, the process is formal and the
ment and/or local authorities award them. freedom to contract is restricted by the nature of the contract.
According to Public Procurement Law No. 4412/2016, which
incorporates the EU Public Procurement Directives into the
Greek legal system, the most frequently used procedures for the
award of public contracts (works, supply of goods or services) are
contracts are commonly used? the open procedure (Arts 27 and 264 of the Public Procurement
Law) and the restricted procedure (Arts 28 and 265 of the Public
Procurement Law). Moreover, less commonly used procure-
No collaborative contract is per se used in Greece. Employers ment procedures are a) the competitive procedure with negoti-
would only enter into joint venture agreements with Contractors ations (Art. 29 of the Public Procurement Law), b) the negoti-
under the same entity in major concession projects. In construc- ated procedure without prior publication (Arts 32 and 269 of the
tion agreements, partnering is usually found in Contractor Public Procurement Law), c) the competitive dialogue (Arts 30
consortia, as the cooperation of multiple Contractors with the and 267 of the Public Procurement Law), d) the innovation part-
intent to construct all or a part of the project together. Each nership (Arts 31 and 268 of the Public Procurement Law), e) the
Contractor is jointly and severally liable to the Employer, but the direct award to a single entity as regards contracts of a project
Employer is not a party in such arrangements. value up to €20,000 (Arts 118 and 328 of the Public Procurement
Law), and f) a brief informal tendering procedure for contracts
1.3 What industry standard forms of construction of a project value up to €60,000 (Arts 117 and 327 of the Public
contract are most commonly used in your jurisdiction? Procurement Law). As a rule, the contracting authorities are
prohibited from treating the participating economic entities with
Industry standard forms are not used in Greece. Bespoke contracts discrimination and must contract with the economic operator that
are used in public projects, in accordance with the EU Public submits the most economically advantageous offer. Participation
Procurement Directives. However, these contracts are standard in public contracts is restricted to economic operators that meet
and are published by the contracting authorities. International certain technical and financial criteria set out by the contracting
Standard forms of contract (by the International Federation of authorities. In exceptional cases, the authorities may opt for a
Consulting Engineers (FIDIC)) are used only in specific private specific contractual entity that best serves the public interest. The
contracts (e.g. hospitality). essential elements of a procurement procedure (e.g. procurement

Kourkoumelis & Partners 59
documents, requests for participation, confirmation of interest, For construction works with private construction contracts
tenders and agreements) are mandatorily in writing and, recently, carried out in locations with a population over 10,000,
by electronic means. with a surface area over 1,000 m3 and a mandatory licence
to execute, the Contractor or Sub-Contractors are respon-
sible for keeping an official safety measures diary, that
is a concept of what is known as a “letter of intent”, in is kept within the construction grounds (Art. 8 of Law
which an employer can give either a legally binding or No. 1396/1983). In public construction contracts, the
non-legally binding indication of willingness either to economic operator is obligated to keep a constructions log,
enter into a contract later or to commit itself to meet which includes the labour hours, the materials and heavy
certain costs to be incurred by the contractor whether or equipment used throughout the day, the work-site injuries,
not a full contract is ever concluded. the weather conditions and the Sub-Contractor informa-
tion (Art. 146 of the Public Procurement Law).
The “letter of intent” is a concept recognised by Greek law, which
indeed outlines all of the important points of the contract. 1.8 Is the employer legally permitted to retain part of
Although indicative of the interest of a party to the contract, it the purchase price for the works as a retention to be
is not legally binding. It is used to describe and may thus prove released either in whole or in part when: (a) the works are
the key points of a negotiation or may be used as an invitation to substantially complete; and/or (b) any agreed defects
the other party to submit an offer. liability period is complete?
1.6 Are there any statutory or standard types Both in private and public contracts, the Employer may retain
of insurance which it would be commonplace or part of the purchase price for the works as a retention. The
compulsory to have in place when carrying out Employer usually retains the amount of the letter of guarantee
construction work? For example, is there employer’s during the period of guarantee between the temporary and the
liability insurance for contractors in respect of death final acceptance of the project, and releases it after its final
and personal injury, or is there a requirement for the acceptance.

In private contracts, insurance is not obligatory by law.
Nonetheless, the parties might agree to it, in order to mitigate guarantee the contractor’s performance? Are there any
the risk taken by the Contractor, and it may be for the works, restrictions on the nature of such bonds? Are there any
site, employees, materials, etc. grounds on which a call on such bonds may be restrained
In public contracts, according to Art. 144 of the Public (e.g. by interim injunction); and, if so, how often is such
Procurement Law, the designer, the Contractor and the technical relief generally granted in your jurisdiction? Would such
consultant are obliged to insure the design, the construction of bonds typically provide for payment on demand (without
the project and the technical consultancy services, respectively, pre-condition) or only upon default of the contractor?
against any risk, including cases of force majeure. Until the adop-
tion of the decision of the Minister of Infrastructure, Transport Performance bonds are standard practice in construction agree-
and Networks on the issues of insurance, projects whose budget, ments. These bonds might be on demand or provide for payment
excluding VAT, exceeds the amount of €500,000 are obligato- upon default of the Contractor. Both options are available but
rily insured. usually bonds are on demand. However, in case of calling the
bonds without real cause, the courts may restrain the action and
order an injunction which is not uncommon.
construction contracts in terms of: (a) labour (i.e. the According to the provisions in Art. 72 of the Public
legal status of those working on site as employees or Procurement Law, the contracting authorities require the partic-
as self-employed sub-contractors); (b) tax (payment of ipating economic entities to provide:
income tax of employees); and/or (c) health and safety? a) A bid bond, the amount of which may not exceed 2% of
the estimated value of the contract not including options
The following statutory requirements apply: rights and extension of the contract, excluding VAT. The
a) The Employer has the same legal obligations towards bid bond must be valid for at least 30 days after the expi-
building workers as the Contractor regarding payment and ration of the term of validity of the tender as specified in
social security contributions. A signed employment contract the contract documents. Before the end of the tender, the
is obligatory for all individuals employed for the project. contracting authority may ask the tenderer to extend the
b) The income taxes of the employed individuals are not the term of validity of the tender and of the bid bond. The bid
responsibility of the Contractor or the Employer. bond is returned to the Contractor upon presentation of
c) All businesses located in Greece are obliged under Greek the good performance guarantee.
Law No. 3850/2010, applicable to projects in general, to hire b) A good performance guarantee for a project value over
a technical security specialist. If at least 50 employees work €20,000, the amount of which is set at 5% of the value of
for them, they also have to hire an occupational physician. the contract, excluding VAT, and is deposited before or at
All necessary measures need to be taken so that health and the signing of the contract. A good performance guar-
safety rules are applied at the workplace. These measures antee covers in full the implementation of all the contrac-
need to be announced to both the employees’ representa- tual terms and any claim by the contracting authority or
tives and the Labour Inspectorate. The Employer is respon- the Employer against the Contractor and are released on
sible for keeping a registry of all work-related accidents, of final acceptance of the works (i.e. following the lapse of
which the Labour Inspectorate is to be notified. the guarantee period commencing with the provisional
acceptance of the works).

60 Greece
c) A good performance guarantee of the framework agree- Employer’s agents, the Supervising Authority according to Art.
ment, the amount of which is set at 0.5% of the value of the 136 of the Public Procurement Law. Supervision is not impar-
framework agreement, excluding VAT. tial but represents the Employer’s rights, acting on his behalf
d) An advance payment bond, in case of an advance payment, while performing contract management duties. Supervision
for an amount equal to the advance payment received. The includes measurement costing and quality control of the project.
advance payment and the advance payment bond cannot Further, Art. 128 of the Public Procurement Law refers to the
be used for expenses not related to the contract. possibility of outsourcing of services by experts for the design
If provided in the contract documents, contracting authori- and execution of major projects.
ties may require tenderers to provide a good functioning guar- In major private construction projects, the supervision is gener-
antee to remedy the defects that arise or the damage caused by ally conferred on independent third parties, recruited directly by
malfunctioning of the works or goods during the period of the the Employer. These engineers undertake tasks such as moni-
good functioning guarantee. The amount of the guarantee is toring the entire process which has to be in line with the contrac-
stipulated in the contract documents at a specified amount. tual terms and technical requirements and comply with the legis-
These guarantees are issued by credit or financial institu- lation. Such engineers may act to some extent impartially when
tions or insurance undertakings legally operating in the Member acting as first-level decision-makers on Contractors’ claims.
States of the European Union or the European Economic Area The concept of an “Engineer” as described by FIDIC does not
or in the GPA Member States and have the right to, in accord- exist in Greek law. However, in large-scale concession contracts,
ance with the applicable provisions. They may also be issued by supervision might be essential.
the ETAA, TSMEDE or be provided with a note of deposit with
the Consignment Deposits and Loans Fund. Moreover, there
are specific provisions for guarantees in public works contracts they will pay the contractor when they, the employer,
in Art. 72 par. 6 of the Public Procurement Law. have themselves been paid; i.e. can the employer include
clause?
guarantees provided to guarantee the performance of
subsidiary companies? Are there any restrictions on the “Pay when paid” clauses are permitted under Greek law.
nature of such guarantees? However, these clauses should be reasonable and should not
violate the principles of good faith and fair practice; otherwise,
The concept of company guarantees is used in Greece to bolster they cannot be enforced.
the financial credibility of their subsidiaries and to secure the
performance of that party’s obligations under the contract. 2.3 Are the parties free to agree in advance a fixed
There are no restrictions to them. They create joint liability with sum (known as liquidated damages) which will be
the parent company and may even be provided in bonds. 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
1.11 Is it possible and/or usual for contractors to have there any restrictions on what can be agreed? E.g. does
retention of title rights in relation to goods and supplies the sum to be paid have to be a genuine pre-estimate
used in the works? Is it permissible for contractors to claim of loss, or can the contractor be bound to pay a sum
that, until they have been paid, they retain title and the right which is wholly unrelated to the amount of financial loss
to remove goods and materials supplied from the site? likely to be suffered by the employer? Will the courts
in your jurisdiction ever look to revise an agreed rate of
A “retention of title” clause gives permission to retain ownership over liquidated damages; and, if so, in what circumstances?
goods and materials supplied, until such time as certain conditions
are met, usually full payment, thus providing a form of security Liquidated damages for a delay to completion, although a prin-
against the Employer’s default or insolvency. Further, after the ciple of common law, is recognised under Greek law in the sense
completion of the project the Contractor may retain, as legal collat- of the penalty clause, where the liable party must pay to the other
eral, the personal property of the Employer that they have built or party a particular and reasonable amount for delay (Arts 404–407
repaired and that is within their possession (Αrt. 695 GCC). GCC). Penalty clauses should be seen as flat-rate remuneration
In the case of public contracts, the Contractor may usually in the sense that the parties agree in advance that a fixed sum
request for adequate compensation, via a notice of default, that corresponds approximately to the damage will be paid by the
if they have not yet received payment (Art. 137 of the Public Contractor to the Employer in the event of particular breaches,
Procurement Law) and it is not common practice that the goods such as late completion, without requiring proof of damage.
and supplies are retained. The works contract, as stated above, is based on the freedom
to contract and therefore the parties hold the right to agree
22 Supervising Construction Contracts to any terms they see fit, as long as these provisions do not
violate or oppose the principles of good faith and fair practice.
2.1 Is it common for construction contracts to be Liquidated damages, although a principle of common law, can
supervised on behalf of the employer by a third party be agreed under the freedom to contract.
(e.g. an engineer)? Does any such third party have a If the Employer can prove that the loss he suffered from a
duty to act impartially between the contractor and the delay to completion exceeds the amount of the penalty clause,
employer? If so, what is the nature of such duty (e.g. is then he may only claim as compensation the excess amount
it absolute or qualified)? What (if any) recourse does a beyond the amount of the penalty clause (Art. 406 par. 2 and
party to a construction contract have in the event that Art. 407 par. 2 GCC), whereas when the Employer does not
prove damage or proves less damage than the amount of the
penalty clause, if he requests the clause, he will not have a claim
Public construction contracts in Greece are supervised by the for damages.

The court will take into consideration the contractual agree- the project as described, c) the completeness, quality and func-
ment of the parties but will also estimate the real economic tionality of the project is not affected, d) the amount spared
damage done to the party and alter the agreed amount, if it is is not used to pay for new works that were not in the original
rendered unjust. contract, and e) the amount spared does not exceed, cumula-
In public contracts, if the contracting authorities have not tively, 10% of the cost of the original contract value, excluding
fulfilled their contractual obligations in a timely manner, they VAT, revision of prices and unforeseen costs (Art. 156 of the
are obliged to afford the Contractor adequate compensation, Public Procurement Law).
equal to the material damages they have sustained (Art. 137 of
the Public Procurement Law). Moreover, Art. 148 of the Public
3.3 Are there terms which will/can be implied into
Procurement Law provides for specific penalty clauses in case of a construction contract (e.g. a fitness for purpose
delays due to the Contractor. obligation, or duty to act in good faith)?
32 Common Issues on Construction Terms such as the fit for purpose obligation or duty to act in
Contracts good faith are not implied terms; on the contrary, they are part
of the work under Greek law.
3.1 Is the employer entitled to vary the works to be Especially in public contracts, the principles of good faith and
performed under the contract? Is there any limit on that common practice (Arts 200 and 288 GCC) shall apply to the
right? interpretation and execution of the contract. These clauses are
applied under very strict conditions by the courts, which may
In private contracts, variation of the works can be negotiated adjust the obligations of the parties when it is required by good
by the parties in compliance with the principles of good faith faith and common practice, and, in particular, when there are
and fair trade and to the extent that each variation cannot be unforeseeable conditions that make the obligation of a party
considered a new project (quantity/price ratio) for which a new unreasonable exceeding the risk assumed.
contract has to drafted.
In public contracts, the project is executed according to the 3.4 If the contractor is delayed by two concurrent
designs. If new and unexpected works are deemed essential by events, one the fault of the contractor and one the fault
the managing authorities, then a new complementary contract or risk of his employer, is the contractor entitled to: (a)
may be signed between the parties. The new works must be an extension of time; and/or (b) the costs arising from
technically necessary to the completion of the main project. The that concurrent delay?
total amount of these new contracts, including the fee for the
completion of the designs required for additional works, shall In principle, if there is a concurrent delay the Contractor is enti-
not exceed 50% of the value of the original contract. For the tled to an extension of time for such time affected by Employer’s
determination of the unit value of the works of the new comple- fault. Regarding the costs arising from that concurrent delay,
mentary contract, the price of the original contract shall be taken this will be a matter of contributory fault in the sense that the
into consideration, and the value for these additional works is court would evaluate which part of the delay is caused by the
provided for in Art. 156 of the Public Procurement Law. Contractor.
According to Art. 156 of the Public Procurement Law, there is
a possibility for amendments to the contract without any increase
in value a) through the budget of unforeseeable expenses included
in the original contract which concerns, in particular, expenses against each other? How long is that period and when
arising from obvious omissions or errors in the measurement of does time start to run?
the design or from construction requirements which become
necessary for the functionality of the project, and b) through a
reduction of the number of works (as a result, the amount saved Generally, the contractual liability limitation period is 20 years
may be used to carry out other works of the same contract). (Art. 249 GCC), except for a five-year liability period for certain
Moreover, according to Art. 155 of the Public Procurement claims, such as the Contractor’s entitlement to payment (Art.
Law, if there is a necessity for additional unforeseen works, their 250 GCC).
construction may be approved by the managing authority. The The period of limitation for the Employer’s claims due to
project may not exceed 15% of the agreed price. latent defects is 10 years with regard to immovable construc-
tions, and six months with regard to movables (Art. 693 GCC).
(Latent defects are defects which were not apparent and which
3.2 Can work be omitted from the contract? If it is a reasonable inspection would not have revealed during the
omitted, can the employer carry out the omitted work defects liability period.)
himself or procure a third party to perform it? In public contracts, after the final acceptance of the project,
the Contractor is liable under the provisions of the Civil Code.
As it is possible for the parties to add work, it is acceptable In case of special projects, tender specifications may specify
for certain works to be omitted from the agreement, with the additional responsibilities or obligations of the Contractor after
necessary adjustment of the agreed payment. These alterations, final acceptance. Final acceptance is the starting point for the
though, cannot result in a substantial change of the nature and/ limitation period of the Contractor’s claims from the contract
or size of the contract. which have not already been time-barred, in accordance with
As already mentioned in the answer to question 3.1, works more specific provisions of the Public Procurement Law (Art.
can be omitted from the contract in order to spare expenses for 172 of the Public Procurement Law).
additional works of the same contract only if a) this is explic- Further, any of the Contractor’s rights deriving from the
itly provided for in the contract and the tender specifications, b) execution of the contract have a general four-month limitation
there is no modification of the basic construction and design of period (Art. 173 of the Public Procurement Law).

62 Greece
3.6 Which party usually bears the risk of unforeseen 3.11 Do construction contracts in your jurisdiction
ground conditions under construction contracts in your commonly provide that the employer can terminate at
jurisdiction? any time and for any reason? If so, would an employer
Generally, in standard contracts, responsibility for unforeseen termination?
ground conditions rests with the party providing the design,
usually the Employer, except for Design-Build Contracts where
the risk is carried by the Contractor. It is common for contracts to provide for termination for conven-
Under Greek law, when totally unforeseen underground ience and arrange parties’ rights and obligations thereof.
conditions change the parties’ agreement and, as a result, the According to Art. 700 GCC, the Employer has the right to termi-
parties’ obligations are untenable, the court can rule the terminate for convenience at any time until the completion of the project.
nation of the contract and the reasonable reimbursement of the In case of termination, the Contractor is entitled to the agreed
parties (Arts 288 and 388 GCC). remuneration, after the deduction of the cost the Contractor was
spared due to rescindment of the contract, or any further economic
obligations of the Contractor towards the Employer.
3.7 Which party usually bears the risk of a change In public contracts, the contracting authorities may unilater-
in law affecting the completion of the works under ally terminate a public contract solely for the reasons provided
for in Arts 133 and 338 of the Public Procurement Law.
Both in private and public construction contracts, the party who

bears the risk of a change in law that can affect the implementa-
tion schedule of the works is usually the Employer. affected party? Is it usual/possible to argue successfully
3.8 Which party usually owns the intellectual property grounds for a claim for force majeure?
Force majeure is a recognised concept in the Greek legal system.
The party who owns copyright in relation to the design and The parties may contractually agree that, in the case of force
operation of the property is the designer. The financial rights majeure, they will attempt to remedy the situation to the extent
and the rights to exploit and use the materials subject to intellec- reasonably practicable, keep the other parties regularly informed
tual property are transferred to the Employer. on the progress and resume the performance of their obligations
within a reasonable time or agree that an unforeseen event shall
lead to the termination of the contract.
3.9 Is the contractor ever entitled to suspend works? The affected party is entitled to receive adequate compensa-
tion, or even withdraw from the contract if the situation is not
The Contractor has the right to suspend works if the fulfilment rectified within the given timeframe (Art. 380 GCC).
of part of the agreement from the Employer’s side is overdue – in In public contracts, until final acceptance, the Contractor bears
particular, when payment is overdue (partial or final payment) – the risk of damage unless they are due to the fault of the managing
and is obliged to suspend the works by an order of the Employer. authority. Exceptionally, for work-related damages resulting from
force majeure, the Contractor is entitled to damages proportionate to
the loss (Art. 157 of the Public Procurement Law).
there any legal requirements as to how the terminating 3.13 Are parties, who are not parties to the contract,
party’s grounds for termination must be set out (e.g. in a entitled to claim the benefit of any contractual right
termination notice)? which is made for their benefit? E.g. is the second or
If a contracting party has not fulfilled their contractual obliga- the contractor pursuant to the original construction
tions and refuses to do so, or is unable to do so, then the other
party may terminate the agreement, if such an action is included
in the contract (Arts 686 and 383 GCC). The mere fact that a contractual agreement may benefit a third
In public contracts, the Contractor may be disqualified, and the party does not in of itself extend any rights to them. There must
contract will be terminated, if they do not fulfil their contrac- be a specific and beyond-any-doubt understanding within the
tual obligations, or do not abide by the written directions of the contract, in which the Contractor will assume certain responsibili-
Supervising Authority (Art. 160 of the Public Procurement Law). ties towards a third entity (Art. 410 GCC). It is then the third party
Additionally, the Contractor may terminate the contract and which obtains the right to claim a certain benefit for themselves.
discontinue all works a) if the project has not commenced for a
period longer than three months due to the fault of the managing 3.14 On construction and engineering projects in
authority, b) if the managing authority or Employer decides to your jurisdiction, how common is the use of direct
suspend the project for a period longer than three months, c) if agreements or collateral warranties (i.e. agreements
there is an order of no payment, or d) if the delay in works is between the contractor and parties other than the
overdue with no fault of the Contractor (Art. 161 of the Public employer with an interest in the project, e.g. funders,
Procurement Law). other stakeholders, and forward purchasers)?
Direct agreements and collateral warranties are not provided for

in Greek construction contracts.

3.15 Can one party (P1) to a construction contract, who 42 Dispute Resolution
due to P2 the sums P2 owes to P1? Are there any limits
on the rights of set-off? 4.1 How are construction disputes generally resolved?
According to the provisions of Art. 440 GCC, the set-off of a Construction disputes in Greece can be resolved through litiga-
party’s claim is valid and can be made either out of court or as part tion or through mediation or arbitration. Generally, disputes are
of a court procedure. According to Art. 152 par. 11 of the Public resolved by the courts where the Greek Civil Procedure Code
Procurement Law, the Employer may set off his liquidated claims (GCPC) is applicable. The GCPC also provides other mecha-
against the Contractor arising from the execution of other projects nisms (not commonly used) such as a) judicial settlement prior
and up to 20% of each certification of the executed project. to the mediation (Art. 209 et seq.), b) out-of-court dispute settle-
ment (Art. 214A), and c) judicial mediation (Art. 214B).
There is limited use of arbitration which can be carried out
3.16 Do parties to construction contracts owe a duty of either in accordance with Art. 867 et seq. GCPC (national arbi-
tration) or Law No. 2735/1999 and the respective transnational
can such duty exist concurrently with any contractual rules in case of international arbitration.
obligations and liabilities? There is also the alternative method of mediation under Law
No. 4512/2018 concerning mediation in civil and commercial
matters, which does not apply to judicial mediation as governed
The parties owe a duty of care in the sense that various contrac-
by the GCPC.
tual obligations are to be construed in accordance with good faith
In public contracts, pre-contractual disputes in tenders with a
and business ethics principles. Further, there may be implied
budget over €60,000 are resolved through a two-stage adminis-
obligations arising from good faith. In both circumstances, such
trative and judicial process.
obligations may be obligations of care.
Stage 1: Any interested party having a legitimate interest in
being awarded a specific construction contract which suffers a
3.17 Where the terms of a construction contract are loss caused by an act or omission of the contracting authority
ambiguous, are there rules which will settle how that in breach of European Union law or domestic law will have to
ambiguity is interpreted? file an application for review before the Authority for Review
of Pre-Judicial Petition (AEPP) challenging this act or omission
In case the terms of a construction contract are ambiguous, (Arts 346 and 360 of the Public Procurement Law). The filing
according to the provisions of the GCC, the rules on the inter- of the application for review is a pre-condition for the exercise
pretation of contracts apply. These rules stipulate that contracts of legal remedies against the acts or omissions of the contracting
shall be interpreted as required by good faith, taking into authorities.
account common practice. The tenderer may also seek for interim measures to be granted
by the AEPP.
Moreover, the AEPP may annul the executed contract if it
finds that:
a) the contracting authority has awarded the contract without
prior publication of a notice in the Official Journal of the
Terms in the contract that are opposed to the principles of European Union where necessary; or
good faith and fair trade (Arts 178, 179 and 281 GCC) would b) if the standstill obligation was not respected (Art. 368 of
be rendered void. In addition, any agreement which breaches a the Public Procurement Law).
statutory provision would be unenforceable. Stage 2: Pursuant to Art. 372 of the Public Procurement Law,
both the tenderer and the contracting authority may challenge
3.19 Where the construction contract involves an the rulings issued by the AEPP with an application for suspen-
element of design and/or the contract is one for design sion and an application for annulment before the competent
only, are the designer’s obligations absolute or are there Administrative Court of Appeal.
limits on the extent of his liability? In particular, does the Ιn case the illegal act or omission of the contracting authority
designer have to give an absolute guarantee in respect of has been annulled either by the AEPP or the court, the suffering
his work? tenderer is entitled to file an action for damages (Art. 373 of the
Public Procurement Law).
In construction contracts where there is the element of design, A similar procedure by a formal two-stage dispute resolution
designers do not necessarily have absolute obligations. Οn the mechanism is applied for disputes from the execution of public
contrary, they can limit liability only for (simple) negligence and contracts (Arts 174 and 175 of the Public Procurement Law).
usually up to the amount of their fee.
3.20 Does the concept of decennial liability apply in your jurisdiction (whether statutory or otherwise) or any other
jurisdiction? If so, what is the nature of such liability and forms of interim dispute resolution (e.g. a dispute review
what is the scope of its application? board)? If so, please describe the general procedures.
See the answer to question 3.5 above. There is no such process in the Greek legal system.

64 Greece
4.3 Do the construction contracts in your jurisdiction There is a court hearing held by the court of second instance and
commonly have arbitration clauses? If so, please the court judgment is published after some months. Finally, the
explain how, in general terms, arbitration works in your losing party can discuss the case for the last time in front of the
jurisdiction. Supreme Court of Greece and this decision is final and obliga-
tory for both parties. The entire process might take more than
In public contracts, arbitration may be agreed upon by parties and six years.
constitutes a clause within the contract (Art. 176 of the Public As already mentioned in the answer to question 4.1, according
Procurement Law), but its use is not common. These arbitration to Art. 372 of the Public Procurement Law, any interested party
clauses mainly provide for proceedings under international arbi- having a legitimate interest may challenge the rulings issued by
tration rules. the AEPP with an application for suspension and an application
for annulment before the competent Administrative Court of
Appeal of the seat of the contracting authority. The competent
4.4 Where the contract provides for international Administrative Court of Appeal decides irrevocably. Disputes
arising a) from the award of public works concession contracts
enforce international arbitration awards? Please advise
of any obstacles (legal or practical) to enforcement. implemented as Public Private Partnerships, and b) from the
award of public contracts with a budget over €15,000,000,
including VAT, are heard by the State Council. The filing of the
International arbitration awards can be enforced in Greece irre- application for annulment is not a pre-condition for the exercise
spective of the country where they have been issued. of the application for suspension. The application for suspen-
According to Arts 903, 905 and 906 GCPC, a foreign arbi- sion shall be filed with the competent court within 10 days of
tral award may be enforced in Greece. In any case, the regula- the notification or full knowledge of the decision on the prelim-
tions set forth by International Conventions and in particular inary ruling by the AEPP and shall be discussed no later than
the 1958 New York Convention (the NYC implemented by Law 30 days after its filing. Τhe time limit for the application for
Decree No. 4220/1961) prevail over the GCPC. Moreover, Art. annulment is interrupted upon the filing of the application for
36 of Law No. 2735/1999 “Law on International Arbitration”, suspension and begins with the service of the relevant deci-
which regulates international arbitration conducted in Greece, sion. The party who succeeded in suspending the execution of
provides that foreign arbitral awards are to be enforced in the contested ruling must bring before the competent court the
Greece under the NYC. application for annulment within 10 days of the service of this
Pursuant to Art. IV NYC, the party who applies for recogni- decision, otherwise the validity of the suspension will be auto-
tion and enforcement of a foreign arbitral award has to submit a matically revoked. The hearing of the application for annul-
series of documents. ment is held within three months of the filing of the application.
Recognition and enforcement of a foreign arbitral award may Τhe application for suspension is admissible if it is probable that
be refused by Greek courts in accordance with Art. V NYC. there is a breach of European Union law or national law and the
Under this article, a foreign award will not be enforced in Greece suspension is necessary in order to remedy the adverse effects of
if the dispute between the parties cannot be subject to settle- that breach or to prevent damage of the applicant. However, the
ment by arbitration under Greek law (point 2a) and if it violates application may be refused if the negative consequences of its
Greek ordre public (point 2b). Further, a foreign award will not acceptance would be more serious than the benefit of the appli-
be enforced if the arbitration agreement was invalid under its cant. The decision on the suspension is issued within 20 days
law or the law of the country in which the arbitral award was of the hearing of the application. The filing of the application
issued (point 1a), if the parties were not capable of entering into for suspension prevents the conclusion of the contract unless
an arbitration agreement (point 1a), if there is a breach of the the competent judge decides otherwise by issuing an interim
rules governing due process of the arbitration (point 1b), if the injunction.
foreign award surpasses the scope of the arbitration agreement If the application for suspension is accepted, the institution
(point 1c), if the composition of the Tribunal did not comply with which adopted the act whose enforcement is suspended may
the agreement of the parties or the applicable law (point 1d) and comply with the content of the decision and withdraw or amend
if the award is not final and conclusive (point 1e). The burden of the act. In that case, the trial of the application for annulment
proving all of the above shall rest on the defendant. is abolished. If the interested party did not file or unsuccess-
fully filed for the suspension and the contract was signed and
4.5 Where a contract provides for court proceedings executed before the application for annulment was discussed,
in your jurisdiction, please outline the process adopted, the trial of the application for annulment is abolished, unless
any rights of appeal and a general assessment of the party has a particular legitimate interest in the continuation
how long proceedings are likely to take to reduce: (a) of the proceedings. If the court annuls an act or omission of
a decision by the court of first jurisdiction; and (b) a the contracting authority after the execution of the contract, the
latter is not affected, unless the procurement procedure has been
suspended prior to the conclusion of the contract by a decision
In private contracts, cases related to the Contractor’s remunera- of the AEPP or by a decision on the application for suspension
tion are brought before the court of first instance according to the or by an interim injunction. In such a case, the party concerned
special procedure of labour disputes. The process commences shall be entitled to claim compensation as referred to in Art. 373
with the filing of a lawsuit with the court of first instance. The of the Public Procurement Law.
court then follows a process for the parties to file their petitions According to Art. 175 of the Public Procurement Law,
and necessary documents and affidavits that would better prove disputes deriving from public work contracts are brought to the
their claims. After a substantial period of time that can be up to Administrative Court of Appeal in the administrative district
two years, the court holds a hearing and then the judge publishes where the construction is taking place after the bringing of an
their final judgment over the next six months. This judgment appeal or an action. Prior to the bringing of an appeal before the
may be appealed by the losing party, within 30 days from the day administrative court, the interested party has to file a complaint
after the service of the court judgment by the opposing party. within the meaning of Art. 174 of the Public Procurement Law,

otherwise the appeal is dismissed as inadmissible. In particular, 4.6 Where the contract provides for court proceedings
for projects whose budget, excluding VAT, exceeds €500,000, in a foreign country, will the judgment of that foreign
the public hearing is held within six months at the latest. The court be upheld and enforced in your jurisdiction? If
decision shall be adopted as soon as possible. The losing party the answer depends on the foreign country in question,
may appeal their case to the State Council and the hearing is are there any foreign countries in respect of which
held when the court deems the case ready for discussion. The enforcement is more straightforward (whether as a
decision might take up to a year to be published. If the execu-
tion of the contested decision will cause damage which would
be difficult to repair, the State Council may order total or partial Under no circumstances can construction contracts provide for
suspension of the execution of the contested decision at the court proceedings in a foreign country.
request of a party.

66 Greece
Dimitris Kourkoumelis was born in Athens in 1967. Dimitris holds a Law Degree from Athens Law School, a Master’s in Law from the
University of Cambridge and a Master’s in International Relations from the Fletcher School of Law and Diplomacy. He is a highly experienced
projects, real estate and public procurement attorney. During the last 15 years, he was actively involved in advising sponsors, contractors,
consultants and the government in most of the publicly and privately financed projects in Greece including the Attiki Odos ring road, the Rion
Antirrion Bridge, the Athens International Airport, the Athens Metro, the Egnatia and PATHE Motorways, the Ionia Odos Highway, the Olympic
Projects, the Athens and Thessaloniki Concert Halls, the New Acropolis Museum and the new National Opera and National Library, as well as
in major international projects in Europe. Further, he has vast experience in energy and property projects and residential, commercial, leisure
and sports developments.
Kourkoumelis & Partners Tel: +30 210 363 3416

Solonos 92 Email: [email protected]
Athens URL: www.kourkoumelispartners.com
Greece
Kourkoumelis & Partners is an international construction and real estate

law firm based in Athens. Most of the firm’s work concerns large infra-
structure and building projects mainly in tourism, culture and sports.
The firm provides early assistance on claims management and dispute
resolution. We draft tender documents and contracts, joint venture agree-
ments, financing documents and guarantees and we ensure smooth
completion of award procedures and construction operations through
preventive involvement. Further, we assist in project permitting including
zoning, planning and environmental permitting. Outside Greece, the
firm has worked on projects in Albania, Bulgaria, Bosnia & Herzegovina,
Romania and the Middle East.
www.kourkoumelispartners.com

Chapter 9 67
India
India
Sumeet Kachwaha
Kachwaha and Partners Dharmendra Rautray
but usually the landowner provides the land and the devel-
12 Making Construction Projects oper undertakes the responsibility of obtaining the necessary
approvals and undertakes the building/financial obligations.
1.1 What are the standard types of construction
contracts which place both design and construction 1.3 What industry standard forms of construction
obligations upon contractors; (ii) any forms of design- contract are most commonly used in your jurisdiction?
only contract; and/or (iii) any arrangement known as
See the answer to question 1.1.
throughout the chapter, we refer to “construction 1.4 What (if any) legal requirements are there to
contracts” as an abbreviation for construction and create a legally binding contract (e.g. in common law
engineering contracts.) jurisdictions, offer, acceptance, consideration and
intention to create legal relations are usually required)?
The construction industry in India does not subscribe to any Are there any mandatory law requirements which need to
standard form of construction contract; however, some of the be reflected in a construction contract (e.g. provision for
commonly used forms include the suite of contracts published
in writing)?
by the International Federation of Consulting Engineers
(“FIDIC”), the Institution of Civil Engineers (“ICE”), and the
model published by the Indian Institute of Architects (“IIA”). The Indian law of contracts is codified (Indian Contract Act,
Governmental construction authorities, such as the National 1872). It is largely based on English Common Law. For any
Highways Authority of India (“NHAI”), employ their own binding contract to come into existence, there should be an
standard form contract as per their departmental requirements, agreement between two or more parties who are competent
particularly for public-private partnership projects. One standard to contract, and the parties must have entered into the agree-
FIDIC form extensively used in the Indian construction industry ment with their free consent, for a lawful consideration and a
is the Plant and Design/Build Contract. Design-only contracts lawful object. These requirements are mandated by the Act
prevalent in India are largely inspired by the FIDIC Conditions of (Section 10 thereof). As with all other contracts, construc-
Contract for Plant and Design/Build (the FIDIC Yellow Book). tion contracts must also satisfy the aforesaid requirements to
Besides the NHAI, several government departments such as the be legally enforceable. Further, rudimentary requirements of a
Public Works Department, Delhi Metro Rail Corporation, Indian valid offer, followed by an acceptance of an offer, with the inten-
Oil Corporation, National Building Construction Corporation, tion of entering into a legally enforceable agreement not void in
Central Public Works Department, etc. have their own standard law, are other essentials of a valid contract under the Act. As the
form contracts. Act provides, contracts need not be evidenced in writing, which
Management contracts are executed in the form of Engineering, similarly applies to all construction contracts.
Procurement and Construction Management Contracts. As the
name suggests, such contracts are executed between employers 1.5 In your jurisdiction please identify whether there
and contractors, wherein contractors are hired to holistically is a concept of what is known as a “letter of intent”, in
manage the completion of a construction project while overseeing which an employer can give either a legally binding or
developments regarding engineering, procurement and construc- non-legally binding indication of willingness either to
tion of a project. enter into a contract later or to commit itself to meet
not a full contract is ever concluded.
The legal position in India as regards a “Letter of Intent”
contracts are commonly used? (“LOI”) is well settled and can be understood while referring to
common law principles to the effect that an agreement to enter
into an agreement does not create any legal relation between
Collaborative contracting is common in the real estate sector in parties, nor is it legally enforceable before a court of law.
India where the landowner and real estate developer enter into A LOI merely indicates a party’s intention to enter into a
a joint development agreement. There are no settled forms contract with the other party in the future. Normally, it is an

68 India
agreement to “enter into an agreement” which is neither enforce- Abolition) Act, 1970 must be complied with by any prin-
able nor does it confer any rights upon the parties. However, cipal employer/contractor who hires 20 or more contract
some aspects of a LOI may contain binding obligations, if so labourers for an “establishment”. The said Act requires
specifically provided therein. Thus, confidentiality, exclusivity the principal employer to register its establishment in
of dealings and governing law/jurisdiction, amongst others, may accordance with the Act, whereas all such contractors must
create binding obligations. In certain circumstances, a LOI may obtain a licence from the authorised licensing authority
be construed as a letter of acceptance of the offer resulting in a specified in the Act. In order to regulate the condition
concluded contract between the parties. It largely depends on the of service of inter-state labourers, the Inter-State Migrant
intention of the parties to be drawn from the terms of the LOI, Workmen (Regulation of Employment and Conditions of
the nature of the transaction and other relevant circumstances. Service) Act, 1979 requires all contractors who employ five
If parties have acted on a LOI (as if there is a binding obligation), or more inter-state migrant workmen to register them-
it can be held as constituting a binding contract between them. selves. It aims to protect and/or provide a migrant work-
In India, a binding contract can result from conduct alone. er’s right to equal wages, displacement allowance, home
journey allowance, medical facilities, etc. The Workmen’s
Compensation Act, 1923 requires that compensation be
of insurance which it would be commonplace or paid to workers if injured in the course of employment.
compulsory to have in place when carrying out Under the Minimum Wages Act, 1948, the employer is
construction work? For example, is there employer’s required to pay the minimum wage rates as may be fixed by
liability insurance for contractors in respect of death the relevant government. Further, the Payment of Wages
and personal injury, or is there a requirement for the Act, 1936, read with the Amendment Act, 2017, ensures
contractor to have contractors’ all-risk insurance? that the employees receive wages on time and without any
unauthorised deductions.
The standard type of insurance policy opted by the employer, The Code on Wages, 2019 (“Wages Code”) passed by
contractor or a sub-contractor separately or jointly is the Parliament in August, 2019 (the provisions of which have
Contractor’s All Risk Policy (“CAR Policy”). All major construc- not yet been notified by the Central Government) seeks to
tion contract projects expressly provide for putting in place a consolidate and replace four Acts: the Payment of Wages
CAR policy during the construction stage. Federal legisla- Act, 1936; Minimum Wages Act, 1948; Payment of Bonus
tion requires any business, including construction projects, Act, 1965; and Equal Remuneration Act, 1976. It extends to
employing more than 10 people to procure registration under all establishments, employees and employers unless specif-
the Employees’ State Insurance Act, 1948 (“ESI Act”). ically exempt. The Code, inter alia, provides for a national
The ESI Act mandates every employer to provide for its work- floor rate for wages which is to be determined by the Central
er’s insurance. The said Act covers both workers employed Government after taking into account the minimum living
directly under an employer and through a contractor. The insur- standards. The Code further provides for a review of the
ance procured by an employer/contractor under the mandate of minimum wages at intervals not exceeding five years.
the ESI Act covers contingencies such as maternity leave, sick- (c) Tax: A person responsible for paying any sum to a contractor
ness, temporary or permanent physical disablement, or death for carrying out any work (including supply of labour for
owing to the hazards of employment which may lead to loss of carrying out any work) is required to, at the time of payment,
wages and earning capacity of an employee. deduct tax commonly known as Tax Deducted at Source
(“TDS”) under Section 194C of the Income Tax Act, 1961.
The Works Contract Tax is applicable to contracts for
labour, work or service. Prior to 1 July 2017, the Central
legal status of those working on site as employees or Government and State Government levied Service Tax and
as self-employed sub-contractors); (b) tax (payment of VAT, respectively, on works contracts. However, after the
income tax of employees); and/or (c) health and safety? roll-out of the Goods and Services Tax (“GST”), works
contracts (in relation to immoveable property) are treated
as supply of services and, at present, tax slabs range from
The following are some of the statutory requirements which
12% to 18%. In the first instance, tax is payable by the
must be complied with:
person supplying the services/goods. The Building and
(a) General Requirements: As stated above, all construction
Other Construction Workers Welfare Cess Act, 1996, which
contracts must satisfy the requirements of the Indian
applies to 10 or more building workers or other construc-
Contract Act, 1872 to be legally enforceable. There are no
tion work, has been enacted for the welfare of construction
statutory requirements specifically in relation to construc-
workers, including regulating the workers’ safety, health,
tion contracts.
and other service conditions. A cess of 1% is collected from
(b) Labour: All employers and contractors are required to
the employer on the cost of construction incurred.
comply with the relevant labour legislation in force in India
(d) Health and Safety: Social security legislation such as the
or in the state/city concerned. The onus of complying with
Employee’s Compensation Act, 2009, ESI Act, Maternity
such labour laws falls upon an employer or a contractor
Benefit Act, 1961, Payment of Gratuity Act, 1972, the
depending on the legislation. Labourers get their legal
Employees’ Provident Fund and Miscellaneous Provisions
recognition from the definition of the word “workman”
Act, 1952, and the Sexual Harassment at Workplace
under the Industrial Disputes Act, 1947 (Federal legis-
(Prohibition, Prevention and Redressal) Act, 2013,
lation) which entitles them to various statutory bene-
mandatorily apply to all employers and contractors hiring
fits and fair treatment at the hands of their employer/
labourers or workmen in the construction industry.
contractor. Further, the Contract Labour (Regulation and

Kachwaha and Partners 69
1.8 Is the employer legally permitted to retain part of 1.11 Is it possible and/or usual for contractors to have
the purchase price for the works as a retention to be retention of title rights in relation to goods and supplies
released either in whole or in part when: (a) the works are used in the works? Is it permissible for contractors to
substantially complete; and/or (b) any agreed defects claim that, until they have been paid, they retain title and
liability period is complete? the right to remove goods and materials supplied from
the site?
Yes. In construction contracts, provision for retaining part of
the purchase price for the given situations is fairly common. Yes, it is possible. Right to lien over goods arises from the
Parties may also agree to deposit the purchase price in an escrow contractor’s right to be duly paid for the goods supplied to an
account to ensure a level playing field for both the employer and employer. The existence of right of lien over goods, and the
the contractor. The contract may provide that the employer, scope of such right, is determined by a contractual clause to
prior to completion of the works, releases the retention money that effect. Lien over goods whose ownership passes over to an
provided the contractor furnishes an unconditional bank guar- employer on delivery to, or affixation on, a construction site may
antee equivalent to the retention money. exist if contractually provided for. However, most construction
contracts do not provide for the contractor’s title rights to the
goods and supplies made for the works.
guarantee the contractor’s performance? Are there any 22 Supervising Construction Contracts
grounds on which a call on such bonds may be restrained 2.1 Is it common for construction contracts to be
(e.g. by interim injunction); and, if so, how often is such supervised on behalf of the employer by a third party
relief generally granted in your jurisdiction? Would such (e.g. an engineer)? Does any such third party have a
bonds typically provide for payment on demand (without duty to act impartially between the contractor and the
pre-condition) or only upon default of the contractor? employer? If so, what is the nature of such duty (e.g. is
Yes, performance bonds/performance guarantees are commonly party to a construction contract have in the event that
provided for in construction contracts in India to provide secu- the third party breaches such duty?
rity against failure of a contractor to perform its contractual
obligations. Similarly, an employer may require company guar- Yes, construction contracts are commonly supervised by third
antees from parent companies against the duties and obligations parties in India who may be appointed by an employer in the role
of a subsidiary company involved in a construction contract. of either an architect or an engineer. The scope of their func-
The nature of restrictions that may apply to a performance tions and duties is contractually defined.
guarantee will depend upon the wording of the terms of guar- Whilst the engineer or architect usually has a contractual duty
antee. A performance guarantee, in nature, is a contract between to act impartially between the contractor and employer, in prac-
an employer and a guarantor, independent of the contract tice in government contracts, the engineer in particular often
between an employer and a contractor. Therefore, unless other- toes the line of the employer.
wise provided, a guarantor shall be obliged to unconditionally
honour a guarantee as and when called upon by the employer.
Normally, construction contracts require the contractor to they will pay the contractor when they, the employer,
furnish an unconditional performance bank guarantee to ensure have themselves been paid; i.e. can the employer include
timely and satisfactory performance by the contractor. The in the contract what is known as a “pay when paid”
employer normally requires the contractor to keep the perfor- clause?
mance bank guarantee valid until the defect liability period is
over or the completion certificate is issued. The beneficiary Yes. Such clauses are valid under the Indian Contract Act, 1872.
of the bank guarantee, i.e. the employer, must make a demand
for payment under the bank guarantee, should a need so arise,
before the expiry of the validity period stipulated in the bank 2.3 Are the parties free to agree in advance a fixed
guarantee. A demand made by the employer for payment after sum (known as liquidated damages) which will be
the validity period will not be honoured by the bank.
The Courts have held that in order to restrain the encashment completion? If such arrangements are permitted, are
of a bank guarantee there should be a strong prima facie case of there any restrictions on what can be agreed? E.g. does
fraud or special equities in the form of irretrievable injustice. the sum to be paid have to be a genuine pre-estimate
Thus, commitments of banks must be honoured free from inter- of loss, or can the contractor be bound to pay a sum
ference by the courts. which is wholly unrelated to the amount of financial loss
1.10 Is it permissible/common for there to be company liquidated damages; and, if so, in what circumstances?
nature of such guarantees? Yes. Stipulating a certain amount to be paid by a contractor to
its employer as liquidated damages is permissible. Such damages
are governed by Section 74 of the Indian Contract Act, 1872,
See the answer to question 1.9. which provides that if a sum is named in the contract as the

70 India
amount to be paid in case of such breach of contract, the party such terms must not offend the intended commercial purpose
complaining of breach is entitled to receive the said amount, of the contract as understood between the parties. While there
“whether or not actual loss is proved to have been caused”. is no agreed set of terms which can be implied in a construc-
Section 74 has been judicially interpreted and the following tion contract, certain obligations are understood as impliedly
principles have been laid down: binding on both the employer and the contractor. For example,
■ Only reasonable compensation can be awarded as liqui- a contractor is expected to perform its tasks while exercising a
dated damages. standard of care, and must provide such materials which are fit
■ Notwithstanding a liquidated damages clause, the factum to be used for the stipulated works.
of damage or loss caused must be proved (the burden for
which is on the claimant).
■ The court must find the liquidated damages to be a genuine events, one the fault of the contractor and one the fault
pre-estimate of the damages. or risk of his employer, is the contractor entitled to: (a)
■ The expression “whether or not loss is proved” in Section an extension of time; and/or (b) the costs arising from
74 has been interpreted to mean that if there is a possibility that concurrent delay?
to prove actual damage or loss, such proof is required.
Where, however, it is difficult or impossible to prove the The Indian position on concurrent delay is not certain. In
actual damage or loss, the liquidated damages amount situations where there are concurrent delays on the part of an
named in the contract, if it is found to be a genuine pre-es- employer and a contractor, an employer may rely upon them to
timate of the damage or loss, can be awarded. substitute an extension of time for payment of any monetary
■ The proof of loss or damage may be circumstantial and the damages to a contractor, whereas a contractor may rely upon
court does not look for arithmetical exactitude. them to defend against imposition of liquidated damages upon
■ The amount named in a contract serves as a ceiling or a itself by an employer. Therefore, in cases of concurrent delays, a
cap on the sum which can be awarded and not the amount contractor would be entitled to an extension of time and not to
which will mechanically be awarded. compensation for any loss it may have suffered due to the delays
If parties have agreed to a genuine pre-estimated sum of money (see: De Beers UK Ltd v. Atos Origin IT Services UK Ltd [2010]
as liquidated damages, then they are deemed to have excluded EWHC 3276 (TCC)). A contractor would be entitled to an
their right to claim an unascertained sum of money as damages. extension of time for the period of delay caused by the relevant
event notwithstanding the concurrent effect of the other event
32 Common Issues on Construction (see: Walter Lilly & Co Ltd v. Mackay [2012] EWHC 1773 (TCC)).
Contracts Indian courts usually refer to and rely upon English cases.
3.1 Is the employer entitled to vary the works to be 3.5 Is there a time limit beyond which the parties to
performed under the contract? Is there any limit on that a construction contract may no longer bring claims
right? against each other? How long is that period and when
Variations in the works to be performed under a construction
contract may be made by an employer or an engineer employed The Limitation Act, 1963 governs a time period for filing a
for such works. If such variations are made, a contractor is enti- court action and also a claim before the arbitral tribunal. As per
tled to seek additional payments for the same so far as such vari- the said Act, the limitation period for the purpose of initiating
ations have been duly authorised by the employer/engineer-in- a suit in relation to a breach of contract is three years from the
charge. However, such variations must not be of such a nature date on which the breach occurs or the cause of action arises.
as to substantially alter the character of the contract in question
and must be within the ability of the contractor to execute.
3.2 Can work be omitted from the contract? If it is jurisdiction?
himself or procure a third party to perform it? It is for the parties to agree in the contract as to who shall
bear the risk of unforeseen ground conditions. Construction
Yes, works may be omitted from a construction contract by contracts generally put all the risk on the contractor.
an employer or an engineer if there is an express term in the
contract permitting omission. However, such omissions must
not be made to deliberately deprive a contractor from its enti- in law affecting the completion of the works under
tled share of works. The employer cannot omit the work on construction contracts in your jurisdiction?
non-bona fide grounds (and have it carried out by someone else
without the contractor’s consent).
Most construction contracts provide for relevant stipulations for
a change in law contingency. Generally, an employer bears the
3.3 Are there terms which will/can be implied into risk arising out of a change in law, and any delays resulting out
a construction contract (e.g. a fitness for purpose of it can be condoned by granting an extension of time to the
obligation, or duty to act in good faith)? contractor. Section 64A of the Sale of Goods Act, 1930 provides
that in the event of an increase or decrease in tax or the impo-
Yes. Indian law recognises use of both express and implied sition of new tax in respect of goods after the making of any
terms in a construction contract. While express terms are easily contract for the sale or purchase of goods, in the absence of any
identifiable, implied terms must be read into a contract while stipulation as to payment of such tax, any increase would entitle
examining the intention of the contracting parties. However, the seller to add the equivalent amount of the contract price and

the buyer would be liable to pay the increased sum to the seller. 3.12 Is the concept of force majeure or frustration known
However, in case of a decrease in tax, the buyer would be enti- in your jurisdiction? What remedy does this give the
tled to deduct the equivalent amount of decreased sum from the affected party? Is it usual/possible to argue successfully
contract price and the seller would be liable to pay that sum to that a contract which has become uneconomic is
the buyer. The provision is applicable to any duty of customs or grounds for a claim for force majeure?
excise on goods and to any tax on the sale or purchase of goods.
The concept of a force majeure event is well recognised in the Indian
legal system. The doctrine of frustration of contract is imbibed
in relation to the design and operation of the property? in Section 56 of the Indian Contract Act, 1872. In accordance
therewith, a contract stands frustrated if the performance of an
agreed set of obligations becomes impossible or unlawful, either
Generally, a contract for service contains clauses so as to before or after the conclusion of a contract. Section 56 of the Act
empower an employer to claim ownership over all intellectual thus recognises force majeure (or act of God) events as a ground for
property as may be created by an employee in the course of his frustration of contracts. Frustration of a contract under Section
employment. Indian law also provides for employment as an 56 of the Act results in such a contract becoming void in law, and
exception to an author’s ownership over his intellectual prop- thus cannot be enforced. Therefore, a frustrated contract stands
erty. Therefore, in the case of construction contracts, owner- discharged and relieves the parties from performance of all
ship of intellectual property in the form of design of concerned underlying obligations. The Supreme Court in Satyabrata Ghose v.
works should vest with the employer. Mugneeram Bangur & Co., AIR 1954, SC 44, inter alia, held that an
untoward event or change of circumstance which totally upsets
3.9 Is the contractor ever entitled to suspend works? the very foundation upon which the parties have entered into
their agreement, will amount to force majeure. However, an excep-
tion to Section 56 states that if frustration was within the reason-
A contractor may suspend performance of its obligations under
able contemplation of the promisor, or if the contract is frus-
a construction contract on grounds provided for in the contract
trated due to acts attributable to the promisor, the promisee shall
in accordance with its statutory right to do so under the Indian
be entitled to compensation for any loss it suffers due to non-per-
Contract Act, 1872. Occasions when a contractor may suspend
formance of the promisor’s obligations under the contract.
performance include non-performance of the obligations or
However, Section 56 does not apply to instances of mere
considerable delay by an employer, non-payment of dues for
inconvenience, economic unfeasibility, or if performance of the
works performed, non-fulfilment of conditions upon which the
contract has become more burdensome, but without impossibility.
performance is contingent, force majeure, etc.
In a fairly recent case, the Supreme Court in Energ y Watchdog v.
CERC, (2017) 14 SCC 80, held that force majeure clauses are to be
3.10 Are there any grounds which automatically or narrowly construed. Further, where the parties have a specific
usually entitle a party to terminate the contract? Are force majeure clause in the agreement, the provisions of the Indian
there any legal requirements as to how the terminating Contract Act, 1872 would not apply.
party’s grounds for termination must be set out (e.g. in a The recent COVID-19 outbreak has seen a spate of invocation
termination notice)? of force majeure clauses and it is likely that the courts will lay path-
breaking law on the subject in due course.
The Indian Contract Act, 1872 allows a party to rescind/termi-
nate a contract in the event of breach by the other party, including
refusal to perform or disabling himself from performing entitled to claim the benefit of any contractual right
(Section 39 of the Act). Over and beyond the statutory grounds which is made for their benefit? E.g. is the second or
of breach recognised in the Act, parties may choose to provide subsequent owner of a building able to claim against
contractual stipulations recognising events which would amount the contractor pursuant to the original construction
to breach of the contract to entitle the injured party to terminate contracts in relation to defects in the building?
the contract. A statutory or common law ground of breach need
not be expressly provided in a contract; however, other instances Third parties cannot bring claims or enforce terms of a contract
of breach should be specified in the contract. against a party to a contract. This principle emanates from the
doctrine of “privity of contract”, which confers rights and obli-
3.11 Do construction contracts in your jurisdiction gations arising out of a contract only upon parties to a contract.
commonly provide that the employer can terminate at Therefore, in the landscape of construction law, a contractor
any time and for any reason? If so, would an employer cannot be subjected to claims from third parties to a construc-
exercising that right need to pay the contractor’s profit tion contract. However, third parties are entitled to a remedy
on the part of the works that remains unperformed as at under tort law for injury suffered due to negligent acts of a
termination? contract. Therefore, a contractor may be subjected to claims
under tort law for negligence.
No. Construction contracts usually specify events on the basis
of which an employer can terminate the contract. In most cases,
the contract provides for a cure period notice to be given by the your jurisdiction, how common is the use of direct
employer prior to termination. If termination is for the employ- agreements or collateral warranties (i.e. agreements
er’s convenience, the contractor is usually entitled to termination between the contractor and parties other than the
payment and compensation. If the contract has been wrong- employer with an interest in the project, e.g. funders,
fully terminated, the contractor is entitled to claim compensa- other stakeholders, and forward purchasers)?
tion. See also the answers to questions 3.10 and 3.18.
Collateral warranties or direct agreements are not usual in
construction and engineering projects in India.

72 India
3.15 Can one party (P1) to a construction contract, who 3.19 Where the construction contract involves an
owes money to the other (P2), set off against the sums element of design and/or the contract is one for design
due to P2 the sums P2 owes to P1? Are there any limits only, are the designer’s obligations absolute or are there
on the rights of set-off? limits on the extent of his liability? In particular, does the
his work?
Yes, parties in a construction contract can set off their claims
and dues against each other. This can be done either by way
of mutual negotiations and agreement, or through a proceeding As regards a designer’s contractual liability, the same shall be
before a court of law or in an arbitration proceeding. An limited to the obligations owed by the designer towards other
instance for the latter would arise where parties disagree upon parties to the construction contract, such as the employer. Due
the amount due to either party. In such cases, a cross-claim is to the application of the doctrine of privity of contract, the
filed by the party who wishes to set off its claims against the contractual liability of the designer would not extend to third
amount it owes to the other party. Such cross-claims must be parties.
for a recognised sum and must be based on a legitimate claim As for a designer’s liability in tort law, please see the response
against the other party. to question 3.13 above. Harm to third parties must have directly
arisen out of the impugned negligence towards the design in
question, and must have been reasonably foreseen as being
3.16 Do parties to construction contracts owe a duty of caused to persons who may avail of the facility designed.
Any guarantee given by a designer under a construction
can such duty exist concurrently with any contractual contract would have relevance only against potential contractual
obligations and liabilities? claims for a defect in design; however, such a guarantee would
not keep his liability under tort law at bay.
The doctrine of “duty of care” originates from tort law and
requires a person to exercise a standard of care while performing 3.20 Does the concept of decennial liability apply in your
any act which could foreseeably cause harm to others. This duty jurisdiction? If so, what is the nature of such liability and
extends to all such persons who, on a reasonable contempla- what is the scope of its application?
tion, can be expected to be affected by the acts of a person.
Therefore, the doctrine of “duty of care” applies to all construc- No, the concept of decennial liability is not recognised in India.
tion works performed by a contractor, and a liability for negli- Defect liability clauses in construction contracts broadly cover
gence may arise for any harm caused to persons who could fore- such liability of the contractor. Liability under the defect
seeably be affected by his acts. liability clause is generally for a period of six or 12 months after
completion of the project.
Any ambiguity must be attempted to be resolved by resorting
to well-recognised rules of contractual interpretation, such There are multifarious ways of resolving disputes that are recog-
as the rule of literal interpretation, harmonious construction, nised in India. These include resolving disputes by way of court
giving effect to the intention of the parties, and resorting to an litigation, arbitration, mediation, conciliation, dispute resolution
interpretation which upholds business efficacy of the contract. boards and judicial settlement. Arbitration is the most commonly
(These principles are to be applied in that order.) If the ambi- used mechanism to resolve construction contract disputes.
guity sustains on the application of the said rules, the rule of
contra proferentem may be resorted to.
3.18 Are there any terms which, if included in a forms of interim dispute resolution (e.g. a dispute review
construction contract, would be unenforceable? board)? If so, please describe the general procedures.
The following terms or clauses shall be unenforceable in a In the absence of a statutory enactment to refer a payment dispute
construction contract: to adjudication, the adjudication process is subject to the parties’
(a) clauses empowering an employer to unilaterally terminate agreement. Generally, a clause containing the adjudication
a contract without any remedy to a contractor; process would be part of the dispute resolution clause wherein
(b) unilateral and substantial alteration of the character of a parties would resolve disputes in the first instance through an
contract by adding/omitting obligations of a contractor; adjudicator named in the contract. The contract would stipu-
(c) clauses for payment of an unreasonable sum in the form of late a time period within which the contractor may refer a deci-
liquidated damages; sion of the engineer to the adjudicator. It would also stipulate
(d) clauses absolutely restricting a party from enforcing his the time limit within which the adjudicator must give his deci-
rights under or in respect of any contract; sion. If either party is aggrieved by the decision of the adjudi-
(e) clauses which limit the time within which a party may cator, it may refer the dispute to arbitration within a stipulated
enforce his rights; and time period failing which the adjudicator’s decision will be final
(f) any other clause which falls foul of the provisions of the and binding.
Indian Contract Act, 1872.

4.3 Do the construction contracts in your jurisdiction 4.5 Where a contract provides for court proceedings
commonly have arbitration clauses? If so, please in your jurisdiction, please outline the process adopted,
explain how, in general terms, arbitration works in your any rights of appeal and a general assessment of
jurisdiction. how long proceedings are likely to take to reduce: (a)
One of the widely accepted means of dispute resolution in
construction disputes is arbitration. The Arbitration and
Conciliation Act, 1996 (“Arbitration Act”) is the governing law Proceedings before a court are initiated upon the receipt of a
of arbitration in India. The Arbitration Act is essentially based plaint by one of the parties. The court then serves summons to
on the UNCITRAL Model Law, 1985 and UNCITRAL Model the opposite party to file their written statement. Issues are there-
Arbitration Rules, 1976. Broadly, the Act has two parts. Part I after framed by the court and the case posted for trial. Evidence-
is an elaborate code providing for all arbitrations seated in India in-chief is in the form of sworn affidavits and cross-examination
(domestic or international arbitrations). Part II provides basi- is conducted in front of court-appointed commissioners. This is
cally for enforcement of foreign awards (see the response to followed by the filing of documents and evidence by the claimant
question 4.4). India is an arbitration-friendly jurisdiction with a and the respondent, respectively. On conclusion of arguments
pro-arbitration Act and a good track record of enforcement for on merits, the court reserves the matter to pronounce its judg-
foreign awards. ment on a later date.
A claimant may request the court for a summary judgment in
case of a certain debt and on lack of defence being available to the
4.4 Where the contract provides for international respondent wherein a judgment is sought without trial.
arbitration, do your jurisdiction’s courts recognise and Parties may prefer an appeal to a High Court within a period of
90 days from the date of the impugned judgment of a lower court,
or within a period of 30 days to any other court in India (Division
II of the Schedule, Limitation Act, 1963). If parties are not satis-
The Arbitration Act recognises and provides for enforcement fied with the judgment of a High Court, a Special Leave Petition
of foreign arbitral awards in India; vide Part II thereof. The (“SLP”) may be filed to the Supreme Court of India against any
said Act gives effect to the Convention on the Recognition and such judgment within a period of 90 days from the date of the
Enforcement of Foreign Arbitral Awards, 1958 (“New York impugned judgment (Order XXI, Rule 1, Supreme Court Rules,
Convention”) and the Convention on the Execution of Foreign 2013). In case of refusal by a High Court to grant a certificate of
Arbitral Awards, 1927 (“Geneva Convention”) with a specific appeal to prefer a SLP before the Supreme Court, an appeal to the
reservation of principle of reciprocity under Sections 44(b) and Supreme Court may be preferred within 60 days of the impugned
53(c) of the Act. Under the New York Convention, Indian courts order of the High Court (Order XXI, Supreme Court Rules, 2013).
may recognise and enforce foreign arbitral awards if the country A decision from the court of first instance can be expected
is a signatory to the New York Convention and if the award is within a period of three to four years and within one to two years
made in the territory of another contracting state which is a recip- from the final court of appeal.
rocating territory. Section 57 of the Act enumerates the pre-req-
uisites to enforce a foreign award under the Geneva Convention.
India is a signatory to the New York Convention, with reserva-
tions that there should be a valid agreement to arbitrate, and that court be upheld and enforced in your jurisdiction? If
such agreement must be evidenced in writing. Another reserva- the answer depends on the foreign country in question,
tion made by India is to the effect that the New York Convention are there any foreign countries in respect of which
would be applicable only to disputes and differences arising out enforcement is more straightforward (whether as a
of a legal “commercial” relationship between the parties, whether result of international treaties or otherwise)?
contractual or not. The Act mandates an award to be rendered in
a country which is a signatory to the New York Convention, and The procedure for enforcement of foreign judgments in India
which has been duly notified in the Official Gazette of India as differs on the basis of reciprocating and non-reciprocating terri-
being a signatory to the New York Convention. This can cause tories. In case of “reciprocating territories”, judgments may be
hardships as, whilst all important arbitration seats are recognised enforced directly as a decree and an execution decree may be
and notified, the Official Gazette has not notified all countries obtained to this effect from an Indian court. Some of the noti-
which are signatories to the Convention. fied reciprocating countries are the United Kingdom, Singapore
Section 48 of the Act provides for conditions which must and Hong Kong. On the other hand, judgments from “non-re-
be satisfied for enforcement of a foreign arbitral award in ciprocating” territories are not executed directly by a court of
India under the New York Convention (these are all as per the law. A fresh suit will have to be filed on the basis of the foreign
New York Convention). The public policy ground is narrowly judgment within three years of the judgment for its enforce-
construed in India for enforcement of foreign awards. ment. This suit can be defeated only on six grounds set out in
The limitation period for enforcement of a foreign award would the Code of Civil Procedure as follows:
be the limitation period for execution of decrees, i.e., 12 years. (See (a) That the judgment has not been pronounced by a court of
Item 136, Schedule, Limitation Act, 1963 and Imax Corporation v. competent jurisdiction.
E-City Entertainment (I) Pvt. Ltd. and Ors., (2017) 5 SCC 331.) (b) That it has not been given on merits, i.e. it is a default
judgment.
(c) That it is founded on an incorrect view of international law
or a refusal to recognise Indian law (if applicable).
(d) That the proceedings were opposed to natural justice.
(e) That it has been obtained by fraud.
(f) That it sustains a claim founded on breach of law in force
in India.

74 India
Sumeet Kachwaha has over 40 years’ experience in the legal profession, mainly in corporate and commercial law. Mr. Kachwaha has held a
Band One ranking in the Arbitration section of Chambers Asia since 2009. He also features in Who’s Who Legal in the Construction, Arbitration,
Procurement, Government Contracts and Asset Recovery sections, and has a Band One ranking in the Dispute Resolution section of the The
Legal 500 Asia Pacific. He also figures in GAR’s Who’s Who Legal Arbitration section. He has handled some of the most leading and landmark
commercial litigations ever to come up before Indian courts.
Mr. Kachwaha has also been involved in the non-contentious side in several high-stakes projects, especially in infrastructure, power, construc-
tion and telecoms. He has advised a wide range of clients (on the victims’ side) in relation to business crimes.
He has served as a Chair of the Dispute Resolution & Arbitration Committee of the Inter-Pacific Bar Association (three-year term). He is
currently serving as the Vice-President of the Asian Pacific Regional Arbitration Group (APRAG), and is on the Advisory Board of the Kuala
Lumpur Regional Centre for Arbitration (now known as the Asian International Arbitration Centre).
Kachwaha and Partners Tel: +91 11 4166 1333

1/6 Shanti Niketan Email: [email protected]
New Delhi – 110021 URL: www.kaplegal.com
India
Dharmendra Rautray completed his LL.M. in 1996 from the London School of Economics and was thereafter called to the England and Wales
Bar in 2001. He is a member of Lincoln’s Inn. He has served as faculty for the CLE Programme conducted by the New York City Bar, New
York. He successfully argued the Constitution Bench matter Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Services Inc. before the
Supreme Court of India.
Mr. Rautray’s main areas of practice are construction arbitrations, litigation, contracts, business transactions and international trade.
Mr. Rautray has authored two full-length books on arbitration published by Wolters Kluwer (2008 and 2018) and several articles published
in leading international law journals. He is also a member of the IBA Asia Pacific Arbitration Group (APAG) Working Group on Initiatives for
harmonising Arbitration Rules and Practices.
Kachwaha and Partners Tel: +91 11 4166 1333

1/6 Shanti Niketan Email: [email protected]
New Delhi – 110021 URL: www.kaplegal.com
India
Kachwaha and Partners is a multi-discipline, full-service law firm with

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, conven-
iently located next to the diplomatic mission area. It is easily accessible
from all parts of Delhi, as well as its suburbs.
The partners and members of the firm are senior professionals with years
of experience behind them. They bring the highest level of professional
service to clients, along with the traditions of the profession, integrity and
sound ethical practices.
Members of the firm are in tune with the work culture of international law
firms, as well as the expectations of large corporate clients. The firm has,
amongst its clients, multinationals and leading Indian corporations.
www.kaplegal.com

Chapter 10 75
Italy
Italy
Luca Di Marco
Dardani Studio Legale Arianna Perotti
corporate entity, or, more commonly, (ii) by concluding coop-

12 Making Construction Projects eration contracts (typically consortiums or associazione temporanea
di imprese).
contracts which place both design and construction 1.3 What industry standard forms of construction
obligations upon contractors; (ii) any forms of design- contract are most commonly used in your jurisdiction?
In Italy there are several standard forms of domestic construc-
series of package contractors? (NB For ease of reference tion contract that can be used, but there is not a prevailing
throughout the chapter, we refer to “construction one. Standard forms are published by different entities, such as
contracts” as an abbreviation for construction and chambers of commerce, professional associations (such as the
engineering contracts.) Italian Association of Construction Companies) or advisors and
consultants.
Different contract types can be used depending on the peculiar- Public constructions are regulated by Legislative Decree No.
ities of the project. The employer may decide to appoint: 50/2016, and subsequent amendments (PCC). In public tender
■ a general contractor, who bears the risk of the entire processes, the contract shall comply with the PCC requirements.
construction including the selection, management, and Usually, the contract template is proposed by the public entity.
coordination of all subcontractors and suppliers; For international construction contracts, where the template
■ a main contractor, who performs the main portion of a is usually proposed by the financiers/employers, a number
construction and coordinates with other contractors of international standard forms can be used, such as the
appointed by the employer; International Federation of Consulting Engineers (FIDIC),
■ a few main contractors performing the main elements Joint Contracts Tribunal ( JCT), or Institute of Civil Engineers
of the construction project (e.g. the building part, the New Engineering Contract (NEC ICE) model forms, subject to
mechanical part, the electrical part, the hydraulic part, extensive negotiation. However, when they need to be adapted
etc.); or to the Italian legislation, bespoke contracts are often preferred.
■ an individual contractor, according to a more traditional
scheme characterised by a more fragmented risk allocation. 1.4 What (if any) legal requirements are there to
Contracts which place both design and construction obliga- create a legally binding contract (e.g. in common law
tions upon the contractor are used primarily in the forms of jurisdictions, offer, acceptance, consideration and
integrated design-build contracts or engineering, procurement intention to create legal relations are usually required)?
and construction (EPC) contracts which are mainly used in the Are there any mandatory law requirements which need to
field of industrial plants. be reflected in a construction contract (e.g. provision for
in writing)?
The requirements under Italian law to create a legally binding
contract are listed under article 1325 Civil Code. These are: (i)
the agreement of the parties; (ii) the cause of the contract; (iii)
the subject matter; and, when expressly provided by the law, (iv)
Collaborative contracting in the sense of integrated project formal requirements. Construction contracts are often subject
delivery or alliancing between all major parties of the project to special legal regimes addressing the tendering process and,
(including particularly the employer and the contractors) is not in that context, formal requirements for the contract to be in
particularly developed in Italy. writing may be set, in accordance with point (iv) above. Any
The cooperation between contractors (especially for the such requirement may be imposed either as a matter of validity
participation in tenders) is achieved either (i) through joint of the contract or as a matter of evidence.
venture agreements, with the establishment of a joint venture

76 Italy
1.5 In your jurisdiction please identify whether there eliminate or reduce risks deriving from the “interaction” in the
is a concept of what is known as a “letter of intent”, in workplace between activities performed by different contractors
which an employer can give either a legally binding or operating on-site.
non-legally binding indication of willingness either to The construction contract must clearly indicate the portion
enter into a contract later or to commit itself to meet of the contract price that is paid by the employer to allow the
certain costs to be incurred by the contractor whether or contractor to comply with health and safety at work provisions.

Letters of intent are widely adopted when negotiating contracts. the purchase price for the works as a retention to be
The extent to which such letters have legally binding effect released either in whole or in part when: (a) the works are
can vary. Normally, letters of intent would make it express substantially complete; and/or (b) any agreed defects
that they do not produce a legally binding contractual obliga- liability period is complete?
tion. However, such documents may give rise to specific obli-
gations (e.g. confidentiality) and may be crucial in determining As the law does not provide for any such retention rights of the
the parties’ conduct throughout the negotiation, eventually employer, the matter is regulated by a contract, which usually
exposing them to pre-contractual liability, this being a peculiar provides that the price is payable on a “milestones” basis.
type of liability in tort set under article 1377 Civil Code. Thus, it is common for the employer to retain a certain amount
(5–10% of each payment) to secure the performance of the
1.6 Are there any statutory or standard types contract. In general, the amounts retained are released in favour
of insurance which it would be commonplace or of the contractor only after completion of works and acceptance
compulsory to have in place when carrying out thereof (typically upon delivery and commissioning). The same
construction work? For example, is there employer’s may apply in respect of the expiry of the defects liability period,
liability insurance for contractors in respect of death but in this case issuance of a specific bond is usually preferred.
The contractor must provide insurance covering its employees guarantee the contractor’s performance? Are there any
and workers against work accidents and occupational diseases restrictions on the nature of such bonds? Are there any
with the National Institute for Insurance against Accidents at grounds on which a call on such bonds may be restrained
Work (INAIL). In addition, contractors are usually requested (e.g. by interim injunction); and, if so, how often is such
to have contractors’ all-risk insurance covering not only all risks relief generally granted in your jurisdiction? Would such
connected with the works equipment but also civil liability for bonds typically provide for payment on demand (without
damages caused to third parties during the execution of the pre-condition) or only upon default of the contractor?
works. Additional insurances are normally requested depending
on the peculiarities of the project. Employers commonly require contractors to provide bonds to
secure the proper fulfilment of their obligations. The most
common are: (i) advance payment bond, to secure the repay-
ment of advance payment(s) effected to the contractor (if any);
(ii) performance bond, to secure proper performance of the
as self-employed sub-contractors); (b) tax (payment of contractual obligations by the contractor; and (iii) warranty
income tax of employees); and/or (c) health and safety? bond, to secure the warranty obligations by the contractor.
Bonds are usually requested to be first-demand bonds issued
by banks (more rarely by insurances). A first-demand bond is an
Labour
autonomous guarantee that can be called upon simple written
In Italy, various types of employment contract can be concluded
demand. In case of an abusive call, the contractor is entitled
in writing, either for a fixed or for an undetermined term. A to file an interim injunction. However, on-demand bonds are
number of obligations are imposed in order to avoid risks of independent from the underlying contract, and courts or arbitral
irregular employment. tribunals will look at the conditions provided in the bond per se
and not in the underlying contract.
Tax
A case-by-case tax assessment is always needed, bearing in mind
that the following are the main taxations: (i) corporate income 1.10 Is it permissible/common for there to be company
tax (IRES); (ii) regional tax on productive activities (IRAP); and guarantees provided to guarantee the performance of
(iii) value-added tax (VAT). subsidiary companies? Are there any restrictions on the
Health and safety
Health and safety on construction sites is regulated by Legislative Downstream or cross-stream corporate guarantees, to be provided
Decree No. 81/2008, which sets out the general principles by parent or sister companies, are quite commonly requested by
and measures to be taken to guarantee the safety of workers employers, especially in order to secure the obligations of contrac-
employed on a project site and which must be complied with by tors which (i) are SPVs or not large corporations, or (ii) form part
the contractor (as well as by all its sub-contractors). of corporate groups structured in a plurality of companies.
The employer is responsible for the implementation of Such guarantees are in principle allowed, to the extent that their
health and safety measures on building sites and must, among issuance is in the corporate interest of the grantor. Therefore,
others, issue the health and safety plan ( piano di sicurezza e coor- the validity of such a guarantee is subject to the assessment of the
dinamento) (PSC) and the Documento Unico di Valutazione dei Rischi benefit gained by the grantor (in return for granting the guarantee)
da Intereferenza containing the measures to be implemented to directly, or at least in the form of “compensating advantage”.

Dardani Studio Legale 77
1.11 Is it possible and/or usual for contractors to have 2.3 Are the parties free to agree in advance a fixed
retention of title rights in relation to goods and supplies sum (known as liquidated damages) which will be
used in the works? Is it permissible for contractors to paid by the contractor to the employer in the event of
claim that, until they have been paid, they retain title and particular breaches, e.g. liquidated damages for late
the right to remove goods and materials supplied from completion? If such arrangements are permitted, are
the site? there any restrictions on what can be agreed? E.g. does
In construction contracts, the transfer of property depends on which is wholly unrelated to the amount of financial loss
the object of the construction: likely to be suffered by the employer? Will the courts
■ in the case of movable assets, if most of the materials are in your jurisdiction ever look to revise an agreed rate of
supplied by the contractor, the property of the entire opus liquidated damages; and, if so, in what circumstances?
passes upon the acceptance. Conversely, when most of the
materials are supplied by the employer, the property of the According to article 1382 Civil Code, the parties are free to
opus is of the employer from the beginning; and include in their contract a “clausola penale” under which, in case
■ in the case of immovable assets, if the soil is property of the of particular contractual breaches (typically late completion/
employer and the materials are supplied by the contractor, delivery or technical underperformance), liquidated damages
the opus is property of the employer from the beginning, shall be paid by the contractor to the employer.
whilst if the soil is also property of the contractor, title Such clauses exempt the employer from proof of damage.
passes upon acceptance. Parties are free to agree that further damages may be claimed in
Retention of title is permitted under Italian law and must be addition to the liquidated damages.
included by the parties in the contract. Liquidated damages may be reduced ex officio by the judge, if
The opportunity to insert retention of title clauses should the agreed sum is manifestly excessive or the main contractual
always be evaluated on a case-by-case basis, also considering the obligation has been only partially unperformed.
effectiveness of their enforcement with respect to the object of
the construction.
22 Supervising Construction Contracts Contracts

right?
employer? If so, what is the nature of such duty (e.g. is According to article 1661 Civil Code, the employer is entitled to
it absolute or qualified)? What (if any) recourse does a order variations not exceeding one-sixth of the contract price and
party to a construction contract have in the event that the contractor is entitled to compensation for the additional works.
If the variation, although not exceeding the above limit, mate-
rially alters the nature of the work or the extent of a specific
The supervision of construction contracts is usually performed activity, a new agreement on the variation is required.
by the works director. In public construction contracts, the This provision is normally waived or amended by the parties
employer must appoint the works director, who is responsible by extending the duty of the contractor to perform the varia-
for the technical, accounting and administrative control of the tions and limiting its rights to additional compensation.
performance of works, as well as for coordinating and super-
vising the activity of the works management office.
3.2 Can work be omitted from the contract? If it is
The works director appointed by the employer owes duties
towards the employer and he is under no duty to act impartially himself or procure a third party to perform it?
between the employer and contractor, unless such duty is specif-
ically included in his appointment. However, works directors
are usually architects or engineers, and are thus subject to rules The contractor is not allowed to omit works without the employ-
of professional conduct and practice issued by their professional er’s consent. Omission of works by a contractor constitutes
associations. breach of contract and determines the applicability of the rele-
vant remedies. According to some scholars, the employer is
entitled to reduce the contractual works by indemnifying the
2.2 Are employers free to provide in the contract that contractor for loss of profit and expenses already incurred.
they will pay the contractor when they, the employer, In public construction, the right of the public employer to
reduce the contractual works is specifically foreseen in article
clause? 106 PCC subject to the limitation indicated therein.
There is no prohibition under the law for any such agreement. 3.3 Are there terms which will/can be implied into
The parties are therefore free to conclude agreements to this a construction contract (e.g. a fitness for purpose
effect. This would imply establishing an express contractual
link between the two contracts.
In the execution of the contract, the parties must take into
consideration not only what is foreseen in the contract itself, but
also the consequences that are implied by law, usage and princi-
ples of equity (article 1374 Civil Code).

78 Italy
Rules of law apply to construction contracts although they are The parties normally take into consideration the legal provisions
not specifically recalled into the contract itself, unless they are which are in force at the time when the contract is concluded.
derogated by the parties. Furthermore, they normally introduce specific provisions about
Conversely, mandatory rules always apply. A clause excluding changes in law during the execution of the contract.
a priori all implied terms, such as an “entire agreement clause”, In the absence of such provisions, changes in law which are
would be deemed invalid by courts insofar as it prevents the mandatory and occur after conclusion of the contract could be
application of mandatory rules. treated as events which give rise to necessary variations of the
The principle of good faith in performance of the contract project, provided that the changes in law have an impact on the
is foreseen in article 1375 Civil Code and applies, although not completion of the works under construction.
specifically recalled, in the contract. In such a case, whenever the parties cannot reach an agree-
The obligations of the contractor are qualified by scholars and ment as to the apportionment of the relevant costs and timing
case law as obligations of result. of performance of the contract, the decision must be taken by
the judge/arbitrator.
events, one the fault of the contractor and one the fault 3.8 Which party usually owns the intellectual property
or risk of his employer, is the contractor entitled to: (a) in relation to the design and operation of the property?
Intellectual property related to the design is owned by the rele-
vant designer, who usually provides an irrevocable, royalty-free,
Performance of the works by the contractor within the time non-exclusive licence to the employer to use such designs for the
frame agreed upon between the parties is a key element of the purposes indicated in the relevant contract. The ownership of
construction contract; therefore, in case of delay, the contractor the design documentation can be transferred to the employer,
is only justified if he is able to prove that the delay was exclu- subject to the author always maintaining his moral right to be
sively caused by an event beyond his control, i.e. by a force majeure recognised as such.
event or by a fault of the employer. Whenever the delay is
partially caused by the fault of the contractor, the contractor is
not automatically entitled to benefit from any extension of time 3.9 Is the contractor ever entitled to suspend works?
nor to receive reimbursement of costs.
Article 1460 Civil Code embodies the general principle of Roman
3.5 Is there a time limit beyond which the parties to law according to which, in synallagmatic contracts, inademplenti
a construction contract may no longer bring claims non est ademplendum; i.e., each party may suspend performance
against each other? How long is that period and when of its obligations in case the other party is in breach of its own
does time start to run? corresponding obligations.
In the absence of specific contractual stipulations, this rule
Different time limits for the exercise of rights under construc- is quite often invoked by contractors in order not to deliver
tion contracts should be taken into consideration: the promised works to the employer in case of failure by the
■ for defects found after completion of the works, the employer to pay the relevant price instalments.
employer will have to denounce such defects to the
contractor within 60 days from their discovery and the 3.10 Are there any grounds which automatically or
legal proceedings will have to be commenced within two usually entitle a party to terminate the contract? Are
years from completion of the works; there any legal requirements as to how the terminating
■ for decennial liability (see question 3.20), the defects have party’s grounds for termination must be set out (e.g. in a
to be denounced within one year from their discovery and termination notice)?
the rights of the claimant are subject to a one-year time
limit running from the relevant notice; and In general, a party may invoke termination of contract for a
■ any other rights of the parties are subject to the ordinary material default of the other party after having served prior
contractual time-bar of 10 years. notice, thereby affording the possibility to remedy.
However, the parties can provide for the right of automatic
3.6 Which party usually bears the risk of unforeseen termination of the contract for the events stipulated therein.
ground conditions under construction contracts in your Typically, this would be the consequence in the case of excessive
jurisdiction? delay or underperformance of works over agreed thresholds.
Similarly, in the absence of contractual provisions, article
If, during the execution of the project, geological, hydrological or 1660 Civil Code grants to the contractor the right of automatic
similar difficulties arise which are not foreseen by the parties and termination in case of necessary variations exceeding one-sixth
make the performance of the contract considerably more onerous of the agreed price.
for the contractor, the contractor is entitled to receive an equi-
table indemnification in connection thereto according to article 3.11 Do construction contracts in your jurisdiction
1664 Civil Code. This provision is usually extensively negoti- commonly provide that the employer can terminate at
ated depending on the peculiarities of the project and on who the any time and for any reason? If so, would an employer
entity that performs the ground/underground survey is (if any). exercising that right need to pay the contractor’s profit
termination?
The right of the employer to terminate a construction contract at
any time and for any reason, even if the execution of works has

already been commenced, is provided in article 1671 Civil Code. price and the employer’s credit for liquidated damages. In such
In this case, the employer shall compensate the contractor for a case, however, it is quite frequent that set-off can only operate
the incurred costs, the works already performed and loss of after any dispute about the entity of liquidated damages has been
profit. resolved by the judge, as a result of which the set-off will operate
not by effect of law but as a result of the judgment (so-called
judicial set-off).
affected party? Is it usual/possible to argue successfully 3.16 Do parties to construction contracts owe a duty of
that a contract which has become uneconomic is care to each other either in contract or under any other
grounds for a claim for force majeure? legal doctrine? If the duty of care is extra-contractual,
A force majeure event which renders an obligation impossible to be obligations and liabilities?
performed relieves the affected party from liability, and it causes
the extinguishment of the same obligation and the termination It is a general principle embodied under article 1375 Civil Code
of the contract. that the parties shall give performance to the contract according
In case of a contract having become uneconomic for a party, to good faith. Claims in tort are instead based on the neminem
such party would not be entitled to invoke force majeure, but if laedere principle. Generally speaking, liabilities in contract are
extraordinary and unforeseeable events have rendered the different in nature from liabilities in tort. However, this does
performance excessively onerous, it would in any case be enti- not exclude that certain facts may give rise to both liabilities, and
tled to demand termination of the contract for “eccessiva onerosità the Supreme Court has held that under certain circumstances
sopravvenuta” unless the other party proposes to adapt the condi- the two legal actions may cumulate.
tions of the contract.
3.13 Are parties, who are not parties to the contract, ambiguous, are there rules which will settle how that
entitled to claim the benefit of any contractual right ambiguity is interpreted?
When interpreting a contract, courts will be aimed at ascer-
contracts in relation to defects in the building? taining the common intention of the parties. The literal inter-
pretation will be the dominant criterion. However, in case of
ambiguity, the following further criteria will be adopted: (a)
Regarding construction of buildings, title to sue the contractor logical and contextual interpretation aiming at construing provi-
under article 1669 Civil Code, i.e. to claim damages arising sions within the whole contractual context; (b) functional inter-
from collapse, risk of collapse or major defects (see question pretation, which guides the judge in identifying the real purpose
3.20), pertains not only to the employer but also to subsequent of the parties’ intention; and (c) interpretation in good faith, and
purchasers of the building who acquired property from the contractual solidarity which should avoid speculative interpre-
same employer. However, such right is not based in contract tation theories.
but in tort.

3.14 On construction and engineering projects in construction contract, would be unenforceable?
between the contractor and parties other than the Certain mandatory provisions of law can render unenforce-
employer with an interest in the project, e.g. funders, able a contractual term which is contrary to such provisions.
other stakeholders, and forward purchasers)? Typically, article 1229 Civil Code provides that any clause that
excludes or limits the liability of the debtor in case of wilful
“Direct agreements” between the contractor and the employer’s misconduct (dolo) or gross negligence (colpa grave) is null and void.
financiers are used in project finance: usually certain contrac- Furthermore, under article 1341 Civil Code, when contracts are
tual warranties or undertakings of the contractor vis-à-vis the executed under the general terms and conditions of one party,
employer are assigned by the employer to its financiers (to secure a number of contractual provisions shall result unenforceable
the lenders’ interests). To the same purpose, performance bonds unless specifically approved in writing by the other party. This
or other collateral warranties (e.g. parent company guarantees) includes limitations of liability, jurisdiction and arbitration
issued in favour of the employer are often similarly assigned. clauses, automatic renewals, forfeitures of rights and waivers.
In certain projects (typically when the employer’s business is
the resale of the object of the construction), certain contractual 3.19 Where the construction contract involves an
warranties of the employer may be assigned to final customers. element of design and/or the contract is one for design
3.15 Can one party (P1) to a construction contract, who designer have to give an absolute guarantee in respect of
owes money to the other (P2), set off against the sums his work?
on the rights of set-off?
In the case that the employer appoints the designer, the designer
is subject to contractual liability. The designer shall perform
Set-off is allowed when the opposite credits are equally liquid,
his obligations with diligence, to be assessed with reference to
undisputed and payable. The most frequent situation of set-off
the nature of the performed activity in accordance with article
occurs between the contractor’s credits for outstanding contract

80 Italy
1176 Civil Code. However, if the design object of the profes- 4.3 Do the construction contracts in your jurisdiction
sional appointment implies the solution of technical problems commonly have arbitration clauses? If so, please
of particular difficulty, the designer is liable only in case of gross explain how, in general terms, arbitration works in your
negligence or wilful misconduct pursuant to article 2236 Civil jurisdiction.
Code.
The Supreme Court clarified that the realisation of a tech- Arbitration can either be institutional or non-institutional. In
nical project by an engineer constitutes an obligation of result case of institutional arbitration, the rules of the relevant institu-
and not of means. tion hosting the arbitration apply, thereby prevailing upon the
rules of the Code of Civil Procedure. The most important arbi-
3.20 Does the concept of decennial liability apply in your tral institutions in Italy are the Milan Chamber of Arbitration
jurisdiction? If so, what is the nature of such liability and (CAM) and the Italian Association for Arbitration (AIA).
With reference to the construction of buildings or other real arbitration, do your jurisdiction’s courts recognise and
estate, article 1669 Civil Code provides for the statutory 10-year enforce international arbitration awards? Please advise
liability of the contractor in case of collapse, risks of collapse or of any obstacles (legal or practical) to enforcement.
other major defects deriving from defects of the soil or defec-
tive construction. Recognition and enforcement of international arbitration awards
This special form of liability, which can neither be dero- in Italy are regulated by the 1958 New York Convention on arbi-
gated nor modified by the contracting parties, is a liability in tration, which was adopted by Act No. 112/1974. Therefore,
tort which creates a sort of presumption of fault on the part of foreign international arbitration awards are easily recognised
the contractor (who therefore has the burden of proving its lack and enforced in Italy provided that an agreement in writing, to
of liability). refer the dispute to arbitration, was validly concluded between
the parties to the contract.
4.1 How are construction disputes generally resolved? in your jurisdiction, please outline the process adopted,
In Italy there are no specialised courts only dealing with the a decision by the court of first jurisdiction; and (b) a
matter of construction. decision by the final court of appeal.
A distinction should be drawn between construction disputes
which concern technical matters and disputes which concern
the legal interpretation of the terms and conditions of construc- Court proceedings at first instance are held in Italy by 139
tion contracts. local tribunals, which have a wide jurisdiction on any civil and
Technical disputes may be referred to the decision of a third commercial matters, divided geographically by districts. The
party – normally a technical company of specialised surveyors average duration of proceedings at first instance is three to four
– whose decision will be final and binding upon the parties; years. Appeal is allowed without a need for the party to obtain
however, legal disputes are normally referred to court or any specific leave, and the Courts of Appeal have full power
arbitration. to review the case on its merits, although new evidence is not
allowed. There are 26 Courts of Appeal and the average dura-
tion of an appeal case is again three to four years. Against the
4.2 Do you have adjudication processes in your appeal decisions it is still possible to file an application to the
jurisdiction (whether statutory or otherwise) or any other Supreme Court in Rome, but only for errors of law and not for a
forms of interim dispute resolution (e.g. a dispute review further review of the facts or the merits of the case.

The Italian legal system has adopted forms of interim and alter-
native dispute resolution quite recently. court be upheld and enforced in your jurisdiction? If
The procedure of “mediation” has been regulated in Italy by the answer depends on the foreign country in question,
Act No. 28/2010 and is compulsory in certain areas of law, but are there any foreign countries in respect of which
not in the matter of construction contracts. However, medi- enforcement is more straightforward (whether as a
ation clauses are increasingly used in construction contracts result of international treaties or otherwise)?
which are concluded within the Italian jurisdiction, and the
success of mediation is mainly related to the quality and skill of The general rule is that foreign judgments are recognised and
the mediators. enforced in Italy through a simple procedure, without any review
An ancient and well-established procedure, which is typical of the merits of the case, providing that the basic rules in the
of Italian law, is the kind of arbitration named “arbitrato irrit- matter of right of defence were observed by the foreign judge.
uale” (as opposed to the ordinary arbitration proceedings which If the judgment to be recognised and enforced in Italy has been
are named “arbitrato rituale”) according to which the arbitra- issued in a country which is a member of the European Union,
tors, rather than being vested with a jurisdictional power, are the enforcement of such foreign EU judgment in Italy can take
given authority by the parties to issue an award which contains place automatically, by simply obtaining “exequatur” and without
a settlement of the dispute. In such a case, the remedies against the need to undergo any procedure, in view of the principle of
the award are quite limited. freedom of circulation of judgments within EU territory.

Luca Di Marco has been a Partner of Dardani Studio Legale since 2014. Luca has 20 years of experience behind him in shipping and
construction law. His practice is focused in advising and assisting clients on shipbuilding and yacht and mega-yacht refits, as well as on
construction contracts and disputes.
Luca provides legal support to a wide range of clients, including leading national and international manufacturing, project and engineering,
shipbuilding yards, shipowners, professional consultants, contractors and sub-contractors, with a particular focus on the infrastructure,
logistics, transport and energy sectors.
He has comprehensive litigation experience and acts as counsel in complex national and international construction and procurement
disputes, both in court and in arbitration.
Luca also assists and advises clients in all phases of a project, including preparation of the tendering, participation in negotiations, follow-up
and handling of matters and claims during the project execution and the warranty period.
He is regularly instructed by a wide range of foreign lawyers with whom he has built strong links. Luca has been a member of the Genoa Bar
since 2003 and speaks Italian and English.
Dardani Studio Legale Tel: +39 10 576 1816

Salita di Santa Caterina, 10/8A Email: [email protected]
16123, Genoa URL: www.dardani.it
Italy
Arianna Perotti has been Of Counsel at Dardani Studio Legale since 2019. Arianna’s professional activity mainly focuses on commercial and
engineering contracts and international private construction contracts. She regularly advises manufacturing and engineering companies
working in the industries of traditional energies and renewable energies (onshore, offshore and submarine). Arianna is particularly keen on
highly technological projects due to her IP background. She particularly focuses on giving advice on, and drafting and negotiating supply
contracts for, construction contracts, EPC and O&M contracts and their ancillary documentation and financial guarantees, being also familiar
with FIDIC models and their practice.
Arianna is involved not only in the contract negotiation phase, but also in the handling and resolution of disputes arising during the execution
of the project.
She was admitted to the Italian Bar in January 2009. Before joining Dardani Studio Legale, she practised in a leading international law firm
and in two multinational industrial groups, mainly dealing with international contractual matters.
Arianna is a member of the Milan Bar and speaks Italian, English, French and Spanish.
Dardani Studio Legale Tel: +39 23 659 3170

Via Cernaia, 4 Email: [email protected]
20121, Milan URL: www.dardani.it
Italy
Based in Genoa and Milan, Dardani Studio Legale is an international

boutique law firm that gathers a team of advocates specialised in mari-
time, international trade, and construction law dealing with a broad range
of shipping, commercial, corporate, and construction matters.
The construction and engineering team of Dardani Studio Legale assists
clients in all projects and construction areas, and particularly in ship-
building, offshore, onshore and submarine construction projects, as well
as in various industries such as oil & gas, power generation, renewable
energies, metals, and industrial automation projects.
Dardani Studio Legale is regularly involved not only in the contract drafting
and negotiation phase, but also in the management of project claims and
in the resolution of disputes.
www.dardani.it

82 Chapter 11
Japan
Japan
Kanagawa International Law Office Hajime Kanagawa
contracting which is called “construction joint venture”

12 Making Construction Projects (kensetsu kyoudou kig youtai ) and is commonly used among small
and mid-sized construction business operators. There are the
1.1 What are the standard types of construction contract following three types of construction joint venture:
in your jurisdiction? Do you have: (i) any contracts which (1) Special Construction Joint Venture
This is a construction joint venture established on a per
and/or (iii) any arrangement known as management project basis in the case of a large-scale or technically diffi-
contracting, with one main managing contractor and cult project for the purpose of securing the stable execu-
with the construction work done by a series of package tion of the construction project.
contractors? (NB For ease of reference throughout (2) Ordinary Construction Joint Venture
the chapter, we refer to “construction contracts” as an This is a construction joint venture established by small and
abbreviation for construction and engineering contracts.) mid-sized construction business operators for the purpose
of strengthening operating and project execution potential
Japan has several types of contracts that have been created by through secure and continuous business relations. This
industry associations and are widely used as templates. The type of joint venture is formed at the time of application
most commonly used templates are: (a) the Central Council for a qualified contracting body in a tendering process.
for Construction Business (chuuou kensetsu g you shingi kai) model (3) Regional Maintenance Type Construction Joint Venture
contracts (the “CCMC”), used for (i) public construction This type of construction joint venture was added in 2011
contracts, (ii) private large-scale construction contracts, (iii) to encourage local construction business operators (mainly
private small-scale construction contracts, and (iv) sub-con- small and mid-sized) who are familiar with the region to
tracting contracts; and (b) the Private Associations of Architects partner up with others to conduct maintenance work for
and Contractors (minkan (nanakai) rengou kyoutei kouji ukeoi keiyaku infrastructure within the region.
yakkan iinnkai ) model form (the “PAMF”). The PAMF is based The joint venture agreement forms for each of the above three
on the CCMC and is the most frequently used model form for types of construction joint ventures made by the Ministry of
private construction projects as a matter of practice. Land, Infrastructure, Transport and Tourism are commonly used.
For design and supervision services, there is a model agree-
ment drafted by the Private Associations of Architects (shikai
1.3 What industry standard forms of construction
rengou kyoutei kenchikusekkei kanritou g youmu itakukeiyaku yakkan contract are most commonly used in your jurisdiction?
chousa kennkyuukai) (the “PAMDSA”). Further, there are design
and construction agreements drafted by the Japan Federation
of Construction Contractors (nihon kensetsug you rengoukai ), and The CCMC and the PAMF are the most commonly used industry
model domestic plant construction contracts published by the standard forms of construction contract in Japan.
Engineering Advancement Association of Japan (enjiniaringu
kyoukai ). 1.4 What (if any) legal requirements are there to create a
For the arrangement known as “management contracting”, legally binding contract (e.g. in common law jurisdictions,
there is no standard form. Note that an arrangement with one offer, acceptance, consideration and intention to create
main contractor directly entering into a construction contract legal relations are usually required)? Are there any
with an employer and then entering into sub-construction mandatory law requirements which need to be reflected in
contracts with sub-contractors for the same construction project a construction contract (e.g. provision for adjudication or
is generally possible, but such arrangement should not fall within any need for the contract to be evidenced in writing)?
“blanket sub-contracting” (ikkatsu shitaukeoi ), which is prohibited
under the Construction Business Act (Act No. 199 of 1949, as Under the Japanese Civil Code (Act No. 89 of 1887, as amended,
amended, the “CBA”). the “Civil Code”), in principle, contracts become valid and
binding once parties’ intentions match each other. No other
actions are required except for certain types of agreement that are
alliance contracting and partnering) in your jurisdiction? required to be in writing. However, under the CBA, construc-
To the extent applicable, what forms of collaborative tion contracts must be executed by the parties in writing and
contracts are commonly used? must provide for (i) scope of work, (ii) price for the work, (iii)
commencement and completion date, (iv) timing and manner
In Japan, there is a partnering system similar to collaborative of advance payment and piece-work payment (if applicable), (v)

Kanagawa International Law Office 83
variation, (vi) force majeure, (vii) price adjustment, (viii) damages the contractor cannot complete the work due to reasons attrib-
to third parties, (ix) use of materials and equipment, (x) inspec- utable to the employer, the employer shall pay the construc-
tion and delivery, (xi) terms of payment, (xii) defect liability and tion fee in full; and (ii) in the event that (a) the contractor
insurance, (xiii) delay and damages, and (xiv) dispute resolution. cannot complete the work due to reasons not attributable to the
employer, or (b) the construction contract is terminated before
the completion of the works, the employer shall pay part of the
is a concept of what is known as a “letter of intent”, in construction fee in proportion to the benefits the employer
which an employer can give either a legally binding or obtains upon the delivery of the completed portion of the
non-legally binding indication of willingness either to works. Therefore, depending on the reason for the contractor’s
enter into a contract later or to commit itself to meet failure to deliver fully completed work and the level of bene-
certain costs to be incurred by the contractor whether or fits obtained by the employer from partially completed work,
not a full contract is ever concluded. the employer has the right to refuse part of the payment of the
construction fee. Furthermore, the CBA imposes special obli-
As a matter of practice, letters of intent (“LOIs”) are rarely gations for payment on the main contractor in a sub-contractor
used in Japan in connection with the execution of construction contract. For example, a main contractor engaging a sub-con-
contracts. However, LOIs are commonly used in other contexts tractor of a certain size generally has the obligation to pay the
such as M&A, so it is not an unfamiliar concept. Whether the construction fee to its sub-contractor within 50 days from such
LOI is binding or non-binding may be specified in the agreement. sub-contractor’s offer to deliver the construction work.
1.6 Are there any statutory or standard types 1.9 Is it permissible/common for there to be
of insurance which it would be commonplace or performance bonds (provided by banks and others) to
compulsory to have in place when carrying out guarantee the contractor’s performance? Are there any
construction work? For example, is there employer’s restrictions on the nature of such bonds? Are there any
liability insurance for contractors in respect of death grounds on which a call on such bonds may be restrained
and personal injury, or is there a requirement for the (e.g. by interim injunction); and, if so, how often is such
contractor to have contractors’ all-risk insurance? relief generally granted in your jurisdiction? Would such
By law, during the construction period, the parties to construc-
tion contracts are only required to purchase (i) insurance that
covers contractors’ employees, and (ii) insurance for defects Performance bonds are often used in public construction projects
in newly constructed housing if the contractor has not depos- that require deposits or other collateral to ensure the performance
ited funds to cover such defects. Additionally, under construc- of the contractor under the Accounting Act (Act No. 35 of 1947,
tion contracts, contractors are generally required to have certain as amended) or Local Government Act (Act No. 67 of 1947, as
types of insurance. For example, under the CCMC and the amended), but such arrangements are uncommon for private
PAMF, contractors must have fire insurance or construction construction projects, other than overseas projects. Performance
insurance and any other insurance stipulated under the design bonds can take various forms to the extent permitted under the
documents. This insurance must cover the completed portion applicable laws, such as deposits, guarantees or insurance.
of construction works, building materials, and building facility While a provisional injunction (karishobun) may theoretically
equipment brought onto the construction site. be a possible tool to restrict a call on the bonds based upon, for
example, non-satisfaction of the conditions for a call, generally,
in order to obtain a provisional injunction, the contractor must
demonstrate to the court that it has rights to be protected and
there is a necessity for the interim relief, based on prima facie proof.
as self-employed sub-contractors); (b) tax (payment of Performance bonds typically provide for payment only upon
income tax of employees); and/or (c) health and safety? default and other related matters of the contractor.
Under the CBA, construction contracts must include the items 1.10 Is it permissible/common for there to be company
enumerated under the answer to question 1.4 above. However, guarantees provided to guarantee the performance of
there are no statutory requirements for construction contracts subsidiary companies? Are there any restrictions on the
in terms of (a) labour contracts that contractors enter into with nature of such guarantees?
employees who engage in construction work at the construction
site, (b) payment of income tax of employees (though contrac- Company guarantees are common in Japan and are often used in
tors owe an obligation to pay withholding tax in connection cases where the company is requested to guarantee the perfor-
with salary payments to employees), or (c) safety and hygiene. mance of subsidiary companies. There are no laws or regula-
tions that prohibit or restrict the nature of such guarantees.
the purchase price for the works as a retention to be 1.11 Is it possible and/or usual for contractors to have
released either in whole or in part when: (a) the works are retention of title rights in relation to goods and supplies
substantially complete; and/or (b) any agreed defects used in the works? Is it permissible for contractors to
liability period is complete? claim that, until they have been paid, they retain title and
Under the Civil Code, in principle, an employer must pay the the site?
construction fee to the contractor in exchange for delivery of
completed works after the full completion of the works, unless Under the Civil Code, ownership of construction works largely
otherwise agreed, provided, however, that: (i) in the event that depends on who has supplied the construction materials.

84 Japan
Generally, works that have been built with materials supplied by due to breach of contract once such amount has been agreed
the contractor belong to the contractor until it hands over such under the contract (under Article 420 of the Civil Code), there
construction work to the employer, unless otherwise agreed under is an exception if the amount is unusually excessive or otherwise
the construction agreements. Similarly, works built using mate- violates public policy (koujyo ryouzoku), so there is some limit to
rials supplied by the employer generally belong to the employer the amounts that will actually be recognised by the courts.
from the beginning of construction.
If an employer supplies the materials, a contactor may use a 32 Common Issues on Construction
statutory lien to retain the completed construction work until the
Contracts
construction fee has been fully paid.
22 Supervising Construction Contracts performed under the contract? Is there any limit on that
right?
Under the Civil Code, when the scope of construction work
duty to act impartially between the contractor and the agreed under the construction contracts needs to be changed,
employer? If so, what is the nature of such duty (e.g. is both parties thereto must agree to such change, unless other-
it absolute or qualified)? What (if any) recourse does a wise agreed in the construction contracts. Under Paragraph 1
party to a construction contract have in the event that of Article 28 of the PAMF, the employer has the right to add or
the third party breaches such duty? change the scope of construction work without the consent of
the contractor, but the employer must accept the change in the
In some construction contracts (especially those involving construction fee and compensate for any damages incurred by the
building construction satisfying a certain statutory threshold), contractor due to such addition or change in scope. In contrast,
the employer hires a licensed architect (or an architecture office under Article 28 of the PAMF, the contractor must obtain the
having a licensed architect) as a supervisor to supervise construc- employer’s consent to change the scope of construction work and
tion work. While a supervisor hired by an employer is considered any change in the construction fee inevitably resulting from such
to have a duty of care to the employer, as a licensed architect, the change of scope.
architect in charge of such supervisory work also owes a statutory
obligation to supervise construction work, among other things, 3.2 Can work be omitted from the contract? If it is
to ensure that the actual work conforms with the design docu- omitted, can the employer carry out the omitted work
ments and, if not, require the contractor to fix such discrepancy. himself or procure a third party to perform it?
2.2 Are employers free to provide in the contract that If omission of work from the contract can be regarded as a change
they will pay the contractor when they, the employer, in the scope of work, it may be subject to the process discussed in
have themselves been paid; i.e. can the employer include the previous question. Also, any process that has been excluded
in the contract what is known as a “pay when paid” from the scope of work may be completed by the employer or
clause? any third parties other than the contractor, because the law and
the model construction contracts are basically silent on this issue.
Theoretically, such a provision could be included if both parties
agree, provided that, under the CBA, the main contractor in a 3.3 Are there terms which will/can be implied into
sub-contractor contract pays the construction fee to the sub-con- a construction contract (e.g. a fitness for purpose
tractor as early as possible, but within one month from the main obligation, or duty to act in good faith)?
contractor’s receipt of its construction fee. Furthermore, a
main contractor engaging certain small-sized sub-contractors The provisions in the contracts should be reasonably inter-
generally has the obligation to pay the construction fee to its preted based on the purposes of the parties, the circumstances
sub-contractor within 50 days of such sub-contractor’s offer to of entering into the contracts, customs, and transaction conven-
deliver the construction work, regardless of whether such main tions. Therefore, depending on the situation, implied terms
contractor has been paid by the employer. such as fitness for purpose or duty to act in good faith may be
taken into account when interpreting contractual provisions.
paid by the contractor to the employer in the event of 3.4 If the contractor is delayed by two concurrent
particular breaches, e.g. liquidated damages for late events, one the fault of the contractor and one the fault
completion? If such arrangements are permitted, are or risk of his employer, is the contractor entitled to: (a)
there any restrictions on what can be agreed? E.g. does an extension of time; and/or (b) the costs arising from
the sum to be paid have to be a genuine pre-estimate that concurrent delay?
which is wholly unrelated to the amount of financial loss Under the Civil Code, in general, the contractor is liable for any
likely to be suffered by the employer? Will the courts delay in construction and required to compensate for damages
incurred by the employer due to any delay attributable to the
liquidated damages; and, if so, in what circumstances?
contractor. However, for any delay attributable to the employer,
the contractor is not liable for any delay in construction and,
The parties may agree to liquidated damages which need not depending on the situation, may have a claim against the employer
necessarily reflect the actual or reasonably estimated amount of for reimbursement of costs or expenses that have increased due
damage. However, although the basic rule is that the court may to the delay.
not reduce the amount of compensation for any damage incurred

Under Article 20 of the PAMF, it is clearly provided that construction contract, in case of fixed-amount contracts, the
the contractor may claim (i) an extension of the construction employer generally bears the risk of changes in laws. In prac-
period, and (ii) reimbursement for costs and expenses that have tice, under Article 29 of the PAMF, the contractor is allowed to
increased due to a delay attributable to the employer. change the construction fee if the amount becomes clearly inap-
If a delay is caused by events that are attributable to both propriate as a result of changes in applicable laws, which may
the contactor and the employer, it is likely that the amount of enable the contractor to transfer the risk of a change in law to
compensation for the damage that each party can claim from the the employer to some extent.
other will be adjusted based on the relative fault of the parties.
3.5 Is there a time limit beyond which the parties to in relation to the design and operation of the property?
The intellectual property in relation to the design and opera-
tion of the property is usually owned by the creator of such intel-
lectual property, unless otherwise contractually agreed. The
Under the new Civil Code which become effective as from April intellectual property rights of design documents and buildings
1, 2020, other than the items subject to a specific statute of limi- (insofar as they have a creative design) are copyright and moral
tations period ( jyoseki kikan) (i.e., claims for defect liability as rights. The intellectual property rights that may occur in relation
discussed below), the general statute of limitations period (shou- to construction materials, building equipment, and methods of
metsu jikou) for claims under construction contracts is (i) 10 years construction are patent rights, utility model rights, design rights,
from the time the claimant becomes free from any legal obstacles and trademark rights, which are usually owned by the inventor.
to exercise such claim (e.g., completion of the design or construc-
tion work), or (ii) five years from the time the claimant knows it
has the legal right to make such claim, whichever is earlier. On the 3.9 Is the contractor ever entitled to suspend works?
other hand, the specific statute of limitations period ( jyoseki kikan)
for employers’ claims against contractors for defect liability (i.e., Under the Civil Code, there is no provision specifically permit-
liability due to non-conformity of the subject matter of the work ting contractor’s suspension of the work. However, as a matter of
with the terms of the contract in respect of kind and quality) is one practice, such default rule under the Civil Code is often amended
year from the time the claimant knows it can make such claim. and actually, under Article 32 of the PAMF, a contractor may
Please note, however, that the old rule is still applicable to claims suspend work in the following situations:
to be accrued under construction contracts executed before April (1) advance payment or partial payment by the employer is
1, 2020 and, therefore, other than the items subject to a specific overdue;
statute of limitations period ( jyoseki kikan) (i.e., claims for defect (2) the employer, unreasonably, rejects cooperation with the
liability as discussed below), the general statute of limitations contractor for discussions necessary for the variation of the
period (shoumetsu jikou) for claims under construction contracts is: work, construction schedule, and construction price;
(i) five years, if either party is a corporation or any other legal (3) the employer cannot prepare the construction site for the
entity; or (ii) 10 years, if both parties are individuals. This period contractor to use, or the contractor cannot perform due to
generally starts from the time when the claimant becomes free force majeure, etc.; or
from any legal obstacles to exercise such claim. The specific (4) the construction was extraordinarily delayed due to reasons
statute of limitations period ( jyoseki kikan) for employers’ claims
attributable to the employer other than the above.
against contractors for defect liability is: (i) 10 years in the case of
Upon the occurrence of any of these conditions, the contractor
buildings or any other construction made of stone, soil, bricks,
must send a written notice demanding cure of such situation
concrete, metals, or any other similar materials; and (ii) five years
within a reasonable period and can only suspend work if such situ-
in the case of buildings or any other construction made of mate-
ation is not cured by the employer within such reasonable period.
rials other than those mentioned in (i) above; and starts from the
Additionally under Article 32 of the PAMF, a contractor may
delivery or completion of the construction work.
suspend work by sending written notice to the employer if it
is recognised that the employer may lack credibility to pay the
3.6 Which party usually bears the risk of unforeseen construction price due to reasons such as the employer suspending
ground conditions under construction contracts in your its payments.
jurisdiction? Similarly, in case law, a lower court approved suspension of
work on the grounds that the contractor feared non-payment of
Excluding the exceptional case where the “fair and equitable” the construction cost by the employer (Tokyo Dist. Ct. Judgment
principle is applied, and unless otherwise agreed under the of 29 August 1997, 1634 Hanrei Jiho 99).
construction contract, in the case of a fixed-amount contract, the
employer usually bears the risk of unforeseen ground conditions.
On the other hand, under Article 16 of the PAMF, the parties usually entitle a party to terminate the contract? Are
to construction contracts may negotiate and discuss changes in there any legal requirements as to how the terminating
construction fees based upon unpredictable events detrimental to party’s grounds for termination must be set out (e.g. in a
the construction work caused by unforeseen ground conditions. termination notice)?
3.7 Which party usually bears the risk of a change Under the Civil Code which became effective as from April
in law affecting the completion of the works under 1, 2020, a party may terminate a construction contract in the
construction contracts in your jurisdiction? following situations unless the non-performance of the counter
party is due to reasons attributable to the terminating party:
Excluding the exceptional case where the fair and equitable (i) if the terminating party demands the counter party to
principle is applied, and unless otherwise agreed under the perform its obligations under the construction contract by

86 Japan
specifying a reasonable deadline and the counter party fails According to Paragraphs 4 and 5 of Article 32 of the PAMF,
to perform such obligations by such deadline, as long as such the contractor may terminate the construction contract by
non-performance is not immaterial; sending written notice to the employer in the event that any of
(ii) if the counter party’s performance of the whole of the obliga- the following occur:
tion is impossible; (1) the period of delay or suspension (pursuant to Paragraph 1
(iii) if the counter party clearly manifests the intention to refuse of Article 31 or Paragraph 1 of Article 32 of the PAMF) lasts
to perform the obligation in whole; for (a) a quarter or more of the construction period, or (b)
(iv) if the counter party’s performance of a part of the obligation two months or more;
is impossible (or if the counter party clearly manifests the (2) the construction cost is decreased by two-thirds or more
intention to refuse to perform such part of the obligation) because the employer significantly decreased the construc-
and the purpose of the contract cannot be achieved with only tion work;
the performance of the remaining part of the obligation; (3) the employer breached the contract and the purpose of the
(v) if, due to the nature of the construction contract or a mani- contract cannot be accomplished due to such breach;
festation of intention by the parties, the purpose of the (4) the employer or its members have relationships with organ-
construction contract cannot be achieved unless the obli- ised crime groups, etc.; or
gation is performed at a specific time on a specific date or (5) it is recognised that the employer lacks credibility to pay the
within a certain period of time, and the counter party fails construction price due to reasons such as manifesting suspen-
to perform its obligation at that time or before that period sion of its payment on a general and continuous basis (e.g.,
expires; or any note or cheque issued by the employer is dishonoured).
(vi) if the counter party does not perform its obligation and it is
obvious that the counter party is unlikely to perform its obli-
3.11 Do construction contracts in your jurisdiction
gation to the extent necessary to achieve the purpose of the commonly provide that the employer can terminate at
construction contract even if the terminating party makes any time and for any reason? If so, would an employer
the demand by specifying a certain deadline. exercising that right need to pay the contractor’s profit
Under the Civil Code, the parties may terminate the contract on the part of the works that remains unperformed as at
on the above grounds even if this is not expressly set out in the termination?
construction contract, unless the parties have specifically relin-
quished such rights in the contract. Under the Civil Code, the parties may terminate the contract
According to Paragraph 2 of Article 31 of the PAMF, the on the grounds enumerated in question 3.10 above even if this
employer may terminate a construction contract by sending is not expressly set out in the construction contract, unless the
written notice to the contractor for any of the following reasons: parties have specifically relinquished such rights in the contract.
(1) the contractor fails to start construction work after the
starting date without justifiable reason;
(2) the construction work is significantly behind schedule 3.12 Is the concept of force majeure or frustration known
without justifiable reason and it is unlikely that the contractor
would complete the construction work within the construc- that a contract which has become uneconomic is
tion period or within a reasonable period after the construc- grounds for a claim for force majeure?
tion period;
(3) the contractor breaches Article 5 (prohibition of blanket
While the exact scope of force majeure is not specifically defined
sub-contracting and blanket delegation) or Paragraph 1 of
under the Civil Code, we have a concept of force majeure and,
Article 17 (repair due to construction work not following the
therefore, if a party defaults due to force majeure or any other
design document) of the PAMF;
reason not attributable to the parties, such party may be released
(4) the contractor breaches the contract (in a way other than in
from the performance of such obligation in default (except for
(1) to (3) above) and the purpose of the contract cannot be
a default of monetary obligations) depending on the situation.
accomplished due to such breach;
Furthermore, there is a similar (while not identical) concept of
(5) the construction licence of the contractor is cancelled or
frustration. For example, some court cases have permitted that:
becomes invalid;
(i) a contract will terminate if an obligation becomes impos-
(6) it is recognised that the contractor is in danger of becoming
sible to perform due to reasons that are not attributable to the
unable to continue the construction work due to reasons
parties; and (ii) the parties may revise or terminate a contract if
such as manifesting suspension of its payment on a general
(a) a major change of circumstances (objective circumstances)
and continuous basis (e.g., any note or cheque issued by the
occurs that was unforeseeable at the time of the signing date,
contractor is dishonoured);
(b) such major change cannot be attributable to the parties, and
(7) the contractor proposes termination of the agreement
(c) forcing a party to perform its obligations under the original
without any reason that falls under Paragraph 4 of Article 32
contract is markedly unfair and against the “principle of good
((1) to (3) of the list below) of the PAMF; or
faith” (shingi-soku) (the “principle of circumstantial change”
(8) the contractor or its members have relationships with organ-
( jijou henkou no gensoku)). However, it is very unlikely that the
ised crime groups, etc.
“principle of circumstantial change” would be applicable to a
Furthermore, according to Paragraph 1 of Article 31 of the
case where a contract has only become economically disadvanta-
PAMF, the employer may terminate the construction contract as
geous due to a change of economic circumstances, unless there
necessary by sending written notice to the contractor (the employer
is a special provision under the contract to release the parties
will need to compensate the contractor for any damages arising
from their obligations in such a case. According to Article 29
due to the termination).
of the PAMF, the contractor may make a claim to change the
construction price in the construction contract to the fair value
at the time of the claim if the construction price becomes clearly
unsuitable due to a sudden change of economic circumstances.

contracts in relation to defects in the building? There is no particular rule that will be applicable when the terms
of a construction contract are ambiguous (e.g., contra proferentem).
As mentioned in question 3.3, the terms of a contract are inter-
In general, under the Civil Code, only the contracting parties preted by considering (a) the purpose of the parties, (b) the
are entitled to claim contract rights. However, if they designate circumstances of entering into such contract, (c) customs, and
a third party as a beneficiary and such beneficiary has expressed (d) transaction conventions and, in some circumstances, the
its intention to the obligor to enjoy the benefit, such beneficiary terms may be interpreted by reference to situations outside of
will be entitled to claim the benefit made under the contract (such the contract and not limited to the terms of the contract.
contract is categorised as a “contract for a third-party beneficiary”
(daisansha no tame ni suru keiyaku) under the Civil Code). In prac-
tice, a daisansha no tame ni suru keiyaku is not used in construction 3.18 Are there any terms which, if included in a
contracts to benefit the second or subsequent owners of a building. construction contract, would be unenforceable?
In general, construction contracts are executed to bind the other

your jurisdiction, how common is the use of direct party to duties which are enforceable. Therefore, except for
agreements or collateral warranties (i.e. agreements cases where such duties are void due to violation of public policy
between the contractor and parties other than the (koujyo ryouzoku), or where there is a cause for cancellation, such
employer with an interest in the project, e.g. funders, contracts are enforceable.
other stakeholders, and forward purchasers)?
3.19 Where the construction contract involves an

In Japan, it has not been common to use direct agreements or element of design and/or the contract is one for design
collateral warranties on construction and engineering projects. only, are the designer’s obligations absolute or are there
Recently, however, direct agreements have been seen more often limits on the extent of his liability? In particular, does the
than before. designer have to give an absolute guarantee in respect of
his work?

owes money to the other (P2), set off against the sums According to case law, in relation to design and supervision
due to P2 the sums P2 owes to P1? Are there any limits duties, designers are said to bear an advanced and broad duty
on the rights of set-off? of care regarding the safety of buildings (Sup. Ct., Judgment of
6 July 2007, 1984 Hanrei Jiho 34). However, such duty of care
does not necessarily mean an absolute or unlimited obligation.
Under the Civil Code, unless otherwise provided by a special
While there are no clauses in the PAMDSA which indemnify
agreement under a contract, P1 may freely set off obligations
or mitigate the obligation of the designer in relation to deliver-
which P1 owes to P2 due to a construction contract or any other
ables, likewise there are no clauses which increase the obliga-
cause (except for obligations arising from tortious acts committed
tion of the designer compared with the general obligation for
in bad faith or causing death or injury to person) against obliga-
non-performance.
tions of the same sum which P2 owes to P1 due to a construction
contract or any other cause, as long as the requirements for set-off
(e.g., the obligation which P2 owes to P1 is due, etc.) are satisfied. 3.20 Does the concept of decennial liability apply in your
There is no provision in the PAMF limiting the rights of set-off. jurisdiction? If so, what is the nature of such liability and

care to each other either in contract or under any other There is no concept of decennial liability in our jurisdiction.
can such duty exist concurrently with any contractual 42 Dispute Resolution

There is no express provision in relation to a duty of care in
the “contracts for work” (ukeoi ) section under the Civil Code.
In general, parties who cannot resolve a dispute by consulta-
Under the Civil Code, a contractor owes a duty to the employer to
tion will use court procedures or alternative dispute resolution
complete its work and the employer owes a duty to the contractor
(“ADR”). According to Article 34 of the PAMF, if a dispute
to pay the construction costs for the completed work. However,
related to a construction contract arises, the parties will first
there is a precedent where the court approved the concept that
request a third party appointed by both parties to resolve the
the contractor, as an expert, owes a duty to research the ordered
dispute, or they will seek to resolve the dispute by mediation or
content and owes a duty to provide information (including giving
conciliation through the “Construction Dispute Commission”
advice and explanation) to the employer as a supplementary duty
(kensetsu koji funsou shinsakai ) (the “CDC”), which is an ADR
based on the “principle of good faith” (shingi-soku) (Nagoya Dist.
body established based on the CBA that resolves disputes related
Ct., Judgment of 15 September 2006, 1243 Hanrei Times 145)
to construction contracts. If such dispute cannot be resolved
and there may be situations where the contractor owes a certain
through the above-mentioned proceedings, the dispute will be
duty of care before the completion of the work. The duty of care
resolved by either an arbitration proceeding held by the CDC
mentioned above can exist concurrently with contractual obliga-
acting as the arbitral tribunal, or by court procedures.
tions and liabilities set out under a construction contract.

88 Japan
4.2 Do you have adjudication processes in your policy in such laws and ordinances, said agreement applies)
jurisdiction (whether statutory or otherwise) or any other during the appointment procedure of the arbitrator or the
forms of interim dispute resolution (e.g. a dispute review arbitration procedure;
board)? If so, please describe the general procedures. (4) either party was unable to participate in the arbitration
procedure;
Under Japanese law, there is a procedure similar to the adju- (5) the arbitral award contains a decision on matters beyond
dication process called “civil mediation”, which is a method the scope of the arbitration agreement or of the petition
of ADR different from court proceedings and arbitration. presented in the arbitration procedure;
However, since civil mediation can only be reached by an agree- (6) the composition of the arbitral tribunal or the arbitration
ment between both parties, it is not the same as the adjudication procedure is in violation of the laws and ordinances of
process used in, e.g., the United Kingdom. Though a court can the country of the place of arbitration (if the parties have
make an order in lieu of mediation if there is no chance that the reached an agreement on matters concerning provisions
parties would enter into an agreement, this order will cease to be unrelated to public policy in such laws and ordinances, said
effective if either party disagrees with the order. agreement applies);
(7) according to the laws and ordinances of the country of the
place of arbitration (if the laws and ordinances applicable to
4.3 Do the construction contracts in your jurisdiction the arbitration procedure are those of a country other than
that of the place of arbitration, said other country’s laws
jurisdiction. and ordinances apply) the arbitral award is not final and
binding, or the arbitral award has been set aside or its effect
has been suspended by a judicial body of that country;
In practice, it is not common for construction contracts to (8) the petition filed in the arbitration procedure is concerned
have arbitration clauses. Under the PAMF, if the ADR process with a dispute which may not be subject to an arbitration
summarised in question 4.1 fails, the parties may choose either agreement pursuant to the provisions of Japanese laws and
arbitration or court proceedings. If arbitration is chosen ordinances; or
and parties enter into an arbitration agreement, under the (9) the content of the arbitral award is contrary to public policy
Japanese Arbitration Act (Act No. 138 of 2003, as amended, in Japan.
the “Arbitration Act”), the arbitration proceedings will start
with one of the parties filing a petition with the arbitral body
pursuant to the agreement. Even if a party files a lawsuit with 4.5 Where a contract provides for court proceedings
the court, the court must dismiss the case without prejudice if in your jurisdiction, please outline the process adopted,
either party claims that there is an arbitration agreement between any rights of appeal and a general assessment of
the parties. When the arbitration proceeding starts, arbitrators
will be appointed pursuant to the arbitration agreement and an decision by the final court of appeal.
arbitral tribunal consisting of such arbitrators will hear the case
and make an arbitral award. The arbitral award binds the parties
under dispute and they may not file any objections to the arbi- Under the Civil Procedure Act (Act No. 109 of 1998, as amended,
tral body or to the court. A party wishing to execute an arbitral the “CPA”), a civil lawsuit will start with the plaintiff filing a
award must acquire an execution order from the court and carry complaint with the competent court (usually the district court)
out the execution pursuant to the Civil Execution Act (Act No. and the court serving the complaint to the defendant. After
4 of 1979, as amended). proceedings, such as preparatory proceedings to marshal issues,
pleadings, and the production of evidence, the court proceedings
of the first jurisdiction will end with a judgment by the court.
4.4 Where the contract provides for international Parties who disagree with the judgment may appeal to the supe-
rior court (e.g., the high court), and, furthermore, parties who
disagree with the judgment of the superior court may, generally
only for reasons related to legal issues, appeal to the Supreme
Court. According to research conducted by the Supreme Court
Under the Arbitration Act, regardless of the place of arbitra- of Japan, although the actual period depends on the individual
tion (i) an arbitral award will be recognised by the competent matters of each case, the average timeline for a decision (a) by the
Japanese court (i.e., become valid) without requiring any special court of first jurisdiction takes approximately nine months, and
action within Japan, and (ii) a party who wishes to execute an (b) by the final court of appeal takes approximately three years in
arbitral award can apply to the competent Japanese court for an total (however, lawsuits related to construction are likely to take
execution order, and the court must issue such order, unless any more time than the average civil lawsuit).
of the following situations are applicable:
(1) the arbitration agreement is not valid due to a limitation on
the capacity to act (koui nouryoku) of either party; 4.6 Where the contract provides for court proceedings
(2) the arbitration agreement is not valid due to reasons other in a foreign country, will the judgment of that foreign
than a limitation on the capacity to act (koui nouryoku) under
the laws and ordinances designated by the parties as appli- are there any foreign countries in respect of which
cable to the arbitration agreement (in case there are no enforcement is more straightforward (whether as a
designated laws and ordinances, the laws and ordinances of result of international treaties or otherwise)?
the country of the place of arbitration will be applicable);
(3) either party did not receive the required notice pursuant Under the CPA, a judgment of a foreign court (“Foreign
to the laws and ordinances of the country of the place of Judgment”) will be upheld by the competent Japanese court
arbitration (if the parties entered into an agreement which (i.e., become valid) without requiring any special action within
agrees on matters concerning provisions unrelated to public

Japan, unless such Foreign Judgment does not satisfy any of the requisite summons or order for the commencement of liti-
conditions below. Also, under the CPA, a party who wishes gation, or have appeared without being so served;
to enforce a Foreign Judgment can apply to the competent (3) the content of the judgment and the litigation proceedings
Japanese court for an execution judgment and, in such case, the must not be contrary to public policy in Japan; and
court must issue an execution judgment without examining the (4) a mutual guarantee must be in place between Japan and the
details of such Foreign Judgment, unless such Foreign Judgment country where the Foreign Judgment is rendered (i.e., the
is not final and binding or does not satisfy any of the following courts of such country would enforce a similar judgment
conditions: rendered by a Japanese court).
(1) the jurisdiction of the foreign court must be recognised Since Japan is not a party or signatory to any of the interna-
pursuant to Japanese laws and ordinances, or applicable tional treaties for the reciprocal recognition and enforcement of
treaties; Foreign Judgments, there is no particular foreign country from
(2) the losing party must have been served (excluding service which judgments are enforced in a Japanese court in a more
by publication or any other service similar thereto) with the straightforward manner than any other country.

90 Japan
Hajime Kanagawa is the Founding Partner of Kanagawa International Law Office. He represents Japanese and multinational clients in a
broad range of corporate and financial matters, including mergers and acquisitions, project finance transactions, acquisition finance transac-
tions and corporate finance transactions. He also has extensive experience in acquisition and financing of multiple renewable power projects
under the feed-in-tariff regime in Japan. Education: University of Tokyo (LL.B., 1995); University of Southern California (LL.M., 2004). Bar
Admissions: Japan and New York.
Kanagawa International Law Office Tel: +81 3 6206 6651

7F, Urban Toranomon Bldg. Email: [email protected]
1-16-4 Toranomon Minato-ku URL: www.k-ilo.com
Tokyo, 105-0001
Japan
Kanagawa International Law Office is a globally minded law firm offering

specialised knowledge and experience in international legal matters,
headed by Mr. Hajime Kanagawa.
www.k-ilo.com

Chapter 12 91
Mexico
Mexico
Roberto Hernández García
COMAD, S.C. Juan Pablo Sandoval García
to bid jointly in order to work as a consortium. COMAD members

12 Making Construction Projects have used NEC contracts in other jurisdictions.
1.1 What are the standard types of construction contract

in your jurisdiction? Do you have: (i) any contracts which 1.3 What industry standard forms of construction
place both design and construction obligations upon contract are most commonly used in your jurisdiction?
and/or (iii) any arrangement known as management
There are no standard forms of construction contract used in
Mexico but, as mentioned before, there are some types of contract
contractors? (NB For ease of reference throughout in Mexico that are commonly used for construction, such as
the chapter, we refer to “construction contracts” as an lump-sum and unit price contracts.
abbreviation for construction and engineering contracts.)
Mexico has not developed a general standard type of construction create a legally binding contract (e.g. in common law
contract (model contract), although some specific projects have jurisdictions, offer, acceptance, consideration and
used international forms such as FIDIC (Féderation Internationale des intention to create legal relations are usually required)?
Ingénieurs-Conseils), AIA (American Institute of Architects – USA) Are there any mandatory law requirements which need to
be reflected in a construction contract (e.g. provision for
and ConsensusDocs (USA). On the contrary, it is common for
construction companies to use their own model contract for both in writing)?
construction (which are typically lump-sum or unit price contracts)
and engineering and design (typically services contracts).
It is important to mention that in Mexico, the applicable law Pursuant to the Civil Code, a person is entitled by an offer only
and the form of the contract will depend on whether is a public by making such offer, and if the offeror wants to take its offer
contract (executed between a private entity and the State) or a down, it will have to do so via the same means of publicity
private contract (executed between private entities). through which the offer was made; additionally, civil legislation
When the contract is formalised and executed with the Public establishes that contracts are obligatory, since the parties agree
Administration, the Public Works and Related Services Law (the on the price and the object without any formalisation needed.
LOPSRM) establishes the standards and/or minimum elements In public projects, the formalities are stricter from the begin-
that the contracts governed by such law shall consider. (It is ning of the binding process: for the contracting authority
important to bear in mind that Mexico is a Federation comprised because it has to, inter alia, upload the project onto the elec-
of 32 States and almost every State has its own regulation regarding tronic system (called “COMPRANET”); and for the partici-
Public Works, so the governing law will depend on whether or not pants in the tender process, since they have to submit a proposal.
the project is federal.) Additionally, there is a stage at which the participants have the
On the other hand, when the contract is a private contract, opportunity to ask questions and clarify specific points on the
according Mexican civil legislation, the parties are free to agree project. Finally, the law establishes a time limit for the contract
the terms and conditions of the contract as they wish, as long to be formalised.
as they do not violate the public order/public interest rules. It is relevant to mention that the general rule is that public
In this regard, regular types of construction contract include construction projects shall be awarded through a bidding
lump-sum, unit price, mixed (lump-sum and unit price) and, process; however, as an exception to the rule, public projects
recently, more Construction Management contracts (at-risk or can be awarded directly or by a “restricted tendering” process.
pure) have been used. If this is the case, the contracting authority will have to comply
with additional formalities such as the issuance of a report
providing reasons which justify not using the regular open bid
1.2 How prevalent is collaborative contracting (e.g. process.
alliance contracting and partnering) in your jurisdiction? Private projects are similar, but generally the owners of such
projects carry out their own market research and directly invite
companies which they consider fit to meet their requirements.
There are no collaborative contracting schemes used in Mexico;

however, is common in public contracts for two or more companies

92 Mexico
1.5 In your jurisdiction please identify whether there b) Tax: the tax field is very general and obliges the parties in
is a concept of what is known as a “letter of intent”, in construction contracts to pay their corresponding taxes.
which an employer can give either a legally binding or c) Health and safety: in terms of article 15-C of the Federal
non-legally binding indication of willingness either to Labour Law, the employer is obliged to review the contrac-
enter into a contract later or to commit itself to meet tor’s compliance with the applicable measures for safety,
certain costs to be incurred by the contractor whether or health and environmental protection. In the “health”
sector specifically, it is a matter of public knowledge that
with the health crisis of 2020, several measures will have to
According to the Civil Code, there is a “contracting promise”, with implemented in various sectors of the economy, construc-
the sole aim of formalising a contract in the future. By signing tion being a key pillar of the economy. In this regard, the
a contracting promise, the parties are only entitled to execute a Mexican health authorities have issued protocols to be
future contract within a set period of time. followed by companies in order to ensure a safe return
In any case, the “letter of intent” is a widely used document in to normal activities, which include maintaining social
the regular commercial construction market, and its enforceability distancing, reducing the gathering of personnel in common
depends very much on the content of the document. areas, and putting a sanitising area at the entrance to the
workplace. It is presumed that those measures will become
1.6 Are there any statutory or standard types permanent. Is also important to note that the measures to
of insurance which it would be commonplace or be taken will vary from one State to another.
liability period is complete?
There is statutory insurance for the contractor with respect to
its employees under the Law of Social Security (for death, works The Public Works and Related Services Law, specifically in its
risk, personal injury or sickness of the employees). Depending articles 46 and 46bis, empower the contractor to make retentions
on the object of the contract, the parties can agree on different derived from subcontractors’ delays. Those retentions can be
kinds of insurance that they deem necessary in order to perform reintegrated if the subcontractor catches up to the schedule.
the corresponding contract. The most common are: profes- In private contracts, the parties are free to agree the terms of
sional liability (design); civil liability; general liability (all-risk); retentions and put these in the contract. It is also common to
automobile; equipment or machinery; environmental; construc- see similar practices in public contracts. Additionally, private
tion; and work insurance. This also depends on the insurance contracts usually contemplate retentions as guarantees for hidden
required by the union contracted. defaults, or even include bond policies in order to guarantee
As for Public Work contracts, they usually force the contractor against hidden defaults.
to provide insurance on certain matters in order to cover contin-
gencies during the execution of the contract. Depending on
the procurement entity, there will be additional requirements 1.9 Is it permissible/common for there to be
according to internal laws and regulations (Federal Commission performance bonds (provided by banks and others) to
of Electricity (CFE), Mexican Petroleum (PEMEX), inter alia).
grounds on which a call on such bonds may be restrained
1.7 Are there any statutory requirements in relation to (e.g. by interim injunction); and, if so, how often is such
construction contracts in terms of: (a) labour (i.e. the relief generally granted in your jurisdiction? Would such
legal status of those working on site as employees or bonds typically provide for payment on demand (without
as self-employed sub-contractors); (b) tax (payment of pre-condition) or only upon default of the contractor?
income tax of employees); and/or (c) health and safety?
In Mexico, bonds are the most common way to guarantee the
In public and private contracts, the general requirements are performance and general obligations under the contract.
almost the same: not to agree against the rules of public order; For public contracts (even for Public Works and/or related
to be in writing, etc. However, there are some specific things to services), providing a bond policy is indeed a legal requirement for
bear in mind, such as: the contractor (article 48 of the LOPSRM). In general, the amount
a) For labour matters: in the case of both public and private of the bond in public contracts is not higher than 10 per cent of the
contracts, the construction contractor shall comply with all total amount of the contract. As for private contracts, the parties
the labour requirements established by the Mexican Social are free to agree on the amount of the bond, and it is common for
Security Institute (IMSS); inter alia, the employers in the the bond policies issued to amount to 30 to 50 per cent of the total
construction field shall comply with the “Obligatory Social amount of the contract.
Security Rules for Construction Workers contracted by In Mexico, there is the Insurance and Bond Institutions General
Project or Determined Time”, which establish several obli- Law, which establishes a summary procedure in order to claim for
gations for construction employers, understood to mean the bond, whereby the bonding company can request additional
either the owner of the project (in private contracts) or the information only once and issue a resolution. The only require-
contractor which will perform the project. Additionally, ment of such law is that the Claimant of the bond prove the exist-
construction employers have to comply with the Federal ence and enforceability of the obligation guaranteed (article 279).
Labour Law, which establishes the general requirements However, it is not common for bonding companies to pay the
and employers’ obligations such as correct and punctual amounts required, and it should be noted that there is no unified
payment, union fees, social and security fees, etc. judicial criteria determining when the bonding company does

COMAD, S.C. 93
or does not have to pay. Also, is important to highlight that, 2.3 Are the parties free to agree in advance a fixed
for instance, bonding companies perform conciliating efforts sum (known as liquidated damages) which will be
resulting, on occasion, in amicable results between the parties in paid by the contractor to the employer in the event of
conflict. particular breaches, e.g. liquidated damages for late
On the other hand, there is a judicial instance where the bonding completion? If such arrangements are permitted, are
company resolution can be challenged, in which the trusted party there any restrictions on what can be agreed? E.g. does
is called to defend itself.
1.10 Is it permissible/common for there to be company likely to be suffered by the employer? Will the courts
guarantees provided to guarantee the performance of in your jurisdiction ever look to revise an agreed rate of
subsidiary companies? Are there any restrictions on the liquidated damages; and, if so, in what circumstances?
Liquidated damages are the most commonly used sanction for
In public contracts, these kinds of guarantee are not commonly breaches of contract under Mexican law. The parties can agree
used. In private contracts, there is no restriction on including or in advance a certain sum to be paid in the event of particular
using them. breaches, or in the cases agreed by them. However, this kind
of provision has some restrictions. In private contracts, the
amount of liquidated damages cannot exceed the value of the
breached obligation, and in public contracts, liquidated damages
used in the works? Is it permissible for contractors to cannot exceed the amount of the performance bond.
claim that, until they have been paid, they retain title and If a contractor wants to claim for liquidated damages, these
the right to remove goods and materials supplied from have to be determined and duly proved. If the court considers
the site? that the damages have not been duly proved, it will not award
the payment of such damages.
It is not common practice to include these provisions in construc- In public contracts, in addition to liquidated damages, the
tion contracts, but we have seen it in a couple of instances. contracting Authority has the legal right and obligation to
Nevertheless, article 2644 of the Civil Code mentions that when initiate “termination for breach” procedures, which can lead to
the contractors have not been paid, they can retain the work that administrative fines, including debarment from participating in
has been constructed, but it does not mention the right to retain public bid procedures for a certain period of time.
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 a 32 Common Issues on Construction
contract clause. Contracts
22 Supervising Construction Contracts 3.1 Is the employer entitled to vary the works to be
2.1 Is it common for construction contracts to be right?
(e.g. an engineer)? Does any such third party have a For public contracts, article 59 of the Public Works and Related
duty to act impartially between the contractor and the Services Law allows the authority to modify the scope of the
work, yet there are some limits on this right: variation in the scope
party to a construction contract have in the event that is the responsibility of the authority, and the determination must
the third party breaches such duty? be supported and establish the impact on the price and payment
terms; such modification can neither vary the contract term or
price by more than 25 per cent, nor modify the original project
It is common for construction contracts to be supervised by a
substantially.
third party on behalf of the owner, usually known as the “super-
If the changes exceed the mentioned percentage but do not
visor”. Third parties are supposed to act impartially, but in prac-
vary the object of the contract, the parties can execute a Change
tice it is common for them to act on behalf of the owner’s inter-
Order, which will be considered part of the contract. Public
ests. Usually the engineer or architect may provide elements for
lump-sum contracts cannot be modified when the total price or
the employer to decide on the completion of the works.
term is affected.
Since there is no privity between the contractor and the super-
Regarding private contracts, articles 2623 and 2627 of the Civil
visor, it is uncommon for a contractor to sue the supervisor or
Code provide that in a lump-sum contract, the employer is enti-
vice versa.
tled to vary the scope of the work. In this type of contract, it is
essential that the parties agree on the terms and conditions of the
2.2 Are employers free to provide in the contract that Change Order, due to all the changes that may be involved (in
they will pay the contractor when they, the employer, terms of payment and time).
have themselves been paid; i.e. can the employer include When executing a Change Order, it is important to verify
in the contract what is known as a “pay when paid” that the new terms do not conflict with contractual provisions,
clause?
but also comply with applicable laws and regulations (e.g. the
Construction Regulations).
According to article 1839 of the Civil Code, if the parties consider
a “pay when paid” clause essential to their contract, they are free
to agree on it.

94 Mexico
3.2 Can work be omitted from the contract? If it is For public contracts, article 66 of the Public Works and Related
omitted, can the employer carry out the omitted work Services Law establishes that the subcontractor will respond to
himself or procure a third party to perform it? hidden defects and any other liability incurred. Additionally,
such article establishes that the subcontractor shall guarantee
According to article 1796 of the Civil Code, the contract shall the works for 12 months by taking out a bond (equivalent to
be performed in the manner agreed. However, such legislation, 10 per cent of the total amount of the contract) or through a
in article 2027, establishes that if the subcontractor omits the credit letter (equivalent to 5 per cent of the total amount of the
performance of certain work or if it is not performed as agreed, performed works).
the employer can do it himself or hire a third party to do it at the
subcontractor’s expense. Since the Civil Code applies supple- 3.6 Which party usually bears the risk of unforeseen
mentarily to the Public Works and Related Services Law, the ground conditions under construction contracts in your
aforementioned articles are applicable to public contracts. jurisdiction?
3.3 Are there terms which will/can be implied into According to the Civil Code (article 2617), the contractor will
a construction contract (e.g. a fitness for purpose bear the risk when this occurs before the completion of the
obligation, or duty to act in good faith)? works, unless otherwise agreed by the parties. This article shall
apply to public contracts; however, there is some ambiguity as to
For public contracts governed by the Public Works and Related its duration.
Services Law and its secondary regulation, such legislation is auto-
matically applicable, even where the contract does not regulate 3.7 Which party usually bears the risk of a change
something specifically or it is ambiguous. in law affecting the completion of the works under
Concerning private contracts, according to article 1796 of the construction contracts in your jurisdiction?
Civil Code, the parties are not only subject to the terms of the
contract, but also to the consequences of the nature of the contract, Regarding public contracts, article 67 of the Public Works and
its uses, good faith and the law. Also, the parties may choose a Related Services Law establishes that the contractor is the only
specific piece of legislation to apply to the contract; for example, one responsible for adherence to the law.
the Civil Code of the respective State and/or the Commercial With respect to private contracts, in lump-sum agreements,
Code. In any case, if there is a controversy, the general rules of all the risks that may arise during construction will be borne by
the contract established in the Civil Code shall apply. the contractor (article 2617 of the Civil Code), including changes
of law. For this reason, it is important to negotiate risk alloca-
3.4 If the contractor is delayed by two concurrent tion while drafting the contract.
For public contracts, according to article 46 of the Public Works

In public contracts, article 46bis of the Public Works and Related
and Related Services Law, the employer owns the intellectual
Services Law mentions that if the delay is caused by the contractor,
property rights, except where there is an impediment.
the contractual penalties will apply, as long as they do not exceed
In the case of private contracts, it is common for the contractor
the total price of the contract. In that case, there will not be an
to keep its intellectual property; however, the parties are free to
extension of time unless the parties agree to it.
agree on this, and it will depend on the specific project.
If the delays are caused by the employer, the contractor is enti-
tled to receive either: (i) the costs occasioned by the delay; or (ii)
an extension of the final deadline in the same proportion of the 3.9 Is the contractor ever entitled to suspend works?
delay, pursuant to article 52 of the Law.
In cases where there are two events that cause the delay, the Even though it is rare to see this, the Civil Code empowers the
affected party can allege a concurrent delay; nevertheless, this has contractor to suspend the works when it is not paid or when
to be proven, notwithstanding that the law is silent on this matter. a situation of force majeure arises (hardship). Both private and
For private contracts, since there is a lack of regulation on this public contracts usually have a force majeure clause.
matter in the Civil Code, the parties are free to agree on the terms;
however, as regards the costs occasioned, article 1840 states that
the parties can agree on liquidated damages in the case that one 3.10 Are there any grounds which automatically or
of them does not comply with its obligations, which may result usually entitle a party to terminate the contract? Are
in a delay.
party’s grounds for termination must be set out (e.g. in a
termination notice)?
a construction contract may no longer bring claims In the case of public contracts, it is possible for the administra-
tion to terminate the contract unilaterally when it has demon-
strated that continuing with the project would adversely affect
the Mexican State. It has also been established that the contractor
The general period under Mexican law is 10 years. For private can terminate the contract strictly due to force majeure issues (arti-
contracts, the time limit to claim for hidden defaults is six months, cles 60 and 62 of the Public Works and Related Services Law,
which start to count from when the object of the contract is given respectively).
(article 2149 of the Civil Code).

COMAD, S.C. 95
For private contracts, the general rule (article 1797 of the an agreement with the will of the contracting parties (article
Civil Code) establishes that an agreement cannot be terminated 1794 of the Civil Code). Additionally, as a general rule, only the
unilaterally. However, the same legislation establishes that the contracting parties are entitled to the contract (article 1796 of the
parties can agree on a manner to terminate the contract without Civil Code). In this regard, unless the parties agree on third-party
judicial intervention (article 1941 of the Civil Code) or, in case rights, only the contracting parties are entitled to the contract
of breach of contract, the affected party can request the termi- (article 1869 of the Civil Code).
nation of the contract plus the payment of losses and damages
(article 1949). Please note that these articles are supplementarily
applicable to public contracts. your jurisdiction, how common is the use of direct
It is important to be clear when agreeing the causes of termi- agreements or collateral warranties (i.e. agreements
nation of the contract, so that the parties can perform clearly in between the contractor and parties other than the
situations when this applies. employer with an interest in the project, e.g. funders,

commonly provide that the employer can terminate at It is common for the contractor (understood as the Project
any time and for any reason? If so, would an employer Manager) to agree with the subcontractors with regard to who will
exercising that right need to pay the contractor’s profit respond to the owner/employer directly, since it is not common
on the part of the works that remains unperformed as at to see the stakeholder involved directly in the management of the
termination? project. In fact, it is common for the contractor to agree with the
subcontractors that the latter will hold the contractor to be harm-
Regarding public contracts, since these are governed by the less before the employer.
Public Works and Related Services Law, the owner/employer is
always empowered to terminate the contract when continuing
with the project could adversely affect the Mexican State. owes money to the other (P2), set off against the sums
As stated above, in private contracts, this condition needs due to P2 the sums P2 owes to P1? Are there any limits
to be clearly agreed between the parties. In this regard, when on the rights of set-off?
the employer terminates the contract unilaterally for conveni-
ence, the contractor has the right to claim the payment of the
In terms of the Civil Code, in these cases, it is possible for the
works performed, pending estimations, known as “non-recov-
parties to set off the debts up to the amount of the lowest one
erable costs”.
(articles 2185 and 2186 of the Civil Code). The limitations to
In both cases, the owner can claim for the damages and losses
this right are expressly established in article 2192.
that the unperformed works may generate.

3.12 Is the concept of force majeure or frustration known care to each other either in contract or under any other
in your jurisdiction? What remedy does this give the legal doctrine? If the duty of care is extra-contractual,
affected party? Is it usual/possible to argue successfully can such duty exist concurrently with any contractual
that a contract which has become uneconomic is obligations and liabilities?
Parties owe a duty of care to each other, considering that they are
Force majeure is recognised in our jurisdiction as an event that is
professionals performing valid work under the law. Additionally,
not foreseeable and where the party is unable to prevent it from
the managing of a project can be understood as carrying out
happening.
someone else’s business. In this regard, the Project Manager
Given the nature of such events, it is not possible to ask for
shall act with the same care as if it were managing its own busi-
liquidated damages (article 1847 of the Civil Code), unless one of
ness, and that could be understood as a duty of care.
the parties had the opportunity to prevent the force majeure and did
A lack of a duty of care will impact on the performance of the
not act accordingly. Also, if the force majeure is duly proved, the
contract and could cause a possible breach by the person that
affected party can be released from what could have constituted a
does not comply correctly.
breach of a specific obligation.
These kinds of duty of care cannot be “extracontractual”
According to article 62 of the Public Works and Related
since they imply a “sanction” or obligation for a specific party.
Services Law, it is possible in public contracts to argue that a force
However, it is common to agree on a “damage and losses” clause,
majeure event caused the impossibility to continue with the works,
which usually covers violation of the duty of care.
bringing about the early termination of the contract.
In any case, breach of the duty of care can constitute legal
Case law states that for an event to be considered force majeure, it is
grounds for the other party to start any claim or lawsuit in order
not enough reason that compliance with the terms of the contract
to claim for damages.
turns out to be more complicated or burdensome than foreseen,
but rather that it is impossible for the works to be completed.
3.13 Are parties, who are not parties to the contract, ambiguity is interpreted?
entitled to claim the benefit of any contractual right
subsequent owner of a building able to claim against In general, construction contracts (and every contract) contain
the contractor pursuant to the original construction the “applicable law” clause, which establishes that if anything is
contracts in relation to defects in the building? lacking in the contract, the particular rules of the applicable law
agreed will apply.
As a general rule, it is an essential element to formalise and execute

96 Mexico
In public contracts, if the contract lacks clarity, the Public 4.2 Do you have adjudication processes in your
Works and Related Services Law applies automatically. However, jurisdiction (whether statutory or otherwise) or any other
if such law is still ambiguous, the private contract rules are appli- forms of interim dispute resolution (e.g. a dispute review
cable. Such rules are as follows: (i) the ambiguous term must board)? If so, please describe the general procedures.
be interpreted in accordance with the other conditions of the
contract, but also applying the sense that is consistent with the There is no “adjudication” as understood in the United Kingdom,
object and purpose of the contract; (ii) the customary practice Australia or Malaysia. However, parties may agree to submit
of the country of the party must be taken into consideration; and their disputes to a Dispute Adjudication Board (DAB) as adju-
(iii) if it is impossible to resolve the doubt through these rules, it dication processes have a binding effect. It is important to note,
will be resolved in favour of the greater reciprocity of interests however, that this is rather uncommon in Mexico due to the lack
(articles 1851 to 1857 of the Civil Code). of regulation.
3.18 Are there any terms which, if included in a 4.3 Do the construction contracts in your jurisdiction
construction contract, would be unenforceable? commonly have arbitration clauses? If so, please
The general rule is that the will of the contracting parties is the jurisdiction.
law that will govern the contract, the limit of such will being the
rules of public order and of general interest, so the parties cannot Many construction contracts have arbitration clauses and depend
agree against them, under the penalty that the clauses agreed on the needs of the parties. Generally, when the parties are from
against the rules of public order and of general interest are not different countries, it is common to see International Chamber of
valid. In this regard, the articles and body of the contracts are Commerce (ICC) or London Court of Arbitration (LCIA) arbi-
enforceable on the parties per se. According to article 1796 of the tration clauses. When both parties are Mexican, there are other
Civil Code, the contract is formally enforced on the contracting national chambers, such as the Mexican Arbitration Centre (CAM)
parties. According to this, the contract is enforceable from the and the Arbitration Centre of the Construction Industry (CAIC).
moment it is executed. When the contract has an arbitration clause but neither the
For private contracts, it is illegal for parties to agree on illicit procedural rules nor the institute that will administrate the proce-
activities, since such clauses will not be enforceable. dure are specified, the Commercial Code will apply, which adopted
the United Nations Commission on International Trade Law
(UNCITRAL) Model Law.
only, are the designer’s obligations absolute or are there 4.4 Where the contract provides for international
limits on the extent of his liability? In particular, does the arbitration, do your jurisdiction’s courts recognise and
designer have to give an absolute guarantee in respect of enforce international arbitration awards? Please advise
his work? of any obstacles (legal or practical) to enforcement.
The designer’s obligations are not absolute with regard to situ- The Mexican jurisdiction has generally been pro-arbitration, and
ations in which a construction contractor incurs a fault for it seems that this trend is continuing, taking into account that
construction reasons and not due to design factors. Mexico is a signatory to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (New York Convention)
3.20 Does the concept of decennial liability apply in your and the Panama Convention.
Decennial liability applies differently according to the State where any rights of appeal and a general assessment of
it is applied. In the Mexico City Civil Code, it applies to defects, how long proceedings are likely to take to reduce: (a)
flaws and incorrect performance according to article 2634. a decision by the court of first jurisdiction; and (b) a
In cases related to construction, these are commercial matters.
Usually, such matters are heard by civil or commercial courts
through ordinary lawsuits, which are commonly solved in a year
and a half (of course, this estimate depends on the complexity of
In Mexico, the most common way of solving disputes is litiga- the case). After this first judgment, there is the right to challenge
tion; however, arbitration and negotiation are gaining ground, such resolution through an appeal, in which the court of appeal
especially for complex projects in sectors such as large-scale essentially has full jurisdiction to review the case substantially.
construction, energy and oil. This procedure can last another 12 to 18 months.
In public contracts, the parties can agree on arbitration by way Finally, there is a constitutional trial which is understood not
of dispute resolution (as a so-called conciliation that is under- as another instance, but as a constitutional review.
taken before the Ministry of Public Function) but termination The entirety of the instances may take between two and four
of a contract by the Contracting Entity is excluded from the years.
subjects eligible for arbitration (article 98 of the Public Works
and Related Services Law).

COMAD, S.C. 97

It will depend on the country; for example, the USA and Canada
are “Mexican Partners” in the new United States-Mexico-Canada
Agreement (USMCA). However, there is a procedure in which
the foreign judgment has to be approved and recognised in the
Mexican jurisdiction in order to be executed.

98 Mexico
Roberto Hernández García is experienced in national and international construction projects. He has acted as counsellor in transactional
and dispute work on projects related to transmission lines, substations, highways, trains, airports and oil facilities, among others. He has
served as co-chair of the IBA international construction projects committee; chair of the ICC Mexico construction disputes committee; and as
a member of the ABA Forum on Construction Law international construction steering committee. He is consulting editor of Construction and
Infrastructure Disputes; author of Construction Law in Mexico: perspectives and challenges; and a fellow of the American College of Construction
Lawyers and the International Academy of Construction Lawyers.
COMAD, S.C. Tel: +52 555 661 3733

Febo 29, Colonia Crédito Constructor Email: [email protected]
Benito Juárez URL: www.comad.com.mx
Mexico City, 03940
Mexico
Juan Pablo Sandoval García gained his law degree from Universidad Iberoamericana, Mexico City, where he obtained the “San Ignacio de
Loyola Medal”, as well as the “Excellency Award” for the score he obtained in the National Official Test. Juan Pablo also has a postgraduate
degree in arbitration from the Escuela Libre de Derecho and the International Chamber of Commerce.
He has a wide range of experience in civil, commercial, administrative and constitutional litigation, as well as national and international litiga-
tion, participating in high-profile arbitration procedures on matters such as Mexico City’s New Airport.
Juan Pablo has participated in international web panels organised by the Asociación Latinoamericana del Derecho de la Construcción (ALDEC)
– the Latin American Association for Construction Law.
COMAD, S.C. Tel: +52 555 661 3733

Febo 29, Colonia Crédito Constructor Email: [email protected]
Benito Juárez URL: www.comad.com.mx
Mexico City, 03940
Mexico
COMAD is a boutique law firm with more than 55 years of experience,

offering tailor-made solutions for our clients in the areas of construction
law, public procurement and anti-corruption. We have been involved for
many years in some of the most important construction and infrastructure
projects in Mexico, Central and South America.
www.comad.com.mx

Chapter 13 99
Netherlands
Netherlands
Jeroen Berlage
CMS Maartje Speksnijder
may be at fault and liable if that decision turns out to be a struc-

12 Making Construction Projects tural design fault.
1.1 What are the standard types of construction contract

in your jurisdiction? Do you have: (i) any contracts which 1.3 What industry standard forms of construction
place both design and construction obligations upon contract are most commonly used in your jurisdiction?
and/or (iii) any arrangement known as management The Dutch Civil Code (“DCC”) is divided into books, with a
special chapter in book 7 reserved for construction contracts
contractors? (NB For ease of reference throughout (Title 12 Book 7 clauses 7:750 DCC and further) and a special
the chapter, we refer to “construction contracts” as an chapter reserved for services (Title 7.7. Book 7 clauses 7:400 and
abbreviation for construction and engineering contracts.) further). Most construction and service contracts, however, are
based on standard-form contracts and conditions, which have
been construed by all major stakeholders and branch organi-
In the Netherlands, one could roughly distinguish integrated
sations and are considered to be well balanced and just. As a
design and construct contracts, which place both design and
general principle, contracting authorities are obliged to apply
construction obligations upon contactors, and traditional
these conditions without amendments if the Dutch Public
construction contracts, which only place the construction obli-
Procurement Act 2012 (“Aanbestedingswet 2012”) applies.
gations upon contractors in accordance with the contract docu- There are a number of these standard-form construction
ments and (design) drawings prepared on account of, and contracts used in the Netherlands. The most commonly used
prescribed by, the employer. In the event of ancillary activi- forms are the Uniform Administrative Conditions 2012 (“UAC”)
ties to be performed by contractors assigned directly by the for construction only, the New Rules 2011 for design and/or project
employer, contractors are usually bound by a multilateral coor- management services only, and the Uniform Administrative
dination agreement, under which coordination of the ancillary Conditions for integrated contracts (“UAC-IC 2005”) for design
activities is usually to the main contractor. and construct contracts. International forms such as JCT and
NEC are hardly ever used, although the use of FIDIC forms may
1.2 How prevalent is collaborative contracting (e.g. sometimes be preferred by international employers.
True collaborative contracting (e.g. “alliance contracting” and intention to create legal relations are usually required)?
“partnering” – as it is understood in other countries) is still not Are there any mandatory law requirements which need to
very prevalent in the Netherlands, although it is gaining interest. be reflected in a construction contract (e.g. provision for
This may have to do with the fact that the contract sum is not
in writing)?
fixed, which as yet is considered to be too big a risk by most
Dutch employers. Insofar as alliance contracting and partnering
contracts are being concluded, these are tailor-made contracts As a general principle, there is no prescribed form to constitute a
and not based on a standard-form contract. A “building legally binding construction contract, nor are there any manda-
team” contract, however, is rather popular and often based on tory law requirements which need to be reflected in a construc-
the Model Building-team Contract 1992. The contractor will tion contract. A contract is concluded by an offer and its accept-
provide its expertise on construction costs during the design ance, regardless of its form.
phase, in return for which the contractor will be entitled to
be the first to submit an offer. All parties to a building team 1.5 In your jurisdiction please identify whether there
are and remain liable for those (team) decisions that lie within is a concept of what is known as a “letter of intent”, in
their specific field of expertise, provided the (team) decision which an employer can give either a legally binding or
has expressly or tacitly been accepted by the relevant expert. If, non-legally binding indication of willingness either to
for instance, the contractor suggests the use of materials or a enter into a contract later or to commit itself to meet
construction method for cost-reduction purposes and the engi-
neer accepts this as a structural design solution, the engineer

100 Netherlands
An “LOI” may be issued to indicate an intention to enter into Furthermore, a collective bargaining agreement (“CAO”)
a contract in due course, but an LOI is not a legal definition could apply to the work. Although the CAO Bouw & Infra,
or term in the Netherlands, and as a general principle an LOI the collective bargaining agreement for construction and infra-
does not constitute a legally or non-legally binding indication structure projects, is currently not declared generally binding,
of willingness to enter into a contract. This may of course be employers may still apply this CAO. In such a case, the provi-
different if parties already agree in an LOI to most of the essen- sions of this collective bargaining agreement shall have to be
tial elements of a contract, such as time, scope and contract applied. To avoid, i.a., reputational risk, if contractors apply
price. It most often, however, serves no real purpose other than the CAO to their employees it is advisable to ensure that they
to allow the possible employer an exclusivity period and to bring respect all CAO conditions.
about some obligation to negotiate in good faith.
Tax
In accordance with the Dutch Collection of State Taxes Act 1990
of insurance which it would be commonplace or (Invorderingswet 1990), (main) contractors or so-called “self-con-
compulsory to have in place when carrying out structors” are jointly and severally liable for unpaid wage tax and
construction work? For example, is there employer’s national insurance contributions due at the level of any – directly
liability insurance for contractors in respect of death or indirectly – engaged subcontractor (so-called “vicarious tax
and personal injury, or is there a requirement for the liability” or “chain liability”).
contractor to have contractors’ all-risk insurance? Chain liability arises (i) if and to the extent that a (sub)
contractor carries out tangible works (including construc-
Dutch statutory law does not require specific insurance in relation, repair, cleaning, maintenance, alteration and demolition
tion to construction projects, save for motor vehicle insurance services, and the handing over of construction works), and
where appropriate. However, construction projects will typi- (ii) if the principal acts as a main contractor, subcontractor or
cally involve: self-constructor.
(a) insurance of the project works (typically referred to as “All The risk of vicarious tax liability or chain liability can be
Risks” insurance), taken out by either the contractor or reduced by opening and paying sufficient amounts into a
the employer to cover loss or damage to the works and/or so-called G-account. A G-account is a frozen account that can
project materials and/or damage to existing properties of only be used to pay wage taxes and national insurance contribu-
the employer; tions to the Dutch Tax Authorities.
(b) employer’s liability insurance, taken out by the contractor
to cover injury to or death of its employees during the Health and safety
course of a construction project; With regard to health and safety, the Working Conditions Act is
(c) public liability insurance, taken out by the contractor to applicable. The Working Conditions Act contains specific provi-
cover third-party claims in relation to personal injury, sions for clients in the construction industry. These are elab-
death or injury to third parties and property damage (other orated in the construction process provisions of the Working
than damage to the works); and Conditions Decree. Failure to comply may lead to fines and/
(d) professional indemnity (“PI”) insurance, taken out by any or liability in case of working accidents or in case of breach of
party with design responsibility, to cover design liability. the provisions.
1.7 Are there any statutory requirements in relation to 1.8 Is the employer legally permitted to retain part of
construction contracts in terms of: (a) labour (i.e. the the purchase price for the works as a retention to be
legal status of those working on site as employees or released either in whole or in part when: (a) the works are
as self-employed sub-contractors); (b) tax (payment of substantially complete; and/or (b) any agreed defects
income tax of employees); and/or (c) health and safety? liability period is complete?
Labour law Even without invoking the right to withhold payment due to
According to article 2 of the Foreign National Act (in Dutch: partial or improper performance by the contractor, and with
Wet arbeid vreemdelingen, “Wav”), a work permit is, in prin- preservation of his right to claim the delivery of the completed
ciple, required for non-EU/EEA employees working in the construction project, a natural employer who does not act in the
Netherlands. Please be aware that as of 1 January 2021, British course of a professional practice or business may – pursuant to
nationals will also be considered non-EU/EEA employees and article 7:768 DCC – withhold up to 5% of the contract price
will therefore, in principle, require a work permit to be able to for the construction of a house from the last payable instal-
work in the Netherlands. Failure to comply can lead to chain ment or instalments, and deposit this amount in an account of
liability for all parties that work in the chain related to a specific a notary instead of paying it to the contractor. If parties agreed
project and is not limited to the formal employer of the foreign to a defects liability period, the employer may withhold payment
worker. Most contracts include indemnification and wording until the end of the defects liability period. Standard condi-
that any penalty will be charged to the other party. One should tions such as the UAC 2012 have a similar clause for professional
be aware of the specific identification requirements which apply employers. In any case, most employers tend to withhold payment
to the hiring and lending of foreign nationals (article 15 Wav). of the last instalment, sometimes in addition to a performance
The main employer, in addition to the labour employer, guarantee. The contractor is likely to prefer payment in full
is jointly and severally liable to the employee for payment before handover and issue a performance bond as security
of the employee’s wage (article 7:616a DCC). There is also a for the defects liability period to avoid i) demand on working
chain liability for other clients and parties in the chain and the capital, and ii) risk of recovery.
employee can hold every (next higher) client in the chain liable
for payment of his wages (article 7:616b DCC).

CMS 101
1.9 Is it permissible/common for there to be 22 Supervising Construction Contracts

restrictions on the nature of such bonds? Are there any 2.1 Is it common for construction contracts to be
grounds on which a call on such bonds may be restrained supervised on behalf of the employer by a third party
(e.g. by interim injunction); and, if so, how often is such (e.g. an engineer)? Does any such third party have a
relief generally granted in your jurisdiction? Would such duty to act impartially between the contractor and the
bonds typically provide for payment on demand (without employer? If so, what is the nature of such duty (e.g. is
pre-condition) or only upon default of the contractor? it absolute or qualified)? What (if any) recourse does a
Performance bonds and parent company guarantees are permis-
sible and very customary in the Netherlands, and there are no
restrictions on the nature of such bonds by law. The guarantee It is common for construction contracts to be supervised on
usually amounts to 10% of the contract sum to be issued at the behalf of the employer by a third party, such as an architect, an
effective date and is reduced at handover for the remainder engineer or a contract manager. The third party acts on behalf
of the defects liability period. Most employers will ask for an of the employer, as a representative, and is not impartial. The
on-demand bond. Quite often, contractors are allowed to have third party may in fact have been involved in, or even respon-
a bond company that does not require a counter guarantee to sible for, the design giving cause for dispute.
issue a bond, instead of having a bank issue a bank guarantee
that demands working capital. 2.2 Are employers free to provide in the contract that
1.10 Is it permissible/common for there to be company in the contract what is known as a “pay when paid”
guarantees provided to guarantee the performance of clause?
Parties have freedom of contract and may agree to include a “pay
when paid” clause, although large companies may no longer
Dutch law does not contain any statutory provisions that impose
apply payment terms longer than 60 days in contracts with SME
liability on a parent company for the acts of its affiliates or group
entrepreneurs. Any clause ipso facto stipulating a longer term is
companies. Dutch law requires each limited liability company
void and the payment term will be considered to be 30 days by
to make its annual accounts publicly available by filing them
operation of law.
at the Trade Register of the Chamber of Commerce. A parent
company exercising control over other entities is also required to
publish annual accounts consolidating the assets, liabilities and 2.3 Are the parties free to agree in advance a fixed
results of the group. The subsidiaries concerned may choose sum (known as liquidated damages) which will be
not to publish their stand-alone accounts as required by law. In paid by the contractor to the employer in the event of
such event, the parent company concerned is required to file a
liability statement whereby it assumes a joint and several liability there any restrictions on what can be agreed? E.g. does
for the legal acts undertaken by such subsidiaries during the life- the sum to be paid have to be a genuine pre-estimate
time of the statement (the so-called 403 statement). The 403 of loss, or can the contractor be bound to pay a sum
statement is available for public inspection and third parties may which is wholly unrelated to the amount of financial loss
rely on it; the liability of the parent company constitutes an inde- likely to be suffered by the employer? Will the courts
pendent obligation towards the creditor. in your jurisdiction ever look to revise an agreed rate of
A contractually agreed parent company guarantee will come liquidated damages; and, if so, in what circumstances?
directly from the parent company, where the contractor is a subsid-
iary of the parent company and will cover the entirety of the works. Parties have freedom of contract. A fixed-sum penalty (also
Company guarantees are often capped at the contract sum. known as liquidated damages) to be paid by the contractor to
the employer in the event of particular breaches, e.g. a fixed-sum
penalty for late completion, is very customary, albeit a difficult
retention of title rights in relation to goods and supplies topic during contract negotiations. A fixed-sum penalty will,
used in the works? Is it permissible for contractors to in principle, preclude the employer from additionally claiming
claim that, until they have been paid, they retain title and “real” damages relating to the breach sanctioned with the
the right to remove goods and materials supplied from fixed-sum penalty. Parties can, however, contractually agree
the site? that a fixed-sum penalty exists in addition to the right of the
employer to claim real damages from the contractor.
Ensuing from article 3:290 DCC, the contractor has the right There is no requirement in law for a fixed-sum penalty to be
of retention. The contractor has to have actual control over the a genuine pre-estimate of loss and it can, in principle, be unre-
work; the employer may have some minor work realised by other lated to the financial loss likely to be suffered by the employer.
contractors but such contractors must not be considered to have Paragraph 42 of the UAC 2012 provides a standard penalty of
taken over control. The contractor may fence off the work and €60 per day for late completion; if the amount is not adjusted,
give notice to third parties that the contractor is evoking his then that will be the maximum penalty, regardless of the actual
right to retention with respect to (parts of) the works. damages or contract price. Courts will cautiously assess and not
Most employers, however, will have the contractor waive its easily set aside a liquidated damages clause.
right of retention, especially when a completion guarantee is to
be provided by the contractor for the benefit of the financer,
since the contractor may also enforce his right against a financer.

102 Netherlands
32 Common Issues on Construction 3.4 If the contractor is delayed by two concurrent

Contracts or risk of his employer, is the contractor entitled to: (a)
3.1 Is the employer entitled to vary the works to be that concurrent delay?
right?
Pursuant to § 8 (5) UAC 2012, the contractor is entitled to an
extension of the construction period and cost compensation if
The employer is, in principle, entitled to vary the works insofar and to the extent that, due to (i) force majeure, (ii) circumstances
as such variations are reasonable. This follows from the nature for which the employer is responsible, or (iii) changes by or on
of a construction contract and articles 6:2 and 6:248 DCC, behalf of the employer in the specification or in the execution
which apply to all contracts. of the works, it is not reasonably possible for the contractor to
The UAC 2012 and the UAC-IC 2005 provide an extensive set complete the works within the agreed term. There needs to be
of (additional) rules with regard to variations. § 36 UAC 2012 a causal link between such a cause of delay and the extra time
provides, amongst other things, that the contractor may refuse and costs required to complete the works for a successful claim,
to accept variations to the works if, as a result of such changes, in which case the contractor’s right to an extension of time and
the total amount of additional payments and deductions each cost compensation exists even if there is an additional (concur-
does not exceed 15% of the contract sum or, as the case may be, rent) cause of delay by the contractor.
the balance of such additional payments and deductions does The UAC-IC 2005 provide in § 44 that the contractor is only
not exceed 10% of the contract sum. entitled to an extension of time and cost compensation if (and
to the extent that):
(a) the UAC-IC 2005 expressly provide for such cost compen-
omitted, can the employer carry out the omitted work sation and/or extension and on condition that the costs
himself or procure a third party to perform it? and/or delay are caused by a circumstance that cannot be
attributed to the contractor;
(b) the costs and/or delay are caused by a circumstance for which
The employer has, in principle, the right to order part of the
the employer is responsible pursuant to the contract and for
work to be omitted, and to carry out the omitted work himself
which the contractor did not have to warn the employer; or
or have a third party carry out the omitted work. The finan-
(c) an unforeseen circumstance arises, the nature of which is
cial consequences of such an order depend on the contractual
such that, according to the standards of good faith, the
arrangements between parties and the specifics of the omitted
employer cannot expect the contract to be maintained
work. If the UAC 2012 apply to the contract, the contractor
unaltered.
may not accept such an order, in case the financial consequences
The contractor can only successfully claim cost compensation
thereof go beyond the above-mentioned thresholds (§ 36 UAC
and/or extension of time, on the basis of § 44 UAC-IC 2005, if he
2012). Without the employer’s consent, the contractor is, in
has notified the employer thereof in writing with due dispatch,
general, not entitled to refuse performance of part of the works
stating the reasons. Again, this right of the contractor also
assigned to it.
exists if there is an additional cause of delay by the contractor.

In general, a contract has legal effect in accordance with its specific
wording. In addition, terms are implied into the contract by virtue Article 7:761 DCC provides that any claim arising out of a defect in
of law, custom and the principle of reasonableness and fairness. the completed and delivered construction expires two years after
Thus, in addition to the general rules for contracts set out in the moment on which the employer has made a complaint about it.
the DCC, the specific rules for construction contracts in arti- If the employer has given the contractor a period of time to repair
cles 7:750–7:769 DCC will be implied (insofar as relevant), unless the construction defect, the period of limitation starts to run at the
specifically agreed otherwise (provided that deviation from the end of that period or when the contractor has made clear that it
specific provision of the DCC is not precluded). These articles will not repair the construction defect. A claim will, in any event,
provide, for example, rules with regard to liability for defects, expire 20 years after completion if it concerns a building, and 10
rules with regard to completion of the works and an obligation years after completion of all other completed constructions.
for the contractor to warn the employer of noticeable mistakes The UAC 2012 and the UAC-IC 2005 provide a contractual
in the assignment. expiry period of five years after completion or, in case the works
It follows from the principle of reasonableness and fairness have collapsed completely or partially, or threaten to collapse, or
that parties to a contract must act in a way that is reasonable have come to be unfit or threaten to be unfit for the purpose for
and fair; a duty for both parties to act in good faith is therefore which they were intended, 10 years after completion.
always implied.
Furthermore, it follows from standard case law that a contract
must be interpreted not only on the basis of the wording thereof, 3.6 Which party usually bears the risk of unforeseen
but also looking at the intention of the parties and what both ground conditions under construction contracts in your
parties have and should have reasonably expected under the jurisdiction?
specific circumstances. This means that the reasonable expec-
tations of parties are also implied into a contract. This depends on the specific distribution of responsibilities in
the contract.

CMS 103
In a “traditional” construction contract to which the UAC to each other in such a way that it is justified to suspend perfor-
2012 apply, the employer will bear the responsibility – and mance. This means, in general, that the contractor may suspend
therefore the risk – for the design and construction methods the execution of the works in case of non-payment (of a substan-
prescribed by him or on his behalf, including the effect that the tial amount) by the employer, unless this right is excluded in the
ground conditions may have on that design and the construction contract.
methods. In line, § 29 (3) UAC 2012 provides that the contractor
is entitled to claim additional payment if, during the execution
of the works, the condition of the site appears to be different usually entitle a party to terminate the contract? Are
from that described in the specification and, owing to the nature there any legal requirements as to how the terminating
of the consequences of such differences, it is not reasonable for party’s grounds for termination must be set out (e.g. in a
the contractor to be accountable. termination notice)?
If the UAC-IC 2005 apply, the employer will be responsible
for the contents of all information he provided to the contractor Under Dutch law, the right to terminate a contract as from the
and thus will be liable if the information provided regarding the day of termination (“opzegging”) must be distinguished from the
ground conditions turns out to be incorrect. § 13 (4) UAC-IC right to terminate a contract with retroactive effect (“ontbinding”).
2005 explicitly provides that the contractor is not liable for Typically, parties have the right to terminate with retroactive
ground pollution discovered during the execution of works. effect in case the other party is in default regarding the perfor-
However, this exclusion of liability of the contractor does not mance of its obligations under the contract. The party in default
apply in case the contractor knew or should have known about will then be liable for damages of the terminating party.
the presence of the pollution before or at the time of formation Under most standard contract forms, the employer will have
of the contract (§ 13 (6) UAC-IC 2005).
the right to terminate a construction contract as from the day
of termination at any time (without cause), while the contractor
3.7 Which party usually bears the risk of a change will in general not be entitled to terminate without cause.
in law affecting the completion of the works under However, the UAC 2012 and UAC-IC 2005 provide that the
construction contracts in your jurisdiction? contractor is entitled to terminate the contract in case the works
are suspended for more than six months and in case the execu-
Both the UAC 2012 and the UAC-IC 2005 provide that the tion of the works is delayed for more than two months due to
employer bears the risk of changes in law impacting the work circumstances for which the employer is accountable. In case
under the contract, unless it must reasonably be assumed that on of such termination, i.e. “opzegging”, the employer will gener-
the tender date the contractor could already have foreseen those ally need to pay the contractor the full contract sum, minus the
consequences and unless the contract provides for specific provi- costs saved by the contractor due to not having to execute the
sions concerning the settlement of changes in wages/salaries and remaining works. However, the exact calculation method for
social security charges or of prices, rent and carriage costs. the amount to be paid differs, depending on whether this is
governed by the UAC 2012, UAC-IC 2005 or the DCC.
in relation to the design and operation of the property? 3.11 Do construction contracts in your jurisdiction
commonly provide that the employer can terminate at
The authors of the copyright material created in respect of exercising that right need to pay the contractor’s profit
the design and operation of a property are, in most cases, the on the part of the works that remains unperformed as at
employer’s design consultants, or where a contractor has carried termination?
out design, the contractor or a combination of these. Such
consultants and/or contractors will typically own the intellec-
Yes; see the answer to question 3.10. The contractor’s profit on
tual property rights in relation to the works.
the part of the works that remains unperformed will, in general,
§ 40 UAC-IC 2005 provides specific rules regarding the
not qualify as saved costs and therefore will need to be paid by
transfer of intellectual property rights of design documents.
the employer.
Under these rules, the employer shall become the owner
of such documents and these may be used by him with due
observance of the rights arising from intellectual property 3.12 Is the concept of force majeure or frustration known
law, after the employer has met his financial obligations to the in your jurisdiction? What remedy does this give the
contractor. This paragraph further provides that the employer affected party? Is it usual/possible to argue successfully
shall not be permitted to repeatedly reproduce the works as
completed in accordance with the design documents – as part
of an extension or otherwise – in whole or in part, without the
express permission of the contractor. However, the employer Dutch law recognises “force majeure” (“overmacht”). In terms
shall be entitled to complete the works in accordance with the of provisions specific to a construction contract, such events
design documents, without the intervention and approval of the initially give rise to a claim for an extension of time and cost
contractor, if the contract is terminated due to an attributable compensation (see the answer to question 3.4). In cases in which
failure of the contractor. performance of the contract is impossible due to force majeure, the
affected party/parties are in fact released from its/their obliga-
tion to render performance.
3.9 Is the contractor ever entitled to suspend works? The fact that a contract has become uneconomic does, in
general, not qualify as force majeure. However, (the cause of) such
The DCC provides that either party to a contract may suspend a fact could possibly qualify as an unforeseen circumstance or
its performance in case of non-performance by the other party, error (on both sides) with regard to the facts, which could give
provided that the obligations of the parties concerned are related rise to nullification or amendment of the contract.

104 Netherlands
3.13 Are parties, who are not parties to the contract, specific wording of the contractual provision is, in principle, not
entitled to claim the benefit of any contractual right open for interpretation. This does not mean that the parties’
which is made for their benefit? E.g. is the second or intentions are irrelevant to the interpretation of contracts
subsequent owner of a building able to claim against governed by the CAO standard, but that these intentions are
the contractor pursuant to the original construction only relevant to the extent that third parties could objectively
contracts in relation to defects in the building? have known about them. The CAO standard not only applies to
collective bargaining agreements but, in general, to all contracts
In general, the benefit of a contractual right can only be claimed which are not the result of negotiations between the contracting
by a party to the contract, unless specifically agreed upon other- parties, e.g. construction contracts which are the result of a
wise. If such a specific arrangement is not included in the public procurement procedure.
contract (e.g. with regard to warranties), third parties will only
have extra-contractual claims, such as a claim on the basis of 3.18 Are there any terms which, if included in a
tort or a violation of specific legal rights. construction contract, would be unenforceable?
3.14 On construction and engineering projects in Terms that, by their content or necessary implications, violate
your jurisdiction, how common is the use of direct public morality, public order or a statutory provision of manda-
agreements or collateral warranties (i.e. agreements tory law are null and void, or voidable in case the statutory provi-
between the contractor and parties other than the sion merely intends to protect one of the parties (article 3:40
employer with an interest in the project, e.g. funders,
DCC). Furthermore, it follows from article 6:248 DCC that any
term which, under the given circumstances, would be unaccept-
able according to the standards of reasonableness and fairness, is
In the Netherlands, direct agreements and/or collateral warran- unenforceable. The latter is, however, a high threshold which is
ties are common in larger, more complex construction projects – at least for construction contracts between professional parties
in which there are, for example, third parties involved as funders – not often met.
and/or when the employer is a developer looking to sell the
works after completion.
3.19 Where the construction contract involves an element
3.15 Can one party (P1) to a construction contract, who designer’s obligations absolute or are there limits on the
owes money to the other (P2), set off against the sums extent of his liability? In particular, does the designer have
due to P2 the sums P2 owes to P1? Are there any limits to give an absolute guarantee in respect of his work?
The extent to which the designer is responsible and liable for
Set-off is possible (article 6:127 et seq. DCC), provided that the the design depends on the exact scope and conditions of the
claim to which P1 sets off (P1’s claim on P2) is due. The right to contract. In general, the designer must perform its assignment
set-off is often excluded in general terms and conditions. in a proper and careful manner and conduct his services to the
best of his knowledge and capacity. Therefore, typically the
designer does not have absolute obligations and does not have
to give an absolute guarantee.
legal doctrine? If the duty of care is extra-contractual, Under the most common standard form for design contracts,
can such duty exist concurrently with any contractual the New Rules 2011, the designer’s liability is limited to direct
obligations and liabilities? damages and, at the choice of the parties, to a sum equal to the
value of the design contract, with a maximum of €1,000,000, or
a sum equal to three times the value of the design contract, with
The parties to a construction contract will normally owe a duty
a maximum of €2,500,000.
of care in both tort and contract. For example, the contractor
has an obligation to deliver good and decent work, exercise
reasonable care and skill and to prevent as much as possible 3.20 Does the concept of decennial liability apply in your
nuisance and damage to persons, goods or the environment. jurisdiction? If so, what is the nature of such liability and
Furthermore, it follows from the principle of reasonableness and what is the scope of its application?
fairness that parties to a contract have to take into account, and
adapt their behaviour to, each other’s interests. This applies even Not in general. However, the UAC 2012 and the UAC-IC 2005
during the negotiating stage of a contract and with regard to all provide for a 10-year liability of the contractor for defects after
aspects of (the execution of) the contract. This duty exists concur- completion in case the works have collapsed completely or
rently with any (explicit) contractual obligations and liabilities. partially, or threaten to collapse, or have come to be unfit or
threaten to be unfit for the purpose for which they were intended.
Under Dutch law, there are two general standards used to inter-
pret contracts. According to the “Haviltex standard”, it is not Most construction disputes are resolved in out-of-court settle-
the text of the contract that is decisive, but the meaning that the ments between the parties themselves. When parties do submit
parties could have reasonably attached to the provisions of the their disputes for dispute resolution, the choice is mainly between
contract in the specific circumstances at hand and what they arbitration and litigation. Because of its in-depth knowledge of
could reasonably have expected. In the “CAO standard”, the construction and the construction industry, many parties choose

CMS 105
arbitration by the arbitration board for the building industry to court. After the respondent has notified the court of its
(“Raad van Arbitrage voor de Bouw”, hereinafter: “RvA”). participation, the respondent will, in principle, have six weeks
to submit a statement of defence. After this first written round,
the judge will either plan an oral hearing or order a second round
jurisdiction (whether statutory or otherwise) or any other of written statements. After the oral and written arguments,
forms of interim dispute resolution (e.g. a dispute review the judge will decide on further continuation of the proceed-
board)? If so, please describe the general procedures. ings, e.g. by hearing witnesses or an order to produce evidence,
or hand down a judgment. How long it will take for the court
of first instance to produce its final decision will depend on the
In case a regular court is competent to hear a dispute, parties will
complexity of the case, the procedural decisions of the court and
be able to initiate regular substantive proceedings (“bodemproce-
dure”) or interim relief proceedings (“kort geding”). Some arbitral parties’ adopted course of action during the proceedings. In
tribunals, like the RvA, will similarly also allow similar interim general, proceedings in first instance will take at least one year.
relief proceedings next to their regular proceedings. The RvA Parties will have three months after the day of the judgment
also provides ‘Fast-Track Binding Advice Proceedings’ and will, in first instance to file an appeal. Similarly, the appeal proce-
on request, determine the condition or quality of a work area, dure will consist of at least one written round and will include
work, auxiliary work or any part thereof. the possibility of an oral hearing. After a judgment of the court
of appeal, parties will in some cases also be able to file an appeal
in cassation at the Dutch Supreme Court. Again, the duration
4.3 Do the construction contracts in your jurisdiction of such appeal procedures will to a great extent depend on the
commonly have arbitration clauses? If so, please specifics of the case and the course of the proceedings.
Interim relief proceedings also start with a writ of summons.
jurisdiction.
The writ will state the date the respondent will actually need to
appear in court for a court hearing, without the need of a prior
The Netherlands has multiple arbitral tribunals that are written statement of defence. After the court hearing, in which
equipped to hear construction disputes. The most prominent both parties will have been granted the opportunity to plead
amongst them are the RvA, an arbitral tribunal specialised in their case, the judge in preliminary relief proceedings will hand
construction disputes, and the Netherlands Arbitration Institute down a judgment, generally two weeks after the date of the court
(“NAI”). In particular, the awards of the RvA are considered hearing. This judgment is also open to appeal and, after a judg-
highly authoritative in the field of Dutch construction law. Most ment of the appellate court, possibly cassation.
construction contracts will therefore designate the RvA as the
competent body to rule on their disputes.
Arbitration at the RvA, and other similar tribunals, is similar 4.6 Where the contract provides for court proceedings
to court proceedings, with (multiple) written and oral rounds in a foreign country, will the judgment of that foreign
taking place and with the possibility of appeal. Typically, the court be upheld and enforced in your jurisdiction? If
tribunal will consist of three arbitrators, of whom one will be a
lawyer and the other two will have relevant technical expertise. enforcement is more straightforward (whether as a
As part of the hearing, which will in general take one full day, result of international treaties or otherwise)?
arbitrators will visit the construction site concerned, together
with the parties, and examine the work if relevant.
The DCCP makes a distinction between foreign judgments from
countries that have treaties with the Netherlands facilitating the
4.4 Where the contract provides for international recognition and enforcement of judgments, and judgments from
arbitration, do your jurisdiction’s courts recognise and countries that do not have such treaties with the Netherlands.
enforce international arbitration awards? Please advise Disputes ruled upon in countries without a relevant treaty with
the Netherlands will have to be resubmitted to the Dutch courts
through the normal procedure. The Dutch judge will, in such a
The Netherlands is a party to the New York Convention 1958. procedure, take note of the fact that the dispute has been adjudi-
Foreign arbitral awards can be recognised and enforced on the cated abroad and will decide, mainly on the basis of the quality
basis of this or another treaty (article 1075 Dutch Code of Civil of the foreign judgment and court proceedings, whether there
Procedure (“DCCP”)). Foreign arbitral awards of countries that is a need to reassess the merits of the case or not. Judgments
are not party to any relevant treaty can, under certain conditions, of countries that have a relevant treaty with the Netherlands
still be recognised and enforced on the basis of article 1076 DCCP. can generally be enforced by receiving an exequatur of a Dutch
Courts can refuse recognition and enforcement on specific court, which will only entail a limited judicial review.
grounds set out in the New York Convention and the aforemen- Judgments from courts of EU Member States can be enforced
tioned articles of the DCC. In most cases, however, foreign arbi- through the “Brussels regime”, which aims to remove obsta-
tral awards will be recognised and enforced in the Netherlands cles for the inter-union recognition and enforcement of judg-
without much difficulty. ments from EU Member States. The Brussels I-bis Regulation
allows some EU judgments in civil and commercial matters to
4.5 Where a contract provides for court proceedings be enforced without the need for judicial involvement of the
in your jurisdiction, please outline the process adopted, Dutch courts altogether.
Generally, civil court proceedings in first instance will start with

a writ of summons by the plaintiff, summoning the respondent

106 Netherlands
Jeroen Berlage specialises in (inter)national transactions, litigation and arbitration relating to infrastructure, (infrastructural) construction
and real estate law, focusing on contracts such as SPA, Turn-Key, DBFM(O) and alliance contracts. He advises and litigates on construction-
and real estate-related issues on behalf of governmental authorities, developers, consultants and some of the major European contractors. In
this capacity he has gained a vast experience of over 15 years in the field of construction and real estate law, including drafting and accompa-
nying tender processes and acting as counsel in complex building disputes, both before civil courts and before various arbitration institutes.
Jeroen graduated from Leiden University in 2000 in both Civil and Criminal Law. Jeroen has been a partner with CMS since 2011, prior to
which he successively practised at NautaDutilh and Houthoff Buruma. Jeroen’s post-graduate studies have included Grotius courses in
Real Estate Law and International Contracting. He lectures on UAV-GC, FIDIC and construction contract management at the Delft University
of Technology and Leiden University and various other educational institutions, and has acted regularly as tribunal secretary of the Royal
Institute of Engineers (Kivi-Nira). Jeroen is a member of the Construction Law Association and the Association for Construction Lawyers
(VBR-A). Jeroen is recommended in The Legal 500 for both Dispute Resolution and Construction.
CMS Tel: +31 20 3016 306

Atrium Parnassusweg 737 +31 62 0493 871
1077DG Amsterdam Email: [email protected]
Netherlands URL: www.cms.law
Maartje Speksnijder specialises in public procurement law and construction law, focusing on litigation and arbitration. Maartje represents
and advises contracting authorities, developers, consultants and contractors in all relevant industries, with a special focus on the construc-
tion, infrastructure and energy industry and sustainable, innovative and social procurement. Maartje joined CMS in 2011 and has gained
vast experience in acting as counsel in (complex) construction and procurement disputes both before civil courts and various arbitration
institutes, as well as reviewing and supervising tendering procedures and drafting contract documentation. Before joining CMS, Maartje
worked at the district court of Amsterdam.
Maartje lectures on public procurement law and she is an annotator for the legal journal JAAN (case law, public procurement law). She is a
member of the Association for Construction Law (VBR), the Dutch Association for Public Procurement Law (NVvA) and the Association for
Property Professionals Utrecht (NaJOU).
CMS Tel: +31 20 3016 363

Atrium Parnassusweg 737 +31 65 0263 339
1077DG Amsterdam Email: [email protected]
Netherlands URL: www.cms.law
At CMS, we have more than 4,800 legal and tax advisers in over 72 offices
in 41 countries. CMS is one of the largest real estate law firms by lawyer
headcount and one of the leaders in construction law. Our specialists not
only keep themselves and their clients continuously informed about the
latest developments in the field of construction and procurement law, but
also on developments in the real estate sector. This applies to civil engi-
neering projects such as civil and utility construction and installations. We
understand that real estate deals are executed to tight deadlines within
complex local legal systems. Evidently, we know local markets inside and
out, but we feel just as much at home in international markets. We will
manage our international teams from the country where you are located
with the guarantee that we have all the expertise you need in order to make
a difference in the real estate and construction market.
www.cms.law

Chapter 14 107
Nigeria
Nigeria
Patrick C. Abuka
Abuka & Partners Sunday Edward, Esq.
between two or more establishments that are desirous of coming

12 Making Construction Projects together to undertake construction work.
The forms of collaborative contracts that are commonly used
1.1 What are the standard types of construction contract are: Joint Venture Agreements; Partnership Agreements; and
Merger Agreements.
and/or (iii) any arrangement known as management 1.3 What industry standard forms of construction
contracting, with one main managing contractor and contract are most commonly used in your jurisdiction?
the chapter, we refer to “construction contracts” as an In Nigeria, the standard forms of construction contract
abbreviation for construction and engineering contracts.) commonly used in the construction industry include:
■ The FIDIC Forms.
The most common standard forms of construction contract in ■ The SFBCN, 1990.
Nigeria are: the Joint Contract Tribunal (JCT) standard form of ■ The GCC, 2011.
contract (without quantities), 2005 Edition; the standard form of ■ The JCT standard form of contract, 2005.
building contract in Nigeria, 1990 (SFBCN); the International ■ The Federal Ministry of Works Contract (variant of the
Federation of Consulting Engineers Contract (FIDIC), other- JCT).
wise known as “The FIDIC conditions of contract for construc-
tion for building and engineering works designed by the 1.4 What (if any) legal requirements are there to
employer, 1999 Edition”; the general conditions of contract for create a legally binding contract (e.g. in common law
the procurement of works, 2011 (the GCC); and the Federal jurisdictions, offer, acceptance, consideration and
Ministry of Works standard conditions of contract (Road works), intention to create legal relations are usually required)?
1999 Edition (FMOWC). The use of standard form contracts Are there any mandatory law requirements which need to
be reflected in a construction contract (e.g. provision for
in Nigeria has been found to be convenient, time-saving and
cost-effective in the construction industry. in writing)?
However, the forms may be amended to suit the requirements
of some types of project, if so required. In fact, the standard
form contracts are mostly used by public sector entities, but not Nigeria is a common law country. The legal requirements for
necessarily by private sector entities. the creation of a legally binding contract in Nigeria are offer,
Yes, we have contracts which place both design and construc- acceptance, consideration, intention to create legal relations and
tion obligations upon contractors in Nigeria. The JCT Design legal capacity.
& Build Contract, 2005 places the obligations for design and Contracts generally do not require any formalities and for this
reason there are no mandatory law requirements which need to
construction on contractors, especially in engineering and
be reflected in a construction contract. However, where the
construction contracts.
construction contract has to do with building over landed prop-
We also have design-only contracts. Any of the standard form
erty, then such construction contract must be in writing, having
construction contracts can be adopted to conclude a design-only
regard to section 4 of the Statute of Frauds, 1677 and section 5
contract which may operate under the Special Conditions of
of the Law Reform (Contracts) Act (No. 64), 1961, which require
Contract (SCC), depending on the requirements of the particular
contracts involving lease of land or any form of interest in land
construction project in Nigeria.
to be in writing.
Yes, management contracting is a well-accepted arrangement
In Nigeria, construction contracts are always in writing
in Nigeria’s construction industry.
because there is a need to have the terms and conditions of the
contract clearly spelt out. This is due to the huge capital outlay
1.2 How prevalent is collaborative contracting (e.g. of the project and the need to avoid controversies thereon.
alliance contracting and partnering) in your jurisdiction? Furthermore, construction contracts in Nigeria always contain
To the extent applicable, what forms of collaborative a provision for adjudication or arbitration. The inclusion of
contracts are commonly used? an adjudication or arbitration clause in a construction contract
makes it mandatory for the contract to be in writing as envisaged
Collaborative contracting is prevalent in Nigeria. It is an agreement by the Arbitration and Conciliation Act, Cap. A18, LFN, 2004.

108 Nigeria
1.5 In your jurisdiction please identify whether there 1.7 Are there any statutory requirements in relation to
is a concept of what is known as a “letter of intent”, in construction contracts in terms of: (a) labour (i.e. the
which an employer can give either a legally binding or legal status of those working on site as employees or
non-legally binding indication of willingness either to as self-employed sub-contractors); (b) tax (payment of
enter into a contract later or to commit itself to meet income tax of employees); and/or (c) health and safety?
The following statutory requirements exist in relation to
construction contracts:
Yes, there is a concept of what is known as a “letter of intent” (a) There are quite a number of pieces of labour legislation
in Nigeria. Whether or not an employer can, through a letter of that employers and contractors must comply with. These
intent, give a legally binding indication of willingness to either include the Labour Act, 2004, which regulates all aspects
enter into a contract later or to commit itself to meet certain of employment in Nigeria, such as terms of employment,
costs to be incurred by a contractor depends on whether or not wages, classes of workers, probationary periods, redun-
the letter of intent does not contain a phrase such as “provisional dancy, etc., the Employees Compensation Act, 2010
offer”, “without prejudice” and so on, and has been accepted (ECA), and the Labour Safety, Health, and Welfare Bill,
and/or acted upon by the contractor. Where a letter of intent 2012 (LSHWB). The President is yet to give his assent to
does not contain such a phrase and has been accepted and/or the LSHWB. When he does so and the LSHWB is signed
acted upon by the contractor, such a letter will create a binding into law, it shall repeal the extant Factory Act, 2009, and
contract. However, where such letter of intent contains a phrase only then will safety and health issues, with respect to
(such as “provisional offer” or “without prejudice”) which construction activities, be adequately covered.
suggests that there is no binding obligation, any party who acted (b) Employers and employees are required to register for a
on the same will be incapable of enforcing the provision of the monthly co-contributory pensions scheme with the Nigerian
letter. The use of the aforementioned phrases, “provisional Social Insurance Trust Fund Scheme (NSITF). Such funds
offer” or “without prejudice”, suggests that there is no intention are further remitted to the Pensions Fund Administrator
to create legal relations. (PFA) of choice for the benefit of the employee at its maturity.
Income received as wages are tax-deductible from source
1.6 Are there any statutory or standard types by employers under the pay-as-you-earn (PAYE) scheme
of insurance which it would be commonplace or and are remitted to the State Inland Revenue Service (IRS).
compulsory to have in place when carrying out Employers and/or contractors, as incorporated companies,
construction work? For example, is there employer’s pay Company Taxes to the Federal Inland Revenue Service
liability insurance for contractors in respect of death (FIRS). There are other taxes, which include education tax,
and personal injury, or is there a requirement for the etc., which may be payable under construction contracts in
Nigeria.
(c) There is no construction industry-specific legislation on
There is no statutorily required type of insurance specific to the health and safety requirements in Nigeria. However, the
construction industry. However, section 64 (1) of the Insurance ECA, 2010 makes provision for compensation of the
Act, Cap. I 17, LFN, 2010 provides for the insurance of a employee in case of death, injury, disease or disability which
building under construction. The section provides that: “No may arise in the course of employment. The Factories Act
person shall cause to be constructed any building of more than (FA), 2004, does not cover construction sites in its defini-
two floors without insuring with a registered insurer his liability tion of “Factory”. This means, therefore, that the provi-
in respect of construction risks caused by his negligence or the sions for both safety and health of workers in the said
negligence of his servants, agents or consultants which may Act exclude employees under construction contracts.
result in bodily injury or loss of life to or damage to property of However, section 57 of the FA empowers the Minister of
any workman on the site or of any member of the public.” Labour and Productivity to make a regulation which will
Also, from the provisions of section 65 (1) of the Insurance extend the provisions of the FA on safety and health to
Act, it is mandatory to insure (with a registered insurer) every works and engineering construction sites. It is expected
public building against the hazards of collapse, fire, earthquake, that, when the LSHWB, 2012, is signed into law by the
storm and flood. President, safety and health considerations as they relate to
“Public building”, from section 65 (2) of the Insurance Act, construction activities will be covered adequately.
includes a tenement house, hostel, a building occupied by a
tenant, lodger or licensee and any building to which members of
the public have ingress and egress for the purpose of obtaining
education or medical services, or for the purpose of recreation released either in whole or in part when: (a) the works are
or transaction of business. substantially complete; and/or (b) any agreed defects
Most standard form construction contracts prescribe insur- liability period is complete?
ance cover in the names of both the employer and the contractor.
The following are types of insurance commonly required in
Yes, if that is the agreement of the parties. It is also common
construction contracts:
for construction contracts to contain a Retention Bond (or
■ All-risk insurance/loss insurance.
Guarantee) for the contractor, in the place of cash, which the
■ Public liability insurance.
employer ought to have retained, prior to full completion of the
■ Professional indemnity insurance (on a “claims made”
contract.
basis for professional negligence).
■ Latent defect insurance.

Abuka & Partners 109
1.9 Is it permissible/common for there to be 22 Supervising Construction Contracts

restrictions on the nature of such bonds? Are there any 2.1 Is it common for construction contracts to be
grounds on which a call on such bonds may be restrained supervised on behalf of the employer by a third party
(e.g. by interim injunction); and, if so, how often is such (e.g. an engineer)? Does any such third party have a
relief generally granted in your jurisdiction? Would such duty to act impartially between the contractor and the
bonds typically provide for payment on demand (without employer? If so, what is the nature of such duty (e.g. is
pre-condition) or only upon default of the contractor? it absolute or qualified)? What (if any) recourse does a
It is common practice in the construction industry for contrac-
tors to take out performance Bonds/Guarantees for the benefit
of the employer as security for the performance of their obli- Construction contracts usually contain provisions for the
gations under the contract. Under some standard forms of employment of a third party as the construction manager, who
construction contract, like the GCC and the FIDIC contracts, is an agent of the employer. He also performs quasi-judicial
the employer may terminate the contract and also institute an decision-making functions and supervises the works. Such
action against the contractor for failing to take out performance construction manager is bound to act impartially. In directing
bonds. There are no restrictions on the nature of such bonds, relations between the employer and the contractor, the construc-
but the nature of such is usually determined by the obligations tion manager’s duty as an agent of the employer is limited by
they create. the terms of the contract and he must act independently and
A call on such bonds may be restrained if there is evidence impartially, when communicating with both of them. However,
before the court that the performance bond no longer subsists except where the provisions of the contract place limitations
or that the guarantor had been discharged. on the powers of the construction manager, the duty of the
A call on such bonds may also be restrained if the guarantor construction manager is absolute.
successfully pleads the doctrine of non est factum – meaning that A party to a construction contract who is aggrieved with the
the performance bond was not the deed of the guarantor or conduct of the third party is at liberty to resort to court in the
never emanated from the latter. event that the third party breaches his duty to act impartially.
Such relief is most unlikely to be granted on an ex parte applica-
tion. The court would prefer to have the employer put on notice. 2.2 Are employers free to provide in the contract that
If there is a Motion on Notice before the court for such relief, they will pay the contractor when they, the employer,
the court would most likely grant the same pending the determi- have themselves been paid; i.e. can the employer include
nation of the substantive suit. However, such reliefs are usually in the contract what is known as a “pay when paid”
clause?
refused by the court after the hearing of the substantive suit,
especially if there is no merit in the guarantor’s case, which is
usually the case. A “pay when paid clause” is unusual in construction contracts,
Performance bonds typically provide for payment only upon especially in Nigeria. However, parties have freedom of contract
default of the contractor. and there is nothing in law which stops them from introducing
this clause to their contract if both parties agree that the clause
should form part of the terms of their contract.
subsidiary companies? Are there any restrictions on the 2.3 Are the parties free to agree in advance a fixed
nature of such guarantees? sum (known as liquidated damages) which will be
Yes. There are no restrictions on the nature of such guarantees.
The employer is at liberty to accept or refuse guarantees from there any restrictions on what can be agreed? E.g. does
the contractors’ parent company or companies. the sum to be paid have to be a genuine pre-estimate
the site? Yes. Parties are free to make a provision for loss occasioned by
the breach of the construction contract. Where the provision is
No. Nigerian law frowns on self-help or lawlessness in any form. a genuine attempt to pre-estimate the loss likely to follow from
It will amount to self-help if the contractors decide to retain the breach, the clause will be a liquidated damages clause and
title and right to remove goods and materials supplied from the the employer will be able to recover that sum irrespective of his
site until they have been paid. However, if the employer and actual loss. The employer will be bound by that amount whether
the contractors, from the construction contract, agree other- or not the amount is smaller than the actual loss suffered by him.
wise, the court will have no option than to give weight to their Yes, there are restrictions on what can be agreed. The sum to
intention. be paid has to be a genuine pre-estimate of the loss occasioned
by the contractor.

110 Nigeria
Yes, the court has unfettered discretion to re-open the construc- occurred simultaneously, the contractor will be entitled to an
tion contract and revise the agreed rate of liquidated damages extension of time in the absence of any contrary provision in the
where the sum agreed upon is a penal sum, that is, an amount construction contract.
designed to deter the contractor from breaking the construction However, where the fault of the employer is the dominant cause
contract or an amount that would give the employer an unmeri- of the delay, the contractor, in the absence of any contrary inten-
torious windfall. The court can also re-open the construction tion of parties, may be entitled to costs occasioned by the delay.
contract if it finds the same to be extortionate. A contract will
be extortionate where, for example, the agreement is harsh and
unconscionable or where there is a provision for a rate of interest a construction contract may no longer bring claims
which is excessive. The court may strike out the clause as penal against each other? How long is that period and when
and the employer, in this circumstance, will be left with his does time start to run?
claims for damages at large.
Yes, there is a limit beyond which the parties to a construction
32 Common Issues on Construction contract may no longer bring claims against each other.
Contracts The period is six years and time begins to count from the date
the cause of action arose (section 7 of the Limitation Act, Cap.
3.1 Is the employer entitled to vary the works to be 522, LFN (Abuja), 1990). However, the general rule of limi-
performed under the contract? Is there any limit on that tation of action admits some exceptions, one of which is the
right? written acknowledgment or part-payment of debt. The prin-
ciple of acknowledgment or part-payment is founded on the
The terms of the construction contract, including the works to theory that acknowledgment or part-payment postpones time
be done under the contract and the rights and obligations of the and establishes a fresh contractual relationship so that a cause of
parties to the contract, are stated in the construction contract. action then starts to run from the date of the fresh contractual
The contract itself is the document to be considered in deter- relationship (L.T Thadani & Anor. vs. National Bank of Nigera Ltd.
mining whether or not the employer is entitled to vary the works 1972 LPELR SC. 63/1969).
to be done. Also, whether or not there is a limit on that right is Furthermore, the Supreme Court of Nigeria has held that
a fact that is to be gathered from the contract. where an action is instituted by a party to a construction contract
If the contract is silent on this matter, then any variation that within time but at the wrong court, the time spent in the wrong
would fundamentally change the works to be done would auto- court would not be counted when considering the issue of the
matically constitute a new contract for which a new contract limitation period (Sifax Nigeria Limited & 4 ors. vs. Mig fo Nigeria
price would be agreed. Ltd &Anor (2018) 9 NWLR (Pt. 1623) 138 at 185, para. E).
3.2 Can work be omitted from the contract? If it is 3.6 Which party usually bears the risk of unforeseen
omitted, can the employer carry out the omitted work ground conditions under construction contracts in your
himself or procure a third party to perform it? jurisdiction?
Any item of work which the employer chose to omit whilst This can be determined in the contract. But generally in law,
drawing the contract necessarily cannot be part of the contract, save for any term to the contrary, the contractor bears the risk
and the right to do the work himself or award it to a third party of unforeseen ground conditions. It is commonly expected that
is also not fettered by any external instrument or statute. It is the construction contract will state who bears what risk. Quite
uncommon for contracts to stipulate that the employer may omit often, the procurement methods adopted help in apportioning
work for the purpose of awarding it to another party. risks appropriately, while being mindful of the principle that risk
should be allocated to the party most able to bear it.

a construction contract (e.g. a fitness for purpose 3.7 Which party usually bears the risk of a change
obligation, or duty to act in good faith)? in law affecting the completion of the works under
The various rights and obligations of parties to a contract are

often provided in the specific contract. In Nigeria, implied The contract, of course, will specifically indicate which party
terms are read into the contract by either the conduct of the bears the risk of a change in law affecting completion. However,
parties, or operations of law, or by the custom or usage of the it is an implied term in the construction contract that the
trade to which the transaction relates. Implied terms often flow contractor must adhere to and comply with extant laws and
or read into the express terms of the contract. However, any regulations applicable to its operation. In the absence of an
term which would contradict the express terms and character of express provision in the contract specifying who bears what risk,
the contract would not be implied into the contract. each party in the contract will be responsible for complying with
the obligations of the law pertaining to it.

events, one the fault of the contractor and one the fault 3.8 Which party usually owns the intellectual property
or risk of his employer, is the contractor entitled to: (a) in relation to the design and operation of the property?
that concurrent delay? The employer pays for and obtains ownership of all intellec-
tual property severally developed by the architect/designer or
Where the cause of a delay is concurrent, in that both the contractor for the execution of the project, provided that the
employer’s delaying event and the contractor’s delaying event contract did not specify otherwise.

3.9 Is the contractor ever entitled to suspend works? 3.13 Are parties, who are not parties to the contract,
A contractor cannot, without appropriate notice to the archi- subsequent owner of a building able to claim against
tect/engineer, suspend work, even where the employer has failed the contractor pursuant to the original construction
to pay in accordance with the contract’s terms. contracts in relation to defects in the building?
The suspension of work by the contractor without due regard
to the contractual provisions may make it liable for breach of
Under the common law doctrine of privity of contract, which
contract or delay. The time and manner in which a contractor
is applicable in Nigeria, a contract does not confer any benefit
may suspend work is usually governed by the relevant provisions
or impose obligations on non-parties to the contract. However,
and terms of the contract.
there are exceptions to the general rule of privity of contract
doctrine whereby, under a construction contract, a third party
3.10 Are there any grounds which automatically or could benefit under the contract. A collateral warranty provides
usually entitle a party to terminate the contract? Are for an extra-contractual facility, which gives rights to a third party
there any legal requirements as to how the terminating under the contract. In other words, a subsequent owner of a
party’s grounds for termination must be set out (e.g. in a building can claim against the contractor pursuant to the original
construction contract in relation to defects in the building, if any.
Yes. If there is a breach of the fundamental terms of the contract,

the innocent party is not only entitled to terminate the contract
but also has the right to seek damages for breach of contract. agreements or collateral warranties (i.e. agreements
The contract may also stipulate the grounds upon which between the contractor and parties other than the
the innocent party may terminate the contract. Such grounds employer with an interest in the project, e.g. funders,
include grounds of fraud, misrepresentation, mistake, etc. other stakeholders, and forward purchasers)?
3.11 Do construction contracts in your jurisdiction The use of direct agreements or collateral warranties (i.e. agree-
commonly provide that the employer can terminate at ments between the contractor and parties other than the employer)
any time and for any reason? If so, would an employer is very common in construction and engineering projects in
exercising that right need to pay the contractor’s profit Nigeria.
termination?
Construction contracts in Nigeria do not commonly provide due to P2 the sums P2 owes to P1?Are there any limits
that the employer can terminate at any time and for any reason. on the rights of set-off?
However, where an employer terminates a construction
contract before the completion of work, the employer may be
Set-off is a term well recognised under Nigerian law. Where two
sued by the contractor for breach of contract and may be ordered
parties are both indebted to each other, one debt can set off the
to pay both special and general damages to the contractor.
other. However, both debts claimed by the two parties must be
The employer cannot, however, be made to pay contractor’s
in the form of a liquidated money demand. There is no set-off
profit on the part of the works that remains unperformed as at
right against future debt or debt which is still contested.
termination.

Parties to construction contracts owe a duty of care to each

The concept of “force majeure” or frustration of contract is well
other both in contract and in tort and such duty of care, which
recognised under Nigerian law and such force majeure events
is extra-contractual, can exist concurrently with any contractual
include natural disasters (earthquakes, floods, tornados, hurri-
obligations and liabilities.
canes), war, labour strikes, pandemics and so on, for which
contracting parties cannot be held accountable or responsible.
A force majeure event is an event which may take place in the 3.17 Where the terms of a construction contract are
course of a contract which is capable of hampering the perfor- ambiguous, are there rules which will settle how that
mance of the contract. A force majeure clause is included in a ambiguity is interpreted?
contract to excuse the breach of the same as a result of acts that
are independent of the will of the parties to the contract. Yes. The rules of interpretation include the Literal Rule, Golden
Force majeure also entitles the party relying on it to extend Rule, Mischief Rule and the Ejusdem Generis Rule. These rules,
performance of the contract. A contract which has become popularly known as the Rules of Interpretation, are to aid the
uneconomic cannot sufficiently ground a claim of force majeure in courts in resolving the ambiguity in the provisions of construc-
order to be excused from the obligations in the contract. tion contracts in order to know the intendment of parties to
construction contracts.

112 Nigeria
3.18 Are there any terms which, if included in a 4.2 Do you have adjudication processes in your
construction contract, would be unenforceable? jurisdiction (whether statutory or otherwise) or any other
Yes. The Nigerian courts will not enforce contracts whose terms
would produce any unlawful purpose or will be illegal and/or
contrary to public policy. Yes. Adjudication processes are available for the resolution of
construction contract disputes in Nigeria, but they are spar-
ingly deployed. The adjudication method of choice is contrac-
3.19 Where the construction contract involves an tually included in the standard form of construction contract
even though there is no statute governing adjudication in
limits on the extent of his liability? In particular, does the Nigeria. The appointment of the adjudicators is made jointly
designer have to give an absolute guarantee in respect of by the employer and the contractor and named in the Special
his work? Conditions of Contract (SCC). Since there is no legislation
governing adjudication in Nigeria, all incidences of adjudication
operate contractually in accordance with the relevant forms of
To properly situate the obligations or liabilities of the designer
construction contract, e.g. the GCC Form. The procedures are
in a construction contract, the terms of the contract must be
therefore as provided in the said agreements.
considered. In a typical design and build contract, the design
is undertaken by a professional (an architect/engineer) and
it is implied in a contract that such a professional will deploy 4.3 Do the construction contracts in your jurisdiction
the utmost care, skill and expertise in carrying out his obliga- commonly have arbitration clauses? If so, please
tions under the contract. In relation to this, a designer may be explain how, in general terms, arbitration works in your
found to owe a “fit for purpose” obligation. However, onerous jurisdiction.
responsibilities in respect of the construction are placed on the
contractor, who impliedly must be found to have undertaken Yes. Arbitration as a method of dispute resolution is the most
to provide works that are fit for purpose, and in that regard the preferred mechanism for the resolution of disputes in the
contractor’s obligations are quite absolute. This is often not the construction industry in Nigeria. Arbitral proceedings are initi-
case for the designer. The designer may only be liable for negli- ated in accordance with the Arbitration and Conciliation Act,
gence (where the design is found to be defective), except where Cap. A18, LFN, 2004, and the rules made pursuant thereto.
there is a collateral agreement with the contractor wherein the The outfits that render arbitration services include the multi-
designer has given an absolute guaranty in respect of his work. door courthouses within the premises of the High Court of
the different States of the Federation, the International Centre
for Arbitration and Mediation in Abuja and the Lagos Regional
jurisdiction? If so, what is the nature of such liability and Centre for International Commercial Arbitration. Construction
what is the scope of its application? contracts normally provide for: the processes for referrals to
arbitration; the number of arbitrators; the qualification that the
proposed arbitrator must possess; the appointing authority, if the
Decennial liability is a legal liability insurance taken out by
parties did not agree on who to appoint as the arbitrator(s); and
builders to cover the costs associated with the defects that may
the applicable law that would govern the arbitral proceedings, etc.
compromise the integrity of their structures or make them
Parties are bound by the arbitration clause contained therein,
unsuitable for their intended purposes.
if any. Where the arbitral tribunal comprises more than one arbi-
Although, in Nigeria, no statute has provided for the concept
trator, any decision of the tribunal, known as the “award”, shall,
of decennial liability, parties to a construction contract are at
unless otherwise agreed by the parties, be made by a majority of
liberty to introduce the concept to their contract and make
all the members of the tribunal (section 24 (1) of the Arbitration
provisions that will cover costs associated with the potential
and Conciliation Act).
collapse of the building after completion thereof.
The court may set aside an arbitral award, if the party making
the application furnishes proof that the award contains deci-
42 Dispute Resolution sions on matters which are beyond the scope of the submission
to arbitration (section 29 (2) of the Act). The court may also
4.1 How are construction disputes generally resolved? set aside the award of an arbitral tribunal where an arbitrator
has misconducted himself, or where the arbitral proceedings or
Construction disputes are generally resolved through consensual award have been improperly procured (section 30 (1) of the Act).
methods such as mediation, conciliation or arbitration. Where An arbitral award is recognised as binding and is enforceable
these methods fail, resort to litigation becomes the last option by the court upon the application of the party relying thereon
for parties. (section 31 of the Act).
The mutual demand for speed, cost-effectiveness, preser-
vation of relationships and maintenance of privacy needed in 4.4 Where the contract provides for international
the resolution of construction contract disputes are the factors arbitration, do your jurisdiction’s courts recognise and
that determine the dispute resolution method to be adopted by enforce international arbitration awards? Please advise
parties. Construction contracts always contain the preferred or of any obstacles (legal or practical) to enforcement.
chosen method for dispute resolution, and the method, as well
as other terms of the contract, is binding on parties. Nigeria has domesticated the Convention on the Recognition
and Enforcement of Foreign Awards (the New York Convention)

and has ratified the same. Thus, foreign arbitral awards in inter- Final decisions from the court of first instance may take
national commercial disputes are enforceable by the Nigerian between one and three years. Summary trial proceedings or
courts, except where the awards are from countries that are not proceedings under the undefended list may be concluded in less
privy to the Convention or where public policy considerations than 12 months.
will hamper their enforceability. Appeals from the Court of Appeal up to the Supreme Court
may not take less than 10 years because the Court of Appeal
and Supreme Court give priority to cases such as criminal cases,
in your jurisdiction, please outline the process adopted, cases involving financial crimes and election petition matters.
any rights of appeal and a general assessment of This is why alternative dispute resolution is strongly recom-
how long proceedings are likely to take to reduce: (a) mended for construction contract disputes.
Court proceedings in Nigeria are initiated in accordance with court be upheld and enforced in your jurisdiction? If
the rules of the relevant court. the answer depends on the foreign country in question,
There are four ways of commencing an action in the Nigerian are there any foreign countries in respect of which
courts, particularly in the High Court and the Federal High enforcement is more straightforward (whether as a
Court. These are by Writ of Summons, by Originating Summons,
by Originating Motion or by Application and Petition. Writ of
Summons and Originating Summons are the most common ways Yes, especially if the judgment is from a country that will give
of commencing an action in the Nigerian courts. An action that reciprocal enforcement to the judgments from the Nigerian
is contentious or likely to be contentious is commenced by way courts.
of Writ of Summons, while Originating Summons is used for an By virtue of the combined interpretation of the Foreign
action that is not contentious or likely to be contentious (Order Judgment (Reciprocal Enforcement) Act, Cap. F35, LFN, 2004,
2, Rule 1 of the High Court of the Federal Capital Territory (Civil and the Reciprocal Enforcement of Judgments Ordinance, Cap.
Procedure) Rules, 2018, and Order 5 of the High Court of Lagos 175, LFN, 1958, foreign judgments may be upheld and given
State (Civil Procedure) Rules, 2019). effect to in Nigeria if the judgments have been registered in the
Actions that are not contentious include actions for interpre- High Court of the State where the judgments are to be enforced.
tation of contracts, wills, judgments or documents generally. Foreign judgments are enforceable provided:
Disputes emanating from construction contracts with regard (a) they are judgments of superior courts in the foreign country,
to breaches of contract or declaratory orders for specific perfor- which has reciprocal treatment of judgments with Nigeria;
mance are, by the rules of the relevant State High Court, insti- and
tuted in the High Court of the State where the contract ought to (b) they have to do with monetary judgments that are final and
have been performed or where the defendant resides or carries conclusive between the parties.
on business. Under the Ordinance, the application for leave to register
By the Constitution of the Federal Republic of Nigeria, 1999, the said foreign judgment in Nigeria must be brought within 12
as amended, any party that is aggrieved by the decision of the months from the date the judgment was delivered in the foreign
High Court or any other courts of co-ordinate jurisdiction, such court. Once registered, it then becomes a judgment of the High
as the Federal High Court and National Industrial Court, is enti- Court and can become enforceable via a certificate issued in
tled to appeal against that decision to the Court of Appeal. accordance with the Sheriffs and Civil Process Act, C6, LFN,
An aggrieved party must file its appeal against the said deci- 2004.
sion within 90 days if the decision is a final decision, and within Enforcement is more straightforward in Commonwealth
14 days if it is an interlocutory decision, or within such longer countries like Nigeria because these countries are always ready to
period the Court of Appeal may allow upon the application of give effect to the judgments emanating from the Nigerian courts.
the Appellant for an extension of time. Appeals from the deci-
sion of the Court of Appeal go to the Supreme Court which has
the final say in any matter brought before it.

114 Nigeria
Patrick C. Abuka is the founding and Managing Partner of Abuka & Partners, Legal Practitioners. He was admitted in 1974 as a Solicitor and
Advocate of the Supreme Court of Nigeria. Education: the University of Ife; the University of Lagos; and the Nigerian Law School (LL.B. Hons.,
1973; B.L., 1974; M.B.A., 1975; LL.M., 2000). Lecturer, MBA Class, University of Lagos, 1976–1978. Member: Nigerian Bar Association (NBA);
International Bar Association; American Bar Association (International Associate Member); Lagos Chamber of Commerce; Nigerian-American
Chamber of Commerce; Hon. Life Vice President, Nigerian-British Chamber of Commerce; and Nigerian-German Business Association.
Abuka & Partners Tel: +234 803 305 4371

10th Floor, Western House Email: [email protected]
8/10 Broad Street
Lagos
Nigeria
Sunday Edward, Esq. is Head of Chambers and Partner, Abuka & Partners, Legal Practitioners. Born on 19 October 1969. Studied law at
the University of Ibadan, Ibadan, Oyo State – obtained LL.B. degree, 1997. Admitted to the Nigerian Bar, as Solicitor and Advocate of the
Supreme Court of Nigeria, in 1998 after obtaining qualifying B.L. certificate at the Nigerian Law School in 1997. Obtained LL.M. degree at the
University of Ife, now known as Obafemi Awolowo University, Ile-Ife, Osun State, in 2004. Member of professional associations including the
Nigerian Bar Association (NBA), Business Recovery & Insolvency Practitioners Association of Nigeria (BRIPAN) and International Association
of Restructuring, Insolvency & Bankruptcy Professionals. He is a Notary Public and a litigator to the core.
Abuka & Partners Tel: +234 806 645 1985

Adamawa Meeting Room Email: [email protected]
Transcorp Hilton Hotel
Maitama, Abuja
Nigeria
Abuka & Partners emerged from the restructuring of the law firm popu-
larly known as Abuka, Ajegbo, Ilogu & Nwaogu which was founded in
Lagos on 28 March 1979 by the four named partners who had practised
individually and separately until that date. Abuka & Partners maintains
offices in Lagos and Abuja. The Abuja office was set up in the Federal
Capital Territory in 1987, initially with a view to effectively providing the
complex and sophisticated legal services required by a major multina-
tional corporate client which has businesses in 109 countries around the
world. The firm’s areas of practice include Commercial and Corporate
Law, International Joint Ventures, Foreign Direct Investments, Immigration
Law, Intellectual Property, Equipment Finance and Leasing, Law of Banking
and Insurance, Capital and Money Markets, Secured Credit Transactions,
Natural Resources Law, Aviation Law and Constitutional Law.

Chapter 15 115
Norway
Norway
Jacob F. Bull
Advokatfirmaet Thommessen AS Henrik Møinichen
Further, we refer to the standard NS 8402:2010 General condi-

12 Making Construction Projects tions of contract for consultancy commissions with remunera-
tion based on actual hours spent. This standard is intended to
1.1 What are the standard types of construction regulate contractual relations between commissioning parties
and architects, consultant engineers and other professionals in
the context of commissions connected to the construction and
only contract; and/or (iii) any arrangement known as civil engineering sector, and is, for example, used for follow-up
management contracting, with one main managing work during the construction period.
contractor and with the construction work done by a In addition, we refer to the standard NS 8403:2005 General
series of package contractors? (NB For ease of reference conditions of contract for construction supervision commis-
throughout the chapter, we refer to “construction sions. This standard is intended to regulate contractual relations
contracts” as an abbreviation for construction and between commissioning parties and construction supervisors
relating to construction supervision in the context of construc-
tion and civil engineering works.
There are two main types of construction contract in Norway: Lastly, we refer to the standard NS 8404:2013 General condi-
(i) NS 8405:2008 Norwegian building and civil engineering tions for independent control commissions.
contracts; and A standard contract for EPCM (engineering, procurement,
(ii) NS 8407:2011 General conditions of contract for design and construction management services) contracts has not been
and build contracts. developed in Norway and EPCM contracts are not widely used
The above standard contracts have been prepared and unan- within the construction sector.
imously recommended by a committee appointed by Standards
Norway, based on a proposal put forward by representatives
both from the employer side and the contractor side, and may
thus be regarded as “agreed documents”. To the extent applicable, what forms of collaborative
NS 8405 has been prepared for use in a contractual relation- contracts are commonly used?
ship in which one party (the contractor) undertakes to carry
out building or civil engineering work (including installations,
Collaborative contracting or alliance contracting is used in
new buildings, maintenance, repairs and alterations) for another
Norway, but there are at present no standard forms for such
party (the employer), and in which most of the drawings, descrip-
contracts. The use of collaborative contracting is increasing both
tions and calculations are to be provided by the employer. Thus,
onshore and offshore.
this standard contract places the design obligations upon the
employer and the construction obligations upon the contractor.
NS 8407 has been prepared for use in a contract where one 1.3 What industry standard forms of construction
part (the design and build contractor) takes on all or a substan- contract are most commonly used in your jurisdiction?
tial proportion of the design work in addition to the execution
of building or civil engineering work (including installations, NS 8405:2008 Norwegian building and civil engineering
new buildings, maintenance, repairs and alterations) for another contracts and NS 8407:2011 General conditions of contract for
party (the employer). Thus, this standard contract places both design and build contracts are most commonly used; see our
the design and construction obligations upon the contractor. answer to question 1.1 above for additional details about these
As to the forms of design-only contracts, the following standard forms of construction contract.
standard is commonly used: NS 8401:2010 General conditions Within the offshore sector, the Norwegian Fabrication
of contract for design commissions. This standard is intended Contract (fabrication/construction obligations upon the
to regulate contractual relations between commissioning parties contractor) and Norwegian Total Contract (design and construc-
and architects, consultant engineers and other professionals tion obligations upon the contractor), both revised and updated
in the context of design commissions in the construction and in 2015, are commonly used. Some employers also use these
civil engineering sector, including the follow-up of design work standards as the basis for construction, and design and construc-
during the construction period and warranty period. tion, contracts for onshore construction projects.

116 Norway
1.4 What (if any) legal requirements are there to contract object. The employer must be co-insured. Further,
create a legally binding contract (e.g. in common law the contractor shall procure and maintain liability insurance,
jurisdictions, offer, acceptance, consideration and which shall cover liability for any damage and economic loss the
intention to create legal relations are usually required)? contractor may cause to the person or possessions of the employer
Are there any mandatory law requirements which need to or any third party in connection with the performance of its obli-
be reflected in a construction contract (e.g. provision for gations under the contract.
The parties are, however, free to agree on a different insur-
in writing)?
ance regime.
With regard to large building or civil engineering work
As a starting point and in accordance with the Norwegian contracts, we often see that the employer provides and main-
Contract Act, a legally binding contract is generally entered into tains a “Construction All Risk” (“CAR”) or “Builder’s All Risk”
once an offer has been given and such offer is accepted within (“BAR”) insurance. On such occasions, the contractor will
the time limit for acceptance. In contrast to English contract usually be co-insured.
law, two parties can enter into a binding agreement regardless For the sake of completeness, it should be mentioned that
of whether or not any (mutual) “consideration” is agreed upon. an employer must, according to mandatory labour legislation,
Pursuant to Norwegian case law, an agreement may be legally provide and maintain workmen’s injury insurance. In addition,
binding even if the parties have not entered into a written employers will always require that the contractor provides and
contract. For instance, an agreement can be legally binding maintains liability insurance and, in the case of design work,
based on one party’s act of quasi ex contractu (a certain type of often professional liability insurance has to be provided and
behaviour), or if it can be determined that the parties have maintained by the engineer.
agreed on the main terms of the agreement. Furthermore,
the contracting parties’ justified expectations may imply that a
legally binding contract has been entered into. 1.7 Are there any statutory requirements in relation to
Consequently, there are no formal requirements with respect
to the validity and enforceability of a contract, i.e. that written as self-employed sub-contractors); (b) tax (payment of
contracts, oral contracts and electronic contracts (scans) are income tax of employees); and/or (c) health and safety?
binding upon the parties and will be enforceable. In order to
enforce an agreement, it would only be necessary to demonstrate
Norwegian authorities have a constant (and increasing) focus
on the balance of probabilities that the parties have entered into
on securing equal working conditions, maintaining good health
the agreement in question.
and safety conditions, and determining environment (“HSE”)
routines on construction sites in Norway. Many of the large-
1.5 In your jurisdiction please identify whether there scale buyers in Norway are public procurers, which have a
is a concept of what is known as a “letter of intent”, in particular focus on compliance. Both HSE and CSR issues are
which an employer can give either a legally binding or often to a certain extent regulated in construction contracts.
Contractors who are interested in Norwegian construction
certain costs to be incurred by the contractor whether or projects must be prepared to provide documentation for both
not a full contract is ever concluded. their proper knowledge about the relevant legislation, and their
ability/willingness to implement systems that will ensure that
projects are performed in compliance with such legislation.
Pursuant to Norwegian case law, there is a presumption that a
There are statutory requirements (and collective wage agree-
Letter of Intent does not commit the parties to enter into the
ments) with respect to, inter alia, the following:
intended agreement. By entering into a Letter of Intent, the parties
(i) working conditions: includes requirements related to
are committed to the process of entering into a legally binding
salary, holidays and holiday pay, working hours, insurance
contract, not to the contract per se. By signing a Letter of Intent,
and pension, accommodation and other working condi-
the parties demonstrate that they are serious and committed to act
tions; and
loyally in negotiations towards a final agreement, but it does not
(ii) health, safety and environment matters: mainly consisting
involve a legal duty to enter into a binding contract.
of requirements relating to safety on construction sites, and
However, there is a “point of no return”, and the circum-
the obligation to ensure a safe physical and mental working
stances may imply that the parties cannot back out of the agree-
environment.
ment. It is important to keep in mind that it is the contents of
The contractor must ensure that the salary and working
the Letter of Intent that serve as a guideline for the interpre-
conditions applicable for the contractor or any sub-contractor
tation. It has no consequence that the parties have called the
personnel are in accordance with the Act of 4 June 1993 no. 58
agreement a “Letter of Intent”, as long as the nature of it fulfils
relating to general application of wage agreements, etc. and regu-
the general conditions for a legally binding contract.
lations appurtenant to the Act. As a minimum, the conditions
shall correspond to the wage agreements applicable to the work.
1.6 Are there any statutory or standard types As to HSE, the employer mainly has a controlling function,
of insurance which it would be commonplace or whereas the contractor is responsible for ensuring that compli-
compulsory to have in place when carrying out ance with HSE requirements is an integral part of the work plan.
construction work? For example, is there employer’s The contractor must present a plan for its HSE work, regular
safety inspections must be carried out, and routines and systems
contractor to have contractors’ all-risk insurance? for handling lapses and incidents must be established.
With respect to tax, the contractor must submit an RF-1199
form to the Central Office – Foreign Tax Affairs (“COFTA”)
According to NS 8407, the contractor shall keep insured mate- concerning information about the contract, contractor and his
rials, design documents and that part of the work which has personnel. Whether an employee must pay tax on earnings
been performed at any time until delivery/take-over of the

Advokatfirmaet Thommessen AS 117
from work which has been performed in Norway depends on 1.10 Is it permissible/common for there to be company
several conditions, e.g. the period of time spent in Norway and guarantees provided to guarantee the performance of
whether the business may be deemed as conducted or carried out subsidiary companies? Are there any restrictions on the
in Norway. In any event, tax agreements between Norway and nature of such guarantees?
another state may limit the right to demand payment of income
tax related to work performed in Norway. It is quite common to require a parent company guarantee in the
event the contractor is the subsidiary of another company, often
1.8 Is the employer legally permitted to retain part of to be issued by the subsidiary’s ultimate parent. There are no
the purchase price for the works as a retention to be general restrictions on the nature of such parent company guar-
released either in whole or in part when: (a) the works are antees, provided that the contract is entered into between profes-
substantially complete; and/or (b) any agreed defects sional parties.
liability period is complete?

According to NS 8407, a deduction of 7.5% of the progress retention of title rights in relation to goods and supplies
payment shall be made by way of retention. The retention shall used in the works? Is it permissible for contractors to
be invoiced and payable in connection with the final account. claim that, until they have been paid, they retain title and
In addition, the employer may withhold payment if the employer the right to remove goods and materials supplied from
has legitimate claims against the contractor. the site?
1.9 Is it permissible/common for there to be In accordance with NS 8407, the contract work shall become the
performance bonds (provided by banks and others) to property of the employer progressively as the work is performed.
guarantee the contractor’s performance? Are there any Materials delivered to the project site and which are to be incor-
restrictions on the nature of such bonds? Are there any porated into the contract object become the property of the
grounds on which a call on such bonds may be restrained employer upon payment. Materials delivered by the employer
(e.g. by interim injunction); and, if so, how often is such shall remain the property of the employer.
relief generally granted in your jurisdiction? Would such The parties may agree that the contractor retain title and the
right to remove goods and materials from the site. However, the
contractor is in principle not entitled to invoke retention rights
towards the employer’s creditors with respect to materials, etc.,
It is common for the contractor to be required to provide the which have been incorporated into the main object.
employer with a performance bond (bank guarantee) to guar-
antee the correct performance of contractors’ obligations under
the contract. There are no general restrictions on the nature of
such bonds (guarantees), provided that the contract is entered
into between professional parties. 2.1 Is it common for construction contracts to be
In accordance with NS 8407, the contractor shall provide the (e.g. an engineer)? Does any such third party have a
employer with security for the performance of his contractual duty to act impartially between the contractor and the
obligations during the execution period and the guarantee period. employer? If so, what is the nature of such duty (e.g. is
The security during the execution period, including liability for it absolute or qualified)? What (if any) recourse does a
delayed completion, shall amount to 10% of the contract price. party to a construction contract have in the event that
Upon take-over/delivery of the work, the security shall be the third party breaches such duty?
reduced to 3% of the contract price in respect of any guarantee
claims for a period of three years. The security shall be provided Some construction contracts are supervised on behalf of
in the form of an ordinary bank guarantee (not an on-demand the employer by a third party. Such an engineer or architect
guarantee) from a bank, insurance company or other financial would not have a particular duty to act impartially between the
institution. However, in construction and supply contracts we contractor and the employer. However, the third party would
often see that an on-demand guarantee is required, i.e. the guar- possibly have some fiduciary duties towards the contractor and
antor cannot invoke any defences and/or counterclaims which may not act in “bad faith” or in a “blameworthy” manner towards
otherwise would have been available for the contractor. the contractor (which may result in liability for damages). The
As a starting point, it would not be possible to restrain a call standard NS 8403:2005 General conditions of contract for
on performance bonds by an interim injunction. Consequently, construction supervision commissions are often used for super-
if the guarantor accepts to pay the amount claimed to the vision contracts.
employer, the contractor usually has no means to prevent
any such payments (and thereby avoid a scenario where the
contractor itself must initiate subsequent legal proceedings 2.2 Are employers free to provide in the contract that
against the employer). However, if the employer’s call on the have themselves been paid; i.e. can the employer include
performance bond must be deemed as “manifestly ill-founded” in the contract what is known as a “pay when paid”
or “fraudulent”, etc., the contractor may succeed in persuading clause?
Norwegian courts to grant him an injunction restraining the
guarantor from making payment, even though the demand has
Yes, the parties may agree to include a “pay when paid” clause in
been made in accordance with the terms of the performance
the contract. However, it cannot be excluded that a “pay when
bond. Such grant of injunctions will be challenging to obtain,
paid” clause may on some occasions be deemed “highly unrea-
and the contractor must have clear evidence that the beneficiary
sonable” and consequently set aside or modified by a Norwegian
knows that the demand for payment is “manifestly ill-founded”
court.
or “fraudulent”.

118 Norway
2.3 Are the parties free to agree in advance a fixed not necessarily be bound “by the four corners” of the contract,
sum (known as liquidated damages) which will be and may use the background law in the interpretation of the
paid by the contractor to the employer in the event of contract.
particular breaches, e.g. liquidated damages for late In furtherance of the above, there are certain general prin-
completion? If such arrangements are permitted, are ciples of Norwegian contract law which will apply regardless
there any restrictions on what can be agreed? E.g. does of the contents of the contract, e.g. a duty to act in good faith
and/or in a loyal manner by, to a reasonable degree, taking into
which is wholly unrelated to the amount of financial loss account the interests of the other party. However, requirements
likely to be suffered by the employer? Will the courts which are more specific in their nature, e.g. a fitness for purpose
in your jurisdiction ever look to revise an agreed rate of obligation, will usually not be implied into the contract without
liquidated damages; and, if so, in what circumstances? any clear indications that the contractor has assumed such an
obligation, in particular if the contract already includes relevant
The parties are free to agree on liquidated damages in the event provisions dealing with the matter at issue (e.g. conditions for
of particular breaches, including in case of delay, and there are no when the contract work shall be deemed defective).
mandatory requirements or general restrictions with respect to
liquidated damages between professional parties. Consequently, 3.4 If the contractor is delayed by two concurrent
the contractor can be bound to pay a sum which is wholly unre- events, one the fault of the contractor and one the fault
lated to the amount of financial loss likely to be suffered by the or risk of his employer, is the contractor entitled to: (a)
employer. an extension of time; and/or (b) the costs arising from
Pursuant to the Norwegian Contract Act, Norwegian courts that concurrent delay?
may set aside or revise an agreed rate of liquidated damages if
it finds that the total amount payable is “highly unreasonable”, In the case of concurrent delay, the contractor would be entitled
which must be assessed on a case-by-case basis. Such revision to an extension of time equal to the parts of the delay that may
is very unlikely with respect to construction contracts between be attributed to the fault of the employer, provided that the fault
professional parties. of the employer impacts the “critical path”. If the contractor
is delayed as a result of two events/faults occurring in parallel,
32 Common Issues on Construction where one is the fault or risk of the contractor and one is the
fault or risk of the employer, the contractor would, as a main
Contracts
rule, not be entitled to an extension of time.
As to the costs incurred by the contractor, the employer
3.1 Is the employer entitled to vary the works to be would only be liable for increased costs which may be attributed
right?
to a fault or risk of the employer. If there are two faults occur-
ring in parallel, and the costs would have occurred regardless of
the employer’s fault, the contractor would, as a main rule, not be
In accordance with NS 8407 (and NS 8405), the employer is enti- entitled to the costs occasioned by that concurrent delay.
tled to vary the works to be done under the contract. A variation
to the work must be sufficiently connected to the contract in
question and must not be of a materially different nature to the 3.5 Is there a time limit beyond which the parties to
originally agreed work. Unless otherwise agreed, the employer
is not entitled to order the contractor to make changes repre- does time start to run?
senting an addition to the contract price of more than 15%.
NS 8407 includes certain time limits that the parties must

3.2 Can work be omitted from the contract? If it is respect. If a party fails to submit a claim within such time limits,
omitted, can the employer carry out the omitted work then the party loses its claim against the other party.
With regard to variation orders and variation order requests,
the standard sets out several strict time limits. The main rule is
According to NS 8407, parts of the work can also be omitted that the contractor is obliged to submit a variation order request
from the contract. If it is omitted, it is somewhat uncertain to the employer “without undue delay” after he becomes aware,
whether the employer may get a third party to perform the work. or ought to have become aware, of the circumstances which
In our opinion, the employer would in most instances not be form the basis for the variation order request.
entitled to issue a negative variation order (omit work from the Further, if the contractor receives a rejection in response to a
contract) if the intention is that the employer wishes to transfer variation order request, including a demand for an extension of
parts of the scope of work to another contractor. time and/or adjustment of the contract price, then the contractor
must take the necessary steps to initiate ordinary court or arbi-
3.3 Are there terms which will/can be implied into tration proceedings no later than eight months after take-over
a construction contract (e.g. a fitness for purpose of the contract work.
obligation, or duty to act in good faith)? The contractor shall issue a final account proposal and the
final invoice within two months after take-over. If the contractor
Subject to certain exceptions, the Norwegian background law fails to do so, the employer is entitled to set a final deadline,
(both general contract law and construction law) would only which shall not be shorter than 14 days. If the contractor fails to
apply as a “gap-filler” to the extent legal questions have not submit the final account, then he loses (with certain exceptions)
been regulated in the contract. Further, in contrast to, for the right to make any claims in connection with the contract
example, English contract law, the judge or arbitrator would against the employer.

It should also be noted that any claims may become time- Further, a party is entitled to terminate the contract if the other
barred in accordance with the Norwegian Limitation Act, party goes bankrupt or becomes insolvent. However, the employer
regardless of the agreed mechanisms in the contract. Claims will shall not be entitled to terminate the contract if it is proven that the
in general be time-barred three years after the date on which the work will be completed in accordance with the contract. Nor shall
creditor first had the right to demand performance. the contractor be entitled to terminate the contract if satisfactory
Further, according to NS 8407, the employer must present security is provided for the timely performance of the remaining
guarantee claims without undue delay and within five years after part of the employer’s obligations under the contract.
take-over at the latest (guarantee period). Except as stated above, NS 8407 does not include any grounds
which automatically entitle the innocent party to terminate the
contract.
ground conditions under construction contracts in your A party must terminate the contract by submitting a written
jurisdiction? notice to the other party (or to its representative). According to
general principles of Norwegian contract law, the notice must
be sent within a reasonable time after the other party’s breach
According to NS 8407, the employer bears the risk for unfore-
of contract became known. Further, the party terminating the
seen ground conditions if they deviate from what the contractor
contract will in most cases be bound by the basis for termination
had reason to expect when preparing its tender. However, the
which has been invoked in the termination notice, even if any
contractor is obliged to take into account all available informa-
(general) reservations are made, i.e. the basis for termination can
tion in connection with the preparation of its tender as further
in principle not be supplemented by additional main arguments,
detailed in the standard contract.
at least if not invoked shortly after the notice was submitted.

According to NS 8407, the employer bears the risk of a change on the part of the works that remains unperformed as at
in law affecting the performance of the works. The contractor termination?
must notify the employer thereof without undue delay. However,
this only applies if the contractor could not have been expected According to NS 8407, the employer is entitled to terminate the
to take into account such changes to laws and regulations at the contract at its convenience. Such termination for convenience
time the tender was submitted and could not have been expected can be effected at any time, but should be “as far in advance as
to avoid the consequences. possible”. If the contract is only partially terminated, but repre-
sents a reduction of at least 15% of the contract price, the termi-
3.8 Which party usually owns the intellectual property nation shall be regarded as a termination for convenience for
in relation to the design and operation of the property? that part of the work (and not as a negative variation order).
According to NS 8407, the contractor will in such cases be
entitled to compensation equal to the financial loss suffered by
Unless otherwise agreed, the employer shall only be entitled to
the contractor due to the termination, i.e. the loss of profit on the
use the design work for the completion of the project, subse-
part of the works that remains unperformed at the time of termi-
quent operations, maintenance, alterations or extensions. All
nation will be recoverable, as well as all other costs incurred by
other rights to the design work shall continue to be held by the
the contractor (e.g. cancellation fees payable to sub-contractors).
party that has prepared the design work.
However, the contractor must implement all reasonable meas-
ures in order to mitigate its financial loss due to the termination.
3.9 Is the contractor ever entitled to suspend works? In Norwegian standard offshore contracts, the parties would
rather pre-agree the termination fees, e.g. the employer shall pay
According to NS 8407, the contractor is entitled to suspend the lesser of 4% of the contract price or 6% of the part of the
performance of the work if the employer is in substantial breach contract price which is not paid at the date of termination (in
of its payment obligation or if it is evident that such breach will addition to all costs incurred due to the termination).
occur. The contractor must notify the employer of such suspen-
sion in writing 24 hours in advance. 3.12 Is the concept of force majeure or frustration known
3.10 Are there any grounds which automatically or that a contract which has become uneconomic is
usually entitle a party to terminate the contract? Are grounds for a claim for force majeure?
termination notice)? The concepts of both force majeure and “frustration” (known as
“failed contractual assumption” or “breach of expectations”)
According to NS 8407, a party is entitled to terminate the are, subject to certain conditions, recognised in accordance with
contract if the other party has substantially breached its contrac- the general principles of Norwegian contract law.
tual obligations, which corresponds with general principles of In accordance with NS 8407, the parties are entitled to an
Norwegian contract law. In addition, a party is entitled to termi- extension of time if the progress of their obligations is hindered
nate the contract if it is evident that a substantial breach will by circumstances outside their control, such as extraordinary
occur. However, the party in breach shall be given a reason- weather conditions, orders or prohibitions by public authorities,
able deadline for remedying the matter before termination can etc. However, a party shall not be entitled to an extension of
be implemented. time in respect of hindrances which the party should have taken

120 Norway
into account when the contract was entered into or the party (i) the primary claim and the counterclaim must exist between
could reasonably have avoided or overcome the consequences of the same parties (except in cases of “connexity”, i.e. claims
such occurrences. The parties are not entitled to any compensa- arising out of the same contractual relationship);
tion as a result of force majeure. (ii) the primary claim and the counterclaim must be of the
In accordance with Norwegian case law, the contractor’s same nature;
risks (and in principle the employer’s risks as well) are limited (iii) the time of discharge of the primary claim must have
according to the doctrine of “failed contractual assumptions”. occurred; and
In order for a party to succeed with a claim based on this (iv) the counterclaim must be due and payable.
doctrine, the assumption must have been a determining element A set-off must be declared. A written notice would be prefer-
in the contract (fundamental assumption), and the other party able, but there are no strict form requirements under Norwegian
must have been aware of the assumption. In addition, the law.
assumption must be deemed “relevant”, which depends on an
overall assessment as to what party should carry the risk for the
unexpected development. care to each other either in contract or under any other
Based on the above rules, it is not usual, and it must be deemed legal doctrine? If the duty of care is extra-contractual,
extremely difficult, to argue successfully that a contract which can such duty exist concurrently with any contractual
has become uneconomic is a ground for claiming force majeure obligations and liabilities?
or a ground for claiming compensation for increased costs, etc.
According to NS 8407, both parties have a duty to cooperate
3.13 Are parties, who are not parties to the contract, and show loyalty during the performance of the contract, which
entitled to claim the benefit of any contractual right is in line with the general principles of Norwegian contract law.
which is made for their benefit? E.g. is the second or A breach of a party’s fiduciary duties may, inter alia, result in
subsequent owner of a building able to claim against liability for damages and loss of rights under the contract.
the contractor pursuant to the original construction To the extent that the duty of care is extra-contractual (i.e.
not included as part of the contract terms, but nonetheless appli-
cable pursuant to general principles of Norwegian contract law),
In accordance with general principles of Norwegian contract law, such duty can in principle exist concurrently with any contrac-
a third party may be entitled to claim the benefit of a contractual tual obligations and liabilities. However, the existence of
right which is made for its benefit, i.e. that a contract may grant specific remedies in relation to certain breaches/issues may be
a third party rights, but in general not impose any obligations on considered as the sole remedies available in any related cases, or
any third party. This must be assessed based on an interpreta- in any event make it challenging to succeed with any additional
tion of the relevant contract. remedies than those stated in the contract.
Further, a contracting party may, unless agreed otherwise,
assign its contractual rights (but not obligations) to a third party
without the other party’s consent.
A second or subsequent owner of a building is, in most cases, ambiguity is interpreted?
regardless of whether a claim or right has been transferred to
such subsequent owner, entitled to make claims for defects
against the contractor in accordance with the original contract. When interpreting a construction contract, the judge’s aim is to
However, the contractor may (except for mandatory consumer determine the meaning intended by the parties. A basic principle
legislation) invoke any limitations of liability, etc. under its of interpretation of contracts is that an agreement must, regard-
contract with the employer against the second or subsequent less of the wording, be interpreted in accordance with the joint
owner of the building. intention of the parties at the time the agreement was entered into.
In respect of commercial contracts, the wording is of particular
importance and often given decisive weight. If, however, the
3.14 On construction and engineering projects in wording is unclear and other relevant circumstances (previous
your jurisdiction, how common is the use of direct negotiations, subsequent conduct, the purpose, etc.) are insuffi-
cient to conclude on the interpretation issue, then the contract
employer with an interest in the project, e.g. funders, will often be interpreted against the interests of the party who
other stakeholders, and forward purchasers)? provided the wording (contra proferentem doctrine).
Direct agreements or collateral warranties are commonly used in 3.18 Are there any terms which, if included in a
project finance projects, such as wind farm projects. construction contract, would be unenforceable?
3.15 Can one party (P1) to a construction contract, who The Norwegian standard construction contracts do not include
owes money to the other (P2), set off against the sums unenforceable terms and there are, in general, no terms which
due to P2 the sums P2 owes to P1? Are there any limits would, if included in the contract, be unenforceable.
on the rights of set-off? However, section 36 of the Norwegian Contract Act allows
for full or partial revision of any contract term if it must be
The right of set-off of a counterclaim against a primary claim considered “unreasonable or contrary to prudent business practice to
is recognised under Norwegian law when the following general enforce it ”. The fact that most construction contracts are entered
conditions are fulfilled: into between professional parties with a specific and well-con-
sidered risk allocation makes it very challenging to succeed with
a claim on this basis.

3.19 Where the construction contract involves an be appointed in an early phase of the contract work. The panel’s
element of design and/or the contract is one for design decisions will not be binding and final unless such effect has
only, are the designer’s obligations absolute or are there been agreed between the parties.
his work? 4.3 Do the construction contracts in your jurisdiction
In construction contracts which involve an element of design jurisdiction.
and/or the contract is for design only, the designer has in general
undertaken an obligation as to the result, which may be char-
According to NS 8407, disputes shall be settled by ordinary
acterised as “absolute”, i.e. the contractor is responsible for the
court proceedings unless it has been agreed to refer disputes to
delivery of a contract object in line with the terms and condi-
arbitration. However, arbitration is often used as a dispute reso-
tions of the contract.
lution mechanism in construction contracts in Norway.
The designer is not obliged to give absolute guarantees in
The Norwegian Arbitration Act is based on the UNCITRAL
respect of his work. In accordance with the principle of contrac-
Model Law on International Commercial Arbitration, follows
tual freedom, the parties may agree on whatever terms, including
the Model Law closely in structure and content, and can be
limited guarantees/warranties.
considered a national implementation of the Model Law, with
According to NS 8407, the guarantee period is set to five years
certain variations. Generally, and as the main rule, parties are
from take-over of the contract object and the contractor is, in
free to agree on the terms governing the arbitration proceedings.
principle, not liable for the employer’s consequential losses.
The Arbitration Act contains only a few mandatory provisions.
In NS 8401 (standard contract for design only), the contractor’s
Section 20 of the Arbitration Act, corresponding to Article 18
liability for damages is, unless otherwise agreed, limited to approx-
of the Model Law, confirms that the parties must receive equal
imately MNOK 5.8 for liability which is not covered by insurance,
treatment at every stage of the arbitral proceedings.
and approximately MNOK 14.5 for liability covered by insurance.
Section 20 also adopts the principle that both parties are fully
entitled to present their cases. It is emphasised in section 28
3.20 Does the concept of decennial liability apply in your that the parties are responsible for clarifying the facts of the case
jurisdiction? If so, what is the nature of such liability and and that they are entitled to present such evidence as they wish.
what is the scope of its application? Under this section, the arbitral tribunal may, however, refuse to
accept evidence which is clearly not relevant and also, to some
The concept of “decennial liability” is not applicable in accord- extent, based on proportionality.
ance with Norwegian law. The Arbitration Act only specifies a few procedural rules.
To the extent that neither of the parties have agreed on what
42 Dispute Resolution shall apply in other respects, the tribunal may apply the rules it
considers appropriate.
The principle of orality (i.e. that the parties, their counsel
and witnesses must express themselves orally before the court)
and the principle of immediacy (i.e. that all evidence must be
Disputes arising in connection with a construction contract, and presented before the court that is to render the judgment) are
which are not resolved by mutual agreement, are normally settled fundamental principles in legal proceedings in the ordinary
by ordinary court proceedings at the agreed legal venue (or the courts of Norway. In arbitration, these principles are not given
right legal venue in accordance with Norwegian procedural the same prominence, but are to a considerable extent adopted
legislation) unless the parties agree otherwise, e.g. arbitration. in most arbitral proceedings.
According to NS 8407, the parties may, unless agreed other- The provisions of sections 12 and 13 of the Arbitration Act
wise and until take-over, also demand that a dispute be deter- concerning the appointment of arbitrators correspond to a great
mined by an umpire (temporary dispute resolution). Such deci- extent, in terms of their content, to Articles 10 and 11 of the
sion shall be binding on the parties if the parties fail to bring an Model Law. Thus, the parties are free to determine the appoint-
umpire decision before a court or arbitration tribunal within six ment procedure. The speed at which the tribunal can be set up
months of the date of the decision. depends on the parties, as long as they agree. The Arbitration
Act provides that the parties must, to the greatest extent possible,
4.2 Do you have adjudication processes in your jointly appoint the arbitral tribunal. This will, at the outset, place
jurisdiction (whether statutory or otherwise) or any other an obligation on the parties to spend some time ascertaining
forms of interim dispute resolution (e.g. a dispute review whether they can reach an agreement on a joint appointment.
board)? If so, please describe the general procedures. If the parties are unable to agree on who should be appointed,
the appointment procedure is in essence similar to that provided
In Norway, we do not have an adjudication process as such. in Articles 10 and 11 of the Model Law: unless otherwise agreed,
However, there is voluntary court-administered mediation. The the tribunal shall consist of three arbitrators. Each party must
purpose of such mediation is that the parties, with the collab- appoint an arbitrator within one month of being requested to
oration of a judge (mediator), try to solve the dispute amicably. do so by the other party. These two arbitrators shall thereafter
Further, pursuant to NS 8407, the parties may agree on together appoint the presiding arbitrator within one month.
establishing a so-called “project integration mediation panel” If a party fails to act as required under the applicable appoint-
(“PRIME”) with a mandate to assist the parties in resolving ment procedure, if the two party-appointed arbitrators are
any disputes which arise during the contract period. The panel unable to reach agreement on the third arbitrator, or if an
will usually consist of three members that have been appointed appointing body fails to act as provided, each of the parties may
jointly by the parties. The purpose is to provide a forum for under section 13 (4) of the Arbitration Act request the relevant
resolving any disputes amicably, and the mediation panel should district court to appoint the remaining arbitrator(s).

122 Norway
Arbitration awards are not subject to any appeal. The only ■ The case commences when the plaintiff files a writ of
recourse against an arbitral award is to bring an action before the summons to the court of first instance (city court). The writ
courts claiming the setting aside of the award. shall state the claims invoked by the plaintiff and set out the
Lastly, we must also mention the Nordic Offshore & Maritime factual and legal assertions on which the claims are based.
Arbitration Association (“NOMA”), which was established in 2017 In addition, the evidence on which the plaintiff wishes to
on the initiative of the Danish, Finnish, Norwegian and Swedish rely must be submitted, but additional evidence may also be
Maritime Law Associations. NOMA has established rules and presented at a later stage.
best practice guidelines for the parties and the tribunal. A recom- ■ The defendant will then be given a deadline (usually three
mended arbitration clause is available on NOMA’s webpage. weeks) for submitting a reply.
Despite its name, NOMA and its guidelines may be used in all ■ Thereafter, further communication with the court and the
kinds of construction projects. As an alternative, the parties may other side, including the submission of additional argu-
refer disputes to the Arbitration and Dispute Resolution institute ments and evidence, is carried out by submitting written
of the Oslo Chamber of Commerce, which has prepared rules for pleadings.
arbitration, fast-track arbitration and mediation. ■ An oral hearing shall in principle be held within six months
from the date on which the writ of summons was filed.
In practice, the scheduling of the hearing depends on the
arbitration, do your jurisdiction’s courts recognise and workload of the court as well as the complexity of the case.
enforce international arbitration awards? Please advise ■ The hearing is divided into three parts: the opening argu-
of any obstacles (legal or practical) to enforcement. ments (where written evidence is normally presented); the
evidence (party and witness testimonies); and the closing
arguments.
Pursuant to section 45 (1) of the Arbitration Act, an arbitra-
■ The court shall render the judgment within two weeks
tion award shall be recognised and enforceable, irrespective of
from the date on which the hearing was adjourned (four
the country in which it was made. This means that arbitration
weeks if there is more than one judge), but the deadline is
awards made in countries not party to the New York Convention
often postponed. The judge will normally indicate when
are also recognised and enforceable in Norway.
the judgment can be expected at the end of the hearing.
However, for an arbitral award to be recognised and enforced,
■ The parties have the right to appeal. The deadline for
certain conditions have to be met, cf. section 45 (2) of the
appeal is one month from the day that the judgment is
Arbitration Act. A party has to make available the original arbi-
served. The court of appeal may refuse leave to appeal
tration award or a certified copy of the award. If the arbitral
against a judgment if it finds it clear that the appeal will not
award has not been made in one of the Scandinavian languages
succeed. However, only on rare occasions does the court
(Norwegian, Swedish or Danish) or in English, the party must
of appeal refuse to hear an appeal.
also make available a certified translation of the arbitration award.
■ The hearing of the appeal will likely be held six to 12
The court (or administrative agency) may also request the
months after the appeal is submitted. The court of appeal
existence of an arbitration agreement to be proved.
shall in principle render the judgment within four weeks
Regardless of whether an arbitral award is recognised and
from the date on which the hearing was adjourned.
enforceable, recognition and enforcement may, however, be
■ A judgment rendered by the court of appeal may also be
refused pursuant to section 46 of the Arbitration Act. This
appealed to the Norwegian Supreme Court. However,
provision corresponds to a large extent to Article 36 (1) of the
judgments cannot be appealed without leave. Leave can
Model Law and Article V of the New York Convention.
only be granted if the appeal concerns issues whose signif-
Pursuant to section 46 (1) of the Arbitration Act, recognition
icance extends beyond the scope of the current case, or if it
or enforcement may be refused at the request of the party against
is important for other reasons that the case is determined by
whom it is invoked, if that party furnishes evidence that one of
the Supreme Court. In construction cases, it is extremely
the parties to the arbitration agreement lacked legal capacity or
rare that the Supreme Court accepts to hear the appeal.
the arbitration agreement is not valid. Such refusal may also
Based on the above, we estimate that a judgment by the court
result where certain procedural errors – concerning notice to
in the first instance may be delivered within six to 12 months
the parties, jurisdiction of the tribunal, etc. – have been made.
after submission of the writ of summons. A judgment from the
The court (or the administrative agency) shall, pursuant to
court of appeal – which in most cases will be the “final court of
section 46 (2) of the Arbitration Act, of their own accord refuse
appeal” – may thereafter be delivered within seven to 12 months
to recognise and enforce an award if the dispute could not be
of the submission of the notice of appeal.
settled by arbitration under Norwegian law or if recognition and
enforcement would be contrary to “ordre public”.
4.5 Where a contract provides for court proceedings court be upheld and enforced in your jurisdiction? If
in your jurisdiction, please outline the process adopted, the answer depends on the foreign country in question,
any rights of appeal and a general assessment of are there any foreign countries in respect of which
how long proceedings are likely to take to reduce: (a) enforcement is more straightforward (whether as a
a decision by the court of first jurisdiction; and (b) a result of international treaties or otherwise)?
A judgment rendered by a foreign court will only be recognised

The main elements of ordinary court proceedings in Norway
as a final and enforceable judgment to the extent prescribed
may be summarised as follows:
by law. In accordance with the Norwegian Dispute Act, the
■ Before the plaintiff files the writ of summons to the court,
Lugano Convention of 2007 between the EU and the EFTA
the plaintiff must notify the defendant in writing that the
countries (including Norway) shall be deemed implemented into
plaintiff is considering initiating court proceedings.
Norwegian law by way of incorporation, and Chapter III of the

Lugano Convention concerns recognition and enforcement of out of the contract shall be solved by court proceedings abroad,
judgments. Consequently, judgments from countries party to the then the judgment will in principle be enforceable in Norway.
Lugano Convention of 2007 may be enforced in Norway. As for However, enforcement of foreign judgments in Norway will
judgments from outside the EU, such judgments may be enforce- in practice be more “straightforward” if the party may rely
able in Norway in accordance with treaties between the states. on the Lugano Convention of 2007 or an international treaty
In addition, a foreign judgment is enforceable in Norway if governing enforcement of judgments between the two jurisdic-
the parties have agreed to refer disputes under a contract to a tions in question.
foreign court. Thus, if the parties agree that disputes arising

124 Norway
Jacob F. Bull (Partner) heads the firm’s practice group for onshore and offshore construction. He has extensive experience with construction
projects both in Norway and abroad. Jacob provides advice in all phases of a project, including preparation of the tendering and negotiation
strategy, participation in negotiations, follow-up, and handling of matters and claims during project execution and the warranty period. His
name is often highlighted by international rating agencies.
Advokatfirmaet Thommessen AS Tel: +47 23 11 11 56

Haakon VIIs gate 10 Email: [email protected]
Postboks 1484, Vika URL: www.thommessen.no
NO-0116 Oslo
Norway
Henrik Møinichen (Managing Associate) works within the firm’s practice area of shipping, construction, oil and gas and oil service. Henrik has
been actively involved in several onshore and offshore construction projects, including assistance in preparing the tender documents, partic-
ipation in negotiations, and dispute resolution during project execution and the warranty period. Henrik has assisted Norwegian and inter-
national clients in major litigation before ordinary courts and arbitration proceedings, and is currently involved in various shipping disputes.
Advokatfirmaet Thommessen AS Tel: +47 23 11 11 22

Haakon VIIs gate 10 Email: [email protected]
Postboks 1484, Vika URL: www.thommessen.no
NO-0116 Oslo
Norway
Advokatfirmaet Thommessen AS is one of Norway’s leading commercial

law firms with offices in Oslo, Bergen, Stavanger and London. The firm has
270 highly qualified employees, including 190 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 experi-
ence 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.
www.thommessen.no

Chapter 16 125
Saudi Arabia
Saudi Arabia
Euan Lloyd
Al Tamimi & Company Emad Salameh
12 Making Construction Projects 1.4 What (if any) legal requirements are there to create a
legally binding contract (e.g. in common law jurisdictions,
offer, acceptance, consideration and intention to create
1.1 What are the standard types of construction legal relations are usually required)? Are there any
contract in your jurisdiction? Do you have: (i) any mandatory law requirements which need to be reflected in
contracts which place both design and construction a construction contract (e.g. provision for adjudication or
obligations upon contractors; (ii) any forms of design- any need for the contract to be evidenced in writing)?
contractor and with the construction work done by a To form a legally binding contract in KSA, there must be:
series of package contractors? (NB For ease of reference (a) an offer by one party;
throughout the chapter, we refer to “construction (b) acceptance of that offer by the counterparty;
contracts” as an abbreviation for construction and (c) certainty as to the subject matter and price;
engineering contracts.) (d) sufficient capacity to contract; and
(e) compliance with principles of Shari’ah.
Construction-only contracting remains the most common Although the principle of freedom of contract is generally
procurement method in the Kingdom of Saudi Arabia (“KSA”) respected in KSA, Shari’ah principles prohibit the charging of
and this is often effected through the use of amended versions interest as well as contracts for assets that are not yet in exist-
of the International Federation of Consulting Engineers’ ence. However, construction contracts are exempted from the
(“FIDIC”) 1999 Red Book (although the 1987 edition is also latter prohibition provided that the contract price and comple-
widely used). However, Design and Build contracting is gaining tion date are pre-agreed.
popularity, and the FIDIC 1999 Yellow Book is usually used as a There is no requirement for a contract to be evidenced in writing
base document in this regard. (although there may well be evidential challenges if this is not the
As in many other jurisdictions, industrial projects are frequently case), and there is no mandatory dispute resolution mechanism.
delivered on a turnkey basis. Although the FIDIC 1999 Silver
Book is well known (and is often used subject to significant 1.5 In your jurisdiction please identify whether there
amendments), bespoke forms of engineering, procurement and is a concept of what is known as a “letter of intent”, in
construction (“EPC”) contracts are also executed. which an employer can give either a legally binding or
As employers in KSA place significant importance on single- non-legally binding indication of willingness either to
point responsibility, engineering, procurement and construc- enter into a contract later or to commit itself to meet
tion management (“EPCM”) contracting is infrequently used certain costs to be incurred by the contractor whether or
(although its popularity may well increase as KSA’s implementa- not a full contract is ever concluded.
tion of Vision 2030 gains traction).
In accordance with principles of freedom of contract, letters
of intent are used and are enforceable in KSA (subject to the
alliance contracting and partnering) in your jurisdiction? requirements of contract formation being satisfied).
Collaborative contracting is seldom used in KSA. As this form compulsory to have in place when carrying out
of procurement is used exceptionally, no particular form of construction work? For example, is there employer’s
contract for this form of procurement is in common circulation. liability insurance for contractors in respect of death
contract are most commonly used in your jurisdiction?
The Saudi Ministry of Investment (previously known as the Saudi
Arabia General Investment Authority) imposes certain insurance
As noted in our response to question 1.1, FIDIC forms of contract requirements on construction projects, such as requiring foreign
(albeit subject to amendments) are generally used in KSA. entities engaging in such projects to “obtain insurance against the
company’s errors in implementation of the project”. Significantly,

126 Saudi Arabia
decennial liability insurance (also known as Inherent Defects contractor upon takeover of the works, with the balance being
Insurance) was made mandatory in December 2018, (pursuant to paid upon the expiry of the defects liability period. However,
a Ministerial Decision on 06/09/1441 in the Hijri calendar (“H”), the entire retention is sometimes withheld until the expiry of
corresponding to 01/05/2020 in the Gregorian calendar). the defects liability period, particularly if the employer does not
In practice and as is typical in the international construction have any other form of security in place.
sector, employers invariably require contractors and consultants
to carry professional indemnity insurance to the extent that they
have design responsibility or are otherwise providing profes- performance bonds (provided by banks and others) to
sional services. guarantee the contractor’s performance? Are there any
Other than in respect of “employer risk events” specified restrictions on the nature of such bonds? Are there any
under the relevant contract, a contractor is usually required to grounds on which a call on such bonds may be restrained
insure the works until they have been taken over. Additionally, (e.g. by interim injunction); and, if so, how often is such
contractors are generally required to take out and maintain relief generally granted in your jurisdiction? Would such
workers’ compensation insurance and public liability insurance. bonds typically provide for payment on demand (without
Delaying start-up insurance is becoming increasingly popular
in industrial projects, particularly if recourse from delay damages
is likely to be insufficient. On-demand performance bonds are almost always required, typi-
cally in the sum of 10% of the contract price, but default bonds
are unusual in KSA. Although the entire value of the perfor-
mance bond can remain in place until the expiry of the defects
legal status of those working on site as employees or liability period, it is not uncommon for the value of the perfor-
as self-employed sub-contractors); (b) tax (payment of mance bond to reduce by 50% upon takeover, particularly if the
income tax of employees); and/or (c) health and safety? employer is holding a retention.
It is unusual for a call to liquidate an on-demand performance
bond to be prevented, and typically this can only be achieved if it
Labour
can be demonstrated that the liquidation would be an abusive act
KSA’s policy of Saudisation (Nitaqat) requires a minimum number
or manifestly wrong. These are significant hurdles to overcome,
of Saudis to be employed by a business. This minimum number
while there is usually a very limited period between the date upon
depends on the type of company, industry and job title. Under
which the request for the bond to be liquidated is issued by the
Nitaqat, businesses with higher numbers of Saudi employees have
beneficiary, and the date upon which the bank complies with the
greater privileges for foreign visa requests.
request and duly encashes the performance bond. However, an
Additionally, foreign entities engaged in public works contracts
injunction would only typically be granted on the basis that the
are required to share 30% of the work with Saudi nationals
contractor imminently files a substantive claim against the party
(but an entity that is majority Saudi-owned is exempt from this
seeking to liquidate the performance bond.
requirement).
Non-Saudi employees must have entered the country on a valid
employment visa. Further, employers are required to obtain work 1.10 Is it permissible/common for there to be company
and residency permits (Iqama) for employees within 90 days of guarantees provided to guarantee the performance of
arrival. subsidiary companies? Are there any restrictions on the
Tax
No income tax on individuals is charged in KSA. However, with- A parent company guarantee is a “creature of contract” and,
holding tax applies to the transfer of monies to a payee residing while not as common as in certain jurisdictions, parent company
outside of KSA while corporate income tax (at a rate of 20%) is guarantees do feature in the construction market in KSA
paid on all gross income received by businesses in KSA. Zakat is (particularly in the context of larger projects being undertaken
a wealth tax imposed only on individuals and businesses located by the local subsidiaries of international contractors).
in Gulf Cooperation Council (“GCC”) countries who are share-
holders of companies registered in KSA. The applicable rate is
2.5%. retention of title rights in relation to goods and supplies
Health and Safety claim that, until they have been paid, they retain title and
The primary source of law is Royal Decree No. M/51/2005, the right to remove goods and materials supplied from
which applies to construction projects and imposes various rights the site?
and obligations on stakeholders. Additional rules, procedures and
restrictions have recently been implemented to combat the spread Public works are subject to the new Government Tenders and
of COVID-19. Procurement Law, which was approved by the Council of Ministers
on 16.07.2019 (the “Procurement Law”). The Procurement Law,
1.8 Is the employer legally permitted to retain part of which applies to government bodies (as well as companies that are
the purchase price for the works as a retention to be majority-owned by the government), provides that a contractor
released either in whole or in part when: (a) the works are cannot remove equipment, temporary works or materials from the
substantially complete; and/or (b) any agreed defects site without the written approval of the engineer.
liability period is complete? In the private sector, freedom of contract allows the parties to
determine their own terms in respect of title. In our experience,
Retentions are prevalent in the market, in respect of which it is the majority of construction contracts provide that title to goods
not unusual for 10% of each interim payment to be retained and and the like passes to the employer on the earlier of delivery to
for half of the aggregate retained amount to be released to the the site or payment.

Al Tamimi & Company 127
22 Supervising Construction Contracts 32 Common Issues on Construction

Contracts
supervised on behalf of the employer by a third party 3.1 Is the employer entitled to vary the works to be
(e.g. an engineer)? Does any such third party have a performed under the contract? Is there any limit on that
duty to act impartially between the contractor and the right?
party to a construction contract have in the event that The Procurement Law provides that, in the context of publicly
the third party breaches such duty? awarded contracts, the value of additional works cannot exceed
10% of the contract price, while the value of omitted works
Given that FIDIC-based contracts are commonly used in KSA, cannot exceed 20% of the contract price.
it is usual for the work to be supervised and for the contract to be The principle of freedom of contract applies to contracts
administered by an engineer. Although these forms of contract which are not subject to the Procurement Law, and it is not
usually require the engineer to act “fairly” or “impartially”, the unusual for no thresholds to be prescribed. However, certain
fact that the engineer is engaged by the employer can be a source contracts (including some FIDIC forms) prohibit omitted works
of concern for contractors. from subsequently being awarded to third parties, while contrac-
Given that a contractor is highly unlikely to have a contractors occasionally retain the ability to claim loss of profit (which
tual relationship with the engineer, the contractor would need to cannot be speculative) in respect of omitted works.
claim against the engineer in tort and this would fundamentally
require the contractor to demonstrate that the engineer failed to 3.2 Can work be omitted from the contract? If it is
act in good faith. However, this is typically a very significant omitted, can the employer carry out the omitted work
evidential burden to discharge, while tort claims for economic himself or procure a third party to perform it?
loss are difficult to maintain.
Please see our response to question 3.1 above.
they will pay the contractor when they, the employer, have
themselves been paid; i.e. can the employer include in 3.3 Are there terms which will/can be implied into
the contract what is known as a “pay when paid” clause? a construction contract (e.g. a fitness for purpose
There is no prohibition against conditional payment arrange-

Shari’ah principles impose a general duty, on all parties, to act in
ments, and these are a typical feature of subcontracts in KSA.
good faith. However, the concept of fitness for purpose is not
However, subcontractors are well advised to insert certain protec-
recognised at law and will therefore only apply to the extent that
tions to mitigate the potential harshness of conditional payment
this is a contractually agreed requirement.
regimes (such as seeking transparency regarding payments made
under the main contract, requiring the main contractor to nego-
tiate with the employer for payment in good faith on their behalf, 3.4 If the contractor is delayed by two concurrent
and seeking to make the conditional payment regime subject to events, one the fault of the contractor and one the fault
thresholds). or risk of his employer, is the contractor entitled to: (a)
paid by the contractor to the employer in the event of KSA law does not expressly address concurrent delay.
particular breaches, e.g. liquidated damages for late Parties are therefore encouraged to clearly address the posi-
completion? If such arrangements are permitted, are tion under the construction contract, in respect of which it is
there any restrictions on what can be agreed? E.g. does not unusual for the contractor to be entitled to an extension of
the sum to be paid have to be a genuine pre-estimate time but to have no entitlement to costs for the duration of the
of loss, or can the contractor be bound to pay a sum concurrent delay.
which is wholly unrelated to the amount of financial loss In the absence of a contractual agreement between the parties,
the courts typically adopt a flexible approach whereby the situ-
liquidated damages; and, if so, in what circumstances? ation is considered holistically (with regard being paid to the
overall conduct of the parties), and we are aware of the principle
of apportionment being applied.
Most construction contracts in KSA entitle the employer to claim
delay damages in the event that the time for completion is not
achieved on account of the contractor’s culpable delay. Delay 3.5 Is there a time limit beyond which the parties to
damages usually accrue at a prescribed daily rate and are subject a construction contract may no longer bring claims
to an aggregate cap of the contract price (which, when exhausted, against each other? How long is that period and when
usually triggers a ground for termination).
Although delay damages are subject to the principle of freedom of
contract (while there is no prohibition regarding penalties, as is the The Commercial Court is the competent court to hear disputes
case in certain jurisdictions), a delay damages regime may be chal- between two private parties. The Commercial Courts Law (issued
lenged (pursuant to Shari’ah principles) if the actual loss suffered is on 14/08/1441H, corresponding to 17/04/2020 and which will
significantly different from the amount of delay damages charged. come into effect two months after its publication in the Official
However, we are only aware of courts decreasing (not increasing) Gazette) provides that a limitation period of five years from the
the delay damages that are payable.

128 Saudi Arabia
date the cause of action accrues applies (although this period may holistically and would be less sympathetic if, for example, a
be extended at the discretion of the court). relatively minor amount is outstanding or if a delay in making
Conversely, a limitation period of 10 years applies to actions payment is relatively insignificant.
before the Administrative Court (Board of Grievances), which is
the competent court to hear disputes between a government party
and a private party. usually entitle a party to terminate the contract? Are
3.6 Which party usually bears the risk of unforeseen party’s grounds for termination must be set out (e.g. in a
ground conditions under construction contracts in your termination notice)?
jurisdiction?
Under the Procurement Law, the relevant government entity is
Although this risk allocation can be rebalanced by the parties, required to terminate a contract in the event of fraud/bribery,
it is nevertheless typical for parties to agree that the employer insolvency or assignment by the contractor without consent.
remains responsible for unforeseen ground conditions (and this The relevant government entity has the discretion to terminate
position is typically endorsed by courts). However, the concept the underlying contract in the event of breach by the contractor
of what was foreseeable or otherwise is inherently uncertain, so (including in the event of slow progress or if a breach is not
parties are well advised to insert drafting to elaborate on this remedied within a cure period of 15 days), in the event of the
issue. contractor subcontracting without consent, or if termination is
in the public interest.
Grounds for termination outside of the Procurement Law are
3.7 Which party usually bears the risk of a change a matter for commercial negotiation and, for example, contrac-
tors typically request the right to terminate if the employer fails
to certify works or fails to make due payments (although such
rights usually only apply following a period of suspension).
This is a matter for commercial negotiation in the context of A party may also petition the court to terminate a contract in
private entities. Under certain unamended FIDIC forms (such as the absence of a contractual right to do so. However, a court
the 1999 Red Book), the contractor is entitled to both an exten- will usually only order termination (or cancellation) in excep-
sion of time and costs to the extent that it is affected by a change tional circumstances and where it is clear that it is inappropriate
in law. However, this risk allocation is frequently revised. For for performance to continue.
example, it may be agreed that that relief is only available in
respect of unforeseeable changes in law, relief may be subject to
pre-agreed thresholds, and it also would not be unusual to limit 3.11 Do construction contracts in your jurisdiction
the contractor’s compensation to an extension of time (particu-
larly as this is frequently a risk in respect of which the employer exercising that right need to pay the contractor’s profit
exercises no control). on the part of the works that remains unperformed as at
However, the Procurement Law regulates the issue of change termination?
in law in the context of government contracts, and provides
that the contract price shall be fixed other than in respect of: (i)
Employers typically require the ability to terminate for conveni-
changes to the price of officially priced basic materials or services
ence. The resultant compensation regime is a matter for negoti-
included in the tender; (ii) changes to customs tariffs, fees or
ation, but the contractor’s entitlements tend to align with conse-
taxes; and (iii) unforeseen circumstances or financial difficulties
quences that apply in the event of the contractor’s termination
beyond the contractor’s control.
for cause. However, we would typically expect the employer
to exclude liability for loss of profit (which is often a mutually
3.8 Which party usually owns the intellectual property applicable exclusion), while employers generally insert drafting
in relation to the design and operation of the property? to allow them the flexibility to engage a third party to undertake
the omitted part of the works.
Intellectual property rights vest in the creator of the deliverable,
and payment of a fee to, say, the design consultant is not neces- 3.12 Is the concept of force majeure or frustration known
sarily sufficient to confer an implied intellectual property licence in your jurisdiction? What remedy does this give the
upon the employer. It is therefore important that the parties affected party? Is it usual/possible to argue successfully
expressly address the issue of intellectual property rights in the that a contract which has become uneconomic is
relevant contracts. grounds for a claim for force majeure?
3.9 Is the contractor ever entitled to suspend works? Contracts frequently address the issue of force majeure, including
in respect of defining the concept as well as its consequences,
and an event of force majeure may trigger termination under the
The Procurement Law prohibits suspension in the context of Procurement Law.
government projects, but the contractor’s right to suspend under In the absence of a contractually agreed force majeure regime,
contracts that are not subject to the Procurement Law is a matter KSA law provides that impossibility may trigger a basis for either
for negotiation. party (who has the burden of proving impossibility) to request
If the contract is silent on the contractor’s right of suspen- that the contract be terminated. If an event of force majeure only
sion, a court may be sympathetic to a contractor who suspends renders performance of part of the contract impossible, then only
performance on account of non-payment of a certified amount, the affected party’s obligations in relation to that part will be
or if the employer (or the supervisor) refuses to issue payment severed (but the balance of the contract will otherwise remain
certificates. However, the court is likely to consider the position in place).

The concept of force majeure interfaces with the principle of 3.17 Where the terms of a construction contract are
Gharar (which translates as hazardous or risky transaction). Under ambiguous, are there rules which will settle how that
this principle, a party can argue that a contract should be set aside ambiguity is interpreted?
if continued performance has become unduly onerous or uncer-
tain (by reference to the contract). However, the party seeking There are no fixed rules regarding how ambiguous contractual
relief in this regard has a significant evidential burden to over- terms are to be interpreted (such as the contra proferentem principle)
come in order to be permitted by a court to rely on Gharar. but drafting, including in the form of priority of documents
clauses, can be agreed to address this issue. Additionally, the
3.13 Are parties, who are not parties to the contract, intention of the parties is usually deciphered from market prac-
entitled to claim the benefit of any contractual right tice and/or from the parties’ conduct.
the contractor pursuant to the original construction 3.18 Are there any terms which, if included in a
contracts in relation to defects in the building? construction contract, would be unenforceable?
The principle of privity of contract applies in KSA, meaning The general principle is that all contractually agreed terms are
that third parties cannot enforce the terms of the underlying permitted unless prohibited by Shari’ah principles. Although
construction contract (unless a collateral warranty is in place). Shari’ah principles are far more applicable to, say, banking and
In the absence of a contractual relationship between the parties, finance than to construction contracts, the court reserves the
an action in tort would need to be brought, but such actions are discretion, in exceptional circumstances, to step in at the request
difficult to maintain in the context of economic loss. A further of a party, if it considers that agreed terms are particularly unfair
cause of action may exist in the context of decennial liability in and/or contravene principles of good faith (to be considered and
the event of the collapse of the building, or if it can be shown determined on a case-by-case basis). Additionally, any entitle-
that its structural integrity has been undermined. ment to indirect losses is susceptible to challenge on the basis
that it is speculative and therefore contrary to Shari’ah principles,
as is the concept of changing interest on late payments.
agreements or collateral warranties (i.e. agreements 3.19 Where the construction contract involves an
between the contractor and parties other than the element of design and/or the contract is one for design
employer with an interest in the project, e.g. funders, only, are the designer’s obligations absolute or are there
other stakeholders, and forward purchasers)? limits on the extent of his liability? In particular, does the
his work?
As the principle of privity of contract is recognised in KSA,
third-party rights are best recognised by requiring contractors
and sub-contractors to enter into collateral warranties or direct No absolute duties or design obligations are implied at law and, in
agreements with third-party beneficiaries (such as funders and the absence of a contractual provision to the contrary, a designer
purchasers), which may incorporate step-in rights. As a general is likely to be held to a standard of reasonable skill. For this
observation, collateral warranties and direct agreements are less reason, design agreements typically set out the standard of care
prevalent in KSA than is the case in other markets (although that the designer is required to attain, and it is not uncommon for
these instruments are increasing in popularity, particularly designers to agree to fitness-for-purpose warranties (although it
where external financing is involved). is prudent to elaborate on what is meant by this obligation, given
that this principle is not based on KSA law).

owes money to the other (P2), set off against the sums 3.20 Does the concept of decennial liability apply in your
due to P2 the sums P2 owes to P1? Are there any limits jurisdiction? If so, what is the nature of such liability and
on the rights of set-off? what is the scope of its application?
The general principle of set-off is recognised at law but is only Decennial liability applies to the total or partial collapse of a
likely to be enforced in clear instances of significant sums (rela- structure on account of a construction defect, and applies for
tive to the value of the contract) being due. No thresholds or a period of 10 years from the date of handover (although the
limits are addressed at law. parties can agree to a short limitation period). As noted in our
To avoid ambiguity, it is therefore typical for parties to contrac- response to question 1.6, contractors are now required to take
tually agree the parameters of the set-off regime. out and maintain decennial liability insurance.
3.16 Do parties to construction contracts owe a duty of 42 Dispute Resolution

legal doctrine? If the duty of care is extra-contractual, 4.1 How are construction disputes generally resolved?
In our experience, the majority of disputes are amicably resolved
through direct negotiation (although it is important to note that
Pursuant to overriding Shari’ah principles, parties are required to the “without prejudice” principle does not exist in KSA, so appro-
discharge their obligations in good faith. This is an extra-con- priate safeguards need to be put in place prior to the commence-
tractual and mandatory duty that applies concurrently with ment of discussions).
contractually agreed obligations.

130 Saudi Arabia
If amicable settlement fails, then the dispute is generally deter- and the GCC Convention). The enforcement of foreign judg-
mined by litigation or arbitration. ments/awards in KSA is principally regulated by Article 11 of
In terms of litigation, the Commercial Court is the compe- the Enforcement Law, which confers jurisdiction upon the
tent court to hear disputes between two private parties, whilst Enforcement Court. The party that is seeking to enforce an
the Administrative Court (Board of Grievances) has jurisdiction award is required to demonstrate that the requirements stipu-
over disputes that involve government entities. lated under the Enforcement Law have been met, including that:
■ courts have no jurisdiction to hear the case (i.e. on the basis
that there is a valid arbitration clause);
jurisdiction (whether statutory or otherwise) or any other ■ the parties were duly summoned, properly represented and
forms of interim dispute resolution (e.g. a dispute review enabled to defend themselves;
board)? If so, please describe the general procedures. ■ the foreign award has become final;
■ there is no existing case that concerns the same issues;
and/or
The Commercial Courts Law (issued on 14/08/1441H, corre-
■ the foreign award does not provide for anything which
sponding to 17/04/2020) provides that, prior to proceeding to
constitutes a breach of KSA public order or ethics (Shari’ah
litigation, the parties must try resolve the dispute in question by
law).
means of conciliation and mediation for a period that does not
exceed 30 days.
Further, the Procurement Law (as set out the Regulations) 4.5 Where a contract provides for court proceedings
states that disputes shall be reviewed by a committee and that the in your jurisdiction, please outline the process adopted,
resolution of the committee shall be binding on the government any rights of appeal and a general assessment of
entity in question (but not on the private entity). how long proceedings are likely to take to reduce: (a)
It typically takes between six and eight months to obtain a first
jurisdiction. instance judgment.
A dissatisfied party may appeal a first instance judgment to the
Court of Appeal, which normally takes up to six months to issue
Arbitration clauses are a common feature of construction its judgment.
contracts in KSA, in respect of which some key points to note Either party may apply to the Supreme Court for the reversal of
are as follows: judgments rendered or affirmed by the Court of Appeal, provided
■ Royal Decree No. M/34 dated 24/05/1433H (16.04.2012) that the objection is based on one of the following grounds:
concerning the approval of the Law of Arbitration came ■ there is a violation of provisions of Shari’ah or law;
into force on 09.07.2012 (the “Arbitration Law”). The ■ the appealed judgment was made by an improper court or by
Arbitration Law is inspired by the UNCITRAL Model Law a court that lacked the appropriate jurisdiction; and/or
and applies to all arbitral proceedings seated in KSA. ■ there is an error in the characterisation or description of the
■ Cabinet Resolution No. 541 of 1438H, which contains the case.
Executive Regulations implementing the Arbitration Law,
was issued on 22.05.2017 and came into force on 07.06.2017
(the “Executive Regulations”). 4.6 Where the contract provides for court proceedings
■ Royal Decree No. 53 dated 13/10/1433H (30.08.2012) in a foreign country, will the judgment of that foreign
concerning the Execution Law came into force on
27.02.2013 (the “Enforcement Law”). are there any foreign countries in respect of which
■ The Saudi Centre for Commercial Arbitration (“SCCA”) enforcement is more straightforward (whether as a
was formally established by KSA Cabinet Decree No. 257 result of international treaties or otherwise)?
dated 14/06/1435H (15.03.2014) and became operational in
2016. The SCCA is located in Riyadh. However, there are
The enforcement of foreign judgments in KSA is principally
no restrictions on foreign arbitral providers operating in
regulated by the Enforcement Law, and the party that is seeking
KSA.
to enforce a foreign court judgment in KSA needs to prove that
■ Arbitration agreements (which are considered to be
KSA judgments are enforced in that country.
separate from the underlying contract) must be concluded
However, it is significant that KSA is a signatory to the Riyadh
in writing by parties with the necessary capacity to agree to
Convention, which addresses the recognition and enforcement
the dispute being resolved by arbitration.
of foreign judgments and arbitral awards (without reviewing the
subject matter of the underlying dispute), provided that such
4.4 Where the contract provides for international judgments or arbitral awards do not violate public order, morality
arbitration, do your jurisdiction’s courts recognise and or overriding principles of Shari’ah law.
enforce international arbitration awards? Please advise KSA is also a signatory to the GCC Convention for the
of any obstacles (legal or practical) to enforcement. Execution of Judgments, Delegations and Judicial Notifications
(1996), thus further facilitating the enforcement of judgments
KSA is a signatory to a number of international conventions emanating from other members of the GCC.
(such as the New York Convention, the Riyadh Convention

Euan Lloyd heads Al Tamimi & Company’s Construction & Infrastructure practice. Euan is admitted as a solicitor in England & Wales and
New South Wales, and has practised in a variety of civil and common law jurisdictions across Europe, the Middle East as well as Asia Pacific
(where he was the Group General Counsel of a global construction and engineering company for over four years).
Euan has advised different stakeholders on various high-value concession agreements, construction contracts, operation & maintenance
contracts and consultant services agreements in respect of a variety of power, utilities, infrastructure, building and development projects.
Euan also has significant construction claims and contentious construction experience (including in the form of arbitration, court proceed-
ings, expert determination and mediation/conciliation).
Euan speaks at various construction industry events and regularly publishes topical articles. He is also the secretary of the Abu Dhabi branch
of the Lighthouse Club.
Euan is a recognised and recommended construction lawyer in Chambers and Partners and The Legal 500.
Al Tamimi & Company Tel: +966 11 4169 666

Sky Towers (North Tower), 9th Floor Email: [email protected]
King Fahad Road URL: www.tamimi.com
Olaya District
Riyadh 11372
Saudi Arabia
Emad Salameh is a qualified lawyer and has previously practised as a licensed lawyer before all courts in Jordan. Prior to joining Al Tamimi,
he had practised in Saudi Arabia since 2007 as a senior legal consultant in a leading Saudi law firm associated with an international law firm.
Emad has experience in restructuring and privatisation projects, corporate/commercial matters and dispute resolution. He has represented
clients in commercial and construction litigation and assisted clients in drafting contracts and agreements, establishing new legal entities,
negotiations, and providing pertinent legal opinions.
Al Tamimi & Company Tel: +966 11 4169 666

Sky Towers (North Tower), 9th Floor Email: [email protected]
King Fahad Road URL: www.tamimi.com
Olaya District
Riyadh 11372
Saudi Arabia
Al Tamimi & Company’s leading Construction & Infrastructure practice

regularly advises all stakeholders in the construction industry in KSA (and
across the GCC) on the following issues:
■ Tender and project documentation.
■ Contract administration assistance and advice.
■ Strategic project planning.
■ Risk management strategies.
■ Claims preparation and assistance.
■ Dispute services, including dispute boards, expert determination, medi-
ation, conciliation, arbitration and litigation.
We pride ourselves on our accessibility, and provide user-friendly and
tailored assistance that reflects our deep knowledge of the KSA construc-
tion market and its nuances.
www.tamimi.com

132 Chapter 17
Singapore
Singapore
Allen & Gledhill LLP Ho Chien Mien
12 Making Construction Projects 1.3 What industry standard forms of construction


contract in your jurisdiction? Do you have: (i) any The most commonly used standard forms of construction
contracts which place both design and construction contracts are: the PSSCOC forms of contract, mainly for public
obligations upon contractors; (ii) any forms of design- sector works; the SIA forms of contract; and the REDAS forms
only contract; and/or (iii) any arrangement known as of contract. Each of the forms comes in different variants,
management contracting, with one main managing e.g. lump-sum fixed-price build-only, measurement build-only,
lump-sum fixed-price design and build, etc. There is a prefer-
ence for standard forms which impose both design and build
contracts” as an abbreviation for construction and obligations on contractors in Singapore.
1.4 What (if any) legal requirements are there to create a
Commonly used standard form construction contracts in legally binding contract (e.g. in common law jurisdictions,
Singapore include the Singapore Institute of Architects and offer, acceptance, consideration and intention to create
Conditions of Building Contract (the “SIA Conditions”), legal relations are usually required)? Are there any
mandatory law requirements which need to be reflected in
the Public Sector Standard Conditions of Contract for Design a construction contract (e.g. provision for adjudication or
and Build Conditions of Contract (“PSSCOC”), and the Real any need for the contract to be evidenced in writing)?
Estate Developers’ Association of Singapore Design and Build
Conditions of Contract (the “REDAS Conditions”).
The SIA Conditions are the most widely used standard form Construction contracts in Singapore are formed when there is a
for “construct only” contracts. Under the REDAS Conditions, the valid offer and acceptance and valuable consideration is provided.
contractor bears both the design and construction responsibil- The parties must at a minimum agree on essential particulars such
ities. On the other hand, the PSSCOC is used for all public as price, time, and scope of works, in order for the contract to
projects in Singapore, with different versions catering to both be commercially workable. The parties’ intention to be bound
“construct only” and “design and build ” contracts. as shown through their words and conduct will also be consid-
FIDIC forms are widely used for engineering projects. ered (Ramo Industries Pte Ltd v DLE Solutions Pte Ltd [2020] SGHC
Management contracting is less common in the Singapore 4 at [68]).
construction industry, although this method of procurement is Within the construction industry, offers are commonly provided
sometimes used by more sophisticated employers. by way of tender or bid. Until such an offer is duly accepted, the
There are new SIA Conditions which have just been released, general position is that no contractual obligation arises.
which introduce design and build elements. These forms have A construction contract in Singapore does not need to expressly
yet to gain wide acceptance. provide for adjudication. The Building and Construction Industry
Security of Payment Act (Cap. 30B) (“SOPA”), which provides
the statutory adjudication scheme in Singapore, applies to any
1.2 How prevalent is collaborative contracting (e.g. construction or construction-related contracts made in writing on
alliance contracting and partnering) in your jurisdiction? or after 1 April 2005.
Whilst there are attempts to introduce collaborative contracting which an employer can give either a legally binding or
in Singapore, this form of contracting is still in its infancy in non-legally binding indication of willingness either to
Singapore. In this regard, the Singapore government has taken enter into a contract later or to commit itself to meet
the lead in trying to promote collaborative contracting and has certain costs to be incurred by the contractor whether or
encouraged the use of this form of contracting in the public not a full contract is ever concluded.
sector. To this end, the Building Control Authority of Singapore
has piloted the introduction of collaborative contracting provi- In Singapore, it is common for employers to instruct their repre-
sions in selected public sector projects. These will be officially sentative or architect to issue a letter of intent to indicate their
introduced when ready. selection of a contractor. While a letter of intent is normally

Allen & Gledhill LLP 133
stipulated to be non-binding, it gives the contractor a basis upon 1.8 Is the employer legally permitted to retain part of
which to commence the mobilisation of resources and nego- the purchase price for the works as a retention to be
tiations with subcontractors and suppliers for the project. It released either in whole or in part when: (a) the works are
also provides contractors with a degree of certainty, particularly substantially complete; and/or (b) any agreed defects
where contractors have to place orders for items that require liability period is complete?
long lead times, such as items to be pre-fabricated in factories
before being delivered for assembly on site. Whether a letter of Yes. Generally, the standard conditions of contract permit
intent is binding would typically depend on its substance, rather employers to withhold retention monies (typically 5–10% of
than its form. the contract price), half of which is released upon substantial
completion of the works, and the other half is released upon the
1.6 Are there any statutory or standard types completion of defects rectification works.
compulsory to have in place when carrying out 1.9 Is it permissible/common for there to be
construction work? For example, is there employer’s performance bonds (provided by banks and others) to
liability insurance for contractors in respect of death guarantee the contractor’s performance? Are there any
and personal injury, or is there a requirement for the restrictions on the nature of such bonds? Are there any
contractor to have contractors’ all-risk insurance? grounds on which a call on such bonds may be restrained
(e.g. by interim injunction); and, if so, how often is such
In Singapore, parties typically include in construction contracts relief generally granted in your jurisdiction? Would such
public liability policies, professional indemnity insurance clauses, bonds typically provide for payment on demand (without
or Contractors All Risks Insurance (“CAR”) clauses (which
encompass all risks associated with material physical loss or
damage in a construction project. Contractors and subcontrac- Contractors are commonly obliged to provide employers with
tors are also required, under the Work Injury Compensation performance bond(s).
Act (Cap. 354) (“WICA”), to maintain work injury compen- In Singapore, there are generally two types – “on-demand”
sation insurance for all employees doing manual work and all and “conditional” bonds. The employer can only call on a condi-
non-manual employees earning S$2,100 a month or less. tional bond upon proof of default, as prescribed in the contract
or bond. However, for an on-demand bond, the institution
providing the bond has to pay the sum assured on demand by the
employer, without any need for proof of default.
legal status of those working on site as employees or The party that procured the bond may attempt to stop the
as self-employed sub-contractors); (b) tax (payment of beneficiary’s call on an on-demand bond by applying for an
income tax of employees); and/or (c) health and safety? injunction. To succeed, the applicant must prove either fraud or
unconscionability.
“Unconscionability” is an equitable concept unique to
Some examples of such statutory requirements are as follows:
Singapore. It involves an act of unjustifiable unfairness by the
1. Generally, under the Building Control Act (Cap. 29) and
party calling on the on-demand bond.
the Building Control (Licensing of Builders) Regulations
However, parties are free to contractually agree to exclude
2008, builders must obtain a builder’s licence if the works,
unconscionability as a basis for stopping a call on the bond, so
broadly speaking, involve the structural integrity of a
long as clear language is used to that effect (CKR Contract Services
building. Such works, and/or works located in areas that
Pte Ltd v Asplenium Land Pte Ltd & Anor) [2015] 3 SLR 1041.
may have a significant impact on public safety, would
In light of the COVID-19 pandemic, the Singapore govern-
typically require the approval of the Commissioner of
ment implemented the COVID-19 (Temporary Measures) Act
Building Control. Similarly, a specialist builder’s licence is
2020 (“COVID-19 TMA”), section 6 of which relates to perfor-
also required to carry out specialist building works.
mance bonds. Generally, when a notification for temporary relief
2. Labour: The Singapore Ministry of Manpower requires
has been served according to sections 5 and 9, a performance
foreign unskilled and semi-skilled workers in the construc-
bond may not be called upon earlier than seven days before its
tion industry to hold a Work Permit. To qualify for a Work
expiry, until the temporary relief period ends.
Permit, all foreign workers must obtain a Skill Evaluation
Certificate, so as to ensure that they are adequately skilled
for various construction trades. Due to quota restric- 1.10 Is it permissible/common for there to be company
tions on the employment of foreign employees, the ratio guarantees provided to guarantee the performance of
of foreign employees to local full-time employees in subsidiary companies? Are there any restrictions on the
the employer’s total workforce must be limited to 7:1. nature of such guarantees?
Employers must also pay a foreign worker levy.
3. Tax: When payments are made to a non-resident company There is no impediment to company guarantees being provided
or individual, he/she is required to withhold a percentage to guarantee the performance of subsidiary companies – provided
of that payment and pay the amount withheld (withholding that it can be shown that the provision of such guarantees is in
tax) to the Inland Revenue Authority of Singapore under the interest of, and provides a corporate benefit to, the parent
the Income Tax Act (Cap. 134). company. Such company guarantees are, however, not common.
4. Health and Safety: Contractors are required under the It is more common for a banker’s guarantee to be sought. Where
WICA to maintain work injury compensation insur- corporate guarantees are sometimes seen, is in the sphere of
ance for (i) all employees doing manual work, and (ii) all major foreign companies providing a parent company guarantees
employees doing non-manual work and earning S$2,100 a to guarantee the performance of their subsidiaries in Singapore.
month or less.

134 Singapore
1.11 Is it possible and/or usual for contractors to have Yes. A liquidated damages clause will only be enforced if the
retention of title rights in relation to goods and supplies liquidated damages provided for are genuine pre-estimates of
used in the works? Is it permissible for contractors to the losses likely to flow from the breach (Dunlop Pneumatic Tyre Co
claim that, until they have been paid, they retain title and Ltd v New Garage Motor Ltd [1915] AC 79 (“Dunlop Pneumatic”)).
the right to remove goods and materials supplied from That said, reasonable liquidated damages are likely to be recov-
the site? erable in scenarios where it is not possible to estimate the losses
that may be suffered, e.g. public infrastructure projects.
The standard form contracts typically vest ownership of goods A new test to decide whether or not a liquidated damages
and supplies used in the works in the employer, whether or not provision should be enforced has been laid down by the UK
the employer has made payment for those plants or materials. In Supreme Court which queries whether the liquidated damages
such cases, as contractors do not have ownership of such goods provision is a “secondary obligation”, and if so, whether it “imposes
and supplies, they cannot claim title over such materials in the a detriment on a party in breach which is out of all proportion to any
event of non-payment. However, it should be noted that section legitimate interest of the innocent party in the enforcement of the primary
25 of the SOPA allows contractors to place liens over unfixed obligation”. However, the traditional test espoused in Dunlop
and unpaid goods supplied by the contractor if the respondent Pneumatic is currently still applicable in Singapore, as the new
fails to pay the adjudicated amount in full. test in Cavendish has yet to be considered by Singapore Court of
Appeal. It remains to be seen if the Singapore Court of Appeal
22 Supervising Construction Contracts will adopt the same test as in Cavendish in deciding whether or
not to enforce a liquidated damages provision.
2.1 Is it common for construction contracts to be Finally, Singapore courts have yet to make adjustments to a
supervised on behalf of the employer by a third party rate of liquidated damages that has been agreed by the parties.
employer? If so, what is the nature of such duty (e.g. is 32 Common Issues on Construction
it absolute or qualified)? What (if any) recourse does a Contracts
The standard form contracts listed in question 1.1 above contem- right?
plate the supervision of works on behalf of the employers by third
parties. The REDAS form refers to such a third party as the Generally, the employer is entitled to order variations if there
“Employer’s Representative”, whereas the PSSCOC refers to such
is a variation clause in the construction contract. However, the
a third party as the “Superintending Officer”. Note that it is also
employer usually will not be able to order variations once the
not unusual for employers using REDAS and PSSCOC forms to
certificate of completion has been issued. The contractor is also
use their own employees as the contract supervisor/administrator.
not required to undertake works beyond the scope of the varia-
The SIA Conditions stipulate that such a third party has to be an
tion clause itself, which typically defines a variation as any addi-
architect.
tion, reduction or substitution to the works. Such variations
These third parties (whether independent parties or employees
cannot substantially change the nature of the contract.
of the employers) are obliged to provide their services in an impar-
tial manner when the contract provides for them to undertake a
certifier’s or adjudicator’s role. In all other respects, they act as the 3.2 Can work be omitted from the contract? If it is
employer’s agents, such as when issuing instructions or directions omitted, can the employer carry out the omitted work
on behalf of the employer, in the best interests of the employer. himself or procure a third party to perform it?
2.2 Are employers free to provide in the contract that Yes. Standard form contracts such as the SIA Conditions and
they will pay the contractor when they, the employer, have PSSCOC contain clauses that allow an employer to omit works
themselves been paid; i.e. can the employer include in from the contract. However, an employer generally cannot omit
the contract what is known as a “pay when paid” clause? works such that the contractor is deprived of the substantial
benefit of such works. If the omission has changed the char-
No. “Pay when paid” provisions are prohibited by section 9(1) acter of the contract substantially, the contractor may allege that
of the SOPA. However, though such provisions are rendered the omitted work amounts to a change in the scope and nature of
unenforceable, parties would not be absolved of payment obliga- the contract. In practice, however, the employer and contractor
tions owed to the other (SKK (S) Pte Ltd v Management Corporation may reach a mutual agreement as to the omission of the works.
Strata Title Plan No 1166 [2013] SGHCR 11 at [23]). Subject to the above and any prohibition in the contract,
the employer may then carry out the omitted works himself or
engage a third party to complete the said works.
paid by the contractor to the employer in the event of 3.3 Are there terms which will/can be implied into
particular breaches, e.g. liquidated damages for late a construction contract (e.g. a fitness for purpose
completion? If such arrangements are permitted, are obligation, or duty to act in good faith)?
there any restrictions on what can be agreed? E.g. does
of loss, or can the contractor be bound to pay a sum Examples of terms that are typically implied under statute include:
which is wholly unrelated to the amount of financial loss 1. a contractor’s right to refer payment-related disputes to adju-
likely to be suffered by the employer? Will the courts dication (section 12 of the SOPA); or
in your jurisdiction ever look to revise an agreed rate of 2. a contractor’s right to suspend performance for non-pay-
liquidated damages; and, if so, in what circumstances? ment (section 26 of the SOPA).

Terms may also be implied under common law, such as: the relevant damage, and (ii) a right to bring such an action.
1. an employer’s obligation to do all that is necessary on his Note that the law on when a particular cause of action arises
part to bring about completion (Evergreat Construction Co is quite complicated – and is dependent also on which cause of
Pte Ltd v Presscrete Engineering Pte Ltd [2006] 1 SLR(R) 634) action is relied upon – e.g. negligence, breach of contract, breach
(“Evergreat”); or of statutory duty, etc.
2. an employer will not prevent a contractor from performing This is, however, subject to a 15-year long-stop limitation.
his obligations under the construction contract (Evergreat; As a result of the COVID-19 pandemic, where section 5 of
TT International Ltd v Ho Lee Construction Pte Ltd [2017] the new COVID-19 TMA on temporary relief for inability to
SGHC 62). perform contracts applies, section 5(7) provides for an extension
of the period of limitation for actions relating to an inability to
3.4 If the contractor is delayed by two concurrent perform contracts.
or risk of his employer, is the contractor entitled to: (a) 3.6 Which party usually bears the risk of unforeseen
an extension of time; and/or (b) the costs arising from ground conditions under construction contracts in your
jurisdiction?
The position in Singapore with regard to extensions of time In Resource Piling Pte Ltd v Geospecs Pte Ltd [2014] 1 SLR 485,
for concurrent delays remains unsettled. On this issue, Quentin Loh J stated at [66] that:
Commonwealth cases are instructive and have persuasive value.
“[I]n the context of the Singapore building and construction industry,
In Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester)
the risk of adverse subsoil conditions is variably borne by the
Ltd (1999) Con LR 32 (“Malmaison”), if there are two concur-
contractor. None of the standard building contract forms commonly
rent causes of delay, one of which is a relevant event allowing
in use in Singapore provide otherwise. This is the well-known and
for a time extension and the other is not, the contractor is enti-
accepted commercial environment of long standing…”
tled to an extension of time for the period of delay caused by
For instance, Clause 5.1 of the PSSCOC states that the risk
the relevant event, notwithstanding the concurrent effect of the
of unforeseen ground conditions lies with the contractor.
other. In contrast, the position in the Scottish case of City Inn
However, Clause 5.2 of the PSSCOC allows the contractor to
Ltd v Shepherd Construction Ltd [2007] CSOH 190 (“City Inn”) is
that if there are concurrent causes of delay, the delay should be recover additional costs incurred as a result of adverse physical
apportioned as between the relevant event and the contractor’s conditions which could not have been reasonably foreseen by an
risk events. However, City Inn has been rejected in the context experienced contractor.
of a JCT Standard Form of Building Contract, in the recent case
of Walter Lilly & Co Ltd v Mackay and Another [2012] EWHC 1773 3.7 Which party usually bears the risk of a change
(TCC), which instead upheld the application of Malmaison in in law affecting the completion of the works under
England. As such, it is likely that the Malmaison approach will construction contracts in your jurisdiction?
be highly persuasive in the Singapore courts. Of note is the local
case of PPG Industries (Singapore) Pte Ltd v Compact Metal Industries A change in law is a risk that is typically allocated between the
Ltd [2013] SGCA 23, where the Court of Appeal found a concur- parties using force majeure clauses.
rent delay and granted an extension of time to the contractor, but There is no clear Singapore authority addressing the issue of
without any discussion of any of the above cases. which party should bear the risks arising out of a change in law
There is no Singapore authority on the contractor’s entitlement if this is not expressly contemplated by the contract. On the
to recover prolongation costs occasioned by concurrent delay. one hand, there is a suggestion that if there is no express provi-
That said, a leading author on construction law in Singapore, sion providing that the happening of such a neutral event would
Chow Kok Fong, notes that where the employer and contractor
allow the contractor a time extension or a claim in damages,
are responsible for a concurrent delay, the general position of the
the contractor is taken to have accepted the legal risk of the
courts in the UK and the US, as well as the SCL protocol, is
occurrence of such an event. On the other hand, the Singapore
that neither party will be able to recover damages from the other
courts may adopt the position expounded by the Supreme Court
party for that period of delay (Chow Kok Fong, Law and Practice
of Christchurch in New Zealand Structures & Investments Ltd v
of Construction Contracts (Sweet & Maxwell Asia, 5th Ed, 2019) pp.
McKenzie [1979] 1 NZLR 515, which held that, in the absence
658, 659). However, in practice and by contractual provision,
of an express clause as to who should bear responsibility for
contractors are usually not allowed to claim costs arising out of
additional costs occasioned by changes in statutory regulation,
any extension of time as a result of a concurrent delay.
it is the responsibility of the employer to vary the work and the
contractor is entitled to additional payment for the varied work.
against each other? How long is that period and when 3.8 Which party usually owns the intellectual property
does time start to run? in relation to the design and operation of the property?
Under the Limitation Act (Cap. 163), the usual limitation period Generally, the creator of a piece of work owns the copyright of
for an action in tort or contract would be six years from the that work. However, where the work was created by the person
date on which the cause of action accrued. In respect of latent in the course of his employment, the employer would generally
damage, the limitation period is either six years from the date be the owner of the copyright in that work. Therefore, tech-
on which the cause of action accrued, or three years from the nical or commercial information created by the architects or
earliest date on which the claimant first had both (i) the knowl- engineers of the employer would usually belong to the employer.
edge required for bringing an action for damages in respect of Usually, this is dealt with in the contract provisions.

136 Singapore
3.9 Is the contractor ever entitled to suspend works? argument would nevertheless be very fact-dependent – particu-
larly on the terms of the construction contract concerned.
Yes. A contractor may suspend work if the contract confers on
the contractor a right to do so. Typically, contracts may permit 3.12 Is the concept of force majeure or frustration known
suspension on account of: in your jurisdiction? What remedy does this give the
1. a serious breach (typically in relation to certification and affected party? Is it usual/possible to argue successfully
payment terms of the contract) by the employer; and
2. the architect’s failure to issue a certificate, save for
an interim certificate (e.g. Clause 33(4) of the SIA
Conditions). Separately, sections 23 and 26 of the SOPA The concepts of force majeure and frustration are known in
entitle a contractor to stop work in the event of the employ- Singapore.
er’s failure to pay an adjudicated amount following the Parties may contractually provide for non-performance upon
rendering of an adjudication determination in the contrac- the occurrence of specified force majeure events so that such
tor’s favour. non-performance does not amount to a breach. Whether force
Otherwise, there is no common law right to suspend work majeure arises and what rights and obligations follow such an event
(I-Lab Engineering Pte Ltd v Shriro (Singapore) Pte Ltd [2018] SGHCR is subject to a precise construction of the contractual clause itself.
15; Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 In the absence of a force majeure clause, the common law
SLR(R) 288 (“Jia Min”)). doctrine of frustration may excuse the non-performance of a
Where legislation or the government requires – such as the contractor by treating the contract as having existed until the
COVID-19 circuit breaker measures suspending all non-essen- point when the frustrating event occurred, while any accrued
rights and obligations remain enforceable after the frustrating
tial activities at workplace premises – contractors must suspend
event. However, the doctrine of frustration operates only in
works.
exceptional circumstances, where the supervening event is one
that radically or fundamentally alters the contract such that it is
3.10 Are there any grounds which automatically or no longer the same as what was originally entered into.
party’s grounds for termination must be set out (e.g. in a 3.13 Are parties, who are not parties to the contract,
termination notice)? entitled to claim the benefit of any contractual right
In addition to any express grounds for termination in a contract, the contractor pursuant to the original construction
the usual grounds on which an innocent party is entitled to contracts in relation to defects in the building?
terminate a contract include (i) such party’s common law rights
to terminate for the other party’s repudiation of performance Section 2 of the Contracts (Rights of Third Parties) Act (Cap.
(or abandonment), (ii) where there is a breach of a condition, or 53B) allows a third party to benefit under the contract if (i) the
(iii) where the breach in question deprives the innocent party contract expressly states the same, or (ii) the contract purports
of substantially the whole benefit of the contract, save where to confer a benefit on him and the parties intended that the term
the term expressly, clearly and unambiguously states that any would be enforceable by the third party.
breach of it, regardless of the seriousness of the consequences to
follow, would never entitle the innocent party to terminate the
contract (RDC Concrete Pte Ltd v Sato Kog yo (S) Pte Ltd [2007] 4 3.14 On construction and engineering projects in
SLR(R) 413; Sports Connection Pte Ltd v Deuter Sports GmbH [2009] your jurisdiction, how common is the use of direct
3 SLR(R) 883).
3.11 Do construction contracts in your jurisdiction other stakeholders, and forward purchasers)?
any time and for any reason? If so, would an employer The use of collateral warranties appears to be more common
exercising that right need to pay the contractor’s profit than direct agreements, especially as between funders and
contractors. Even then, where there are step-in rights for
termination?
funders, collateral warranties are not always insisted upon.
The standard form construction contracts in Singapore do not

provide for the employer to have the right to terminate at any 3.15 Can one party (P1) to a construction contract, who
time and for any reason. Nevertheless, it is not uncommon for
some employers to try to incorporate such a provision in their on the rights of set-off?
contracts. Where such provisions are incorporated, and unless
there is an express provision providing that the employer exer-
cising such a right need not pay the contractor’s profit on the Under Singapore law, in addition to any rights conferred by the
part of the works that remains unperformed as at termina- contract, P1 may rely on legal and equitable set-off to set off
tion, it is arguable that such profits may be recoverable by the against the sums due to P2 the sums P2 owes to P1. However, both
legal and equitable rights of set-off can be excluded by clear and
contractor. Although the termination at any time and for any
unequivocal words in a contract ( Jia Min). Contracts providing for
reason would not be in breach of contract, it would be argu-
temporary finality on the architect’s certificates may also exclude
able that an implied term exists to require the employer exer-
set-offs which have not been certified by the architect (Chin Ivan v
cising such a right to pay the contractor’s profit on the part of
H P Construction & Engineering Pte Ltd [2015] 3 SLR 124).
the works that remains unperformed as at termination. Such an

At common law, the amount should be ascertainable and 3.19 Where the construction contract involves an element
due, while in equity, the right of set-off includes unliquidated of design and/or the contract is one for design only, are the
damages. However, unlike legal set-off, equitable set-off needs designer’s obligations absolute or are there limits on the
to be inseparably connected to the claim against which it is raised. extent of his liability? In particular, does the designer have
to give an absolute guarantee in respect of his work?

care to each other either in contract or under any other Usually, an architect’s liability is not absolute in the sense that
legal doctrine? If the duty of care is extra-contractual, the architect is liable wholly for all losses that result from the acts
can such duty exist concurrently with any contractual of that architect. It must be shown that the architect has fallen
obligations and liabilities? short of the standard of the ordinary skilled person exercising
and professing to have a special skill or competence (Bolam v
Parties to construction contracts can owe a duty of care to each Friern Hospital Management Committee [1957] 1 W.L.R. 582 at 586).
other in contract, with such scope and content as contractually In certain circumstances, an architect may also rely on the inde-
prescribed. At the same time, a concurrent duty of care in tort may pendent contractor defence (MCST 3322 v Mer Vue Developments
also arise if the test laid down in Spandeck Engineering (S) Pte Ltd v Pte Ltd [2016] 2 SLR 793).
Defence Science & Technolog y Agency [2007] 4 SLR(R) 100 is satisfied: In special circumstances, an architect can enter into a duty
1. it must be factually foreseeable that a failure by one party beyond that of using skill and care in carrying out design. This
to take reasonable care could result in the other party may occur expressly (for instance, by contract) or it may be implied
suffering damages; that the designer has warranted the achievement of a certain
2 there must be sufficient legal proximity between the result, e.g. a fitness for purpose clause.
parties, taking into account the physical, circumstantial, Employers may, in practice, try to extract an absolute guarantee
and causal proximity of the parties and their acts; and from designers in respect of their work. However, designers
3. there must be no policy considerations which would mili- seldom agree to this due to difficulties in obtaining professional
tate against the establishment of a tortious duty of care. indemnity insurance in this regard.
This tortious duty of care cannot be inconsistent with the
terms of the contract. 3.20 Does the concept of decennial liability apply in your
3.17 Where the terms of a construction contract are what is the scope of its application?
ambiguity is interpreted? No, the concept of decennial liability does not apply in Singapore.
The current approach taken by Singapore courts for the 42 Dispute Resolution
construction of contract terms is a “contextual” one (Zurich
Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction 4.1 How are construction disputes generally resolved?
Pte Ltd [2008] 3 SLR(R) 1029 (“Zurich”)). Under this approach,
the court takes into account the “essence and attributes of the
document being examined” (Zurich at [132(a)]). Apart from litigation, the SOPA provides for an adjudication
Extrinsic evidence may be admitted to aid in the interpre- process to achieve a fast and low-cost settlement of payment
tation of the written words of a contract, provided that the disputes. Disputes are also commonly resolved through arbitra-
extrinsic evidence in question is “relevant, reasonably avail- tion. The SIA Conditions and PSSCOC both provide for this
able to all the contract parties and relates to a clear or obvious avenue of dispute resolution. Parties may also need to proceed
context” (Zurich at [132(d)]). to mediation before the commencement of arbitration or litiga-
If there is still any ambiguity in the interpretation of a clause, tion proceedings. Alternatively, arbitration or litigation proceed-
the contra proferentem rule would apply and the clause is to be ings may be stayed in order for parties to pursue mediation. The
construed against the party seeking to rely on it. Singapore government has recently started to promote collab-
orative contracting which may involve the use of standing
dispute adjudication boards to help resolve disputes. The new
3.18 Are there any terms which, if included in a COVID-19 TMA also provides for determination before an
assessor in relation to disputes regarding temporary relief from
inability to perform contracts caused by a COVID-19 event.
The following are examples of unenforceable terms/clauses in
a contract:
1. clauses which exclude liability for personal injury or death 4.2 Do you have adjudication processes in your
(section 2 of the Unfair Contract Terms Act (Cap. 396)); forms of interim dispute resolution (e.g. a dispute review
2. “pay when paid” provisions (section 9 of the SOPA); board)? If so, please describe the general procedures.
3. liquidated damages clauses that amount to a penalty; and
4. provisions which might prevent, modify, restrict, or other-
wise prejudice the operation of the terms of the SOPA Yes, there is a mandatory statutory adjudication procedure under
(section 36(2) of the SOPA). In determining if a contrac- the SOPA applicable to most types of construction works. An
tual clause offends section 36(2) of the SOPA, a balance adjudication typically occurs in the following manner:
must be struck between protecting the entitlement of 1. The contractor may activate the adjudication process by
those performing the work to receive progress payments, serving a payment claim on the employer.
and the parties’ freedom to contract (CHL Construction Pte 2. The employer is required to provide a payment response
Ltd v Yangguang Group Pte Ltd [2019] SGHC 62 at [32]). stating, amongst other things, the response amount and, if

138 Singapore
the response amount is less than the claimed amount, the on International Commercial Arbitration, or section 24 of the
reason for the difference and the reason for any amount IAA (PT First Media TBK v Astro Nusantara International BV [2014]
withheld. 1 SLR 372). Enforcement of all other foreign awards may only
3. If the contractor to a construction contract disputes the be refused on the grounds set out under section 31 of the IAA.
payment response issued by the employer, or if the employer
failed to provide a payment response within the period stip-
ulated by the SOPA, the contractor is entitled to make an in your jurisdiction, please outline the process adopted,
adjudication application after a stipulated period. any rights of appeal and a general assessment of
4. After the contractor lodges the adjudication application, the how long proceedings are likely to take to reduce: (a)
employer shall lodge an adjudication response, following a decision by the court of first jurisdiction; and (b) a
which the adjudicator shall make a determination. decision by the final court of appeal.
The adjudication process is designed to determine the
quantum of payment quickly and economically without the full An action is commenced with the claimant’s personal service of
length of arbitration or litigation. Typically, the adjudication a copy of a writ or any other originating process (supported by
process can be completed within a few weeks. a statement of claim or affidavit, respectively) on the defendant
within six months of its issue by the court, or within 12 months
if the claim is to be served out of jurisdiction. Once pleadings
commonly have arbitration clauses? If so, please are exchanged, discovery, the exchange of affidavits of evidence-
explain how, in general terms, arbitration works in your in-chief and expert reports (if necessary) and setting down for
jurisdiction. trial occur. A party may file an appeal within one month of the
rendering of the judgment.
Typically, as construction disputes involve large volumes of
Yes. The SIA Conditions, PSSCOC and REDAS Conditions
evidence and require the provision of expert evidence, the time
contain arbitration clauses.
required to resolve such disputes may vary between 12 and 24
A dual arbitration regime exists in Singapore. Domestic arbi-
months.
trations are governed by the Arbitration Act (Cap. 10) (“AA”)
and international arbitrations are governed by the International
Arbitration Act (Cap. 143A) (“IAA”). Many provisions in the 4.6 Where the contract provides for court proceedings
two statutes are similar. Nonetheless, the main distinctions are in a foreign country, will the judgment of that foreign
as follows: court be upheld and enforced in your jurisdiction? If
■ Stay of court proceeding in favour of arbitration
Under the domestic arbitration regime, the court has enforcement is more straightforward (whether as a
discretionary power as to whether to grant a stay where one result of international treaties or otherwise)?
of the parties commenced court proceedings in contra-
vention of an arbitration agreement. However, under the
Generally, yes. Foreign judgments may be enforced in Singapore
international arbitration regime, it is mandatory for a court
under the:
to grant a stay if the court is satisfied that there is an arbi-
1. Reciprocal Enforcement of Commonwealth Judgments Act
tration agreement, unless such an agreement is null and
(Cap. 264) (“RECJA”): Facilitates the enforcement of judg-
void, inoperative or incapable of being performed.
ments or orders of superior courts of the Commonwealth
■ Appeal against an award
countries whereby a sum of money is made payable.
Under the domestic arbitration regime, a party who is dissat-
2. Reciprocal Enforcement of Foreign Judgments Act (Cap.
isfied with an arbitral award may appeal to the court. This
265) (“REFJA”): Facilitates the enforcement of judgments
right to appeal is limited to questions of law arising out of by courts of non-Commonwealth countries which have
an award made in the proceeding. Under the international been gazetted under the REFJA. The judgment need not
arbitration regime, there is no right of appeal at all. be monetary.
3. Common law: Facilitates the enforcement of foreign judg-
4.4 Where the contract provides for international ments which fall outside the ambit of RECJA and REFJA.
arbitration, do your jurisdiction’s courts recognise and However, do note that the Reciprocal Enforcement of
enforce international arbitration awards? Please advise Commonwealth Judgments (Repeal) Act 2019 (“RECJA Repeal
of any obstacles (legal or practical) to enforcement. Act”) has been passed though it has not yet come into force,
and REFJA was amended through the Reciprocal Enforcement
Yes. Singapore is a signatory to the 1958 New York Convention of Foreign Judgments (Amendment) Act 2019 (“REFJ(A)A”).
on the Recognition and Enforcement of Foreign Arbitral Awards. These Acts aim to consolidate Singapore’s statutory regime on
Thus, an international arbitration award may be enforced, with the enforcement of foreign judgments into a single framework,
leave of court, in the same manner as a judgment or an order of and expand the scope of reciprocal arrangements regarding
the court (i) by an action under common law, (ii) under section 29 enforcement of foreign judgments with other countries.
of the IAA, or (iii) under section 46(3) of the AA. Under the common law, an in personam final and conclusive
The Rules of Court set out the procedures for enforcing a foreign judgment rendered by a court of competent jurisdiction,
foreign arbitral award. Generally, an application can be made which is also a judgment for a definite sum of money, is enforce-
by filing an originating summons, which is supported by an affi- able in Singapore provided, inter alia:
davit. Once leave is given by the court to enter judgment on an 1. it was not procured by fraud;
application to enforce the award, the other party has 14 days to 2. its enforcement would not be contrary to public policy;
challenge the leave granted. 3. its enforcement would not be an enforcement of foreign
penal, revenue or other public laws; or
Enforcement of international arbitration awards from arbi-
4. the proceedings in which it was obtained were not contrary
trations seated in Singapore may be refused on either the
to natural justice.
grounds set out in Article 34 of the UNCITRAL Model Law

Ho Chien Mien is Co-Head of the Construction & Engineering Practice at Allen & Gledhill.
He undertakes a wide range of contentious and non-contentious construction and engineering related work. On the contentious side, he has
extensive litigation, arbitration, adjudication and mediation experience – both domestic and international. On the non-contentious side, he
has been involved in some of the largest building and infrastructure projects in Singapore and the Asia Pacific region, 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.
In 2018, Chien Mien was among the inaugural batch of select practitioners to be recognised as a Senior Accredited Specialist in Building and
Construction Law by the Singapore Academy of Law. He sits on the main panel of arbitrators for the Singapore International Arbitration Centre
and the Asian International Arbitration Centre. Chien Mien is an Accredited Adjudicator with the Singapore Mediation Centre, and a Fellow
of the Singapore Institute of Arbitrators and Accredited Arbitrator under the Law Society Arbitration Scheme. Further, he has contributed to
various domestic and international publications and is the editor of the construction section of Atkin’s Court Forms (Singapore Edition).
Allen & Gledhill LLP Tel: +65 6890 7502

One Marina Boulevard Email: [email protected]
#28-00, Singapore 018989 URL: www.allenandgledhill.com
Allen & Gledhill is an award-winning full-service South-east Asian law firm placed to advise clients on their business interests in Singapore and beyond;
which provides legal services to a wide range of premier clients, including in particular, on matters involving South-east Asia and the Asian region.
local and multinational corporations and financial institutions. Established With its offices in Singapore and Myanmar, its associate firm Rahmat Lim
in 1902, the Firm is consistently ranked as one of the market leaders in & Partners in Malaysia, and its alliance firm Soemadipradja & Taher in
Singapore and South-east Asia, having been involved in a number of chal- Indonesia, the Allen & Gledhill network has 600 lawyers in the region, making
lenging, complex and significant deals, many of which are the first of their it one of the largest law firms in South-east Asia.
kind. The Firm’s reputation for high-quality advice is regularly affirmed by its www.allenandgledhill.com
strong rankings in leading publications, and by the various awards and acco-
lades it has received from independent commentators and clients. The Firm
is consistently ranked band one in the highest number of practice areas, and
has the highest number of lawyers recognised as leading individuals. Over
the years, the Firm has also been named ‘Regional Law Firm of the Year’ and
‘SE Asia Law Firm of the Year’ by many prominent legal publishers. With
a growing network of associate firms and offices, Allen & Gledhill is well

140 Chapter 18
Slovenia
Slovenia
Njives Prelog Neffat
Law Firm Neffat Ana Toni
the contractual contract and then the contractor concludes sepa-

12 Making Construction Projects rate contracts with sub-contractors.
However, in public procurement procedures in Slovenia the
1.1 What are the standard types of construction contract contractors often appear in a consortium. Another form of
co-operation between contractors is a joint venture entity, which
is less common.
and/or (iii) any arrangement known as management
contracting, with one main managing contractor and 1.3 What industry standard forms of construction
with the construction work done by a series of package contract are most commonly used in your jurisdiction?
the chapter, we refer to “construction contracts” as an
abbreviation for construction and engineering contracts.) There are not really any standard forms specific to a certain
industry. The OZ has some specific provisions about the construc-
In the Republic of Slovenia, construction contracts are concluded tion contracts that are most commonly used in all industries.
in accordance with the provisions of the Obligations Code Usually, the PGU is also used to complement the OZ provisions
(OZ), Special Construction Usages (PGU) and the International and agreements made by parties. Other standard forms, such as
Federation of Consulting Engineers’ (FIDIC) books. FIDIC books, are used quite rarely (mainly for large-scale projects,
As per the OZ, a construction contract (and a building contract) or public procurement contracts in the case of co-financing of
is a contract for work through which the contractor undertakes to construction projects by the European Union).
build a specific structure on specific land according to a specific
plan by a specific deadline, or to carry out any other construction 1.4 What (if any) legal requirements are there to create a
work on such land or on an existing structure, and the employer legally binding contract (e.g. in common law jurisdictions,
undertakes to pay the contractor a specific fee for the work. The offer, acceptance, consideration and intention to create
law also stipulates that this contract must be concluded in writing. legal relations are usually required)? Are there any
The execution of particular construction work is usually not mandatory law requirements which need to be reflected in
a construction contract (e.g. provision for adjudication or
just about concluding a single contract. Construction works
any need for the contract to be evidenced in writing)?
require preparation, which is done by the employer himself or
by a third party hired for this work. Namely, the contractor who
will carry out the construction needs plans on which to base The general legal requirement in the Slovenian OZ is that a
the work that will be completed. Typically, in addition to the legally binding contract shall be deemed concluded when the
building contract, two contracts are concluded in this connec- contracting parties agree upon its essence or, in other words,
tion; namely, the project construction contract (design contract) agree upon essential elements of the contract. Therefore, the
and the construction control contract (supervising construction essential elements of a construction contract, especially the
contract), but those two are explicitly regulated by the OZ. scope of the works and the payment, must be agreed between the
The design contract is subject to the rules of contracts for parties of the construction contract.
work. It is an independent contract concluded by the employer Regarding special mandatory law requirements, construction
and the contractor of the project. contracts must be concluded in written form. The contract may
Apart from the above, the parties are free to agree on any also be concluded through written offer and written acceptance
other form or mixed forms of contract. Thus, different types of this offer.
of contract can be concluded: construction and design contracts;
design-only contracts; or programme management contracts, etc. 1.5 In your jurisdiction please identify whether there
which an employer can give either a legally binding or
In the jurisdiction of Slovenia, collaborative contracting is not The short answer is yes.
very common. Usually, the employer and contractor conclude

Law Firm Neffat 141
In concluding transactions, a letter of intent is increasingly 1.8 Is the employer legally permitted to retain part of
used in practice by parties in the process of negotiation regarding the purchase price for the works as a retention to be
all the components of the transaction. Often, in the later stages released either in whole or in part when: (a) the works are
of a transaction, especially when one of the parties is not ready substantially complete; and/or (b) any agreed defects
to conclude a contract, the question arises as to what the legal liability period is complete?
nature of the letter of intent is and how strongly it binds the
parties who sign such letter of intent. Yes. Usually the payment from the employer to the contractor,
The letter of intent is a notion that is not known or regu- based on the construction contract, is made upon final takeover
lated by the OZ. It has been developed by business practices in full or (more typically) in instalments. Upon such payment,
regarding the contracting phase, especially for cases where nego- the employer may retain part of the purchase price for the works
tiations are lengthy and more complex transactions are involved. as a retention, if agreed by both parties. Both options (a) and (b)
The letter of intent is a written statement from one or both are possible. Such retention can also be made under the PGU
parties during the negotiations or at the end of the negotiations. provisions unless parties excluded their use in the contract.
Although the purpose of a letter of intent is to identify and The PGU stipulates that the employer has the right to retain a
explain to the parties what the stage of contracting is and what proportionate part of the price to remedy the deficiencies found
their mutual rights and obligations are, there are often disputes at the time of acceptance and delivery of the works.
as to whether the parties really agreed on a particular right or
obligation. Not all letters of intent can be defined on the same
legal grounds, since this requires analysis of each specific case
to determine the legal nature or legal consequences of a specific guarantee the contractor’s performance? Are there any
letter of intent. An individual letter of intent may have the legal restrictions on the nature of such bonds? Are there any
nature of an offer or even express consent to the instructions grounds on which a call on such bonds may be restrained
and therefore constitute a contract. (e.g. by interim injunction); and, if so, how often is such
Therefore, a signed document addressed to the parties as a relief generally granted in your jurisdiction? Would such
letter of intent may, in substance, constitute a number of different bonds typically provide for payment on demand (without
documents – it may be a letter of intent by which the parties do pre-condition) or only upon default of the contractor?
not commit themselves and merely outline what their purposes
and objectives are in relation to a potential transaction, and how In Slovenia, bank guarantees are permissible and quite common
the transaction process will proceed in the future. Alternatively, (especially in public procurement contracts). We can divide
the document may, through its content, constitute a precontract bank guarantees into two basic forms: 1. independent (“on
or a contract, if all the necessary components have been agreed. first demand”) bank guarantee (typical); and 2. dependent bank
guarantee (rare). Bank guarantee “on first demand” essentially
means that the contractor’s bank must pay the requested sum
of insurance which it would be commonplace or to the employer immediately when the employer calls on the
compulsory to have in place when carrying out guarantee. This bank guarantee is independent from the basic
construction work? For example, is there employer’s contract. There are no statutory restrictions on the nature of
liability insurance for contractors in respect of death such bank guarantees. In the construction industry, the two
and personal injury, or is there a requirement for the most common types of bonds are: performance bond for the
contractor to have contractors’ all-risk insurance? time period between signing of the contract and takeover; and
warranty bond for the time period between takeover and the end
In accordance with the Slovenian jurisdiction, the statutory insur- of the contractor’s liability. Typically, there are no restrictions on
ance which is compulsory for contractors is business liability the agreed percentage of the performance and warranty bond.
insurance. Contractors are also obliged to register their own However, the Decree on financial collateral in public procure-
employees for the compulsory social insurance (health insurance, ment, in relation to the Public Procurement Act, states that the
pension and disability insurance, parental insurance, and unem- maximum allowed percentage for a performance bond is 10%
ployment insurance). and for a warranty bond is 10% of the purchase price (with VAT).
Regarding the grounds on which a call on such bonds may
be restrained (e.g. by interim injunction), it is possible for the
court to bring an interim injunction to stop the bank paying the
legal status of those working on site as employees or amount referred to in a bond. The Execution and Security Act
as self-employed sub-contractors); (b) tax (payment of stipulates that a court will issue an interim injunction to secure
income tax of employees); and/or (c) health and safety? a non-monetary claim if the creditor proves it is likely that the
claim exists or that the claim against the debtor will arise. The
creditor must also make one of the following assumptions:
There are no specific statutory requirements in relation to
■ that there is a risk that the enforcement of the claim will be
construction contracts in terms of labour, social security, tax
precluded or substantially impaired;
and health and safety. All general laws related to those areas are
■ that the injunction is necessary to prevent the use of force
also applicable to any staff member working on the project site.
or the occurrence of damage that is difficult to recover; or
The legal status of those people depends on their agreement
■ that if the provisional injunction was rendered unfounded
with the employer; however, if a self-employed worker essen-
in the course of the proceedings, the debtor would not
tially only works for one employer, the court could establish that
suffer more serious adverse consequences than those which
such person is treated as an employee by that employer. For
would have occurred without the issuance of the provi-
foreign workers, work permits might be required.
sional injunction.

142 Slovenia
The creditor is not obliged to prove the risk if it is likely that The scope of supervision is defined primarily in the Building
the debtor with the proposed order would suffer only minor Act and in the Architecture and Civil Engineering Act. Apart
damage. A risk is considered to be apparent if the claim is to be from that, parties can freely agree on the scope.
made abroad, unless the claim is made in a Member State of the A supervising engineer acts on behalf of the employer but is
European Union. obliged to follow statutory obligations.
Case law shows that courts are hesitant in issuing interim injunc- Usually, there is no recourse by the construction contract
tions; in other words, interpretation of provisions on interim party in the event of a third-party breach of the other contract.
injunctions are restrictive. Nevertheless, such recourse could be allowed contractually, so
that the contract is to the benefit of a third party.
guarantees provided to guarantee the performance of 2.2 Are employers free to provide in the contract that
subsidiary companies? Are there any restrictions on the they will pay the contractor when they, the employer,
nature of such guarantees? have themselves been paid; i.e. can the employer include
clause?
It is permissible, but company guarantees are not very common
in Slovenia. Company guarantees are not specifically regulated
under Slovenian law. In business practice, it is possible to issue The “pay when paid” clause is very rare in contractual contracts
parent company guarantees. In practice, it is also often agreed in Slovenia. However, the employer and contractor are free to
between contractors and subcontractors that the contractor is agree on such clause in a contractual contract.
responsible for the defects of the subcontractor, as if they were A more common example is the agreement between contractor
caused by the contractor himself. Such clause is also stated in and subcontractor stating that the contractor will not pay the
Sub-Clause 4.4 FIDIC Red Book, which deals with breaches by subcontractor unless or until the employer pays the contractor.
the subcontractor of the subcontract which cause damage to the In case of a dispute regarding a “pay when paid” clause, the
contractor under the main contract. court would probably decide that this clause is invalid because
it is not consistent with the basic principle of conscientiousness
and fairness.
used in the works? Is it permissible for contractors to 2.3 Are the parties free to agree in advance a fixed
claim that, until they have been paid, they retain title and sum (known as liquidated damages) which will be
the right to remove goods and materials supplied from paid by the contractor to the employer in the event of
the site? particular breaches, e.g. liquidated damages for late
It is possible for contractors to have retention of title rights in
relation to goods and supplies used in the works and, on the of loss, or can the contractor be bound to pay a sum
grounds of such clause and non-payment, claim removal of goods which is wholly unrelated to the amount of financial loss
and supplies. It can be agreed that there will be transfer of title likely to be suffered by the employer? Will the courts
upon payment. However, as soon as goods have been installed or in your jurisdiction ever look to revise an agreed rate of
become part of the building, the title will transfer automatically to liquidated damages; and, if so, in what circumstances?
the owner of the development (under the Law of Property Code).
There are two different notions in Slovenia: liquidated damages
22 Supervising Construction Contracts and contractual penalties.
The contracting parties may, by agreement, modify the statu-
2.1 Is it common for construction contracts to be tory regime for damages for breach of contract. The parties may
supervised on behalf of the employer by a third party also agree on a contractual penalty (for non-monetary liabilities)
(e.g. an engineer)? Does any such third party have a or pre-determine the amount of compensation (flat-rate compen-
duty to act impartially between the contractor and the sation), thereby reinforcing the debtor’s obligation.
employer? If so, what is the nature of such duty (e.g. is Given the above, contractual penalty should be distinguished
it absolute or qualified)? What (if any) recourse does a from liquidated damages. In the case of a contractual penalty,
the creditor must prove a breach of a contractual obligation
under the responsibility of the counterparty, and neither the
existence nor the amount of the damage should be proved, since
Yes, it is usually mandatory for construction contracts to be super- this is not a prerequisite for the right to a contractual penalty.
vised, on behalf of the employer, by a third party (supervising In the event of a claim for damages, the existence of damage
engineer). is always a condition for the success of the claim, and in addi-
A supervising construction contract is a contract intended for tion to the breach of contractual obligation (for which the
a third party to control the progress of the work, the consump- debtor is responsible), a causal link must be made between
tion of material, the amount of work performed, or the work breach of contractual obligation and damage suffered by the
being carried out in accordance with the project documenta- loyal customer contract. It is not entirely clear whether liqui-
tion, etc. In practice, such contracts have become established dated damages require proof of breach of contract (for which
as an independent contract type, which is not subordinated to the debtor is responsible), damages and a causal link between
a construction or works contract, but is subject to the rules breach of contractual obligation and damage. Undoubtedly,
of a contract of mandate. Unlike construction contracts and the creditor does not have to prove the amount of the damage,
contracts for works, which are success contracts, a construction but also – with regard to the remaining assumptions of a busi-
control contract is an endeavour, so the contractor must make ness compensation obligation – the burden of proof is shifted
sure that he controls the construction with due care. to the debtor. The purpose of a liquidated damages agreement

Law Firm Neffat 143
is to avoid proving the amount of the damages. The liquidated 3.3 Are there terms which will/can be implied into
damages agreement is therefore in favour of a loyal party, so a construction contract (e.g. a fitness for purpose
it is also reasonable to take the view that it can also succeed obligation, or duty to act in good faith)?
in claiming full compensation (if greater than the agreed liqui-
dated damages) if it succeeds in proving all the assumptions of The basic principles of the Slovenian OZ, e.g. the principles of
a business compensation obligation. Applying the third para- conscientiousness and fairness, the duty to act in good faith,
graph of Article 242 of the OZ (or Article 252 of the OZ), the diligence, prohibition on abuse of rights, duty to perform obli-
claim for reduction of the amount of liquidated damages should gations, and prohibition on infliction of damage, shall also apply
be granted to the party breaching the contract if damages are to construction contracts.
manifestly disproportionate to the damage. This can only occur The term ‘fitness for purpose’ shall not apply in construction
in this exceptional case, otherwise ‘liquidated damages’ would contracts. Contractors shall deliver what they have bargained
lose its meaning. for, and employers shall not expect contractors to guess what
their future intentions might be.
Contracts 3.4 If the contractor is delayed by two concurrent
3.1 Is the employer entitled to vary the works to be or risk of his employer, is the contractor entitled to: (a)
performed under the contract? Is there any limit on that an extension of time; and/or (b) the costs arising from
right? that concurrent delay?
The employer is entitled to vary the works to be performed In Slovenian law, such a case would be regulated by the funda-
under the construction contract. According to Article 3 of the mental principles of the OZ, such as the rule of simultaneous
Slovenian OZ, participants shall be free to regulate their obliga- performance, which determines that in bilateral contracts
tional relationships. neither party shall be obliged to perform its own obligations
According to the PGU, the employer is entitled to vary the if the other party is not simultaneously performing the latter’s
technical documentation, which is the basis of performing works. obligations or is unwilling to do so, unless agreed otherwise or
If the technical documentation is changed, the contract price, stipulated otherwise by law, or unless it follows otherwise from
timeline and other parts of the contract will also be changed the nature of the transaction.
appropriately. Taking this into account, the contractor would be entitled to
The contractor has the right to request changes to be put an extension of time and the remuneration of costs arising from
in the contract or to terminate the contract, if the conditions that concurrent delay, corresponding to the fault of his employer.
for performing the contract are altered significantly due to the
change of technical documentation. 3.5 Is there a time limit beyond which the parties to
However, this principle does not apply to public procurement a construction contract may no longer bring claims
law, where the parties’ autonomy is limited. In accordance with against each other? How long is that period and when
the Slovenian Public Procurement Act, contracts and frame- does time start to run?
work agreements may only be modified without a new procure-
ment procedure in certain cases. Regarding the liability of the contractor and designer for
solidity of structure of the building, the time limit to bring
3.2 Can work be omitted from the contract? If it is claims between the parties is as follows:
omitted, can the employer carry out the omitted work The contractor shall be liable for any defects in the execution of
himself or procure a third party to perform it? the structure concerning its solidity if such defects show them-
selves within 10 years of the delivery and takeover of the works.
The contractor shall be obliged to execute the work according The contractor shall also be liable for any deficiencies in the
to the agreement and according to the rules of the transaction. land on which the structure is built that show themselves within
The contractor must execute the work by the deadline stipu- 10 years of the delivery and takeover of the works, unless a
lated, or in the time reasonably required for such transactions if specialist organisation gave an expert opinion that the land was
no deadline is stipulated. The contractor may not omit any work suitable for construction and during construction no circum-
from the contract, unless omission is agreed with the employer. stances arose to awaken any doubt over the justification of the
Omission of work, without consent of the employer, is consid- expert opinion.
ered a breach of contract. This shall also apply to the designer, if the defect in the struc-
The contract may also not give the employer the right to omit ture originates from any defect in the plan.
part of the work from the contract. In case of omission of the Under these provisions, the contractor or designer shall
work by the employer, the contractor is still entitled to the full be liable not only to the ordering party, but also to any other
compensation, reduced by the expenses saved. acquirer of the structure. It shall not be possible to exclude or
Generally, a work in a contract cannot be omitted for the limit their liabilities by contract.
purpose of assigning work to another contractor unless other- The employer shall be obliged to notify the contractor and
wise agreed between the parties. The contractor shall be enti- designer regarding defects within six months of discovering the
tled to perform all the contract work. In normal circumstances, defect; otherwise, the ordering party or acquirer shall lose the
the act of omission and assigning it to another contractor is right to make reference thereto.
considered bad practice and contrary to the principle of good The right of the ordering party or other acquirer against the
faith in the construction industry. contractor or designer, deriving from their liability for defects,
shall expire one year after the day the contractor or designer was
notified regarding the defect.

144 Slovenia
The contractor or designer may not make reference to the employer would usually bear the risk of a change in law, unless
provisions above if the defect relates to facts that were known or otherwise agreed between the parties.
could not have remained unknown thereto and that they failed
report to the ordering party or other acquirer, or if through
their action they misled the ordering party or other acquirer into in relation to the design and operation of the property?
failing to exercise the rights on time.
Regarding the construction of something other than a In general, the rights to intellectual property belong to the person
building, the time limit to bring claims between the parties who created the design.
is as follows: Under Slovenian law, a design needs to be registered in order
Two years from takeover of works. In this case, the employer to be protected under industrial property law as a patent or
shall be obliged to notify the contractor as soon as possible, but industrial design.
at least within a month of the defect being discovered, if the Patents shall be granted for any inventions, in all fields of tech-
defect has not been noticed during a customary inspection. An nology, which are new, involve an inventive step and are suscep-
employer who notified the contractor on time regarding defects tible to industrial application.
in an executed work may no longer exercise rights in court An industrial design shall be registered as a design to the
proceedings one year after such notification. extent that it is new and has an individual character.
Regarding performing work before takeover or payment, 3.9 Is the contractor ever entitled to suspend works?
the time limit to bring claims between the parties is as
follows:
The contractor shall have the right to suspend the execution
Three years in commercial contracts (contracts concluded by
of the works if he is unable to perform the works due to the
commercial entities among themselves), or five years in other
employer’s conduct or the work is significantly impeded because
contracts (general statute-barring period).
of such conduct.
In case of a claim for performance, the limitation period starts
Such conduct of the employer is considered to be non-fulfilment
when the contractor does not accomplish the work or stops the
or irregular fulfilment of his obligations, such as the elimination of
work without being entitled to do so. The limitation period for
deficiencies in the technical documentation on the basis of which
payment claims starts when payment is due.
the work performs, the advance payment and the payment of a
temporary situation.
3.6 Which party usually bears the risk of unforeseen In such cases the contractor may only suspend works when the
ground conditions under construction contracts in your reasonable period of time allowed by the contracting authority
jurisdiction? has expired.
The contractor may also suspend work due to default of the
The Slovenian OZ does not regulate which party shall bear employer only after an appropriate time has elapsed for the
the risk of unforeseen ground conditions under construction employer to fulfil its obligations.
contracts. However, in practice, usually the employer carries the Additionally, the contractor may suspend works in case of force
risk of unforeseen ground conditions, unless otherwise agreed majeure or in case of suspension or lifting of the building permit.
between the parties.
Regardless, the Slovenian OZ regulates the matter of urgent 3.10 Are there any grounds which automatically or
unforeseen works, which may be the consequence of unforeseen usually entitle a party to terminate the contract? Are
ground conditions. In such cases, the contractor may carry out there any legal requirements as to how the terminating
urgent unforeseen works without the employer’s prior approval party’s grounds for termination must be set out (e.g. in a
if the approval cannot be supplied because of the urgency of the termination notice)?
works. Unforeseen works are those that have to be performed
urgently to ensure the stability of the structure or to prevent the Yes, there are some legal grounds on which a party may auto-
occurrence of damage, and that were caused by the unexpectedly matically or usually terminate the contract. According to the
heavy nature of the land, unexpected water or any other extraor- Slovenian OZ, these legal grounds are:
dinary, unexpected development. The contractor must notify (a) Withdrawal from contract because of deviation from
the employer without delay regarding such circumstance and agreed conditions
the measures taken. The contractor shall have the right to fair If, during the execution of the work, it is shown that the
payment for the unforeseen works it was necessary to perform. contractor is not keeping to the contractual conditions
The employer may withdraw from the contract if the agreed and is not in general working as the contractor should,
fee would be considerably higher owing to such works. In the and that the work executed will have defects, the employer
event of withdrawal from the contract, the employer must pay may warn the contractor of this and stipulate a deadline by
the contractor an appropriate part of the fee for the work already which the work should be adapted to the obligations. If the
performed, and a fair reimbursement of the necessary costs. contractor fails to fulfil the employer’s requirements by this
deadline, the employer may withdraw from the contract
3.7 Which party usually bears the risk of a change and demand the reimbursement of damage.
in law affecting the completion of the works under (b) Withdrawal from contract prior to deadline
construction contracts in your jurisdiction? If the deadline is an essential component of the contract
and the contractor is so delayed in starting or finishing the
The Slovenian OZ does not regulate which party usually bears transaction that it is clear that it will not be completed on
the risk of a change in law affecting the completion of the time, the employer may withdraw from the contract and
works under construction contracts. However, in practice the demand the reimbursement of damage.

Law Firm Neffat 145
The employer shall also have this right when the deadline obligations, the latter may demand return according to the rules
is not an essential component of the contract if, for reason on the return of that which was acquired unjustly.
of the delay, the employer no longer has an interest in the If the partial impossibility of performance is the consequence
contract being performed. of a development for which neither party was responsible, the
(c) Special case of withdrawal from contract other party may withdraw from the contract if the partial perfor-
If the performed transaction has such a defect that the mance does not satisfy such party’s needs; otherwise, the contract
work is useless or if it was performed in breach of express shall remain in force and the other party shall have the right to
contractual conditions, the employer may withdraw from demand the proportionate reduction of such party’s obligations.
the contract and demand the reimbursement of damage An uneconomic contract cannot be an event of force majeure.
without previously demanding the rectification of the
defect.
If the executed transaction has such a defect that the work entitled to claim the benefit of any contractual right
would not be useless or if the transaction was not executed which is made for their benefit? E.g. is the second or
in breach of express contractual conditions, the ordering subsequent owner of a building able to claim against
party shall be obliged to allow the contractor to rectify the the contractor pursuant to the original construction
defect. If the contractor fails to rectify the defect by the contracts in relation to defects in the building?
stipulated deadline, the ordering party may also choose to
withdraw from the contract. As mentioned above in question 3.5, the contractor shall be liable
(d) Termination of contract by employer’s wish for any defects in the execution of the structure concerning its
Until the ordered transaction is completed, the employer solidity or for any deficiencies in the land on which the structure
may withdraw from the contract whenever they wish; is built if such defects/deficiencies show within 10 years of the
however, in this event the employer must pay the agreed delivery and takeover of works, not only to the employer party
payment to the contractor, minus the costs not incurred of the contract, but also to any other acquirer of the structure.
by the contractor that would have been incurred if the This liability shall also apply to the designer, if the defect in
contract had not been rescinded, and also that which was the structure originates from any defect in the plan.
earned elsewhere and that which the contractor had no
intention of earning.
(e) Withdrawal from contract because of higher fee 3.14 On construction and engineering projects in
If the agreed fee rises significantly, the employer may also
withdraw from the contract. In this event, the employer between the contractor and parties other than the
must pay the contractor an appropriate part of the agreed employer with an interest in the project, e.g. funders,
fee for the work performed to date, and a fair reimburse- other stakeholders, and forward purchasers)?
ment for necessary costs.
(f) In general, either party may terminate the contract
Usually, the contractor provides insurance or collateral warran-
due to break of contract by the other party
ties to the employer; for example, bank guarantees. Other direct
According to the PGU, all notices (termination notice or
agreements or collateral warranties are not very common in the
warning notice) must be in writing.
Slovenian jurisdiction.

termination?
Slovenian law allows and permits set-off of monetary claims.
As mentioned above in question 3.10, the employer can termi- One party may offset claims against the other party if those two
nate the contract at any time and for any reason; in other words, claims are declared in cash or in other replaceable things of the
whenever he wishes. In such case the employer must pay the same type and the same quality, and if both have fallen due.
agreed payment to the contractor, minus the costs not incurred There are: claims where offset is excluded, especially claims
by the contractor that would have been incurred if the contract that cannot be attached; claims for things or the value of things
had not been rescinded, and also that which was earned else- that were placed in safekeeping or made available for loan for the
where and that which the contractor had no intention of earning. debtor, or that the debtor unduly took or retained; claims arising
through the intentional infliction of damage; compensation claims
for damage done, in relation to damage to health or cause of death;
3.12 Is the concept of force majeure or frustration known and claims deriving from a lawful obligation to maintenance.
that a contract which has become uneconomic is 3.16 Do parties to construction contracts owe a duty of
grounds for a claim for force majeure? care to each other either in contract or under any other
In the Slovenian jurisdiction, the concept of force majeure is obligations and liabilities?
known.
If the performance of obligations becomes impossible for one
party to a bilateral contract because of a development for which The rights derived from obligational relationships shall be
neither party was responsible, the obligation of the other party limited by the equal rights of others. It shall be necessary to exer-
shall also expire; if the latter has already performed part of their cise them in accordance with the basic principles of the Slovenian

146 Slovenia
OZ and their purpose. When exercising their rights, participants The decennial liability period is different from the limitation
in an obligational relationship must refrain from actions which period within which the claim must be filed. The right of the
would render the performance of the obligations of other partic- employer or other acquirer against the contractor or designer
ipants more difficult. When concluding obligational relation- deriving from their liability for defects shall expire one year after
ships and when exercising the rights and performing the obli- the day the contractor or designer was notified regarding the
gations derived from such relationships, the parties must also defect.
observe the principle of conscientiousness and fairness. These
basic principles can generally be described as the precepts of 42 Dispute Resolution
honesty, respect for the other party’s interests and cooperation
with the other party.
These principles are a legal framework for parties to an obliga-
tion relationship and must be respected at all stages of the obli-
gational relationship, during the performance of the contract as In general, construction disputes will proceed very quickly, in
well as during the contract negotiation. order to maintain the construction project at a normal pace.
These basic principles exist concurrently with any contractual Thus, it is crucial that the procedure for resolving construction
obligations and liabilities. disputes is as flexible and efficient as possible. Therefore, our
courts offer the possibility to solve disputes amicably with medi-
ation in front of the court. In rare cases, when the parties do
3.17 Where the terms of a construction contract are not resolve the dispute in such a way and conclude a court settle-
ment (or out-of-court settlement, for that matter), parties shall
proceed with the litigation.
However, there has been an increased number of disputes that
In the interpretation of ambiguous provisions in the contract, have been settled before arbitration. Therefore, day by day we
it shall not be necessary to adhere to the literal meaning of see an increasing number of arbitration clauses in construction
the expressions used, but shall be necessary to identify the contracts.
contracting parties’ common intentions and interpret the provi-
sion so as to comply with the principles of obligational law set
out in the Slovenian OZ. 4.2 Do you have adjudication processes in your
3.18 Are there any terms which, if included in a board)? If so, please describe the general procedures.
In the Slovenian jurisdiction, there is no possibility for an adju-
Yes, according to Slovenian law, construction contracts’ terms dication process. However, in accordance with the Contentious
that contravene the mandatory provisions of law would be Civil Procedure Act, there are some options to accelerate the
unenforceable. resolution of disputes, such as preparatory hearings. At the
latter, judges can openly discuss with parties the legal and factual
aspects of the dispute, where they strive to conclude court settle-
ments. In cases where parties to the dispute, at the end of the
only, are the designer’s obligations absolute or are there preparatory hearing, do not reach an agreement, the judge can
limits on the extent of his liability? In particular, does the start its first official hearing.
designer have to give an absolute guarantee in respect of As already mentioned in question 4.1, the courts in Slovenia
his work? prefer mediation as a way of resolving disputes. The parties can
also agree on arbitration before the Chamber of Commerce and
As mentioned above in question 3.5, liabilities for solidity of Industry of Slovenia or any other arbitration tribunal.
structure of the building also apply to the designer, if the defect
in the structure originates from any defect in the plan. The 4.3 Do the construction contracts in your jurisdiction
designer shall be liable within 10 years of the delivery and take- commonly have arbitration clauses? If so, please
over of the works. The designer shall be liable to the employer explain how, in general terms, arbitration works in your
and also to any other acquirer of the structure. It is not possible jurisdiction.
to exclude or limit this designer’s liability by contract.
As mentioned above in question 4.1, we see an increasing
3.20 Does the concept of decennial liability apply in your number of arbitration clauses in construction contracts.
jurisdiction? If so, what is the nature of such liability and In Slovenian law, the arbitration procedure is governed by the
what is the scope of its application? Arbitration Act.
In Ljubljana the Ljubljana Arbitration Centre (LAC) oper-
Yes, in the Slovenian jurisdiction decennial liability is applied. ates, which is an autonomous arbitration institution at the
As listed above in question 3.5, the decennial liability period is Chamber of Commerce and Industry of Slovenia and which is
a warranty period for 10 years from the date of delivery. As a independent from it. The LAC has been settling disputes since
mandatory rule, parties may not agree on a shorter period. This the establishment of the Tribunal of the Ljubljana Chamber of
liability refers to the contractor and to the designer. Both shall Trade, Craft and Industry in 1928. The LAC is composed of
be liable not only to the ordering party, but also to any other the Board and the Secretariat. The LAC administers the reso-
acquirer of the structure. lution of domestic and international disputes by arbitration in
In the case of decennial liability, any limitation or exclusion of a accordance with the Ljubljana Arbitration Rules of the Ljubljana
liability clause will be held as invalid. The contractor’s or design- Arbitration Centre at the Chamber of Commerce and Industry
er’s liability for major defects cannot be limited or excluded. of Slovenia (the Ljubljana Arbitration Rules) and other rules

Law Firm Neffat 147
and procedures agreed by the parties, and provides information Starting civil proceedings requires the claimant to file an
concerning arbitration, mediation, conciliation and other forms action, which is subsequently served to the defendant. Invitation
of alternative dispute resolution. to mediation is also a part of this step in the proceedings. The
The Ljubljana Arbitration Rules entered into force on 1 defendant has the right to file a statement of defence within 30
January 2014. days after receiving the action of the claimant.
Arbitration is a procedure for resolving disputes before the Each party may file two written submissions during prepara-
Arbitral Tribunal, which can be composed of one or more arbi- tions for the main hearing.
trators. The parties may appoint the Arbitral Tribunal them- After the court receives a statement of defence, a prelimi-
selves and authorise it to reach a final decision on the dispute by nary hearing is scheduled. A preliminary hearing encompasses
making an arbitral award. An award is final and binding on the discussion with the parties regarding factual and legal questions
parties. As regards the parties, an award has the effect of a final of the dispute; a timetable for the proceedings is also set out.
and binding court judgment. The first hearing which follows precludes the parties from
Arbitration enables the parties to agree on all relevant aspects making new statements on facts and submitting evidence in the
of the proceedings (the number of arbitrators, procedural rules, following hearings. At the subsequent hearings the evidence is
the seat of the arbitration, the language of the proceedings, etc.). considered by the court. After the final hearing has been held,
The Ljubljana Arbitration Rules follow the modern interna- the court prepares a written judgment within 30 days.
tional trends in institutional arbitration and ensure the parties The parties are obliged to state all facts on the grounds of which
a speedy and efficient arbitration together with high-quality their claims are based, and to propose evidence confirming such
services. facts. The judgment is issued based on the facts and evidence
presented to the court.
A decision of the court must be within the frame of the claims
arbitration, do your jurisdiction’s courts recognise and being filed in the procedure. The parties can waive their claim,
enforce international arbitration awards? Please advise recognise the claim of the opponent and settle. In general, the
of any obstacles (legal or practical) to enforcement. court decides on the petition on the basis of an oral, direct and
public negotiation.
In the Republic of Slovenia, approximately one-third of cases
International arbitral awards are binding and shall be enforced
are resolved in absence of a hearing.
by Slovenian courts.
In general, the average proceeding at first instance takes
Slovenia is a member of all major multilateral conventions in
about 12 months. The duration of proceedings depends mainly
the field of international commercial arbitration. Pursuant to
on the nature and complexity of the case and the conduct of the
Article 8 of the Constitution of the Republic of Slovenia, the
parties to the proceedings.
ratified and published international treaties are applied directly.
An appeal against the judgment of a first-instance court is
On the basis of reciprocity, the Republic of Slovenia applies
decided by the higher courts. In certain cases, the parties may
the New York Convention on the Recognition and Enforcement
also file an extraordinary remedy to the Supreme Court. The
of Foreign Arbitral Awards of 1958 for the recognition and
average proceeding at higher courts takes about six months.
enforcement of arbitral awards issued on the territory of another
Convention country.
Domestic judges decline to recognise and enforce interna- 4.6 Where the contract provides for court proceedings
tional arbitration awards under Article V(2)(b) of the 1958 New in a foreign country, will the judgment of that foreign
York Convention due to violations of procedural law or in cases court be upheld and enforced in your jurisdiction? If
of “public policy exception”. the answer depends on the foreign country in question,
4.5 Where a contract provides for court proceedings result of international treaties or otherwise)?
It highly depends on which court issues a judgment. If the judg-
a decision by the court of first jurisdiction; and (b) a ment is issued by the court of a country that is a Member State of
decision by the final court of appeal. the European Union, such judgment (based on Regulation (EU)
No 1215/2012 of the European Parliament and of the Council
of 12 December 2012 on jurisdiction and the recognition and
The Contentious Civil Procedure Act contains key provisions
enforcement of judgments in civil and commercial matters) shall
regarding court proceedings in the Republic of Slovenia. The
be recognised in Slovenia without any special procedure being
structure of the Slovenian civil court system comprises first-in-
required. Regarding the enforcement, such judgment shall be
stance courts, higher courts and the Supreme Court.
enforceable in Slovenia without any declaration of enforceability
At first instance, jurisdiction is divided between local courts
being required.
and district courts. The jurisdiction of the court of first instance
In order to do this, the applicant shall provide a copy of the
depends on the amount of the dispute: if the dispute’s claim
judgment which satisfies the conditions necessary to establish
is EUR 20,000.00 or less, the lawsuit has to be filed before a
its authenticity, and a certificate concerning a judgment in civil
local court. When the disputed claim exceeds EUR 20,000.00,
and commercial matters issued by the court of origin, certifying
the claim has to be filed before the district court. When the
that the judgment is enforceable and containing an extract of
disputed claim in commercial cases is lower than EUR 4,000.00,
the judgment as well as, where appropriate, relevant informa-
such claim is subject to simplified procedural rules. However,
tion on the recoverable costs of the proceedings and the calcu-
the latter also applies in other civil cases when the amount of
lation of interest.
the disputed claim is lower than EUR 2,000.00. Cases in civil
proceedings before the local and district courts are generally
decided by a single judge.

148 Slovenia
When the court of origin is outside of the EU, the Private

International Law and Procedure Act is applicable. A foreign
judgment has the same status as a judgment issued by the court
of the Republic of Slovenia and has the same legal effect in
the Republic of Slovenia as a domestic judgment, only if it is
recognised by a court of the Republic of Slovenia. Such rule is
also applicable in cases of court settlements. A petitioner for
recognition of a foreign judgment shall attach to his petition
the foreign judgment in question or its authenticated copy, and
submit an attestation of a competent foreign court or another
body, proving his decision to be final under the laws of the State
in which it was issued. However, the Act is not used for relations
which are regulated by another act or an international treaty.

Law Firm Neffat 149
Njives Prelog Neffat is head of the Law Firm Neffat public procurement department. She concentrates on pre-award and post-award coun-
selling and litigation, representation in civil proceedings regarding public procurement and public-private partnerships. Ms. Prelog Neffat
is highly regarded for the commercial advice she provides, with a focus on strategic procurement and the development, negotiation and
implementation of complex public contracts. Ms. Prelog Neffat has been actively working with local and international clients in the field of
public procurement. She has also been lead counsel of numerous projects in the Republic of Slovenia. Ms. Prelog Neffat has significant
knowledge of the National Review Commission for Reviewing Public Procurement Award Procedures, in which she has been working as a
legal counsellor. She also works in the field of resolution of construction and engineering disputes through adjudication, dispute boards,
litigation and arbitration.
Ms. Prelog Neffat is always up to date with decisions of the Court of Justices of the European Union, the Slovenian Information Commissioner,
the Court of Appeal and the Supreme Court of the Republic of Slovenia, the National Review Commission and the Court of Audit, since she
is the founder and CEO of the company jnp.si which analyses and publishes all the decisions weekly. Therefore, she can always give advice
that is up to date in accordance with current practice.
Law Firm Neffat Tel: +386 1 300 00 61

Miklošičeva cesta 18 Email: [email protected]
1000 Ljubljana URL: www.neffat.si/en
Slovenia
Ana Toni is an Attorney at Law at Law Firm Neffat in Ljubljana. She focuses on complex commercial litigation, with an emphasis on contract
disputes and business tort matters. She also deals with legal issues in a high-pressure, high-profile environment in which the client’s repu-
tation and business are on the line. Ms. Toni counsels clients on contract enforceability and compliance issues and has substantial expe-
rience litigating cases in courts, as well as in arbitration. One of her main focuses is also helping to avoid and resolve disputes on complex
construction and supply contracts.
Working as a Senior Judicial Advisor at the District Attorney’s Office in Ljubljana, she gained substantial experience on white-collar crime.
Consequently, she represents corporations and their board committees, directors, officers and employees in criminal investigations and at
trial successfully. Ms. Toni has represented numerous clients in many investigations, including those relating to corrupt practices, money
laundering and tax fraud.
Law Firm Neffat Tel: +386 1 300 00 70

Miklošičeva cesta 18 Email: [email protected]
1000 Ljubljana URL: www.neffat.si/en
Slovenia
Law Firm Neffat has a long tradition that is rapidly developing in the key factors to the success of the legal work entrusted to us and we must
Republic of Slovenia. The Firm actively works in the fields of Corporate understand the economic, sector-based, financial and managerial culture
Law, M&A, Public Procurement, Waste Management and Environmental of our clients.
Law, Construction and Engineering law, Real Estate, Litigation, Commercial www.neffat.si/en
Law, GDPR, White-Collar Crime, Copyright Law and many others.
In an increasingly complex economic world, we believe that our role is to
assist our clients: working out the best possible course of action resulting
from various situations; obtaining efficient, comprehensive and tailored
legal advice in various complex situations; and optimising decision-making
in every manner possible. In order to achieve this, our team believes that
the quality of the relationship that we have with our clients is one of the

150 Chapter 19
Switzerland
Switzerland
Philippe Prost
Meyerlustenberger Lachenal Ltd. Jacques Johner


contract in your jurisdiction? Do you have: (i) any In Swiss construction and design contracts, the standard terms
contracts which place both design and construction issued by the Swiss Society of Engineers and Architects (SIA) are
obligations upon contractors; (ii) any forms of design- widely used. There are different rules for different types of work.
only contract; and/or (iii) any arrangement known as For instance, SIA rule 118 is relevant to construction contracts,
management contracting, with one main managing whereas SIA regulations 102 and 103 are used for contracts
with architects and construction engineers, respectively. Often,
because the parties have to expressly include those regulations in
contracts” as an abbreviation for construction and their contract if they want them to apply, they do so and modify
engineering contracts.) them where needed. In the context of public procurement, the
KBOB (the Co-ordination Conference of the responsible federal
and cantonal clients and owners) issued a standard form for general
In Swiss contract law, pursuant to the Swiss Code of Obligations
and total contractor agreements. However, it is more and more
(CO), freedom of contracts and priority to the parties’ inten-
common for KBOB contracts to be concluded in relation to private
tions are the main principles that apply. Swiss statutory law
projects. In the international context, the various sets of condi-
contains many general and specific contractual rules regulating
tions issued by FIDIC (International Federation of Consulting
certain types of contract, such as those relating to construc-
Engineers) are the most common standard forms.
tion. However, subject to mandatory legal provisions, parties
are generally free to deviate from statutory law by altering provi-
sions or adding new ones. 1.4 What (if any) legal requirements are there to create a
Parties can therefore enter into all types of contracts and legally binding contract (e.g. in common law jurisdictions,
define their content. As a consequence, in practice, there are offer, acceptance, consideration and intention to create
various types and configurations of contractual arrangements legal relations are usually required)? Are there any
mandatory law requirements which need to be reflected in
that may be concluded in the context of a construction project, a construction contract (e.g. provision for adjudication or
depending on its complexity, regardless of whether the main any need for the contract to be evidenced in writing)?
parties are local or international: (i) in terms of design and
construction obligations of the contractor, the total contractor’s
model is very common in practice, in particular for complex Similarly to any other contract under Swiss law, the creation of
projects. In such configuration, the total contractor both a construction contract involves the exchange of an offer and
designs the project in coordination with architects and other the resultant acceptance of the two contracting parties. Both
planners and executes it as a general contractor does; (ii) one can expressions of will must encompass the essentialia negotii of the
also freely decide to separately mandate an architect only for the construction contract, which is the work to be carried out and its
design and to entrust a general contractor or various specialised price (article 363 CO). However, it is not necessary for parties to
contractors for the performance of the work; and (iii) manage- agree on a fixed price or the manner of calculating it, as article
ment contracting is also an option, as it is a declination of the 374 CO contains a general rule in this regard. As to the form
total/general contractor’s model. In this case, the manage- of the contract, there are no special conditions, although most
ment contractor manages the different contractors at the same construction contracts are made in writing for clarity and eviden-
worksite. tiary purposes.

Collaborative contracting is a concept that is not yet commonly not a full contract is ever concluded.
used in Switzerland, at least not under this term.
Under Swiss law, a “letter of intent” usually has no binding effect,

Meyerlustenberger Lachenal Ltd. 151
unless unequivocally specified by the parties and provided that 1.8 Is the employer legally permitted to retain part of
it does not contain all the essentialia negotii. the purchase price for the works as a retention to be
However, the letter of intent obliges each party to negotiate in released either in whole or in part when: (a) the works are
good faith. In some circumstances, a breach of such a pre-con- substantially complete; and/or (b) any agreed defects
tractual obligation may involve liability for damages even if the liability period is complete?
main contract has not been concluded (culpa in contrahendo).
Yes. Even though this is not mentioned in the law, retention
1.6 Are there any statutory or standard types of part of the purchase price (usually 5–10%) is common in
of insurance which it would be commonplace or construction projects, whether part of the contract or other appli-
compulsory to have in place when carrying out cable standards. It either comes in addition or instead of a perfor-
construction work? For example, is there employer’s mance bond (see question 1.9). Parties are free to decide whether
liability insurance for contractors in respect of death the retention is released upon the acceptance of the works or after
and personal injury, or is there a requirement for the the defects liability period is complete, even though 100% of the
contractor to have contractors’ all-risk insurance? price is usually paid when the works are substantially completed.
Pursuant to SIA rules, it is the latter option that prevails.
Construction work requires many insurances. In most cantons,
it is compulsory to take out an insurance covering fire and
elementary damages during the works. performance bonds (provided by banks and others) to
The building owner often takes out a civil liability insur- guarantee the contractor’s performance? Are there any
ance covering damages caused to third parties in relation to restrictions on the nature of such bonds? Are there any
his specific project. In addition, it is common for the owner, grounds on which a call on such bonds may be restrained
contractor and other parties involved to take out an insurance (e.g. by interim injunction); and, if so, how often is such
covering damages to the building during the process. relief generally granted in your jurisdiction? Would such
Material and tools on the worksite are usually also insured by bonds typically provide for payment on demand (without
their respective owner.
Contractors often take out – and the employer will often
request – insurance covering claims of the employer for defects It is not uncommon for the contractor to be required to provide
that appear during the warranty period. a performance bond, which subordinates the achievement of the
works, predominantly for important construction works. It is,
however, much rarer in smaller projects. Upon achievement, a
guarantee concerning the defects of the construction must then
legal status of those working on site as employees or be provided.
as self-employed sub-contractors); (b) tax (payment of Both the performance guarantee and the defects warranty
income tax of employees); and/or (c) health and safety? are generally secured by a bank guarantee or a security bond.
In such a case, the guarantor’s bank undertakes to pay to the
party benefiting from the guarantee, upon its first demand, any
Swiss law contains norms of labour and public law whose objec-
amount up to a defined maximum. Such guarantee is irrevo-
tive is the protection of workers, the payment of income tax and
cable, unconditional and may be exercised if certain obligations
the preservation of the employees’ health and safety.
are not properly fulfilled.
Construction sites are regularly inspected by authorities, in
A guarantor can seek interim measures (relief) against a guar-
particular to prevent undeclared work. In the event of breaches
antee’s calling. However, in an interim measure litigation, the
of the regulations, the authority can stop the construction
guarantor must demonstrate (with readily available evidence)
work and impose administrative fines. Constructors must be
that the calling of the guarantee constitutes a manifest abuse
aware that they may also be held liable for violation by their
of rights by the creditor. The courts tend to take a very restric-
sub-contractors.
tive approach on this issue as a bond/guarantee is of an abstract
Concerning labour law, the employer has to comply with
nature. The principle usually applied by courts (and banks) is
general principles such as the non-discrimination and equal
“pay first, litigate after”.
treatment principles. It is common in practice that collective
labour schemes set minimum standards for workers that have to
be followed by the employer. There are also mandatory declara- 1.10 Is it permissible/common for there to be company
tions that have to be made in the context of public procurements. guarantees provided to guarantee the performance of
In case of non-compliance, the contractor might be blacklisted. subsidiary companies? Are there any restrictions on the
There are also specific regulations that apply to certain foreign nature of such guarantees?
workers in Switzerland both in terms of labour and taxes, for
example requiring the employer to pay the tax of employees Yes, generally speaking, it is permissible to have downstream
(withdrawal tax). guarantees (as an obligation of the subsidiaries of the guarantor),
In terms of health and safety, Swiss labour law as well as Swiss although this is not very common in construction projects. In
administrative and environmental law set numerous regulations this context, the Swiss CO foresees a number of forms of guar-
regarding the protections of the workers (equipment, hours of antees that are admissible.
work, etc.) and the use and storage on the worksite of toxic mate-
rials, asbestos, PCB, leaded paint, chemicals, etc.

152 Switzerland
1.11 Is it possible and/or usual for contractors to have Liquidated damages are not explicitly regulated by statutory
retention of title rights in relation to goods and supplies Swiss law but are nevertheless admissible. These are treated in
used in the works? Is it permissible for contractors to the same way as contractual penalties, despite their purpose not
claim that, until they have been paid, they retain title and being to penalise – in opposition to contractual penalties – but
the right to remove goods and materials supplied from rather to compensate an anticipated damage. To assess whether
the site? parties agreed upon liquidated damages or a contractual penalty,
their true intention is relevant rather than the potentially incor-
A right as described in the question does not exist in Switzerland. rect designation used in the agreement.
It would be deemed a strong violation of property rights in Swiss If liquidated damages exceed the actual damage incurred, they
law. Nevertheless, any contractors that have supplied labour are subject to the same judicial review and possible reduction
and materials, or labour alone, for construction work, demoli- that applies to the contractual penalty (article 163 para. 3 CO).
tion work or other similar works may register a legal mortgage on
the property. This right is granted to all contractors, even if they 32 Common Issues on Construction
are not in a direct contractual relationship with the employer or Contracts
property owner.
Legal mortgages are one of the most efficient methods for
contractors to secure payment claims. These are broadly used in 3.1 Is the employer entitled to vary the works to be
practice, given that their provisional registration can be obtained
right?
easily, quickly and at a low cost through a summary judicial
procedure.
As a general principle, parties to a construction agreement are
always free to modify its contractual terms, including the works,
as long as they agree on the modification and respect the manda-
tory nature/scope of the contract. With regard to the works
2.1 Is it common for construction contracts to be description, construction contracts usually contain a “change
order” clause that entitles the employer to seek variations to the
works during the execution of the contract. However, in such
employer? If so, what is the nature of such duty (e.g. is event, the parties have to agree (generally in writing) on the scope
it absolute or qualified)? What (if any) recourse does a of the change and its consequences on the price and delivery date.
When he deems it appropriate, the employer will usually himself or procure a third party to perform it?
appoint an architect to supervise the contractor or the general
contractor, checking the works and invoices on his behalf. The If the contractor has omitted the work due to lack of diligence, the
architect has a duty of loyalty to the employer and a duty of care employer will first have to warn the contractor and seek for reme-
vis-à-vis him only. diation at the delivery of the works. If the contractor does not
remedy the works within an agreed and reasonable timeframe, the
2.2 Are employers free to provide in the contract that employer is allowed to ask a third party to perform it in lieu of the
they will pay the contractor when they, the employer, have contractor at the latter’s risks and costs.
themselves been paid; i.e. can the employer include in However, once the delivery has taken place, the employer can
the contract what is known as a “pay when paid” clause? only ask the contractor for a reduction of the price (article 368 CO).
Even though such a clause is not frequently used in Swiss construc- 3.3 Are there terms which will/can be implied into
tion contracts, parties are free to agree on “paid if paid” or “paid a construction contract (e.g. a fitness for purpose
when paid” provisions. However, according to Swiss statutory law, obligation, or duty to act in good faith)?
unless otherwise agreed between parties, payment for construc-
tion work is due upon completion or delivery. If parties agreed on
Switzerland is a civil law country. The common law concept of
a delivery in parts and a payment by instalments, the amount due
“implied terms” does not exist under Swiss law, which contains
for each phase is payable upon delivery of the partial work agreed.
mandatory and non-mandatory statutory provisions that would
In addition, the right of subcontractors to register a legal mort-
apply if the parties have not regulated certain issues in their
gage is mandatory and may not be validly waived with subcon-
contract. For construction contracts, the statutory provisions
tractor agreements.
are contained in article 363 CO, while for engineering contracts,
the relevant provisions can either be article 363 CO or article
2.3 Are the parties free to agree in advance a fixed 394 CO depending on how the contract is qualified. In addi-
sum (known as liquidated damages) which will be tion, the parties will frequently refer to the corresponding SIA
paid by the contractor to the employer in the event of regulations which set the industry standard and state of the art.
there any restrictions on what can be agreed? E.g. does 3.4 If the contractor is delayed by two concurrent
the sum to be paid have to be a genuine pre-estimate events, one the fault of the contractor and one the fault
of loss, or can the contractor be bound to pay a sum or risk of his employer, is the contractor entitled to: (a)
which is wholly unrelated to the amount of financial loss an extension of time; and/or (b) the costs arising from
likely to be suffered by the employer? Will the courts that concurrent delay?
Swiss law has not yet provided a clear answer to this question.

The response depends on the importance of the two events and In specific cases, the contractor is allowed to suspend the
their factual circumstances. work unilaterally if the continuation of the work could result in
However, the current trend is that in such event, the contractor strong and otherwise inevitable damages for the employer or if
would be entitled to an extension of time, even if he is partly at any decision from a public authority obliges him to do so.
fault for the delay, and would not be entitled to claim for costs
resulting from his own delay.
3.5 Is there a time limit beyond which the parties to there any legal requirements as to how the terminating
a construction contract may no longer bring claims party’s grounds for termination must be set out (e.g. in a
against each other? How long is that period and when termination notice)?
Each party is allowed to terminate the contract if the other party
Yes. On the one hand, the CO provides limitation periods does not respect its obligation, i.e. if the contractor fails to start
depending on the type of claim (of five and 10 years, respec- the work on time or performs it in a defective manner, respec-
tively; see article 127 et seq. and article 371 CO). On the other tively if the employer fails to pay the contractor for the work done.
hand, contractual or statutory notice requirements may impose On his side, the employer may unilaterally withdraw from the
a much shorter time limit on a party that wishes to assert that a contract at any time before the work is completed, provided he
claim must be observed. In particular, according to article 370 pays for the work already done and compensates the contractor
CO, the employer has to notify hidden defects immediately upon in full. In addition, where an estimate agreed with the contractor
their discovery. The parties may, however, agree on diverging is exceeded by a disproportionate amount through no fault of the
notice requirements or warranty periods in their contracts. employer, the latter has the right to withdraw from the contract
before or after completion.
Extraordinary circumstances (e.g., force majeure) may lead to the
contract’s termination, only after a court finds that even with a
jurisdiction? price adaptation, the execution of the contract cannot be reason-
ably required and rules so.
In practice, parties to a construction contract frequently
The employer usually bears this risk because the contractor does include in their agreement a list of events qualifying as acceptable
not often agree on bearing it, as it may have a significant impact grounds, such as insolvency or bankruptcy of a party, repeated
on deadlines, the price and the quality of the works. and serious breach of the contract or major delay in the start or
delivery of the work, which entitle each party to terminate the
3.7 Which party usually bears the risk of a change contract early.
in law affecting the completion of the works under The termination notice is usually served in the same form as
construction contracts in your jurisdiction? the contract and the specific communication rules provided for
in the contract, if any, have to be followed.
Swiss statutory law does not cover this issue. In practice,
the construction agreement provides that the contractor will 3.11 Do construction contracts in your jurisdiction
perform the works based on the current legal provisions at commonly provide that the employer can terminate at
the time of its conclusion. Therefore, any change of law that any time and for any reason? If so, would an employer
might impact important aspects of the agreement, such as the exercising that right need to pay the contractor’s profit
price, deadlines and quality of the works, would trigger a mutual on the part of the works that remains unperformed as at
modification of the contract and the employer will usually bear termination?
the associated risks and costs.
Given the freedom of contract principle, it is, however, admis- Yes, as mentioned under question 3.10, pursuant to article 377
sible for parties to agree to have either this charge borne by the CO, the employer can withdraw from the contract at any time,
employer or the contractor, or to have it shared between them. provided that it pays for work already done and compensates the
contractor in full.
in relation to the design and operation of the property? 3.12 Is the concept of force majeure or frustration known
The architect primarily owns the full intellectual property rights
in relation to the design he drew and can assign them to the grounds for a claim for force majeure?
contractor or the property owner. However, only patrimonial
intellectual property rights are transmissible (and not moral
rights such as the copyright on the works). Swiss law recognises the concept of force majeure, even though
it is not described as such in statutory law. In accordance with
article 119, para. 1 CO, an obligation is deemed extinguished
3.9 Is the contractor ever entitled to suspend works? when its performance is made impossible by circumstances that
are entirely beyond the control of the concerned party and the
The parties are always free to negotiate the suspension of the performance has therefore become strictly impossible (either
work if this is required by external circumstances. Moreover, temporarily or permanently). In such an event, the contractor
pursuant to article 82 CO, each party may suspend the perfor- does not breach the obligations that are impacted as long as the
mance of its own obligation, including payment or works, if the impossibility persists.
other party has failed to timely perform its corresponding obli- With respect to force majeure events, the parties can allocate the
gation (exceptio non adimpleti contractus). related risks in the contract. If they do not regulate this topic in

154 Switzerland
the contract, some legal, non-mandatory, statutory provisions of 3.16 Do parties to construction contracts owe a duty of
the CO can apply. For example, article 376 CO states that if the care to each other either in contract or under any other
work is destroyed by accident and prior to completion or delivery, legal doctrine? If the duty of care is extra-contractual,
the contractor is not entitled to payment for the work done or can such duty exist concurrently with any contractual
of the expenses incurred, unless the employer is in default on obligations and liabilities?
acceptance of the work. Similarly, article 378 CO provides that
if the completion of the work is rendered impossible by an inci- According to article 2 of the Swiss Civil Code, parties to any
dental occurrence affecting the employer, the contractor is enti- contract owe each other a duty to act in good faith. Parties have
tled to payment for the work already done and the expenses to cooperate in order to help each other perform their respec-
incurred that were not included in the price. The contractor may tive obligations, namely by providing relevant information to
further claim for compensation if such impossibility is due to the each other in due course. For example, the contractor has an
employer’s fault. obligation to inform the employer of any defect in the design
In case of lump sum contracts, force majeure events may lead (article 364 CO).
to a price increase or to the termination of the contract (article
373, para. 2 CO).
Concerning hardship or economic impossibility, the affected
party may ask to amend the terms of the contract or request ambiguity is interpreted?
its termination if the subsequent circumstances have changed
in such way that the performance of the contractual obligation
would become excessively burdensome (clausula rebus sic stantibus). Under Swiss law, when the terms of a construction contract
are ambiguous, the judge will first try to establish the true and
common intention of the parties, using an empirical approach,
3.13 Are parties, who are not parties to the contract, despite any inaccurate expressions or designations used either in
entitled to claim the benefit of any contractual right error or by way of disguising the true nature of their agreement.
If the true intention cannot be identified at this first stage, the
the contractor pursuant to the original construction judge will then, by applying the principle of trust, seek to determine
contracts in relation to defects in the building? what meaning the parties could and should have given to their
mutual expressions of will pursuant to the rules of good faith,
taking into account all of the circumstances.
Swiss law strictly applies the principle of privity of contracts, the
result being that third parties do not have any right deriving from
the contract, unless specific rights have been duly assigned to 3.18 Are there any terms which, if included in a
them. This may, for example, be the case if the subsequent owner construction contract, would be unenforceable?
of the building was entitled to a claim against the contractor if
the deed of sale of the building includes an assignment of the sell- As Swiss law has a very liberal approach, most of the terms
er’s rights under the original construction contract in his favour. chosen by the parties will be enforceable. Nevertheless, contract
However, not all rights can be transferred to a third party. clauses that deviate from those prescribed by law are only admis-
Usually, such agreements take the form of a tripartite agreement sible where the law does not prescribe mandatory wording and
with proxy. provided that they do not contravene public policy, morality or
rights of personal privacy (article 19, paragraph 2 CO). Therefore,
3.14 On construction and engineering projects in contractual terms that go against mandatory statutory law are
your jurisdiction, how common is the use of direct unenforceable.
3.19 Where the construction contract involves an element
designer’s obligations absolute or are there limits on the
In Switzerland, it is not very common to see such agreements in to give an absolute guarantee in respect of his work?
the context of construction projects.
In terms of extent, the liability of the designer is similar to any
3.15 Can one party (P1) to a construction contract, who other party’s liability. Swiss law does not make any distinction
owes money to the other (P2), set off against the sums regarding a designer’s liability with any other contractor. In
due to P2 the sums P2 owes to P1? Are there any limits addition, the liability will be defined based on the qualification
on the rights of set-off? of the contract, which depends on the factual circumstances
and not on the determination of the contract itself (mainly
Pursuant to article 120 CO, where two persons owe each other “mandate” or “contractor’s agreement”). Therefore, the obliga-
sums of money or performance of identical obligations, and tion of the designer will be to work towards a result, but without
provided that both claims are due, each party may unilaterally guaranteeing it or to obtain it.
decide to set off his debt against his claim. There is no limi-
tation to the use of this right, but the party who does so must 3.20 Does the concept of decennial liability apply in your
expressly declare that it is doing so. jurisdiction? If so, what is the nature of such liability and
Under Swiss law, liability for defects is governed by article 371

CO (see question 3.5 above).

In practice, parties frequently modify the liability regime by 4.4 Where the contract provides for international
including SIA rule 118 in their agreement. Hence, it is very arbitration, do your jurisdiction’s courts recognise and
unusual for them to agree on more than a five-year liability enforce international arbitration awards? Please advise
period. Such extensions are typically agreed, in certain sectors, in of any obstacles (legal or practical) to enforcement.
relation to a specific part of the work (e.g. sealing) and provided
that the building owner enters into a maintenance contract with Switzerland is a party to the New York Convention on the
the contractor. Recognition and Enforcement of Foreign Arbitral Awards.
Finally, there is also a 10-year liability period that applies only Switzerland has made no reservations, withdrawing its declara-
to defects intentionally hidden by the contractor. tion of reservation in 1993.
Both domestic and international arbitral awards are easily
42 Dispute Resolution recognised and enforced. As a matter of fact, the Swiss Supreme
Court does not review the merits of an international award
4.1 How are construction disputes generally resolved? unless it manifestly violates public policy.
The parties can freely define the mechanism for dispute reso- 4.5 Where a contract provides for court proceedings
lution. The most commonly used formal dispute resolution in your jurisdiction, please outline the process adopted,
mechanism is State court litigation or, more rarely, domestic any rights of appeal and a general assessment of
arbitration, while international contracts often provide for inter-
national institutional (SCAI, ICC) or ad hoc arbitration. decision by the final court of appeal.
4.2 Do you have adjudication processes in your As Switzerland is organised as a federal system, all Swiss Cantons
jurisdiction (whether statutory or otherwise) or any other have their own judiciary system. Nevertheless, the Swiss CPC
obliges each Canton to set up a double judiciary instance system.
Therefore, parties have a right to appeal in the Canton. Moreover,
under very strict conditions, the Swiss federal Supreme Court,
An adjudication process is not provided by statute under Swiss which is the highest court in Switzerland, may review final deci-
law. It is rarely used in construction contracts for small and sions of the cantonal courts of appeal, but only on matters of law,
medium-sized construction projects. In contrast, it is more not facts.
frequently seen in international or large-scale projects. The length of those proceedings can last between two and
five years. The first instance proceedings are the longest as they
4.3 Do the construction contracts in your jurisdiction usually include hearings, expert opinions, proof examinations,
commonly have arbitration clauses? If so, please etc. These could last two years or much more depending on
explain how, in general terms, arbitration works in your the complexity of the case. Moreover, interim measure such as
jurisdiction. expert opinions can also take a few months.
Courts of appeal are faster and usually take their decision
In Switzerland, arbitration clauses are rare in practice. This within a year, while the Swiss federal Supreme Court generally
type of clause is more common for contracts relating to large issues its rulings within six to nine months.
or complex projects and/or when at least one of the parties is a
person abroad. 4.6 Where the contract provides for court proceedings
Arbitration is possible in Switzerland both in domestic and in a foreign country, will the judgment of that foreign
international matters. In the former case, article 353 et seq. of court be upheld and enforced in your jurisdiction? If
the Civil Procedural Code (CPC) will apply (unless the parties the answer depends on the foreign country in question,
decide that article 172 of the Swiss Private International Law are there any foreign countries in respect of which
Act, PILA, will apply). In the latter case, article 172 PILA will enforcement is more straightforward (whether as a
apply. A notable difference between the two is the possibility for
the parties to appeal against a domestic arbitral award, whereas
no appeal is possible in international arbitration (awards may, Enforcement depends on the country where the judgment was
however, be challenged on the basis of very limited grounds – rendered. EU judgments will typically be easier to enforce in
public order, improper composition of the Arbitration panel, Switzerland (on the basis of the Lugano Convention) than those
violation of the right to be heard). of other countries with which no international treaty exists.
SIA has published a specific arbitration regulation (SIA 150),
but it is not often used in contracts.
Parties are free to determine the arbitration procedure and to
decide on the procedural steps, subject to the requirements of
due process.

156 Switzerland
Philippe Prost gives legal advice to companies and private clients regarding real estate acquisitions or sales, constitution or sale and
purchase of rights of acreage (land lease), construction projects, architect and engineer contracts, financing of real estate projects and mort-
gage negotiations, related tax issues, lease contracts, drafting and reviewing of contracts, including the due diligence process.
Philippe directs and manages both a privately owned real estate company, active in the market since 1998, and a public-owned real estate
company, incorporated in 1998. He has built solid experience over many years in the fields of commercial building rentals in downtown
Geneva, major renovation and construction projects as well as in the oversight of development and construction projects, risk management
and surveillance of real estate agencies in charge of day-to-day business.
As a litigator, Philippe represents clients before the competent courts of Geneva, Vaud, Valais, Neuchâtel, Jura and Fribourg in all types of
legal disputes, mainly in rental law, construction law, zoning and administrative matters, as well as in arbitration proceedings.
Meyerlustenberger Lachenal Ltd. Tel: +41 22 737 10 00

Rue du Rhône 65 Email: [email protected]
1204 Geneva URL: www.mll-legal.com
Switzerland
Jacques Johner is an associate lawyer in both MLL’s Real Estate and Dispute Resolution teams in Geneva and Lausanne. His practice
includes real estate, construction law, land and use planning law, as well as public procurement law and other aspects of public law. He is
also a member of the competition and distribution practice group.
Jacques holds a Certificate of Advanced Studies in Legal Professions (ECAV) delivered by the University of Geneva. He holds a Bachelor’s
degree and a Master’s degree in law from the University of Lausanne, with specialisations in business law and in litigation, magna cum laude.
Prior to joining MLL in 2015 as a junior associate, Jacques worked for five years as an in-house lawyer for the City of Lausanne, in the energy
and telecommunications department. He is a native French speaker and his working languages are French, English, Italian and German.
Meyerlustenberger Lachenal Ltd. Tel: +41 22 737 10 00

Rue du Rhône 65 Email: [email protected]
1204 Geneva URL: www.mll-legal.com
Switzerland
Meyerlustenberger Lachenal Ltd. (MLL) is an international business law to real estate holding structures, assistance in tender procedures, advice
firm in Switzerland, with offices in Zurich, Geneva, Zug and Lausanne. MLL regarding subcontractor and general contractor agreements and representa-
specialises in representing and advising clients at the intersection of high tion in rental matters.
tech, IP-rich and regulated industries. www.mll-legal.com
MLL’s broad-based expertise in all fields of real estate law is cemented by
its involvement in the boards of directors of real estate companies and
its leading role in professional organisations such as the Association of
Business Tenants. The close collaboration of our experts in real estate,
company and tax law when planning transactions and setting up real estate
holding structures guarantees optimum results.
MLL’s expertise is namely focused on purchase and sale of real estate and
real estate portfolios, advice on company law and tax law issues related

Chapter 20 157
Taiwan
Taiwan
Wei-sung Hsiao
Lee and Li, Attorneys-at-Law Chun-wei Chen
agency administering government procurement matters in

12 Making Construction Projects Taiwan, are used. FIDIC contracts, despite their global currency,
are seldom used by employers in Taiwan.
contracts which place both design and construction 1.4 What (if any) legal requirements are there to create a
obligations upon contractors; (ii) any forms of design- legally binding contract (e.g. in common law jurisdictions,
only contract; and/or (iii) any arrangement known as offer, acceptance, consideration and intention to create
management contracting, with one main managing legal relations are usually required)? Are there any
contractor and with the construction work done by a mandatory law requirements which need to be reflected in
series of package contractors? (NB For ease of reference a construction contract (e.g. provision for adjudication or
throughout the chapter, we refer to “construction any need for the contract to be evidenced in writing)?
Under Taiwan’s Civil Code, a contract is formed and binds the
parties as long as the parties agree on the major terms of the
Depending on the contractors’ scope of work, the International contract. The agreement does not have to be in writing; oral
Federation of Consulting Engineers (“FIDIC”) classifies agreement is also recognised. For construction contracts, the
construction contracts into three types: turnkey/engineering, major terms include scope of work and payment. As long as the
procurement and construction (“EPC”); design-build; and employer and its contractor agree on the principal terms, orally
construction. But in Taiwan, the line between turnkey/EPC and or in writing, the construction contract will be deemed formed
design-build is rather blurred. The Government Procurement Act and legally binding.
(“GPA”), the law governing government procurement projects
in Taiwan, defines turnkey as a type of construction contract
where the contractor is responsible for detailed design and on-site 1.5 In your jurisdiction please identify whether there
performance. This broad definition covers both turnkey/EPC
and design-build. non-legally binding indication of willingness either to
Procurement and Construction Management (“PCM”) is also enter into a contract later or to commit itself to meet
widely used in Taiwan, especially in large-scale construction certain costs to be incurred by the contractor whether or
projects. In these projects, construction consulting firms are not a full contract is ever concluded.
hired to help employers manage and oversee their contractors’
performance. Letters of intent are not common in construction projects.
Employers in Taiwan – mostly government agencies – are
1.2 How prevalent is collaborative contracting (e.g. required to follow the mandatory bidding process, and letters of
alliance contracting and partnering) in your jurisdiction? intent are not required by the process. Once the winning bidder
To the extent applicable, what forms of collaborative is determined, the employer will sign a formal contract with the
contracts are commonly used? bidder directly.
However, in some projects, the contractors will enter into
Collaborative contracting is not adopted in Taiwan. In construc- letters of intent with their subcontractors to demonstrate both
tion projects, employers would sign contracts with their consult- parties’ willingness to cooperate. These are mostly non-binding.
ants and contractors individually. If the contractors wish to
subcontract their work, they enter into separate contracts with 1.6 Are there any statutory or standard types
their subcontractors. of insurance which it would be commonplace or
In Taiwan, construction projects usually come from the govern-
ment. Where the government is the employer, contract templates Labour insurance is required by law, but construction insur-
created by the Public Construction Commission (“PCC”), the ance is not. While every contractor is obligated to procure

158 Taiwan
labour insurance for all its workers, it is free to negotiate with government agencies are the employers. They prefer bank guar-
its employer as to the type of construction insurance it will antees over corporate guarantees, even if the guarantees are
purchase. The most common type of insurance in the construc- issued by established companies.
tion industry is a commercial general liability policy, and where
necessary, the employer can require additional insurance policies
from its contractor. Also, most construction contracts prescribe retention of title rights in relation to goods and supplies
the major terms of the policies, such as the insured, the scope of used in the works? Is it permissible for contractors to
coverage and the maximum deductible, to ensure that any prop- claim that, until they have been paid, they retain title and
erty loss, or personal injury or damage during construction will the right to remove goods and materials supplied from
be properly covered. the site?
1.7 Are there any statutory requirements in relation to Goods and supplies used in the works usually belong to the
construction contracts in terms of: (a) labour (i.e. the employer under the contract. The contractor may claim title rights
legal status of those working on site as employees or of the goods and supplies if: (1) the contract is silent on the distri-
as self-employed sub-contractors); (b) tax (payment of bution of the title rights; and (2) the goods and supplies have not
income tax of employees); and/or (c) health and safety? become an integral part of the works.
Under Taiwan law, a contractor has to procure labour and national 22 Supervising Construction Contracts
health insurance for its workers. If the contractor subcontracts its
work to a subcontractor, the subcontractor is also subject to the 2.1 Is it common for construction contracts to be
same legal requirement. As the employers, both the contractor supervised on behalf of the employer by a third party
and the subcontractor are required to deduct income tax from (e.g. an engineer)? Does any such third party have a
their workers’ paycheques. The law governing occupational duty to act impartially between the contractor and the
health and safety also requires that contractors/subcontractors employer? If so, what is the nature of such duty (e.g. is
take necessary precautions to prevent their workers from any it absolute or qualified)? What (if any) recourse does a
on-site dangers. These legal requirements are standard provisions
in most construction contracts in Taiwan, and will still bind the
contractors/subcontractors even if not prescribed in the contracts.
Yes, in a government procurement project the employer would
usually hire a third party, most often an engineer or engi-
1.8 Is the employer legally permitted to retain part of neering company, to supervise the contractor’s performance of
the contract. As the third party is hired by the employer, it is
substantially complete; and/or (b) any agreed defects not obligated to act impartially between the contractor and the
liability period is complete? employer; rather, its conduct will be deemed the employer’s. If
the third party breaches the contract, the contractor can claim
any remedy that applies if the employer breaches the contract.
Yes, the employer is entitled to keep part of the construction
payment due to the contractor – usually 5% of every monthly
payment – as a retention, as long as the right is explicitly specified 2.2 Are employers free to provide in the contract that
in the contract. Usually the retention is released to the contractor they will pay the contractor when they, the employer, have
when the contractor’s work is accepted by the employer. themselves been paid; i.e. can the employer include in
the contract what is known as a “pay when paid” clause?

The “pay when paid” clause is not prohibited by the law, but it is
not used in contracts between the employers and their contractors
restrictions on the nature of such bonds? Are there any because construction payments usually come from the employers.
grounds on which a call on such bonds may be restrained However, many contractors will put the clause into the contracts
(e.g. by interim injunction); and, if so, how often is such with their subcontractors to keep their cash flow in check.
pre-condition) or only upon default of the contractor? 2.3 Are the parties free to agree in advance a fixed
Performance bonds are used in almost all construction projects particular breaches, e.g. liquidated damages for late
in Taiwan, especially those awarded by the government. completion? If such arrangements are permitted, are
Performance bonds typically provide for payment on demand. there any restrictions on what can be agreed? E.g. does
Although a provisional injunction from the court can undercut the sum to be paid have to be a genuine pre-estimate
an employer’s right to call the bond, an application for a provi- of loss, or can the contractor be bound to pay a sum
sional injunction is seldom granted.
1.10 Is it permissible/common for there to be company liquidated damages; and, if so, in what circumstances?
subsidiary companies? Are there any restrictions on the Yes, the parties to a construction contract are free to agree on a
fixed amount of liquidated damages due to the employer when the
contractor breaches the contract. The amount can be a percentage
Corporate guarantees are rarely used in Taiwan. As indicated, of the total contract price or the price for the work constituting
most construction projects come from the public sector, where the breach. However, the agreement is subject to certain legal

Lee and Li, Attorneys-at-Law 159
restrictions. First, the fixed amount cannot be used to cap any of damages, a contractor’s claim for damages enjoys a one-year
liability caused by intentional acts or gross negligence. Second, or 15-year time limit, which starts when the cause of the damages
the court has discretion to cut the amount if it finds the amount manifests itself. As to the employer’s defect claims, they are
disproportionately higher than the employer’s actual loss. time-barred to one year after the defects are identified.
32 Common Issues on Construction 3.6 Which party usually bears the risk of unforeseen
Contracts ground conditions under construction contracts in your
jurisdiction?
performed under the contract? Is there any limit on that Under Taiwan’s construction contracts, the risk of unforeseeable
right? ground conditions is usually borne by employers. Some turnkey
contracts may shift the risk to the contractors, but they can
Yes, the employer is entitled to vary the works to be performed often be covered by construction insurance policies, in whole
under the contract as long as the change is not significant. The or partially.
law does not specify what constitutes significant change, but
Article 22 of the GPA does forbid any contractual changes that 3.7 Which party usually bears the risk of a change
would increase the contract price by more than 50%. in law affecting the completion of the works under
omitted, can the employer carry out the omitted work Nearly all construction contracts in Taiwan allocate the risk of
himself or procure a third party to perform it? legal changes to the employers. Where the law is changed to
make completion of the work more difficult or impossible, the
Contractors are not allowed to omit work from the contract, contractors are entitled to demand more construction time and/
but the employer can cancel part or all of the work under the or payments, or to terminate the contract.
contract. If the cancellation constitutes termination for conven-
ience, the contractor can claim damages against the employer. 3.8 Which party usually owns the intellectual property
a construction contract (e.g. a fitness for purpose In construction projects where government agencies are the
obligation, or duty to act in good faith)? employers, the intellectual property right for the work performed
by the contractors is usually assigned to the employers through
General legal principles, such as duty to act in good faith, and/ mutual agreement. Allowing the contractors to enjoy the intel-
or common industry practices, are sometimes cited to interpret lectual property right is relatively rare.
vague or conflicting terms in a construction contract. The legal
principle or common practice applied varies from case to case.
3.4 If the contractor is delayed by two concurrent No, the contractor has no right to suspend works under the
contract. Under the Civil Code, the contractor’s handover or
completion of the works is a condition to payments from the
that concurrent delay? employer, unless the employer’s finances deteriorate after the
signing of the contract.
There is no statutory solution for delay by two concurrent events.
In most cases, the contractor facing such a delay will be granted 3.10 Are there any grounds which automatically or
an extension of time. How long the construction term will be usually entitle a party to terminate the contract? Are
extended hinges on: (1) which event happened first; and (2) the there any legal requirements as to how the terminating
percentage of responsibility to be borne by the contractor. In
addition to the extension of time, a few employers will reimburse
the contractors for their time-related costs during the extension.
Under the Civil Code, an employer is free to terminate the
construction contract at any time before the work is completed,
3.5 Is there a time limit beyond which the parties to but it has to compensate the contractor for any damage sustained
from the termination. Also, if the work in a construction contract
relies heavily on the contractor’s skills, the contract should be
deemed terminated when the contractor is deceased or no longer
able to perform the work.
There are numerous types of claim that may arise from a construc- In construction contracts, one party is usually entitled to termi-
tion contract, and different claims are subject to different stat- nate the contract when the counterparty is in material breach.
utes of limitations. A contractor’s payment claim against the Where the contract is awarded by government agencies, the
employer is subject to a two-year time limit, which starts to run contractors usually have the right to terminate the contract if their
when the work is accepted. And while there are different types work has been suspended for three consecutive months or more.

160 Taiwan
3.11 Do construction contracts in your jurisdiction because the deductions may interrupt the contractors’ cash flow,
commonly provide that the employer can terminate at which is essential for the performance of the contract.
on the part of the works that remains unperformed as at 3.16 Do parties to construction contracts owe a duty of
termination? care to each other either in contract or under any other
Most construction contracts entitle employers to terminate the obligations and liabilities?
contract for convenience. Where a contract is terminated for
causes unattributable to the contractors, under Article 511 of Yes, parties to construction contracts owe a duty of care to each
the Civil Code, the employers should compensate the contrac- other. The law does not specify the standard of care to which
tors for their damage. The damage includes the costs and a contractor should adhere, but the prevailing court view is a
expected profit. But most contracts would exclude the interests contractor, being a professional, should exercise a higher level of
the contractors are likely to gain for any work not yet performed care in performing the contract.
at the time the contract is terminated. The duty of care is to decide which party should be held account-
able for contractual breaches. A contractor will be held account-
3.12 Is the concept of force majeure or frustration known able if it fails to satisfy its duty of care and therefore breaches
in your jurisdiction? What remedy does this give the the contract. As to what liability the breaching contractor should
affected party? Is it usual/possible to argue successfully bear, it depends on what the contract says.
Yes, the concept of force majeure is recognised in Taiwan’s construc- ambiguity is interpreted?
tion contracts. In most cases, it is the contractors that will be
affected by force majeure events. When an event of this kind occurs,
In interpreting ambiguous terms in a contract, Article 98 of
a contractor is usually entitled to extensions of time and cost
the Civil Code prioritises the parties’ real intent over the literal
reimbursements.
meaning of the terms. According to the prevailing court view,
Contracts that have subsequently become financially unviable
the purpose and context of the contract, and earlier drafts of the
cannot be grounds for a force majeure claim. However, the contrac-
terms, shall be considered in order to understand the parties’
tors may cite the doctrine of change of circumstances in the Civil
real intent.
Code to demand that the contract be terminated or the terms of
the contract revised.
which is made for their benefit? E.g. is the second or Any terms that violate the statutory restrictions or bans, social
subsequent owner of a building able to claim against order or morality will be deemed null and void. For example,
the contractor pursuant to the original construction a clause to shorten or waive the statute of limitations, or elimi-
contracts in relation to defects in the building? nate in advance liability caused by intentional acts or gross negli-
gence, will be seen as invalid and unenforceable.
No. A contract binds only the parties to it, and only the parties
can claim rights derived from the contract. A third party is
not entitled to any of the contractual rights, unless the contract element of design and/or the contract is one for design
specifies otherwise or a party to the contract transfers its right only, are the designer’s obligations absolute or are there
to the third party. limits on the extent of his liability? In particular, does the
his work?
agreements or collateral warranties (i.e. agreements The designer’s obligation and the extent of his liability are solely
between the contractor and parties other than the determined by the contract, no matter what type of contract the
employer with an interest in the project, e.g. funders, designer enters into. The contract can set a limit on the design-
other stakeholders, and forward purchasers)? er’s aggregate liability, but the limit becomes invalid if: (1) the
liability is caused by the designer’s intentional act or gross negli-
In construction projects in Taiwan, direct agreements are gence; or (2) the liability is expressly excluded from the contrac-
commonly used, but collateral warranties are not. tual limit.
3.15 Can one party (P1) to a construction contract, who 3.20 Does the concept of decennial liability apply in your
owes money to the other (P2), set off against the sums jurisdiction? If so, what is the nature of such liability and
due to P2 the sums P2 owes to P1? Are there any limits what is the scope of its application?
A concept similar to decennial liability exists in Taiwan. Under
An employer is allowed to deduct the sum its contractor owes to the Civil Code, an employer has one year to inspect the work
it from the payment due to the contractor. However, in reality, after the work is completed or handed over to the employer.
most employers would make deductions of this kind cautiously Where the work is construction on land or significant repair of

Lee and Li, Attorneys-at-Law 161
construction, the inspection period is extended to five years. disputes arbitrated cannot be resolved by arbitration under Taiwan
The inspection period can be further extended to five years and law; or (3) the countries where the awards are rendered or whose
10 years respectively if the contractor is found to have deliber- laws are applied do not recognise Taiwan’s arbitration awards.
ately concealed work defects from the employer.
42 Dispute Resolution in your jurisdiction, please outline the process adopted,
4.1 How are construction disputes generally resolved? how long proceedings are likely to take to reduce: (a)
In Taiwan, construction disputes are usually resolved through:
(1) amicable negotiation between the parties; (2) mediation by the
The court system in Taiwan can be divided into three levels: the
PCC or the court; (3) litigation; or (4) arbitration with the parties’
district court; the high court; and the Supreme Court. Any party
consent. If PCC mediation founders owing to the employer’s
who loses the district court trial is free to lodge an appeal to the
rejection of the PCC’s mediation proposal, Article 85-1 of the
high court, but only claims exceeding NT$1.5 million can be
GPA entitles the contractor to apply for arbitration without the
brought to the Supreme Court. The trial time for each instance
employer’s consent.
can last from less than a year to more than five years, depending
on the complexity of the dispute, but overall it will take the court
4.2 Do you have adjudication processes in your longer to adjudicate on construction disputes.
board)? If so, please describe the general procedures. 4.6 Where the contract provides for court proceedings
A dispute review board and a dispute adjudication board were the answer depends on the foreign country in question,
once discussed but ultimately not adopted in Taiwan. are there any foreign countries in respect of which
explain how, in general terms, arbitration works in your Yes, foreign court decisions will be upheld and enforced in
jurisdiction. Taiwan unless: (1) the foreign court had no jurisdiction to render
the decision; (2) the defendant losing the suit did not attend
No, arbitration clauses are rarely seen in Taiwan’s construc- the hearings because of illegal service; (3) the reasoning of the
tion contracts nowadays. If contractors would like to have their decision or the legal proceedings defy Taiwan’s social order or
construction dispute arbitrated, they will need to seek consent morality; or (4) the foreign country does not recognise Taiwanese
from their employer or subject the employer to mandatory arbi- court decisions.
tration under Article 85-1 of the GPA.

Yes, international arbitration awards are recognised and enforce-

able in Taiwan unless: (1) the recognition or enforcement of the
awards would defy Taiwan’s social order or morality; (2) the

162 Taiwan
Wei-sung Hsiao is one of the few dual-certified attorneys and civil engineers in Taiwan, holding a Master’s in Civil Engineering from National
Taiwan University and a Master of Laws from Soochow University.
Boasting 18 years in construction and government procurement law practice, Wei-sung is highly sought after by multinational and domestic
construction companies for various infrastructure construction disputes in Taiwan. The infrastructure projects include nuclear power plants,
refinery plants, harbours, highways, tunnels, city subway systems, airport transit systems, and ‘build-own-operate’ incinerators.
Lee and Li, Attorneys-at-Law Tel: +886 2 2763 8000 ext. 2192
8F, No. 555, Sec. 4 Fax: +886 2 2766 5566
Zhongxiao E. Rd. Email: [email protected]
Taipei 11072 URL: www.leeandli.com
Taiwan
Chun-wei Chen is a junior partner of Lee and Li’s real estate and construction practice group. In government procurement projects, she acts
as the liaison between foreign bidders and the local government. Over the years, her experience in a multitude of construction disputes, many
of which are domestic infrastructure cases, has earned her the clients’ trust. In addition to her trial practice, Chun-wei regularly writes on
construction law issues. Her experience in construction disputes has effectively insulated clients against risks.
Chun-wei received her Master’s degree from University of Pennsylvania Law School (LL.M., 2011) and her undergraduate degree from
National Taiwan University (LL.B., 2005).
Lee and Li, Attorneys-at-Law Tel: +886 2 2763 8000 ext. 2145
8F, No. 555, Sec. 4 Fax: +886 2 2766 5566
Zhongxiao E. Rd. Email: [email protected]
Taipei 11072 URL: www.leeandli.com
Taiwan
Established in 1953, Lee and Li is Taiwan’s preeminent law firm. Its capa-
bility to diversify and specialise has earned it recognition and trust from
domestic and multinational clients.
With more than 100 attorneys admitted in Taiwan, along with technology
experts and specialists in other fields, Lee and Li stays current on the latest
developments in every industry and is fully committed to helping clients
achieve their business goals.
Lee and Li’s real estate and construction practice group is renowned for
its ability to provide creative and customised solutions, from the conven-
tional means of litigation to the alternative means of mediation and arbi-
tration. The group also has extensive experience in representing clients
in construction disputes involving a wide array of claims and technical
issues, navigating clients through complicated legal hurdles.
www.leeandli.com

Chapter 21 163
USA
USA
Douglas Stuart Oles
Oles Morrison Rinker & Baker LLP Alix K. Town
In the U.S., construction management contracting is typically

12 Making Construction Projects handled by a construction manager. Some of them (“at risk”)
also hold direct agreements with trade contractors, while others
1.1 What are the standard types of construction (“not at risk”) merely ask as advisors to an employer (usually
referred to as the “owner” in the U.S.).
only contract; and/or (iii) any arrangement known as 1.2 How prevalent is collaborative contracting (e.g.
management contracting, with one main managing alliance contracting and partnering) in your jurisdiction?
contractor and with the construction work done by a To the extent applicable, what forms of collaborative
series of package contractors? (NB For ease of reference contracts are commonly used?
engineering contracts.) On design-build or P3 projects, contractors commonly partner
with design firms, either through a joint venture agreement or
conventional subcontracting. On large civil projects, it is also
With its 50 separate states, the United States offers a wide variety
common for two or more general contractors to bid for the work
of contract types. Before the 1980s, there was a general preference
together, either as a temporary alliance team or a formal joint
for fixed-price design-bid-build contracts, based on an employer
venture entity. See, e.g., ConsensusDocs 298.
advertising a fully completed set of design documents. Time-
and-materials arrangements have also long been used, especially
where it is difficult to estimate a fixed price or when construction 1.3 What industry standard forms of construction
must begin before there is time to complete a design. In recent contract are most commonly used in your jurisdiction?
decades, however, statutory changes have facilitated a much
increased use of design-build contracting and its variations such See answer to question 1.1 above.
as engineer-procure-construct (EPC) contracting. The evolving
technologies used in construction have led to an increased use of
design-build contracting in specialty trades. Although public-pri- 1.4 What (if any) legal requirements are there to create a
legally binding contract (e.g. in common law jurisdictions,
vate partnerships (P3) and Integrated Project Delivery (IPD) have
offer, acceptance, consideration and intention to create
had a relatively slow start in the United States, their use seems legal relations are usually required)? Are there any
to be gradually increasing. Nonetheless, many segments of the mandatory law requirements which need to be reflected in
U.S. construction industry remain largely unfamiliar with those a construction contract (e.g. provision for adjudication or
project delivery systems. On IPD, see Bruner & O’Connor on any need for the contract to be evidenced in writing)?
Constr. Law, §6.18.10 et seq. (2020).
There is no standard form of construction agreement in the Although U.S. states are generally common law jurisdictions,
United States. The contract forms provided by the International some of them (e.g., California and Louisiana) have adopted civil
Federation of Consulting Engineers (FIDIC) are rarely if ever codes that include many principles applicable to construction law.
used. Federal construction projects are generally governed by Purchase of equipment and other goods is typically governed by
the Federal Acquisition Regulation (FAR), a book containing the Uniform Commercial Code (UCC), which provides rules
numerous clauses mandated on various types of jobs. On local for sales, security interests, warranties and remedies when those
government projects and private construction, the A-201 General terms are not specified by contract. Where a state lacks appli-
Conditions and other forms published by the American Institute cable case law on a particular subject, its courts often look to
of Architects (AIA) are probably the most widely used. Other well- federal case law or to decisions in neighbouring states.
known suites of contract forms are published by ConsensusDocs, Under U.S. common law, a binding contract typically requires
the Engineers Joint Contract Documents Committee (EJCDC) an offer, acceptance, and economic consideration. Consideration
and the Design-Build Institute of America (DBIA). All of these can be very minimal (including the mere exchange of reciprocal
forms make an effort to achieve a degree of balance between the obligations). Most requests for proposals are written as invita-
various parties that typically participate in a complex construction tions for tenders, so that they do not constitute offers in them-
project, although that balance can easily be lost when the forms selves. Employers typically treat the tenders as offers and try to
are heavily modified to favour the interests of a particular party. reserve broad discretion in deciding which one (if any) to accept.

164 USA
The individual states have various requirements as to which 1.7 Are there any statutory requirements in relation to
kinds of contract must be in writing to be valid (so-called “stat- construction contracts in terms of: (a) labour (i.e. the
utes of frauds”). Some terms can be implied from industry prac- legal status of those working on site as employees or
tice or from previous dealings between the parties. On some as self-employed sub-contractors); (b) tax (payment of
facts, acceptance may be inferred where an employer allows income tax of employees); and/or (c) health and safety?
work to proceed without a signed agreement. However, if the
evidence indicates no “meeting of the minds” with regard to (a) In the U.S., labour relations between workers and employers
essential contract terms, a binding contract is unlikely to exist. are primarily governed by federal statutes and regulations,
Even without a written agreement, a contractor may have an creating substantial uniformity between the states. The
equitable right to payment if it performs work in good-faith reli- Immigration Reform and Control Act of 1986 prohibits the
ance on what it reasonably understood as an employer’s offer to knowing hire of workers who lack legal status to work in
contract (e.g., implied contract, quasi-contract, quantum meruit, the U.S. Other laws prohibit discrimination, such as Title
and equitable estoppel). VII of the Civil Rights Act, the Age Discrimination in
Employment Act, and the Americans with Disabilities Act.
1.5 In your jurisdiction please identify whether there Minimum wage rates are established by the Wage Rates
is a concept of what is known as a “letter of intent”, in Requirements (formerly under the Davis-Bacon Act) and
which an employer can give either a legally binding or other laws, as are rules for paying premiums for overtime
non-legally binding indication of willingness either to labour. Separate union agreements often govern the bene-
enter into a contract later or to commit itself to meet fits that must be paid to construction workers or to their
certain costs to be incurred by the contractor whether or labour unions.
not a full contract is ever concluded. (b) In the U.S., most taxes are assessed either by the federal
government or by the individual states. Contractors must
Enforceability of agreements is likely to depend more on their usually withhold sums from worker compensation to assure
substance than on their form. A letter of intent may be unen- payment of applicable taxes and employee benefits. State
forceable if it is nothing more than an agreement to agree. It is tax rates vary considerably. There is no federal sales tax or
not uncommon, however, for parties to enter what they intend as VAT, but most states charge sales and excise taxes that apply
a binding “memorandum of understanding” or “memorandum to many construction projects. The federal government
of agreement”, while leaving details for later negotiation. It is charges income tax on individuals, as do most state govern-
also common for employers to issue a limited notice to proceed ments. The federal government also charges a corporate
or execute a limited-scope agreement that allows certain prelim- income tax, although it was substantially reduced in 2018.
inary and/or long-lead activities to begin while the parties The federal government also charges taxes to support Social
continue negotiating to price the balance of the planned project. Security (retirement), Medicare (medical care for seniors),
and unemployment insurance.
(c) Health and safety are heavily regulated, both at a federal and
of insurance which it would be commonplace or state level. The federal Occupational Safety and Health Act
compulsory to have in place when carrying out (OSHA) and its implementing regulations are probably the
construction work? For example, is there employer’s best-known. Individual states have their own occupational
liability insurance for contractors in respect of death safety laws, and the federal Jones Act has specific remedies
and personal injury, or is there a requirement for the for injuries occurring during work on a ship or barge.

Applicable statutes generally require contractors to hold a licence the purchase price for the works as a retention to be
in the state where work is done, and such licences usually mandate released either in whole or in part when: (a) the works are
some level of insurance. There are many insurance products substantially complete; and/or (b) any agreed defects
and insurance approaches available. Employers typically require liability period is complete?
contractors to provide coverage for general liability and excess
liability, which covers at least personal injury, death and property U.S. employers are generally entitled to withhold a portion of a
damage. Applicable laws also typically require insurance for losses contractor’s price as security for final completion of a construc-
caused by automobiles and for workers’ compensation. Contracts tion project. Such withholding must be authorised by contract,
including design responsibility are likely to require professional and it is typically in the range of 5% to 10% of the contract
liability insurance. It is also common to require insurance against price. Many contracts provide that the percentage of reten-
environmental pollution and coverage for completed operation declines after the work is at least 50% complete, and it is
tions. Employers often procure builder’s risk or all-risk insur- often possible for the contractor to obtain release of the reten-
ance covering damage to the project as it is constructed. On some tion balance by posting a special bond as substitute security for
jobs, prime contractors may purchase insurance against defaults the employer. It is not common to allow retention after final
by lower-tier contractors. completion, e.g., as security for performance of post-completion
To avoid the cost associated with multiple tiers of contractors warranty claims that have not yet arisen. For specialty contrac-
procuring overlapping policies, it is common for projects to have tors performing early stages of work (e.g., foundations, shoring,
a single consolidated Contractor Controlled Insurance Program or ground improvement), it is common to provide for release
(CCIP) or Owner Controlled Insurance Program (OCIP). of their retention when their work is done, rather than holding
back money until a much later date when the rest of the project
is completed.

Oles Morrison Rinker & Baker LLP 165
1.9 Is it permissible/common for there to be Relatively few employers have sufficient in-house experience
performance bonds (provided by banks and others) to to manage a complex construction project with their own
guarantee the contractor’s performance? Are there any personnel. Therefore, they often hire a construction manager
restrictions on the nature of such bonds? Are there any for that purpose. Construction managers typically do not owe a
grounds on which a call on such bonds may be restrained duty to act impartially between employer and contractor. Where
(e.g. by interim injunction); and, if so, how often is such the employer retains its architect to perform this role, however,
the architect may be bound to act impartially by contract or by
pre-condition) or only upon default of the contractor? Rule 2.4 of the National Council of Architectural Boards (or
similar provisions in state codes of professional responsibility
for architects).
Performance bonds are commonly used in the United States,
and most contractors have established relationships with surety
companies that provide bonding when necessary. Banks are not 2.2 Are employers free to provide in the contract that
typically involved in providing performance bonds, and letters they will pay the contractor when they, the employer,
of credit are much less common as project security than in many
other countries. U.S. employers also typically require payment clause?
bonds (like the “Miller Act” bonds on federal contracts and the
similar “little Miller Act” bonds on state contracts). Forms of
bond are generally not prescribed by law, although some forms Subcontracts often provide that the employer’s prime contract
(like the ones published by the AIA) are widely used. payments are a “condition precedent” for lower-tier contrac-
tors getting paid (“pay if paid”), and it is also common to see
clauses indicating that lower-tier contractors should wait to get
1.10 Is it permissible/common for there to be company paid after the prime contractor is paid (“pay when paid”). The
enforceability of “pay if paid” clauses was challenged success-
fully in California on the theory that it conflicted with statutory
lien rights. Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882,
938 P.2d 372, 64 Cal.Rptr.2d 578 (1997). Many state courts have
When the successful tenderer is a new joint venture entity or not yet specifically addressed this issue, but they are likely to hold
a specially formed project company, it is not unusual for the that a subcontractor may at least be required to wait for a reason-
employer to require guarantees from the parent companies, and able time while the prime contractor pursues payment from the
U.S. law will not substantially restrict the nature of such guaran- employer on the subcontractor’s behalf.
tees. On most projects, however, the employer relies on bonds In federal contracts, FAR 52.232.27 generally requires prime
and retention as the principal guarantees of contractor perfor- contractors to pass progress payments through to subcontractors
mance. Parent guarantees are particularly likely on contracts within seven days after receiving money from the government.
(e.g., P3) with long-term project operating responsibilities. State governments generally have similar “prompt payment”
statutes for their own projects.
the site?
If a commercial contract is silent as to ownership of delivered the sum to be paid have to be a genuine pre-estimate
materials and equipment, the contractor’s ownership rights of loss, or can the contractor be bound to pay a sum
in those “goods” are likely to be governed by the Uniform which is wholly unrelated to the amount of financial loss
Commercial Code, which includes a mechanism for establishing likely to be suffered by the employer? Will the courts
security interests in delivered products until the employer pays
for them. On most commercial projects, however, contracts
provide that title passes upon installation (or even earlier, when
goods are delivered and paid for). Contracts often provide that Liquidated damages are widely used on U.S. projects to deter-
employers may take over the materials purchased by a defaulting mine the price that a contractor will pay for unexcused delays in
contractor as needed to complete the job. The contractor’s right completing its work, especially where it will be difficult to fore-
to payment is generally protected by statutory lien rights in the cast the employer’s resulting financial damages. When likely
improved property, or by some form of payment bond. delay costs are unusually high (e.g., from high-revenue-pro-
ducing facilities like power plants and casinos), liquidated delay
damages are also used to cap monetary liability for delay because
it would be difficult to attract fixed-price tenders without such
assurances. Employers will generally be unable to enforce liqui-
2.1 Is it common for construction contracts to be dated damages that are held to be a penalty, i.e. that do not repre-
sent a reasonable forecast of fair compensation for anticipated
duty to act impartially between the contractor and the delay-related costs. The reasonableness of liquidated damages
employer? If so, what is the nature of such duty (e.g. is is typically determined as of the time of contracting, rather than
it absolute or qualified)? What (if any) recourse does a later when a breach occurs. Liquidated damages are usually not
party to a construction contract have in the event that recoverable by an employer who has caused concurrent delays
the third party breaches such duty? during the time period at issue.

166 USA
Liquidated damages are also used to determine contractor to place some degree of reliance on the employer’s partial design
liability for other types of breaches. On power plants, for and/or site information).
example, liquidated damages are typically used to limit liability Many courts have held that an employer owes an implied duty
based on failure to achieve key performance guarantees such as to disclose any non-public “superior knowledge” about the site or
heat rate and overall power output. the project that a court finds should have been disclosed to the
When a prime contract fixes the amount(s) of monetary damages contractor.
for delay or for some other breach, those damage rates typically When furnishing materials or equipment for a construction
preclude a separate claim for “actual” damages arising from the project, the seller typically owes implied duties that the goods will
same breach. be of “merchantable” quality and that they will be reasonably fit
for their intended purposes. See U.C.C. §2-314, 315. Such implied
32 Common Issues on Construction warranties may, however, effectively be disclaimed by contract.
State statutes may provide that home builders owe an implied
Contracts
duty that the resulting residences meet certain standards for
“habitability”.
3.1 Is the employer entitled to vary the works to be In construction service agreements, contractors are generally
held to an implied duty that they will perform in a “good and
right?
workmanlike” manner. And in design contracts, architects and
engineers may be held to an implied obligation to perform to the
Almost every construction contract contains language giving the “prevailing standard” established for similar services in the area
employer a right to increase or decrease the contractor’s scope where the work is done.
of work by issuing a written variation, normally called a “change In multi-prime contracts, employers may owe an implied duty
order” in the U.S. Where the parties cannot agree on such a vari- to coordinate their various prime contracts, and prime contrac-
ation, employers often reserve a right to issue a unilateral directors will probably be held to an implied duty to coordinate their
tive to perform the variation. There are, however, normally some various subcontractors and suppliers.
limits on this power. If it fundamentally changes the nature or
scope of work, it may be treated as a “cardinal change”, i.e. essen-
tially a breach of contract by the employer. A major deletion may 3.4 If the contractor is delayed by two concurrent
also be treated as a partial termination for convenience rather
than a deductive change, which may affect the mechanism used an extension of time; and/or (b) the costs arising from
to price the adjustment. Variations normally have to be exercised that concurrent delay?
in good faith, and an employer may be constrained from inviting
tenders on a broad scope of work and later using deductive
changes to remove only the easiest or most profitable portions If the delays are truly concurrent and cannot be segregated, the
of the scope. most common approach is that neither party may recover mone-
tary delay damages from the other party during the period when
both of them were independently causing delay. In some cases,
3.2 Can work be omitted from the contract? If it is however, courts and arbitrators will make an effort to apportion
omitted, can the employer carry out the omitted work delay costs between the two parties.
himself or procure a third party to perform it? If a party can show that it slowed parts of its work after real-
ising that the job was already being delayed by the other party, it
Where an item of work is unintentionally omitted from a contract may overcome the concurrent delay defence.
(e.g., a “scope gap”), employers may typically add it by issuing
a variation (see question 3.1 above). Alternatively, the employer
may generally perform the omitted work with its own forces a construction contract may no longer bring claims
or with another prime contractor. On power plants and other against each other? How long is that period and when
major infrastructure, it is common for employers to supply some does time start to run?
of the major long-lead equipment themselves, in part to expedite
the schedule and also to avoid paying mark-ups to the installing
State laws typically include a “statute of repose”, setting the
contractor. In some cases, union agreements may restrict the
number of years in which a construction-related claim must
ability of the employer to use its own labour on site.
accrue (i.e. the time in which they must generally be discovered).
After a claim has accrued, states have separate statutes of limi-
3.3 Are there terms which will/can be implied into tation that define the number of years in which the discovered
a construction contract (e.g. a fitness for purpose claim must be filed (in court or arbitration).
obligation, or duty to act in good faith)? Some construction contracts and agreements with insurers
or sureties will specify shorter time limits for making claims
In the U.S., every contract party owes an implied duty of good than the periods allowed under state statutes. Many construc-
faith and fair dealing. As a corollary to this duty, parties are typi- tion contracts specify that contractor claims need to be asserted
cally held to owe an implied duty that they will not hinder or before accepting final payment from the employer.
delay each other.
An employer who provides plans and specifications for use 3.6 Which party usually bears the risk of unforeseen
in construction impliedly warrants that they are suitable for use, ground conditions under construction contracts in your
and employers are typically held responsible for errors and omis- jurisdiction?
sions in their contract documents unless the contractor assumes
responsibility for reviewing and completing the design as a
Most U.S. commercial construction contracts assign the risk of
design-builder (and even in that case the contractor may be able
unforeseen subsurface conditions to the employer, assuming that

the employer normally has more time and opportunity to study 3.10 Are there any grounds which automatically or
the ground that will be excavated. This is typically handled by a usually entitle a party to terminate the contract? Are
Differing Site Conditions clause. See, e.g., FAR 52.236-2. Such there any legal requirements as to how the terminating
clauses typically allow compensation if a contractor encoun- party’s grounds for termination must be set out (e.g. in a
ters latent site conditions that differ materially from those indi- termination notice)?
cated in the contract documents (“type 1”) or latent conditions
of an unusual nature that would not normally be expected in Employer-drafted contracts sometimes provide that contracts
the type of ground at issue (“type 2”). Contractors must usually are automatically terminated if the contractor files for bank-
give prompt notice of such conditions and should take reason- ruptcy protection, although such rights are likely to be limited
able steps to mitigate their impacts. Contractor rights to claim by federal law. Contracts typically authorise termination for
Differing Site Conditions may be limited if the contractor is paid default, however, only if a party fails to cure a breach within
to conduct its own independent pre-bid investigation of subsur- a specified time after receiving written notice from the other
face conditions or if a particular contractor had knowledge of party. Underlying defaults most often include failure to: make
the condition based on prior work at the site. required payments; prosecute work; correct defects; provide
required bonds or insurance; and provide essential permits or
3.7 Which party usually bears the risk of a change site access.
construction contracts in your jurisdiction? 3.11 Do construction contracts in your jurisdiction
The risk of unforeseen post-tender changes in laws, regulations or any time and for any reason? If so, would an employer
building codes is often allocated by contract. The AIA General exercising that right need to pay the contractor’s profit
Conditions typically assign responsibility to the employer, except
termination?
for legal changes that were already known or foreseeable when
tenders were submitted. This issue became a source of much
dispute when state laws imposed major temporary restrictions on U.S. construction contracts often allow employers and prime
construction during the 2020 COVID-19 pandemic. contractors to terminate lower-tier agreements “for conveni-
ence” at any time. Such rights must generally be reserved by
contract because they do not arise from common law. Applicable
3.8 Which party usually owns the intellectual property clauses usually provide that a terminated contractor may not
recover profit that would have been earned on the unperformed
balance of the work.
Many contracts treat project-specific design as “work for hire”
that belongs to the employer. Absent a contract clause to the
contrary, an architect probably has copyright protection for
its plans, drawings and other design work product as stated in affected party? Is it usual/possible to argue successfully
the Architectural Works Copyright Protection Act of 1990. In that a contract which has become uneconomic is
negotiated contracts, designers often retain ownership but grant grounds for a claim for force majeure?
a royalty-free perpetual licence to the employer and its succes-
sors for use on the project site.
The concept of force majeure is well known in U.S. construction
contracting. Although some contracts allow compensation to
3.9 Is the contractor ever entitled to suspend works? a contractor whose progress is interrupted by such unexpected
events, most contracts merely allow only an uncompensated
Under U.S. common law, contractors generally have a right to extension of time. Force majeure events are typically defined to
suspend based on an uncured material breach by the employer include only unforeseen events outside the control of both
(e.g., failure to make progress payments). Such rights are, contract parties, and labour strikes may be excluded from this
however, often restricted by contract and should be exercised only category if they arise from specific acts or omissions of the
after giving written notice and opportunity to cure. On federal affected contractor (i.e. to be distinguished from national or
projects, a contractor must generally proceed unless the govern- regional strikes). The fact that a project becomes more difficult
ment contracting officer has ordered a cardinal change (i.e. a or costly due to rising costs of labour or materials is generally not
substantially different or larger scope than originally awarded). regarded as a force majeure condition, although courts may regard
Contracts often require work to proceed despite a pending sudden and extreme price escalations in this category. Many U.S.
dispute, e.g., regarding compensation for an employer variation. employers have argued that the COVID-19 pandemic is a force
Other circumstances that may justify a contractor’s temporary majeure event for which no resulting costs are recoverable, but
suspension of work may include an employer’s failure to provide contractors counter that claims for changes in work and lost effi-
permits or site access, discovery of unforeseen hazardous mate- ciency are compensable even if pure delay costs are not.
rials in the ground that impede progress, the employer’s failure to In some limited cases, performance may also be excused (i.e.
make key required decisions (e.g., approving submittals), encoun- effectively allowing its termination) on force majeure principles if
tering unexpected archaeological remains, or other unanticipated the contractor can show that the specified work was frustrated
force majeure events outside the contractor’s reasonable control. by impossibility or commercial impracticability.

168 USA
contracts in relation to defects in the building? Following the principle of contra proferentem, U.S. courts often
tend to construe ambiguous contract terms against the party who
wrote them. Normally, an ambiguity only exists if it is reasonably
Under U.S. common law, third parties may possess rights under susceptible to at least two alternative meanings. Once a clause
agreements between two other parties if such rights were clearly is found to be ambiguous, courts in most states may consider
intended. For example, a prime contractor may effectively evidence outside the written contract (“parol evidence”) to assist
require a subcontractor to indemnify the employer for third-party in interpretation. For example, courts often look at the parties’
claims based on errors in the subcontractor’s work. Warranties course of performance before a dispute arose, common under-
on special materials and on installed equipment are often set up standing of certain terms in the construction industry, a desire to
to flow directly from the manufacturer or supplier to the end give meaning to every term, and a desire to avoid interpretations
customer. Lenders and employers may require subcontracts to be that result in an inequitable forfeiture by one party. Some states
assignable to them if the prime contractor defaults on its obliga- may also allow the use of parol evidence to help clarify (but not
tions. Residential developers generally require builders to make flatly contradict) a written contract even if it does not immedi-
direct warranties to purchasers of new homes. Alternatively, resi- ately seem ambiguous on its face.
dential purchasers may have rights against contractors based on Many contracts seek to minimise ambiguities by establishing
tort law or state statute. an “order of precedence” that can be applied if various contract
documents are found to be inconsistent. Some contracts also
3.14 On construction and engineering projects in require the contractor to review the various documents and
your jurisdiction, how common is the use of direct provide prompt written notice if and when conflicts or ambigu-
agreements or collateral warranties (i.e. agreements ities are discovered.
other stakeholders, and forward purchasers)? 3.18 Are there any terms which, if included in a
Collateral warranty is not a familiar term in U.S. construction

law, although many warranties from sub-tier parties run directly As discussed elsewhere in these answers, a number of commercial
to employers, and contracts often provide that warranties may terms are unenforceable or void in U.S. construction contracts.
be assigned by the employer. Also, contractor indemnity clauses The unenforceability may result from a statute or from common
often protect both the employer and its engineer(s). law case decisions. The invalid clauses will vary from one state
to another.
Terms that tend not to be enforced include: a) requirements to
3.15 Can one party (P1) to a construction contract, who indemnify another party against its own fault; b) clauses requiring
waiver of fundamental rights guaranteed by constitutions or stat-
on the rights of set-off? utes; c) pre-construction waivers of statutory lien rights; d) liqui-
dated delay damages set higher than the contractee’s reason-
ably anticipated damages; e) damages precluding one party from
It is generally understood that a party’s payment obligations on recovering any damages for delays or breaches by the other party;
a particular contract may be set off against monetary obliga- f) “pay if paid” clauses making a subcontractor’s payments abso-
tions owed by the payee under the same contract (e.g., progress lutely conditional on corresponding payments from the employer
payments being withheld to pay costs of curing defective work). to the prime contractor; and g) clauses that violate any other law
U.S. common law may also allow an employer to withhold or public policy.
payments based on sums owed by the payee on a separate project.
Common law rights of set-off may be limited by contract if
not by law. For example, contracts commonly provide that the 3.19 Where the construction contract involves an
employer’s progress payments should be treated as a “trust fund” element of design and/or the contract is one for design
in favour of persons providing labour or materials on the job,
which is inconsistent with the idea of diverting the funds to pay designer have to give an absolute guarantee in respect of
one of the contractor’s obligations on another job. his work?
A prime contractor’s power to withhold money from a subcon-
tractor based on debts on another job may also be limited by an
Although some design contracts attempt to impose a standard
applicable “prompt payment” statute.
of defect-free design, most designers will insist on applying the
common law standard under which claims of professional negli-
3.16 Do parties to construction contracts owe a duty of gence require proof that the defendant violated the prevailing
care to each other either in contract or under any other standard of professional care for comparable services. That
legal doctrine? If the duty of care is extra-contractual, prevailing standard clearly allows for some level of error or
imperfection, and cases alleging professional negligence typi-
cally require evidence from a licensed professional who can
explain how prevailing standards apply to the facts. Design
Obligations generally arise either by contract, or in tort, or by contracts often specify that the designer will correct errors in
statute. With regard to implied obligations, see answer to ques- design at its own cost, but designers will generally not agree to an
tion 3.3 above. unqualified guarantee that their work is free of defects. Design

contracts also typically include an aggregate cap on monetary rights against real property (e.g., under a statutory lien), that lien
liability for breach of contract by the design professional. foreclosure action must generally be prosecuted in a court.
Arbitration is typically commenced when a claimant files a
demand for arbitration with the administrative entity in charge
jurisdiction? If so, what is the nature of such liability and of handling the arbitration. The respondent may answer in detail
what is the scope of its application? (and may serve a counterclaim), and its failure to do so will gener-
ally be treated as a denial of the claims asserted. Responding
parties may also assert cross-claims against third parties who
U.S. law generally has no direct counterpart to “decennial liability”
have consented to arbitration. The arbitral administrator may
of the sort required in France and some other civil law countries.
assess filing fees based on published rates, and parties will gener-
Approximately half of the states, however, have long statutes of
ally be required to deposit sufficient additional funds to cover the
repose that can create a risk of liability for latent defects discovered
expected charges of the arbitrator(s). Unlike international arbi-
many years after substantial completion of a construction project.
tration, domestic arbitrations in the U.S. generally allow at least
See, e.g., California Civil Code §895.
a limited number of depositions, although pre-hearing discovery
tends to be more limited in arbitrations than in courts.
42 Dispute Resolution Courts give considerable deference to arbitration. Arbitral
awards are generally final and enforced in the U.S., although stat-
4.1 How are construction disputes generally resolved? utes allow very limited appeals in extraordinary cases (e.g., arbi-
trators who fail to disclose conflicts, going beyond the parties’
Under a federal government contract, disputes are ultimately contractual submission to arbitration, obvious partiality, or
subject to resolution in a federal court or agency board, without fundamental denial of due process).
a jury. Under state, local or private contracts, disputes are ulti-
mately subject to resolution in a court (often with a right to 4.4 Where the contract provides for international
jury) unless the parties have agreed otherwise. Although some arbitration, do your jurisdiction’s courts recognise and
federal agency boards have significant experience in construction enforce international arbitration awards? Please advise
disputes, most courts have little such experience, and parties often of any obstacles (legal or practical) to enforcement.
agree by contract that disputes will be referred to mediation and
ultimately to binding arbitration by a person with construction The United States is a signatory nation to the Convention on
industry expertise. the Recognition and Enforcement of Foreign Arbitral Awards
Many contracts initially refer disputes to high-level executives (the “New York Convention”), and the U.S. complies with this
of the parties before they may be submitted to a court or arbitra- agreement by enforcing arbitral agreements and awards issued in
tion panel. Many large complex projects also establish a Dispute signatory countries. Consistent with Article V of the New York
Review Board that helps to resolve issues while the job is being Convention, defences to enforcement of a foreign award include
performed. Non-binding mediation is also very commonly used lack of due process, a conclusion that enforcement would be
to resolve complex construction disputes. contrary to public policy, and other listed defences.
A number of companies provide mediation and arbitration Chapter 2 of the Federal Arbitration Act provides terms under
services. Two of the largest providers are the American Arbitration which courts of the United States shall enforce foreign arbitra-
Association (AAA) and JAMS, each of which publishes detailed tion awards in accordance with the New York Convention.
rules for mediation and arbitration.
4.2 Do you have adjudication processes in your in your jurisdiction, please outline the process adopted,
jurisdiction (whether statutory or otherwise) or any other any rights of appeal and a general assessment of
forms of interim dispute resolution (e.g. a dispute review how long proceedings are likely to take to reduce: (a)
board)? If so, please describe the general procedures. a decision by the court of first jurisdiction; and (b) a
The U.S. has not yet adopted “adjudication” of the kind that is now
widely used in the United Kingdom. On large complex projects, Federal courts typically allow jurisdiction only to limited cate-
however, many contracts require submission of disputes to a gories of cases (e.g., claims for damages over $75,000 between
Dispute Review Board (DRB), typically a panel of three individuals parties located in different states). State trial courts exercise
who have substantial construction industry experience. Although broader jurisdiction, extending to all parties doing business
DRB recommendations are usually subject to appeal, they resolve within their borders. Parties in courts are often entitled to
many issues and are often given considerable deference. demand use of a jury.
Court actions typically begin by filing a written “complaint”
identifying parties, key facts, and basic legal claims. Defendants
are generally required to file a written “answer” to the complaint,
explain how, in general terms, arbitration works in your and the answer may also assert one or more counterclaims. A
jurisdiction. responding party may also assert cross-claims against third
parties who are subject to the court’s jurisdiction.
After the parties’ initial exchange of written positions, they are
Many of the most widely used construction contract forms
typically required to exchange relevant documents and produce
provide for mediation and ultimately for binding arbitration
witnesses for pre-hearing oral examination (depositions). Parties
as a means of resolving construction disputes, especially on
are also generally allowed to require opposing parties to answer a
private projects. Arbitration is generally not, however, an avail-
limited number of written questions (interrogatories). Discovery
able remedy under federal government construction contracts.
in a U.S. court is usually much more extensive than would be
Where an unpaid contractor or supplier seeks to enforce security
allowed in an international arbitration or litigation.

170 USA
The delay between filing of a case and commencement of the The Federal Arbitration Act also contains no general require-
hearing will vary significantly from one jurisdiction to another. ment that U.S. courts must recognise a foreign court judg-
Some courts have much heavier schedules than others, and a ment. Several states have nonetheless adopted the 2005 Uniform
long backlog can delay the scheduling of a hearing. Larger cases Foreign Money-Judgments Recognition Act, which sets forth
with more witnesses and complex issues are likely to experience criteria under which signatory states agree to enforce judgments
significantly longer delays in getting a trial date. In most cases, from foreign courts. As under the New York Convention, prin-
however, a hearing can be set between one and two years after cipal concerns are assuring that the foreign proceeding allowed
a complaint is filed. Depending on the jurisdiction, it can then due process and that its ultimate judgment does not violate U.S.
take several months or years to receive a decision. public policy. However, U.S. courts are likely to give reason-
U.S. court rules allow for purely legal issues to be resolved able deference to judgments rendered by courts in other coun-
prior to trial, under what is called a summary judgment motion. tries that have signed the New York Convention, and the U.S.
has bilateral agreements with various countries that facilitate
enforcement of foreign judgments and awards.
in a foreign country, will the judgment of that foreign Some individual states have their own bilateral agreements
court be upheld and enforced in your jurisdiction? If with other jurisdictions that facilitate enforcement of court
the answer depends on the foreign country in question, judgments. See the 1962 Uniform Foreign Money-Judgments
are there any foreign countries in respect of which Recognition Act and the 2005 Uniform Foreign-Country Money
enforcement is more straightforward (whether as a Recognition Act, which have been adopted in 23 states and the
result of international treaties or otherwise)? District of Columbia.
The United States has not signed any general agreement to enforce
foreign court judgments that would be equivalent to enforce-
ment of foreign arbitral awards under the New York Convention.

Douglas Stuart Oles is an arbitrator, mediator and lawyer in private practice, who has devoted more than 30 years to helping avoid and
resolve disputes on complex construction and supply contracts. He is a board member of the Global Engineering & Construction panel at
JAMS and a senior partner in Oles Morrison Rinker & Baker LLP (Seattle, Anchorage & Oakland). His positions and activities include:
■ American Bar Association Forum on Construction Law: national chair (2005–06).
■ American College of Construction Lawyers: national President (2018–19).
■ Best Lawyers in America: selected.
■ Canadian College of Construction Lawyers: Honorary Fellow.
■ Chartered Institute of Arbitrators: Fellow.
■ International Academy of Construction Lawyers: Fellow & Treasurer.
■ International Bar Association, International Construction Projects Committee: Vice Chair of Project Execution Committee and panel
speaker at conferences in Australia, Austria, Germany, Greece, and the Netherlands.
■ Society of Construction Law: Program Coordinator 2008 (London), 2010 (Hong Kong), 2012 (Melbourne), 2014 (Kuala Lumpur), 2016 (São
Paulo), and 2018 (Chicago).
For many years, Mr. Oles has worked as a litigator and as a drafter and negotiator of commercial contracts. His work includes energy
facilities, airports, major highways, bridges, foundations, hotels, universities, hospitals, and numerous other projects. He also has extensive
experience with U.S. federal contracts.
Mr. Oles has written or contributed to numerous books and articles on construction law. The most recent include: Construction scheduling:
issues for lawyers (Constr. Law Int’l 2018); The Legal Maze of the Keystone XL Pipeline (Int’l Constr. Law Rev. 2016); Construction ADR (ABA 2014)
(chapter on international Choice of Law and Venue); and Construction Damages and Remedies, 2nd edition (ABA 2013) (chapters on Theories
of Recovery, Elements of Damages, and Proof of Damages). Mr. Oles received his undergraduate degree (with distinction) in history from
Stanford University (Phi Beta Kappa). He was Executive Editor of the Washington Law Review and received his juris doctor (with honours) from
the University of Washington.
Oles Morrison Rinker & Baker LLP Tel: +1 206 623 3427
701 Pike St., Suite 1700 Email: [email protected]
Seattle, WA 98101 URL: www.oles.com
USA
Alix K. Town focuses primarily on public procurement, frequently representing owners, general contractors, and subcontractors on a broad
range of government and private contracts, including contract formation and administration matters, government investigations, and
contract claims and disputes. After serving as a Pathways Intern for the Air Force’s Suspension and Debarment Office, Ms. Town has a
unique perspective on ethics and compliance matters and focuses her practice on guiding contractors successfully through the public
procurement marketplace.
Ms. Town frequently writes for the federal government contracts blog, The Procurement Playbook. She is a member of the American
Bar Association’s Public Contracts Law Section, the Pacific Northwest Defence Alliance, and a past president of the National Contract
Management Association, Portland-Vancouver Chapter.
Ms. Town received her undergraduate degree from Trinity College in Hartford, Connecticut and received her juris doctor from The George
Washington University Law School. She recently completed an LL.M. in Public Procurement Law and Policy at the University of Nottingham.
Oles Morrison Rinker & Baker LLP Tel: +1 206 623 3427
701 Pike St., Suite 1700 Email: [email protected]
Seattle, WA 98101 URL: www.oles.com
USA
Established in 1893, Oles Morrison Rinker & Baker LLP is one of the West companies. Chambers and Partners recognised Oles Morrison Rinker &
Coast’s most experienced construction law firms with more than 30 attor- Baker in its annual Chambers USA Guide as a leading Washington firm in
neys practising at offices located in Alaska, California and Washington. We the area of construction law.
have been providing legal counsel to public and private clients throughout www.oles.com
the nation and internationally in all phases of construction and government
contracting since the 1930s. Our attorneys play integral roles in a wide
range of leading infrastructure projects, transportation systems and real
estate developments. In addition to our primary practice areas of construc-
tion and government contracts, our clients look to us for our legal counsel
on commercial litigation, business and real estate. Our international
work has included a variety of transactional assignments, in addition to a
growing volume of dispute resolution assignments between international

172 Chapter 22
Zimbabwe
Zimbabwe
Nikita Madya
Wintertons Legal Practitioners Chantele Sibanda


contract in your jurisdiction? Do you have: (i) any The NJPC contracts and the FIDIC Forms of Contract are
contracts which place both design and construction commonly used. Please refer to question 1.1 above.
management contracting, with one main managing 1.4 What (if any) legal requirements are there to
contractor and with the construction work done by a create a legally binding contract (e.g. in common law
series of package contractors? (NB For ease of reference jurisdictions, offer, acceptance, consideration and
throughout the chapter, we refer to “construction intention to create legal relations are usually required)?
contracts” as an abbreviation for construction and Are there any mandatory law requirements which need to
engineering contracts.) be reflected in a construction contract (e.g. provision for
in writing)?
The Construction Industry Federation of Zimbabwe (“CIFoZ”)
established the National Joint Practice Committee (“NJPC”)
The general concepts of offer and acceptance and the inten-
Standard Contracts 2000, the main one being the NJPC
tion to create binding legal relations (animus contrahendi ) are
Building Contract together with two sub-contracts (“the NJPC
essential requirements to any valid contract in our jurisdic-
contracts”). These contracts are largely based on the Fédération
tion. Generally, there is no requirement for contracts to be in
Internationale des Ingénieurs-Conseils (“FIDIC”) Forms of Contract
written form. Verbal agreements are equally binding where the
and have been endorsed by FIDIC. These contracts are essen-
terms of same are clear or easily ascertainable. However, parties
tially managing contracts. The main contract is between an
are generally advised to enter into written agreements, as it is
employer and the principal contractor, administered through an
easier to prove the terms in the event of disputes arising. The
administrator who is essentially a consultant. The first sub-con-
parties’ freedom to agree on the contractual terms is subject to
tract regulates an arrangement between a main contractor
certain statutes such as the Contractual Penalties Act [Chapter
and a sub-contractor, while the second sub-contract regulates
8:04] and Consumer Contracts Act [Chapter 8:03], which
the agreement between an employer and any sub-contractor
impose consumer protectionism and thereby limit the freedom
nominee of his choice. The NJPC contracts are largely focused
to contract. Although the general law of contract is Roman-
on construction works but make provision for design works
Dutch Law, parties are free to prescribe a law applicable to their
in cases where the design function is given to the principal
agreement (lex loci) as well as the dispute resolution mechanism.
contractor. There are no design-specific standard contracts in
For instance, parties can agree to resolution of disputes through
Zimbabwe, nor are these common.
arbitration proceedings to be held at a place of arbitration in
In large construction projects, parties are increasingly
another jurisdiction under agreed arbitration rules.
adopting the FIDIC Forms of Contract. Contracts which place
both design and construction obligations upon contractors
are not uncommon and reliance is placed in this regard on the 1.5 In your jurisdiction please identify whether there
FIDIC Yellow Book. Design-only contracts are not common. is a concept of what is known as a “letter of intent”, in
Most contractors in large construction projects are foreign which an employer can give either a legally binding or
companies who prefer to use the FIDIC Forms of Contract. non-legally binding indication of willingness either to
1.2 How prevalent is collaborative contracting (e.g. not a full contract is ever concluded.
The concepts of “Letters of Intent”, “Expressions of Interest”
and “Memorandums of Understanding” are common in our juris-
diction. Subject to agreement between the parties, these can be
Collaborative contracting is quite common in Zimbabwe, binding or non-binding. Such arrangements can provide mech-
depending on the size of the project. The standard contracts anisms for exit/termination of rights and obligations subject to
used are the NJPC contracts as well as FIDIC Forms of Contract certain circumstances. It is not uncommon for parties to provide
as detailed in question 1.1 above. for payment of costs incurred by the aggrieved party pursuant

Wintertons Legal Practitioners 173
to the transaction in the event of the substantive contracts not Section 19A of the Income Tax Act provides for the taxa-
being concluded for reasons attributable to the other party. tion of non-resident companies that operate through a perma-
nent establishment in Zimbabwe. A permanent establishment
is widely defined and would include where a fixed place of busi-
of insurance which it would be commonplace or ness is established in Zimbabwe. A fixed place of business is
compulsory to have in place when carrying out defined widely, and includes a place of management, a branch,
construction work? For example, is there employer’s an office, a factory, a workshop, an installation or structure for
liability insurance for contractors in respect of death the exploration of natural resources, a mine, an oil or gas well,
and personal injury, or is there a requirement for the a quarry or any other place of extraction of natural resources, a
contractor to have contractors’ all-risk insurance? building site, or a construction or installation project.
All qualifying contractors are required to pay corporate taxes
Yes. The construction industry normally requires all-risk insur- to the fiscal authorities. A new business is required to be regis-
ance (including third-party liability) due to the high incidence tered with the Zimbabwe Revenue Authority (“ZIMRA”)
of accidents in the construction sector. It is also common for within 30 days of incorporation. All companies must appoint
professional consultants to obtain professional indemnity insur- a public officer of the company within one month of the estab-
ance. In large construction projects which are funded by interna- lishment of such office or place of business. The public officer
tional institutions, lenders have also started to request procure- has to be approved by the Commissioner General and is answer-
ment of political risk insurance, and completion risk insurance. able for all company tax matters.
The contractors are also required to procure insurance cover for Where a contractor is not registered for tax purposes, the
the workers involved in construction work under the National employer is obliged to deduct withholding tax from any payment
Social Security Authority (“NSSA”) Accident Prevention and made to such contractor pursuant to the contract and remit same
Workers Compensation Scheme (Notice No. 68 of 1990). to the fiscal authorities.
Under the Workers Compensation Scheme, the employer is
liable for any amounts due in respect of the workers’ contribu-
tions to the scheme until such time as the contractor is assessed
legal status of those working on site as employees or by NSSA. The employer is entitled to recover any amounts paid
as self-employed sub-contractors); (b) tax (payment of to NSSA pursuant to this.
income tax of employees); and/or (c) health and safety?
There are some statutory requirements in respect of certain the purchase price for the works as a retention to be
construction contracts. Generally, the law in Zimbabwe requires released either in whole or in part when: (a) the works are
every company involved in construction to comply with labour, substantially complete; and/or (b) any agreed defects
tax, health and safety laws. liability period is complete?
Generally, occupational health and safety laws that are appli-
cable to all employers and employees across sectors are the This normally depends on the provisions of the contract. In prac-
Labour Act [Chapter 28.01] and the NSSA Accident Prevention tice, provision is normally made for retention money, which is
and Workers Compensation Scheme (Notice No. 68 of 1990). money that is withheld until the taking over of the works or the
At a secondary level, there are the Protection from Smoking end of the defects liability period, whichever the parties agree to.
(Public Health (Control of Tobacco)) Regulations S.I.264 of The NJPC contracts allow for a retention of monies paid by an
2002 that prohibit smoking in enclosed public places including employer as security for completion of the works and the making
workplaces, the Labour Relations (HIV and AIDS) Regulations good of defects. The NJPC issues, from time to time, a recom-
S.I.202 of 1998 which prohibit discrimination on the grounds of mended scale of retention percentages to be used. The amount to
AIDS/HIV status, the Pneumoconiosis Act [Chapter 15.08], and be retained by an employer shall be the retention percentage of the
the Factories and Works Act [Chapter 14.08] and its regulations. value of the work and materials. The exact amount of the reten-
Construction contractors are allowed to employ expatriate tion money, and when the retention money is payable, will depend
workers with specialised skills, subject to the granting of the rele- on the terms of the contract.
vant work permits and residency permits by the relevant govern- It is not uncommon for parties to agree to the release of part of the
mental authorities. The Engineering Council Act (Chapter retention money upon the taking over of the works, with the balance
27:22) provides that no person who is not ordinarily resident being paid upon expiration of the agreed defects liability period.
in Zimbabwe, nor foreign firms, are allowed to carry out any Typically, payments will be made by the employer to the contractor
engineering work without being registered with the Council of at intervals based on the production of progress certificates, which
Engineers. Every foreign firm that wishes to perform or engage must state the amount payable. The contract normally provides that
in engineering work in Zimbabwe must first register with the a certain percentage of each of these payments stated in the certificate
Council and obtain a practising certificate before undertaking be withheld as the retention money.
any engineering work, and such certificate may only be granted Where retention money is not provided for, performance guar-
for specific projects that require expertise and specialised skills antees from the contractor and sub-contractors are normally
or technology that are not available in Zimbabwe. required. Sometimes both retention and performance bonds
Zimbabwe’s tax system is a source-based system. The contractor are agreed upon.
is obliged to deduct pay-as-you-earn (“PAYE”) tax from the
salaries of all taxable employees and remit the same to the fiscal
authorities.

174 Zimbabwe
1.9 Is it permissible/common for there to be The lien (ius retentionis or right of retention) entitles the holder
performance bonds (provided by banks and others) to thereof, in this case the builder, to retain possession of the prop-
guarantee the contractor’s performance? Are there any erty until the expenses incurred by the builder in respect of the
restrictions on the nature of such bonds? Are there any property which are recoverable by the builder are paid to the
grounds on which a call on such bonds may be restrained builder. A lien is discharged after the claim is satisfied.
(e.g. by interim injunction); and, if so, how often is such
bonds typically provide for payment on demand (without 22 Supervising Construction Contracts
Performance bonds, insurance, bank and parent company guar- supervised on behalf of the employer by a third party
antees are used extensively in construction projects. The nature
of such bonds and guarantees is a matter of contract between employer? If so, what is the nature of such duty (e.g. is
employer and contractor. There are no restrictions on the nature it absolute or qualified)? What (if any) recourse does a
of such bonds or guarantees. Performance bonds are manda- party to a construction contract have in the event that
tory in government and state-owned enterprise construction the third party breaches such duty?
projects, especially in cases where advance payments are made
to the contractor. The courts can grant an interim injunction to Yes, it is common for employers to engage project managers to
restrain calls on such bonds if the contractor proves to the court supervise their projects. Generally, all public procurement work
that the call is not warranted or there are disputes under the is subject to monitoring by the Procurement Board as consti-
construction contract which have been referred to arbitration. tuted in terms of the Procurement Act (Chapter 22:07). In
The court ruled in one case that paying on the performance private contracts, subject to agreement, third parties usually act
bond on demand when there are disputes between the parties as an employer’s representative, in which case they will interface
would constitute denying the contractor the right to be heard with the contractor, supervise compliance with the terms of the
and the courts will be inclined to grant the injunction pending a construction contract and take remedial action if necessary, and
determination of the main dispute. give instructions to the contractor on behalf of the employer.
Alternatively, the third party could play a limited advisory role
1.10 Is it permissible/common for there to be company where it will monitor the contractor’s performance, report and
guarantees provided to guarantee the performance of make recommendations to the employer who will engage the
subsidiary companies? Are there any restrictions on the contractor itself. The third-party project manager/supervisor
nature of such guarantees? must exercise its duties professionally and, to the extent possible,
impartially, in order to ensure compliance with the terms of the
Company guarantees are permissible but not common in contract and applicable laws and by-laws. If the third party acts
Zimbabwe. Whether such guarantees would be acceptable is as the employer’s agent, it is up to the employer to terminate the
a matter that largely depends on the agreement of the parties appointment in the event of breach.
having regard to the stature of the holding company issuing It should be noted that there are also regulatory requirements
the guarantee. Bank and insurance guarantees are generally for every construction site to be inspected/supervised by State/
preferred as they carry low risks of default in the event that there local government authorities (as part of the authorisation for
is a call on the guarantee. construction works). In supervising construction projects, the
respective government authorities may suspend construction
contracts where there is a breach of law, construction norms
or regulations, and only through a petition to the courts or
using the courts’ administrative means. However, in doing so,
claim that, until they have been paid, they retain title and they will be acting on behalf of the relevant local government
the right to remove goods and materials supplied from authority or administrative institution. Each local government
the site? authority has by-laws that regulate the standards to be observed
in carrying out the construction works.
It is possible for contractors to have retention of title rights in
relation to goods and supplies used in the works, depending 2.2 Are employers free to provide in the contract that
on the terms of the agreement regulating the relationship. In they will pay the contractor when they, the employer,
principle, it is permissible and normal for contractors to have have themselves been paid; i.e. can the employer include
retention of title rights in relation to goods and supplies used in in the contract what is known as a “pay when paid”
the works, and to remove goods and materials from the site if clause?
payment is not forthcoming.
However, it should be noted that our common law of property The construction contract, like any commercial contract, records
recognises the principle of accession. If the materials perma- the terms agreed to by the parties who are at liberty to agree on
nently accede to the structure and the land, they become part of any terms and conditions which are not prohibited by law and
the structure and cannot be removed if such removal will cause which do not offend public policy. In this vein, depending on
damage to the structure. It is also not possible to contract out of the circumstances of the case, the parties may agree that the
the common-law principles relating to accession. employer will pay the contractor when the employer itself has
Zimbabwean law also recognises a builder’s or contractor’s been paid.
lien, which operates by law and is a form of enrichment lien.

2.3 Are the parties free to agree in advance a fixed be recorded in the construction contract. The omitted works
sum (known as liquidated damages) which will be can be completed by the employer or a third party engaged by
paid by the contractor to the employer in the event of the employer.
there any restrictions on what can be agreed? E.g. does 3.3 Are there terms which will/can be implied into
the sum to be paid have to be a genuine pre-estimate a construction contract (e.g. a fitness for purpose
of loss, or can the contractor be bound to pay a sum obligation, or duty to act in good faith)?
likely to be suffered by the employer? Will the courts Where the parties have not specifically addressed this, certain
terms are implied into a construction contract by law or prac-
tice. For instance, all contracts must comply with applicable laws,
and the contractor shall be obliged to follow construction norms,
It is permissible for the parties to agree in advance to the quantum health, safety and environmental rules, and any other law imposed
of liquidated damages or penalties payable by the contractor to by the State, at all times.
the employer in the event of particular breaches, e.g. liquidated Normally, general principles of contract apply in this regard.
damages for late completion. This is usually fixed as a percentage Certain terms, which necessarily arise from the contractual rela-
of the contract value, and is normally capped at 10%. These tionship between the employer and the contractor, or which are
liquidated damages or penalties are, however, subject to the necessary in the business sense to give effect to the contract, will be
provisions of the Contractual Penalties Act [Chapter 8:04] where implied. Implied terms may include that the employer will co-op-
applicable. The court can reduce the penalty in cases where the erate with the contractor, or that the employer will not deprive the
penalty is out of proportion to the loss or damage suffered at the contractor of possession of the construction site save in accord-
invitation of the other party. The party seeking to reduce the ance with the terms of the agreement.
agreed damages must present evidence before the court to show It may also be an implied term that the contractor will do the
that the actual damages or loss suffered by the party concerned
work in a good and workmanlike manner, use suitable material
are far less than the amount agreed to in the contract. This is a
and perform his obligations in such a way as to conform to the
matter entirely in the discretion of the court.
applicable building regulations. These are just examples of implied
Parties may agree on the contractual penalty being payable in
terms. These can of course be express terms in the construction
case of a breach of the parties’ obligations under the construc-
agreement.
tion contract. Zimbabwean law does not require that the amount
determined as a penalty must be a genuine pre-estimate of loss.
Invariably, the agreed damages are capped at amounts far less 3.4 If the contractor is delayed by two concurrent
than the actual loss incurred. events, one the fault of the contractor and one the fault
Section 88 of the Procurement Act (Chapter 22:07) stipulates or risk of his employer, is the contractor entitled to: (a)
the manner in which such liquidated damages shall be provided an extension of time; and/or (b) the costs arising from
in public procurement contracts where the parties have agreed to that concurrent delay?
make provisions for liquidated damages.
The main requirement is that the penalty rate must be agreed Under the NJPC, in the event of a concurrent delay attribut-
by both parties in the contract and should be in the frameworks able to both parties, the contractor would normally be entitled
prescribed in the law (min–max). However, if the intent of the to an extension of time that takes into account the delay caused
party is to compensate the financial loss, the amount must be by the contractor. The contractor would normally not be enti-
evidenced by facts. tled to recover costs in respect of the concurrent delay. In all
instances, however, regard must be had to the facts, as there are
32 Common Issues on Construction cases where it is appropriate for the costs to be shared.
Contracts
3.1 Is the employer entitled to vary the works to be a construction contract may no longer bring claims
performed under the contract? Is there any limit on that against each other? How long is that period and when
right? does time start to run?
Normally this is to be stipulated or addressed in the contract, As a general rule, the limitation period for prescription of a claim
which ordinarily prescribes the nature and scope of the allow- (usually debts) for disputes arising from contracts is three years.
able variations and the procedure to be adopted where a vari- The prescription period starts to run from the date the cause
ation to the agreed works is sought. If the contract does not of action arises, that being the time from which the claimant
provide for variations to the works, any variation of the scope of became aware of all the facts which are necessary to enable it
work may be performed only on the basis of an additional agree- to prove its cause of action. Ordinarily, the limitation period
ment signed by both parties in accordance with the contract’s starts upon final acceptance of the works (taking over), even if
non-variation clause. Variations from design documentation the contract provides for partial acceptances. However, if the
require additional approval from State authorities. contract provides for a warranty period longer than the prescrip-
tion period then claims under such warranty can be made at any
time during the subsistence of the warranty.
It is normal for parties to agree to omission of certain works

for various reasons. Such agreed omissions should preferably

176 Zimbabwe
3.6 Which party usually bears the risk of unforeseen It is generally preferable to expressly set out the termination
ground conditions under construction contracts in your rights, and the consequences of such termination in the contract,
jurisdiction? although failure to do so does not take away the aggrieved party’s
termination rights at law.
Normally, construction is carried out on the basis of design
documentation. A geotechnical survey is required to be done 3.11 Do construction contracts in your jurisdiction
before the construction works begin. If such survey is provided commonly provide that the employer can terminate at
by the employer, the contractor acts on the basis of relied-upon any time and for any reason? If so, would an employer
information. Contractors are usually permitted to verify the exercising that right need to pay the contractor’s profit
information before a construction contract comes into effect. on the part of the works that remains unperformed as at
termination?
After it comes into effect, the contractor bears the responsi-
bility for unforeseen ground conditions save where the failure
to foresee same was a consequence of the professional negli- Construction contracts generally provide for the right of the
gence of the persons conducting the geotechnical survey. In any employer to cancel the contract for cause. Cancellation by the
event, the obligations in the event of unforeseen ground condi- employer may be done in the event of insolvency, neglect or
tions must be addressed in the construction contract. failure to complete work timeously resulting in the works being
materially affected, or suspension of work without cause on the
part of the principal contractor. Cancellation for no cause is
uncommon. As termination is done due to cause, no payment is
construction contracts in your jurisdiction? due to the contractor in respect of the work that remains unper-
formed unless there is a specific provision in the contract for
this.
Since changes in law affecting contractual relations are regarded
as force majeure circumstances, both parties will bear the risk.
However, in big construction projects of national interest which 3.12 Is the concept of force majeure or frustration known
are funded by international institutions, the Project Company in your jurisdiction? What remedy does this give the
usually enters into an Implementation Agreement pursuant to
which the government undertakes to provide relief to the Project grounds for a claim for force majeure?
Company where it is adversely affected by such changes in law.
Yes, the use of force majeure clauses in commercial contracts,

3.8 Which party usually owns the intellectual property including construction contracts, is common practice in
in relation to the design and operation of the property? Zimbabwe. Force majeure circumstances provide full release
from liabilities under the commercial contract after a specified
It will depend on the provisions of the design agreement. period. Force majeure events may widely be defined as extraor-
Normally the designer is the owner of the intellectual property dinary, unpreventable and unforeseeable circumstances caused
and the employer has rights of use. by a natural phenomenon (such as an earthquake, landslide,
hurricane, drought and others) or social and economic circum-
stances (such as war, blockade, import and export bans in the
State interest and others) which are not controllable by the will
or action of either party and due to which the parties cannot
Yes, the contractor is entitled to suspend works when the perform their contractual obligations. The mere fact that a
employer fails to fulfil its obligations under the construction contract has become uneconomic is not sufficient grounds for a
agreement, such as payment, failure to provide materials, equip- claim for force majeure. The parties are also free to agree on the
ment, or technical documentation as may be applicable. events or circumstances constituting force majeure and how such
events or circumstances shall be treated.
usually entitle a party to terminate the contract? Are 3.13 Are parties, who are not parties to the contract,
there any legal requirements as to how the terminating entitled to claim the benefit of any contractual right
party’s grounds for termination must be set out (e.g. in a which is made for their benefit? E.g. is the second or
termination notice)? subsequent owner of a building able to claim against
The parties are free to regulate the circumstances under which contracts in relation to defects in the building?
either party is entitled to terminate the contract. The law of
Zimbabwe recognises the doctrine of freedom of contract. Contracts made for the benefit of a third party are binding if
A contract is usually terminated through performance, nova- accepted by a third party for whose benefit they were made. As
tion, release, delegation, settlement, set-off, merger, prescrip- a general rule, during transfer of title to the property (building),
tion, supervening impossibility and on notice given by an the new owner acquires rights and obligations related to such
aggrieved party in accordance with the relevant contractual property. In the circumstances, subsequent owners of a building
provisions if the other party has committed a material breach may be able to claim against the original contract in relation to
of the contract. defects in the building only if such defects were revealed during
In addition, the construction contract often provides for the the defects liability period provided by the original contract.
employer’s right to terminate the contract if there is a significant
delay in the contractor’s execution of the works, or for defaults
listed in the contract.

3.14 On construction and engineering projects in The parties must therefore exercise care in ensuring that the
your jurisdiction, how common is the use of direct contract does not make provision for something that is expressly
agreements or collateral warranties (i.e. agreements prohibited by law. In large construction contracts, care must
between the contractor and parties other than the be taken to ensure that the employer has secured the relevant
employer with an interest in the project, e.g. funders, exchange control approvals to enable payment to contractors
other stakeholders, and forward purchasers)? outside Zimbabwe.
These are quite common in large construction projects which

are funded by international lenders. This allows the third element of design and/or the contract is one for design
parties with interest in the project to step in, in the event of only, are the designer’s obligations absolute or are there
issues with the employer. limits on the extent of his liability? In particular, does the
his work?
due to P2 the sums P2 owes to P1? Are there any limits The designer bears the risk for his design, but the extent of his
on the rights of set-off? liability can be limited contractually. It must be borne in mind,
however, that the liability of the designer to a third party cannot
Set-off is recognised under common law in Zimbabwe. A debt be excluded contractually and in the event of the designer being
qualifies for set-off if it is admitted or if it is capable of easy and guilty of a delict, such as negligence, and such delict causing
speedy proof. In other words, only liquidated debts may be set damage to a third party, the designer will be liable to that third
off. Furthermore, set-off is only possible if the debts are both party.
due and payable at law. The parties can regulate the question of
whether set-off should apply in their contract. 3.20 Does the concept of decennial liability apply in your
legal doctrine? If the duty of care is extra-contractual, Decennial liability does not apply in Zimbabwe. The parties are
can such duty exist concurrently with any contractual free, however, to make provision for such liability in their contracts.
Parties to a construction contract generally owe a duty of care to
each other. Should either of the parties commit a delictual act,
as opposed to a breach of the contract, such delictual act could
give rise to a damages claim. A delict is a breach of a general
duty imposed by law which will ground an action for damages in Disputes can be resolved either by approaching a court or
the suit of the person to whom the duty was owed and who has through alternative dispute resolution, such as mediation, arbi-
suffered harm in consequence of the breach. A typical delictual tration or referral to an expert. Construction agreements typi-
claim will arise where a party has suffered damages as a result cally contain mediation and arbitration clauses in terms whereof
of the negligence or other unlawful conduct of the other party. parties will submit to arbitration in the event of a dispute. The
The parties are free to limit the circumstances in which such parties are free to provide the details of the processes appli-
liability may arise. cable to the resolution of any disputes, as long as such processes
are not against the law of Zimbabwe. For instance, a clause
allowing one party to resort to self-help in the event of a dispute
3.17 Where the terms of a construction contract are will not be enforceable.
The normal rule is that, when interpreting a contract, the
language used in the contract must be given its ordinary, gram- board)? If so, please describe the general procedures.
matical meaning. If this creates ambiguity, our courts have devel-
oped various rules setting out how contracts may be interpreted.
The purpose of these rules is to establish the true intention of Yes, provided the contracts make provision for this. The NJPC
the parties. The courts are guided, in construing contractual Building Contracts make provision for adjudication. The admin-
provisions, by judicial precedent. Parties generally regulate what istrator would refer the dispute to adjudication by an adjudicator
common rules should apply in the interpretation of the contract. appointed by the NJPC. The adjudication will be dealt with
in terms of the rules of the NJPC. The adjudicator will invite
submissions from both parties and has power to review and revise
3.18 Are there any terms which, if included in a any action or inaction of the administrator relating to the dispute.
construction contract, would be unenforceable? The adjudicator also has the power to review and revise any deci-
sion, opinion, instruction, valuation, certificate or notice and to
A construction contract, like any commercial contract, records order such measurement and valuations as he may determine. No
the terms agreed to by the parties, who are at liberty to agree reference to adjudication is permitted later than 10 days after the
on any terms and conditions which are not prohibited by law issue of the final payment certificate, save in relation to matters
and which do not offend public policy. Generally, construction concerning defects and the release of the retention.
contracts are unenforceable if they are against any applicable
laws or are against public policy and morality (contra bonos mores).

178 Zimbabwe
4.3 Do the construction contracts in your jurisdiction 4.5 Where a contract provides for court proceedings
commonly have arbitration clauses? If so, please in your jurisdiction, please outline the process adopted,
explain how, in general terms, arbitration works in your any rights of appeal and a general assessment of
jurisdiction. how long proceedings are likely to take to reduce: (a)
Construction contracts in Zimbabwe commonly have arbitration
clauses providing for referral of disputes to one or more arbitra-
tors appointed either by agreement between the parties or, failing Where there are no factual disputes, a party can approach the
that, by some other body such as the Commercial Arbitration court by way of a Court Application instituted by way of notice
Centre of Zimbabwe or a relevant professional body such as of motion accompanied by supporting affidavits. If, however,
the Engineering Council of Zimbabwe, the Valuers Council of there is a factual dispute, the correct procedure to follow is
Zimbabwe, etc. The parties are free to provide in the construc- to approach the court by way of action, which is instituted by
tion contract how the arbitration process is to be regulated in rela- summons. Ordinary actions or applications are usually resolved
tion to the number of arbitrators to be involved, the seat of the by the court of first instance within six to 14 months. Depending
arbitration, rules of procedure, the language to be used, and the on the urgency of the matter, a party can bring an application to
period during which the arbitrator is required to render his deci- court on an urgent basis, in which case the rules of court relating
sion, failing which the procedure to be followed in arbitration to time periods are relaxed. This procedure is usually resorted
proceedings is as stipulated in the Arbitration Act [Chapter 7:15]. to in cases in which one party desires, for instance, to obtain an
interdict or an injunction against the other party.
Appeals against decisions of the High Court may be directed
4.4 Where the contract provides for international to the Supreme Court and it normally takes six to 12 months for
an appeal to be heard and determined. Where the issue raises a
of any obstacles (legal or practical) to enforcement. constitutional question, it may be directed to the Constitutional
Court.
All decisions and proceedings of any inferior court and of any
Yes. Zimbabwe ratified the Washington Convention on the tribunal, board or officer performing judicial, quasi-judicial or
Settlement of Investment Disputes between States and Nationals administrative functions may be taken on review in the High
of Other States which was incorporated into Zimbabwean law Court, in respect of grave procedural irregularities or illegalities
by the Arbitration (International Investment Disputes) Act occurring during the course of such proceedings.
[Chapter 7:03].
The Convention on the Recognition and Enforcement of
Foreign Arbitral Awards requires courts of contracting states 4.6 Where the contract provides for court proceedings
to give effect to private agreements to arbitrate and to recognise in a foreign country, will the judgment of that foreign
and enforce arbitration awards made in the contracting coun-
tries. In terms of Article 3 of the Convention, each contracting are there any foreign countries in respect of which
state shall recognise arbitral awards as binding and enforce them enforcement is more straightforward (whether as a
in accordance with the rules of procedure of the territory where result of international treaties or otherwise)?
the award is relied upon.
Under the Convention, an arbitration award issued in any
Section 3 of the Civil Matters (Mutual Assistance) Act [Chapter
contracting state can generally be freely enforced in any other
8:02] allows judgments given in “designated countries” to be
contracting state (save that some contracting states may elect to
registered by the High Court of Zimbabwe and enforced as if
only enforce awards from other contracting states – the “reci-
they were judgments of the High Court of Zimbabwe. The
procity” reservation).
designated countries will be deemed so in terms of a statutory
Additionally, Zimbabwe adopted (with amendments) the
instrument issued by the responsible Minister. The process is
Model Law on International Commercial Arbitration adopted by
therefore straightforward in respect of these designated coun-
the United Nations Commission on International Trade Law on
tries. Decisions from countries outside of the Designated
21 June 1985, to give effect to the Convention on the Recognition
Countries List can still be enforced. The decision of the foreign
and Enforcement of Foreign Arbitral Awards adopted in New
court would be taken as the cause of action on the basis of which
York on 10 June 1958. Awards from international arbitration
fresh proceedings are commenced in Zimbabwe.
proceedings are recognised and enforced in Zimbabwe subject
to compliance with the procedures in the Model Law.
Apart from the above, the Civil Matters (Mutual Assistance)
Act [Chapter 8:02] allows for the registration of awards from
an international tribunal as may be declared from time to time.

Nikita Madya joined the firm on 1 July 2000 and became a Partner on 1 July 2003. He heads the firm’s Energy, Infrastructure and Natural
Resources Department and is co-head of the Commercial and Corporate Department. He has a large commercial practice and advises
several listed and unlisted companies in relation to acquisitions, mergers, disposals and various types of contracts. He is currently involved
in greenfield projects in the energy sector, with work covering all aspects, including the construction elements involved in such projects. He
has handled several completed transactions for companies listed on the Zimbabwe Stock Exchange, including share option schemes, rights
issues, mandatory offers to minorities, Zimbabwe Stock Exchange Rules compliance and related matters. He has acted and continues to
act as local counsel for a number of international law firms handling investment transactions into Zimbabwe. He is also involved in advising
local, regional and international financial institutions in various loan transactions.

Wintertons Legal Practitioners Tel: +263 4 250 113/29
Beverly Corner, 11 Selous Avenue Email: [email protected]
P.O. Box 452 URL: www.wintertons.co.zw
Harare
Zimbabwe
Chantele Sibanda is an Associate at Wintertons with a focus on Corporate and Commercial Law, where she focuses on business trans-
actions, drafting and review of contracts, regulatory compliance and commercial litigation. She regularly assists Mr. Madya in the Energy,
Infrastructure and Natural Resources Department.
Chantele graduated from the University of KwaZulu-Natal in Durban, South Africa. Prior to joining Wintertons, Chantele served as an Articled Clerk
at Webber Wentzel in Johannesburg, South Africa and interned under Advocate Fay Mukaddam at Terma Commercial Advisory Services (Pty) Ltd.
Wintertons Legal Practitioners Tel: +263 4 250 113/29 ext. 134

Beverly Corner, 11 Selous Avenue Email: [email protected]
P.O. Box 452 URL: www.wintertons.co.zw
Harare
Zimbabwe
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 impor-
tance 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, commer-
cial law firm. Our mixture of youth and experience enables us to maintain
stability whilst creating innovative solutions to 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.
www.wintertons.co.zw

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What is the purpose and scope of the publication?

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What topics are covered in the publication?

Construction &

Engineering Law 2020

Featuring contributions from:

Breyer Rechtsanwälte Kachwaha and Partners Meyerlustenberger Lachenal Ltd.

CMS Kourkoumelis & Partners Three Crowns LLP

COMAD, S.C. Law Firm Neffat Wintertons Legal Practitioners

Sub Editor Contributing Editors:

Chief Media Officer

©2020 Global Legal Group Limited.

Nicholas Downing & David Nitek

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